Dollar: Why is the Greenback Quiet on a Huge S&P 500 Break?
Japanese Yen Sensitive to Carry as Growth Outlook Reaffirms Stimulus Hold
British Pound: In Confusion, Improving Growth and Stimulus Outlook Prevails
Australian Dollar Looking for a Spark as Market Sees no Cuts First Time in 2 Years
New Zealand Dollar Eyes 0.8100 as Rate Expectations Build
Canadian Dollar Faces Data-Driven Volatility Threat
Gold Posts Biggest Rally in Three Weeks, At Pre-June FOMC Level

Dollar: Why is the Greenback Quiet on a Huge S&P 500 Break?
This past session was incredible for both the US dollar and broader financial markets. Indisputably, the most remarkable development was the critical technical breakdown of the S&P 500 and other benchmark US equity indexes. Having muscled its way to record highs through a tumultuous economic recovery, fading revenue growth and record low market yields; the US stock market has found itself in an extremely exposed position. Having put our faith in the ongoing support of the Federal Reserve’s stimulus programs, we have achieved record highs on 15-year lows in participation, a buildup based on record amounts of leverage while investors have significantly bolstered their risk profile in the pursuit of higher returns. Though not the sole factor in the capital market’s rise, the US central bank is essential to maintaining the façade of strong and stable conditions. And, that is why there is so much concern surrounding the Taper and its time frame.

Through the past three months, there have been a number of developments to undermine optimism and positioning founded on boundless support from stimulus including: data to support a steady economic backdrop; growing concerns surrounding the costs of an eventual exit and most importantly the Fed’s own warnings. As belief has grown that the first moderation in quantitative easing (QE) is at hand, we have seen various markets topple. US Treasuries were the first to tumble in early may as they are arguably the most direct exposure for those investors that were looking to ‘front run the Fed’. As global capital flows took the signal of yield volatility, the carry trade dove later the same month – breaking off a long-running relationship to the S&P 500. The USDollar made a move around the same time Treasuries, but commitment was truly established after Fed Chairman Bernanke’s comments following the June 19 rate meeting. These markets all started to adjust to this inevitable conclusion, but the standard for conviction remained with a benchmark that had yet to turn: US equities.

With the heavy drop from US stocks this past session – the biggest since the June FOMC gathering – there is a new sense of certainty to the inescapable moderation of stimulus. That is why so many were caught off guard when the dollar didn’t surge higher while other markets played out their own Taper fears. In reality, the greenback and other key asset measures were already the process of this adjustment. Is that to mean that we won’t see a further rally from the dollar as this belief becomes mainstream? Absolutely not. While the reserve currency has reversed some of its anti-stimulus discount, there is still a safe haven role. If the equity selloff builds and/or is disorderly, the dollar can rally.

Japanese Yen Sensitive to Carry as Growth Outlook Reaffirms Stimulus Hold
On a day when US equities are tumbling, we would expect risk aversion to transmit easily into carry trade. The yen-denominated crosses are still richly priced given the historically low yield differentials the group currently sport. That said, the yen itself has a lasting stain of a forcibly-devalued currency thanks to the Bank of Japan’s devoted efforts over the past five months. We may have already seen the limitations to how much the central bank can manipulate its currency in the name of inflation, but traders will remain cautious. To override this concern, we need to see a wholesale deleveraging effort that abandons all yield-bearing assets that flout their corresponding risk.

British Pound: In Confusion, Improving Growth and Stimulus Outlook Prevails
There is little doubt that the outlook for the UK economy and its currency have improved materially from the opening months of the year. From fear of an unending recession and denaturing stimulus ramp, we now find a broad recovery alongside a central bank that wants to adopt forward guidance without the QE. And yet, the sterling has yet to retrace more than half the losses suffered through the beginning of the year from the alternative scenario. So, when the market debates the Fed’s Taper and balance of risk, the pound draws capital in the clamor.

Australian Dollar Looking for a Spark as Market Sees no Cuts First Time in 2 YearsThere are two aspects to the Australian dollar’s fundamental role as a high-yield currency that determine direction and momentum: the appetite for yield and the level of return for the currency itself. On the second facet, the Aussie dollar has made incredible strides. Since last week’s RBA rate cut, we now find the 12-month rate forecast – essentially the establishment of the current policy regime – sees no change. This is the first time we have seen a ‘neutral’ reading in the rates market since July 2011. What is still absent though is a swell of carry demand.

New Zealand Dollar Eyes 0.8100 as Rate Expectations Build
We have seen the interest rate outlook for New Zealand turn to forecasts for hikes some time ago. However, now the outlook seems far more robust than a ‘one-and-done’ test rate hike that does little to truly support a high-yield currency that has been ravaged over the past few years. According to overnight index swaps, the rates market is projecting 84 bps of rate hikes through the coming 12 months – certainty of three 25bp hikes and debate of a fourth. That is the most hawkish rate watchers have been since August 2, 2011. When carry appetite returns…

Canadian Dollar Faces Data-Driven Volatility Threat
As an ‘investment currency’, a simple academic expectation for the Canadian dollar would be for a drop alongside equities. In fact, the benchmark US 10-year government bond yield is higher than its Canadian counterpart. Nevertheless, the loonie was down against most of its counterparts this past session. A tepid existing home sales report for July contributed to easing trend, but moreso after the move was instigated. For tomorrow’s session, the data may act as the catalyst. Capital flows and factory output figures for June are core to the economy.

Gold Posts Biggest Rally in Three Weeks, At Pre-June FOMC Level
The 2.3 percent rally from gold Thursday was the strongest since July 22 and drew the highest volume reading (17.2 million shares on the SPDR Gold ETF) since June 28. However, the single day advance through immediate resistance at $1,350 isn’t as remarkable as the broader context. The metal is now trading at its highest level since the day the Fed implicitly confirmed the forthcoming Taper (June 19). Furthermore, we are less than $10 from the 100-day moving average. We are now 177 days below this average – the second longest jaunt on record.

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