DailyFX | April 2 2012 9:44 EDT
You couldn’t miss it: the US dollar was under pressure through the opening day of the week / month / quarter. Is this a sign for what is in store for the currency through the immediate future or is this still volatility without clear direction.
Dollar Ready to Collapse at Critical Level with FOMC Minutes Ahead
You couldn’t miss it: the US dollar was under pressure through the opening day of the week / month / quarter. Is this a sign for what is in store for the currency through the immediate future or is this still volatility without clear direction. Regardless, the benchmark is staring down serious levels of support and we are starting to see bigger waves on the fundamental plane. If we are waiting for a spark to set things off, FX traders should be ready for the event risk on the docket. Before we set the sensitivity dial to high, however, it is important to understand what the primary themes for the dollar are – in other words, what could get the market moving. The recent boost the greenback extracted from the bounce in rate expectations and Treasury yields has notably backed off. To wit, the 12-month rate forecast for the Fed measured through overnight swaps are anchored to 10-15 bps and refusing to take the next step to 9-month highs. Further dampening early reads of a return to carry glory, the Fed purchased $4.5 billion in longer-dated Treasuries (the first of four purchases this week) in the Operation Twist effort to lower rates.
For dollar traders, the restrained outlook for yield should curb expectations for a hearty and lasting rally to develop on the basis that the greenback is soon to be a carry candidate (though there is still room for short interest to unwind Fed stimulus-funded positions outside the US). Alternatively, we still have the opposite end of the risk spectrum for the dollar to react to: risk aversion. And, in that role, little slack has developed. In this role, those trading dollars or risk sensitive assets (ie most markets), a close eye should be kept on the upcoming FOMC minutes. Though there is relatively little scope for change in policy expectations from the central bank, there is a rapidly growing faction expecting the minutes to outline options for future stimulus moves. And, in case there is doubt to the legitimacy of these calls, a Fed survey shows 15 of the 21 Primary Dealers (a market maker for government securities) expect QE3. That said, we go through periods were the market starts to lean on its stimulus expectations. This looks to be one of those times. If prayers are answered, the dollar falters, missed and it may rally.
Australian Dollar Traders Head into RBA Decision with Strong Opinions
There was a remarkable drive behind the Australian dollar at the open of trade in Monday’s Asia session. The catalyst: the Chinese manufacturing activity report. Factory-sector data was released for many of the largest economies, but the 11-month high from China’s survey (53.1) clearly elicited the greatest reaction from the capital and carry markets. For the Australian dollar, the risk connections were clear; but there was the further trade ramifications that gave the currency an extra boost. As strong as that fundamental rally was, the subsequent correction was just as quick and aggressive. Boosting risk appetite itself is one way of getting the Aussie dollar moving. Another way is to alter its position in the carry trade spectrum. To that effect, we are watching the RBA decision for guidance. The baseline scenario is for no change to the benchmark rate (4.25 percent) and there is a low probability of change to the group’s view to future policy making; but swaps markets have recently priced in as much as a 50 percent chance at a 25bp cut this go around. This tells us that someone will be proven incorrect...
Euro Slides against Carry and Funding Currency Alike as Economic Issues Stand Out
There are a few key concerns with the euro for this new week. The ECB rate decision is an obvious one that many are counting down to. That said, we shouldn’t adopt convenience to replace serious fundamental drive. It may be more difficult to define, but the balance of weight behind the health of the Euro-region’s financial markets is still an active driver for the shared currency. Through the open of this new trading week, financial media outlets were rehashing the story that EU officials are hoping the recent boost to their firewall will encourage the IMF to up their own contribution. If that is the headline bulls are waiting on, they could be on ice for a while with the next G20 meeting on April 20. In the meantime, the jobless rate hit a near-15 year high, factory activity stagnated and European bank holdings at the ECB are just off records.
Japanese Yen Rallies Despite Tankan Disappointment
It’s a new fiscal year for Japan and the currency still managed a significant rally through the opening 24 hours of the new week / month / quarter / year. That in itself wouldn’t be particularly unusual if it weren’t for the fact that the data released through the period (the Takan numbers for the first quarter) didn’t disappoint and risk trends were actually pointing higher. That would suggest that the risk push is building on false pretenses or the currency is building its own strength. The yen will struggle for real progress; but if a true risk unwind kicks in, the yen will snap too quickly.
British Pound Outpaces Euro with Activity Report, BCC Cries Out for Stimulus
The sterling advanced for a third consecutive day against its euro counterpart. That said, the currency didn’t stray too far from its bigger cousin when a third party was drawn into the conversation (like EURJPY and GBPJPY). On the data front, the UK’s standing on the manufacturing release can out well – the 52.1-reading was the highest in 10 months. Despite the implications this carried for growth, however, the British Chamber of Commerce continued its calls for government stimulus to help out the “weak” recovery. How strong will this call grow?
Swiss Franc Pushing the Envelope, Backing the SNB into a Corner
We are little more than 30 pips away from the SNB’s self-determined 1.2000-floor on EURCHF. There was already significant pressure on the central bank’s shoulders as a significant crisis event for the Euro Zone could have sparked an overwhelming flood of safety-seeking capital that swamped their offsetting efforts and subsequently trigged stops on floating long orders. Now, there is less of an immediate threat to the financial functioning of the euro-region, but diminishing the buffer room will nevertheless leverage the risk for the SNB. How close will they let it get?
Gold Up as Dollar Down, Metal Traders Would Cheer Stimulus Talk
The dollar is down and gold is up – little surprise there. When we look at the precious metal’s performance against the broader currency spectrum, we see the higher yield players were making out with gains. That means investors were tapping fear of underperformance for specific currencies rather than wholesale shifting capital out of the FX realm. That may change in the upcoming session as we are back on the stimulus conversation. If the FOMC minutes lays out the steps for the next stimulus effort as Goldman suspects, currency appeal with diminish.
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Next 24 Hours
ANZ Commodity Price (MAR)
Prices expected stable as Kiwi-commodity correlations high
China Non-manufacturing PMI (MAR)
May follow manufacturing PMI
Retail Sales s.a. (MoM) (FEB)
Retail sales moderate, could mean Aussie domestic economy slowing
Labor Cash Earnings (YoY) (FEB)
Helped higher by weak yen
Reserve Bank of Australia Rate Decision
Major data of the day: will take into account Monday’s Chinese PMIs, global trends, weaker AU domestic data
PMI Construction (MAR)
British sector still weak, growing
Euro-Zone PPI (YoY) (FEB)
Inflation still does not seem to be problem for Eurozone despite rapid easing; debt still in focus
Euro-Zone PPI (MoM) (FEB)
ISM New York (MAR)
Eastern economy still strong
Factory Orders (FEB)
Led by stronger domestic demand
Total Vehicle Sales (MAR)
Large purchases of vehicles keep pace, recovering
BRC Shop Price Index (YoY) (MAR)
Small retailers seeing gains
AiG Performance of Service Index (MAR)
Domestic services sector seeing shrinkage, similar to other domestic data
Halifax House Price (3MoY) (MAR)
BoE-watched housing index showing continued correction, data not expected market moving
Halifax Plc House Prices s.a. (MoM) (MAR)
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