| By John Kicklighter, Currency Strategist
Talking Points
- Dollar Suffers Biggest Hit Since in Seven Weeks as Risk Perks Up
- Australian Dollar Rallies after Employment Boost, Awaits Chinese GDP
- Japanese Yen Volatility Belongs to Carry, Trend to BoJ Stimulus Pressure
- Euro: With Global Sentiment Steadying, EU Crisis Fears Subside
- British Pound Strength Should be Monitored Through EURGBP
- Swiss Franc: SNB has a Distinct Interest in Risk Trends, Global Stimulus
- Gold Gains Serious Traction Against Dollar, Struggles Against Aussie Dollar
Dollar Suffers Biggest Hit Since in Seven Weeks as Risk Perks Up:
Though the dollar didn't stick to its correlation with risk trends while sentiment waned through the first half of this week, it certainly did react as capital markets came roaring back these past 48 hours. The Dow Jones FXCM Dollar Index put in for its worst one-day tumble (0.57 percent) since February 23rd and subsequently found itself at the threshold of a new bear trend. This is a concerning position for the benchmark currency to be in considering its propensity to leverage its reaction to 'risk off' scenarios and the notable trouble it had in overtaking its 10,100 range high over the past six months. Now that we find the dollar has discounted much of the very early, hawkish Fed policy expectations that were priced in through previous weeks, the rebound in the currency's safe haven role looks perfectly timed to cause more trouble than benefit.
Monitoring risk trends should be a primary concern for all traders regardless of their market, and especially so for those involved with the majors. For risk guidance, we saw the S&P 500 reverse half of the loses over its five-day decline through Tuesday that set the tone for an underlying trend change. Through the past session, the catalysts for 'risk on' came through multiple sources. Heading into this week, concerns had built up that US corporate earnings would slow to their weakest levels since 2009 - though they would generally expand to new highs. This seems to have set the bar remarkably low, and the better-than-expected reports from Alcoa and Google have helped to retrace some of those negative expectations. Another outside catalyst is the moderation of fear surrounding the Euro Zone financial troubles. Fundamentally, the situation has not changed dramatically, but the drop in important sovereign debt yields (Spain and Italy) helps set the speculative tone.
The catalyst with potentially the most far-reaching and persistent influence on sentiment, however, are stimulus expectations. There were mild murmurs through the past trading day about QE3 looking more likely (likely in the wake of comments made by Fed members Yellen and Dudley), but the consensus seems generally set in winding down the expansive stimulus belief. If there were a means to boost support, it would likely come through a program more like the recent 'Operation Twist'-style effort where the balance sheet is held steady but the portfolio composition is changed. That said, the focus has seemed to move beyond a mere reaction to Fed efforts only. In the absence of support from the world's largest central bank, support from the Chinese, Euro Zone and Japanese groups have stepped in. Whose devaluing the currency now... Australian Dollar Rallies after Employment Boost, Awaits Chinese GDP: The Aussie dollar was the stand out performer Thursday against the backdrop of strong risk appetite sentiment. Positive risk trends plays an influential role for this currency in particular as its sensitivity to rate changes has been leveraged through a deteriorating interest rate forecast. We would surprisingly see an improvement on that front as well however this past session. Following the surprising jump in employment growth for the month of March (44,000 jobs added), the 12-month rate forecast jumped 10 bps up from the two-month low (94 bps) set just the previous day. Further for risk trends, the strong Chinese lending figures would also boost the positive sentiment towards the currency. As a guide for those looking for the fundamental catalysts for the Aussie dollar, there are three themes that can be followed through three different pairs. The risk trends are best seen in AUDJPY. The Chinese economic influence shows through better in AUDUSD. And, rate forecasts show in AUDNZD. Japanese Yen Volatility Belongs to Carry, Trend to BoJ Stimulus Pressure: Policy officials in Japan continue to do their best to taking the currency down - though this has very little influence on price action. Where the yen has found relief is through risk appetite trends itself. With the rebound in speculative interests over the past 48 hours, the carry trade interest has firmed up. Of course, those pairs with the larger carry differential (AUDJPY, NZDJPY) have enjoyed the larger upside swing; yet they will also be the most sensitive to big swings back and forth. If this risk rebound proves solid and progressive, the BoJ will find relief in the pressure to further expand stimulus. Yet, if we fall back into a 'risk off' scenario, the central bank will be scrambling again. Euro: With Global Sentiment Steadying, EU Crisis Fears Subside: Have fundamentals improved for the Euro? Not really. However, as we have seen many times before, a positive turn in sentiment tends to cast the shared currency in a positive light and overshadows the fears that the FX market would otherwise dwell on. For an objective review of the developments that matter to the region's underlying fundamental health, we start off on the government bond front. Italy sold €4.88 billion in debt (below the €5 billion maximum and with some maturities that fall outside the LTRO coverage), to relatively modest increases in yields - modest compared to the pained Spanish auction earlier this week. Meanwhile IMF head Lagarde stated that Spain shouldn't be compared to any of the other periphery EZ countries that have sought bailouts and ECB member Paramo further charged speculation the SMP program is revived. British Pound Strength Should be Monitored Through EURGBP: We've seen a lot of volatility in the sterling pairs, but much of this activity can be attributed to the cross currency rather than the pound. While the pound can take the role of a safe haven or yield currency given its middle-of-the-road benchmark, its intrinsic strength has been relatively unmoved recently. To see a true representation of strength for this currency specifically, a good read is EURGBP to monitor crisis spread. Swiss Franc: SNB has a Distinct Interest in Risk Trends, Global Stimulus: The Swiss franc has appreciated alongside the Euro when we measure its performance against the yen or US dollar. But the focus for traders and policy officials when it comes to this pair remains on EURCHF. And, on that front, we have seen no meaningful progress to offer relief for SNB officials looking to maintain the integrity of the 1.2000 level they vowed to defend. In the changing seas of risk appetite trends, we see a lot of activity for yen crosses and dollar-based pairs; but the SNB is no doubt carrying high hopes for a risk recovery to usher the euro higher. Gold Gains Serious Traction Against Dollar, Struggles Against Aussie Dollar: That test of the multi-year rising trendline proved influential for gold. The metal has put in for another impressive rally this past session to expand on raise the tally to a 68 point run. However, what has helped drive the commodity higher? A prime factor here is the US dollar's remarkable weakness. However, outside of that drive, the drive has been relatively weak. In fact, if we look at gold in Australian dollar terms (which itself has capitalized on positive risk trends), we find that gold actually closed slightly lower on the day. --- Written by John Kicklighter, DailyFX Currency Strategist
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