More of the SAME SAME or DIFFERENT??
Dollar Suffers Fifth Consecutive Loss as Correlations Start to Crack
The greenback’s suffering continued Thursday as appetite for risk was still a clear fixture across the markets. However, there are signs of fatigue in this speculative drive that could ultimately succumb to the unfavorable fundamental backdrop and onset of the weekend liquidity drain. For the benchmark itself, the Dow Jones FXCM Dollar Index (ticker = USDollar) dropped for a fifth consecutive trading day and raised its net losses over that period to 153 points – the worst bear trend for the currency since last January. The pain is palpable, but the conviction questionable. Where the dollar index tacked on a hearty extension to its decline to hit monthly lows, there was significant dispersion of pace between the different dollar-based majors, the yen crosses and the capital market benchmarks for risk trends. If risk trends were indeed in control of the market and looking to carry us to a new and lasting phase; we’d expect its influence to be far-reaching and overwhelming.
We know the US currency as an extremophile safe haven – it outperforms when risk aversion is at its peak and liquidity demand clouds all ambitions for return. Alternatively, when appetite for yield returns; the exceptional levels of stimulus and record low rates for benchmark US assets divert capital away. Positioned at the extreme of the spectrum, the greenback will naturally be more sensitive to the ebb and flow of investor sentiment. We need to look further away from the fringes, however, and measure ambitions from more stable pairs / assets. Because, if the absence of conviction (in risk or anything else market-worthy) is the quickest way to stall trends and spark reversals from over extended moves. Starting at the extreme, one of the FX market’s favorite pairs (AUDUSD) posted its fifth consecutive with a 64 pip climb (the daily advance has averaged 58 pips in this series). Yet, the S&P 500 – an equally renowned sentiment barometer – barely advanced despite a dalliance into two-month highs.
The true gauge of risk’s influence comes through the most liquid and fundamentally-rooted asset’s performance. If speculative appetites are truly in control and backed by the necessary momentum to feed a trend; it should encompass the entire market. That said, the EURUSD was once again virtually unchanged on the day. Considering the euro is a fundamentally-burdened currency that tumbled to two-year lows against the greenback, genuine investor confidence should theoretically dull its risks and play to its yield potential and play to the appetites of speculators looking for a quick reversal. The cracks are clear, but this doesn’t mean a major dollar reversal is around the corner. An exhausted risk run could generate draw the most ambitious back (AUDUSD), but it would leave the stable (EURUSD) unchanged. When need a catalyst – either way.
Euro Strays from Risk Trends, Spain Yields Surge Despite Bailout Progress
As long as the market’s eyes aren’t glazed over by absolute risk appetite, the euro will remain anchored to its fundamental burden. Though the ‘Eurozone Crisis’ headlines seem to have lost some of their punch through market impact, the threat remains. The top headline this past session from the Euro-area was Spain’s troubled bond auction. Despite Prime Minister Rajoy’s presentation of €65 billion in budget cuts and the Bundestag’s approval of the nation’s bailout, the country grew its highest rates on its 5-year note (6.459 percent) on record. For all three maturities demand (measured by bid-to-call) plunged to 1.9 versus a previous 4.3. In turn, Spain’s benchmark 10-year bond yield hit that attention-grabbing 7 percent threshold. What happens if approval of a bailout at the upcoming Ministers meeting doesn’t offer optimism…
British Pound Climbs but Expectations for Stimulus Setting In
The sterling marked a notable, bullish break from congestion against the US dollar and pushed to yet another multi-year high against the euro. That said, the pound’s fundamental troubles are picking up. Adding weight to the need for additional stimulus going forward, the UK docket showed retail sales missed expectations and mortgage lending dropped 5 percent last month. Already drifting, we find the 3 month pound-based Libor rate has dropped 20 percent this past month (to 0.793 percent) and swaps show expectations of a 25bp cut before the end of the year.
Canadian Dollar: Will Fundamental Traders Pay Attention to CPI Data?
When risk appetite is on the rise, yield becomes the priority. That has lead to a divergence in the performance between the Canadian dollar and its higher-yielding counterpart, the Australian currency. Yet, what happens when the drive for yield-at-any-price cools? In the midst of a dovish rate regime, the Aussie dollar will quickly lose ground. For the loonie, however, we have a hawkish bias. Furthermore, this investment currency has one of the most impressive backdrops for growth and financial health of all the majors.
Australian Dollar Extends its Strongest Run Since November
Despite the hesitance of US equities (typically backed by stimulus-hopes), the Australian dollar climbed across the board Thursday. For AUDUSD, the 5-day rally is the strongest (for progress) since November. This outperformance comes at a price. If there is a correction in risk, the Aussie dollar will be exposed to leveraged reversals. That said, there are underlying fundamentals that offer an additional buffer. The WSJ reported this past session on supposed plans by the Bundesbank to start buying Australian assets to diversify its reserves.
Japanese Yen Notably Steady in this Week’s Risk Drive
With the dollar down five consecutive sessions while the Aussie and US equities rise, it would be fair to make the assumption that the premier funding currency was under extreme duress Thursday. Yet, that wasn’t the case. For Thursday and the entire week, the yen shown a mixed performance. This is telling sign of the conviction in sentiment trends, but it also a serious burden for officials trying to weaken the currency.
Gold the Most Congestive in Two Months as Risk and Stimulus Talk Builds
The average daily range for gold for the past 20 active trading days (a month) hit its lowest level in two-months. In other the market’s a quieting and congestion is squeezing the precious metal. That wouldn’t be a concern if it weren’t for the volatility we are seeing through traditional risk channels (gold is a safe haven) and the growing din of stimulus voices across the board (it is also the premier, anti-fiat).
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