| By John Kicklighter, Senior Currency Strategist for DailyFX.com
Talking Points
- Dollar Suffers Biggest Drop in Four Weeks on Quiet Day?
- Euro Fundamentals Worsen, Though Markets Lose Interest
- British Pound: BoE Discusses the UK's Greatest Problem - The Euro Zone
- Swiss Franc Maintains its Elevated Volatility as SNB Jordan Talks Options
- Japanese Yen Struggling as Risk Aversion Cools, BoJ Says More Easing Ahead
- Australian Dollar: RBA's Stevens Says Chinese Slowdown a Concern to Watch
- Gold Climbs a Second Day as 'Safety without Crisis' Diverts Dollar Flows
Dollar Suffers Biggest Drop in Four Weeks on Quiet Day? The 20-day (1-month) rolling correlation between the US dollar and aggregate currency market volatility index currently stands at 0.93. Considering implied (expected) volatility is essentially a measure of risk or fear, the greenback is currently locked in to sentiment trends. That means that any financial tremor will give the benchmark currency a sudden boost; but by the same token, a pullback in volatility translates into a diminished appetite for the dollar. Naturally, with the US market's closed for the Memorial holiday, the activity levels would drop and the currency in turn would take a hit.
It is interesting to note that while US equity markets (buoyed by the expectation that the Fed lies in wait for any sign of investor losses to swoop in with another stimulus injection) consolidated throughout last week, the greenback extended its advance to a four day advance. That outperformance ended Monday, however, as the Dow Jones FXCM Dollar Index dropped 0.38 percent - the biggest one-day decline since the exhaustion move on April 27. We were expecting US speculators to be absent through the opening 24 hours, but the damper on liquidity this one country's absence would have on other regions was a something of a surprise. Volume on the European benchmark DAX (German) and FTSE 100 (UK) indexes reflected the weakest levels of trading volume we have seen all year. Asian market turnover was the lowest seen in over a month for many of the key composites. With the greenback already overstepping its bounds on its safe haven position and the liquidity drain doing little to incite risk-adverse volatility, a correction found a strong fundamental pull.
The real tone of the week will be reflected, though, in how the currency performance as participation levels top off. In the early hours of the Asian trading session, we have seen regional shares drop while US equity futures slide on the open. The immediate shift to risk aversion comes without a definable catalyst to underlying sentiment - but that will likely be the tempo for the week. For risk-based fundamental sparks this week, there are few scheduled events or releases that look to hold the necessary impetus to single-handedly unite all the capital and credit markets to the same bearing. We can wait for an off-chance that the NFPs can stir unrest for a pre-existing lean or keep a watchful eye on the headlines.
Euro Fundamentals Worsen, Though Markets Lose Interest
Over the past few weeks, we have seen repetitious or completely unsurprising headlines lead to the euro to a substantial decline. Monday, we would see substantive developments for sentiment meet a completely unresponsive currency. Such is the importance of a pre-established bearing on the markets and risk trends to forging progress. Carrying over the newswire chatter from the weekend and opening 24 hours of active trading, we learned that Spain's Bankia not only requested a €19 billion bailout, but the country was contemplating a loan of government debt which could be used as collateral for ECB funds rather than outright cash. Spanish Prime Minister Rajoy's please for the ECB to revive its purchases of government bonds (through the SMP) rings in our ears, yet the ECB reported no new purchases for an 11th week. That's concerning considering the Spanish yield spread (over the German 10-year) is at a record high and credit default premiums are rising quickly.
British Pound: BoE Discusses the UK's Greatest Problem - The Euro Zone
Members of the both the British government and central bank reportedly met Monday, and the topic of conversation was how best to stabilize the Kingdom's economy and financial markets. From the commentary that was read after the discussion, it was clear that there is a common problem that the officials are coming to: the Euro Zone's financial crisis. Given Prime Minister's drive to complete the austerity effort, it was likely the discussion included calls for more BoE stimulus. MPC member Broadbent noted that further rate cuts would likely be ineffective, but that isn't what we would expect from the group regardless. The FX market is pricing in the possibility of further bond purchases.
Swiss Franc Maintains its Elevated Volatility as SNB Jordan Talks Options
Though we haven't seen any meaningful trend spring out of EURCHF since Thursday's fireworks, there is still an afterglow of volatility for the pair. And, when you can get the market paying attention, there is a greater sensitivity to event risk (even the mundane) for a short period afterwards. This is where SNB President Jordan's comments come into play. The central banker remarked over the weekend, that officials were mulling options of capital curbs and negative rates. This isn't particularly new, but it sounds dramatic when people are paying attention.
Japanese Yen Struggling as Risk Aversion Cools, BoJ Says More Easing Ahead
Capital markets were a mixed back on Monday - Asian shares were rising and the European markets were generally on the lam. This would present a confusing picture for the safe haven Japanese yen, but the addition of tame volatility levels would help bolster carry interests. Yet, heading back into a deeper pool, we have seen activity levels pick up and negative risk sentiment kick back in. Data this morning offered little influence despite the clout of employment, spending and retail sales figures. A bigger headline though is direct yen-to-yuan trade come Friday.
Australian Dollar: RBA's Stevens Says Chinese Slowdown a Concern to Watch
RBA Governor Glenn Stevens made it a point not to speak on monetary policy at his speech on Monday, but he did touch upon one of the currency's top three catalysts: China. Having been distracted by risk trends and interest rate expectations these past weeks, China has fallen somewhat to the wayside, but Stevens brought it back when he suggested the softer Chinese economy data was a concern to watch. In the meantime, risk seems to have leveled off last week and the probability of a 50bp RBA rate cut at the next meeting has been cut in half.
Gold Climbs a Second Day as 'Safety without Crisis' Diverts Dollar Flows
Gold managed a second consecutive advance against the US dollar through Monday's dampened trade conditions, but that is about the only relevant development we can pull from the recent set up on congestion. Between metal and reserve currency we have two safe havens separated by liquidity position. With volatility off, the level of fear that drives liquidity isn't active, but that doesn't mean it reverses course. --- Written by John Kicklighter, Senior Currency Strategist for DailyFX.com
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