Currencies | Feb 06 2012
Dollar At Risk Of Fresh Plunge As Dow Moves To Test Multi-Year Highs
By John Kicklighter, Currency Strategist, FXCM
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Dollar at Risk of Fresh Plunge as Dow Moves to Test Multi-Year Highs
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Euro Unable to Join in Risk Move as Greece Headlines Lose Optimism
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British Pound: Is an Increase in BoE Stimulus Next Week Priced In?
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Australian Dollar Trades Estimate an RBA Cut’s Influence on Carry Drive
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Canadian Dollar Distracted from Weak Jobs by Risk Run
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Japanese Yen and Swiss Franc: Intervention Cues to Watch For
- Gold Tumbles on Risk Rally, Shows Unusual Correlation to Dollar
Dollar at Risk of Fresh Plunge as Dow Moves to Test Multi-Year Highs
Though the dollar ended Friday in the red, its performance was too bad. A sharp correction of intraday gains for the Dow Jones FXCM Dollar Index would leave the benchmark in the red, but it nevertheless ended well off the week’s lows. However, we need to appreciate the larger trend and momentum to fully appreciate the greenback’s bearings to develop a sense of where we will go. The dollar has closed out its third, consecutive weekly decline (the worst run since October); and new highs for equities threatens to carry that unwinding trend for the safe haven currency even further. Splashing financial headlines through Friday’s close was the fact that the Dow Jones Industrial Average marked its highest daily close since May of 2008. Even the most ardent fundamentalist should respect the potential of follow through on meaningful technical breaks (as we bold through limit entry and stop orders) and the media’s coverage draws in previous unaware speculators. That said, follow through beyond the flush of risk chasing carries different requirements. The NFPs isn’t a game changer, so what would carry us through?
Euro Unable to Join in Risk Move as Greece Headlines Lose Optimism
There is an ECB rate decision scheduled for next Thursday; but in the hierarchy of fundamental concerns for the shared currency, that does not occupy top spot. Sure, there will some degree of repricing that will be required as the market factors in subtle changes in tone from the official statement and central bank President Draghi’s comments, but it is unlikely that we will stray too far from the expected outcome of a hold on the benchmark and no official changes to extracurricular stimulus efforts. On the other hand, there is a very real concern surrounding the situation in Greece. A tumultuous situation, we now have the concern that Greek politicians may not agree to further austerity to secure ‘Bailout Two’.
British Pound: Is an Increase in BoE Stimulus Next Week Priced In?
The Monetary Policy Committee’s (MPC) four months are up. Back in October when the Bank of England announced its 75 billion sterling increase to its bond purchase program, the group said it expected the effort to take approximately four months fully implement. Now, coming on to the February rate decision; we find that economists are expecting another 50 billion pound increase to the UK’s version of QE. Just this past week, BoE member Adam Posen (an eternal dove) remarked that there was a case for another 75 billion pound ‘slug’; so perhaps there is some room for surprise in this event. A change in the outlook for recession and the contagiousness of the EU crisis could give this another event a greater element of market-impact; but this policy authority has made a clear push for transparency and consistency. What truly matters is the market’s take. If the UK finds a more frequent comparison to stimulus flooded currencies, it could significantly change its fundamental bearing.
Australian Dollar Trades Estimate an RBA Cut’s Influence on Carry Drive
Top, scheduled event risk over the first half of next week is without question the Reserve Bank of Australia’s (RBA) monetary policy decision. We have already seen two consecutive quarter-percent (25bp) rate cuts, so the speculation of a third will carry a smaller ‘surprise’ quotient than it would otherwise. As of now, the consensus amongst economists is for a third rate cut of equal magnitude and the market is on board with a 79 percent chance of the same. What really matters in this event though is the influence of risk trends at the time of the release. If the ‘risk on’ drive carries through to the rate decision and the central bank unexpectedly hold, it could generate a significant additional relief rally for the Aussie dollar. Alternatively, if the taste for yield has been supplanted by a fear of the unknown, that expected cut could amplify deleveraging.
Canadian Dollar Distracted from Weak Jobs by Risk Run
The Canadian dollar managed an advance against all its liquid counterparts Friday – even edging out a bullish close against the impressive performance from the Aussie dollar. Yet, it was clear that the surge in risk appetite was heavily responsible for this performance as a ranking of returns on loonie dollar based pairs reads as a list of currencies with descending yields. The spillover effects of a modestly more optimistic outlook for the US (Canada’s largest trade partner) may have helped to edge the other ‘investment currencies’ out, but this is still an unusual performance given the weaker-than-expected increase in jobs (2,300) and unexpected uptick in the jobless rate (7.6 percent). If risk appetite struggles for its footing early next week, the Canadian dollar will be the first to suffer for its outperformance against higher yield counterparts.
Japanese Yen and Swiss Franc: Intervention Cues to Watch For
Intervention Watch 2012 continues. Though, Friday’s push for higher-yield and higher-risk currencies and assets offered a little pressure relief for the relative safe haven Japanese yen and Swiss franc. Though neither currency has particularly benefited from the positive sentiment bearing for the past three or four weeks (an interesting reflection to the strength of the move), the week-ending surge seemed to generate the right amount of exuberance to excite an actual demand for carry. However, as surely as we question the authenticity of investor optimism against the fundamentally troubled (Euro and sterling) and high yield (Australian and New Zealand dollars), we assess the scene for these safe havens. I won’t start fighting the prevailing trend but I’m nevertheless dubious. Should this current drive mark a messy ending, the rally could inadvertently instigate SNB and Japanese MoF intervention by trigger an aggressive deleveraging of EURCHF and EURJPY.
Gold Tumbles on Risk Rally, Shows Unusual Correlation to Dollar
Over the last 20 trading days, the correlation between the US Dollar Index and gold was an astounding -0.96 (suggesting that currency and metal moved more or less in the exact opposite direction and same intensity level over the period). We know that there is a connection between the two in that a demand for absolute liquidity is a boon for the dollar and burden for the expensive metal. Alternatively, when there is a passive impression of risk aversion (where investors are willing to diversify out of absolute safe havens but are still concerned about correlation risk), capital moves away from the extremely low yield dollar but can find its way to gold for some level of safety and capital gains potential. Yet, there is also a state where the market looks for the highest yields and most over-sold assets. Friday’s surge in equities and other benchmark capital market assets offered a taste of the extreme condition – leading both dollar and gold to sharp losses. The question is: does it last?
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