Dollar’s Best Week in 3 Years Spark for 110 USD/JPY, 1.2000 EUR/USD? The Fed delivered the global financial markets its biggest shock this past week since the US default brinkmanship resulted in the loss of country’s triple-A rating back in August of 2011. And, the central bank didn’t even change policy. The group’s massive $85 billion-per-month QE3 stimulus program survived the FOMC meeting this past week, yet the 10-year Treasury note was sold heavily enough to drive its yield over 40 basis points higher for the biggest weekly increase in a decade. Meanwhile, the Dow Jones FXCM Dollar Index (ticker = USdollar) rallied 2.4 percent – the strongest move in three years- and the S&P 500 dropped 2.1 percent for its worst performance this year. This revival of risk-appetite based correlations suggests a current of eroding sentiment is carrying us on a market-wide delevering effort that has enough weight to develop a lasting bull trend for the dollar. Yet, does this broad volatility have the necessary elements to send EURUSD back towards 1.2000 or USDJPY up to 110. It is highly unlikely we see both. To send EURUSD plunging 1,000 pips, we will likely need a combination of Euro-area financial risk and general risk aversion (the latter usually instigates the former). Yet, the level of risk aversion to carry the world’s most liquid pairing that far would spur a carry trade unwind for the stimulus-laden yen crosses that sent USDJPY tumbling alongside AUDJPY. Euro Confidence Crumbling as Global Sentiment Suffers, Greece Teeters The euro is always walking a fine line between controlled, long-term stability risk and immediate crisis. Officials this past week have acted to play down the trouble that has developed in Greece, and desensitized Euro-area investors are tempted to believe that this will be another false threat. Yet, moderate troubles can turn extreme without the help of domestic instability should the broader backdrop for market sentiment deteriorate. European equities suffered the worst weekly performance in 13-months, but the real concern is the sovereign / banking financial trouble feedback. Though still well off 2011 highs as of yet, EU banking sector CDS and Spanish 10-year government bond yields have lurched aggressively higher. In the meantime, Greece’s troubles should not be forgotten. The exit of a government coalition partner speaks to strain in the country that can cause problems with the IMF warning the country on its austerity funding gap. Japanese Yen: The Bank of Japan is Still Winning Given the exceptional moves for global equities, US Treasuries, high yield currencies and the safe haven dollar; we would look for the Japanese yen to realign to its historical role as a safe haven, funding currency. Yet, through the past week, the yen actually fell against most of its counterparts – and its gains against the pummeled Aussie and Kiwi dollar’s was slight. The Tokyo markets were rocked in the weeks preceding the Taper rout, which no doubt discouraged an inflow of foreign capital looking for haven. With an equity volatility reading twice that of the US and Japanese Government Bonds (JGB) ready to suffer another bout of record swings at any moment, Japan’s financial system is doesn’t present a convincing safe haven backdrop. However, should fear continue to build, the leveraged yen carry trades will take a hit. British Pound Faces Financial Stability Report, King and Carney SpeechesThere was relatively little individual performance from the sterling this past week. GBPUSD tumbled 1.9 percent due to the dollar’s rally while a tumble in risk rallied sunk the commodity bloc (AUD, NZD and CAD) to the sterling’s favor. While there was fundamental fodder to take in, it wasn’t of the cut that can overwhelm a current as deep as risk appetite and Fed stimulus-dependency. We may seen that secondary performance give way to a more active currency in the not-too-distant future however. In the week ahead, a UK Financial Stability Report will likely illuminate the £26 billion funding gap in the nation’s banks noted by the PRA this past week. For monetary policy, outgoing-BoE Governor King is scheduled to testify before the Treasury Committee for the last time; while incoming-Governor Carney hosts the G-20 Financial Stability Board meeting to discuss global regulations. Australian Dollar Suffers Biggest Drop in 15 Months as Bonds Collapse Having already suffered an exceptional tumble from its ill-fated attempt to overtake 1.0600 just two months ago, AUDUSD made an effort to ensure the tentative rebound from last week was completely snuffed out. The 3.7 percent decline this past week was the worst performance for the pair in 15 months. It would be easy enough to hang responsibility for this move on the greenback, but the malaise in Australian yields shows that the high yield currency is itself suffering. As a carry trade currency, the incredible drop in the10-year government bond – the biggest since 2001 – shows a steady unwinding of yield seekers’ positions. This may seem like a ‘blow off’ move, but putting the 3.76 percent yield into perspective, we were at 5.75 percent in 2011, 6.75 percent in 2008 and north of 10 percent two decades ago. New Zealand Dollar: Will Kiwi Repeat Worst Performer of the Week? It is easy to be distracted by the Australian dollar’s meteoric plunge through the past two months. However, for this past week, it was the New Zealand dollar that took top spot for worst performer. Until this past week, the kiwi showed a level of restraint to its decline compared to its Aussie counterpart; but recently momentum may indicate a change of scale. The slump in demand for two bond auctions – a 3 percent 2020 bond and local agency debt – confirms the market is losing its appetite for New Zealand yield. We will see a more direct assessment of just how strained the foreign appetite for yield is with the RBNZ’s monthly currency flows assessment due Thursday morning. Gold Suffers 7 Percent Plunge as Speculative Positioning Hits 7 Year Low There was little reprieve for gold this past week. Though the precious metal fought for a bullish close Friday – the first in five trading days – it hardly made up for the heavy damage incurred throughout the week. The 6.8 percent plunge over the period was the worst since September of 2011. Some may find solace in the relatively restrained volume in both futures and ETFs behind this selloff, but the progress over the last year and current historical level should cut this optimism to realistic levels. A 30 percent drop in nine months to three-year lows gives us proper scope of the situation. Looking at the COT figures (speculative futures positioning through this past Tuesday), the market is most pessimistic on gold since 2006. While this can be considered a contrarian / oversold indication, the complete fundamental shift for the commodity means it is difficult to mount a robust recovery. Given its volatility (bad for a safe haven status) and lack of yield (not a carry), the dollar rebound is painful.
Posted on: Sat, 22 Jun 2013 08:24:15 +0000
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