Dollar Extends Worst Run in 6 Months, NFPs Ahead

Talking Points:

• Dollar Extends Worst Run in 6 Months, NFPs Ahead
• Japanese Yen: A Collapse in Household Spending Before Tax Hike
• Euro Has Adjusted for Dovish View on Next Week’s ECB

Dollar Extends Worst Run in 6 Months, NFPs Ahead

Despite the S&P 500’s weakness and the steady rise in medium-term Treasury yields, the US dollar continues to suffer. In fact, the equally-weighted Dow Jones FXCM Dollar Index (ticker = USDollar) this morning is working on its sixth consecutive decline. This matches the longest tumble for the world’s most liquid currency since August 9th. If the bears pick up where they left off on Monday, we would very likely meet a meaningful technical break to extend a bearish trend and definitively mark the worst trend for the dollar since January 2011. Yet, the adage that ‘it’s not the breakout that matters, but rather the follow through’ applies just as surely to fundamentals as it does to technicals. If the greenback were to post such unfavorable headlines, does it immediately relegate the currency to weeks of free fall?

One of the most constructive elements to the currency’s bear run this week has been the lack of major event risk to impede the speculative range reversal – a low threshold correction of the gains forged after the FOMC hikes rates on March 19. Since the third Taper and the time frame for the first Fed hike (sometime in mid-2015) started to take shift on that event, we have seen little additional fuel to stoke the dollar’s fire. Speeches from policy officials have fallen into line with the vague calendar the official statement laid out. Perhaps today’s PCE inflation figures (the group’s preferred price measure) gives a little more clarity to speculation, but event risk next week will more likely distract.

A wait-and-see approach to major event risk is common for the markets – especially when the larger catalysts for market movement are lacking for drive. Without a risk drive to highlight the greenback’s safe haven status or a rapidly increasing yield curve to project a competitive rate path for the US, market participants are discouraged from building positioned ahead of event risk that can shape these themes. Looking ahead to next week, there is plenty of event risk to feed both. Top billing will be Friday’s March NFPs release, but a FOMC Chair Yellen Speech, sector activity and key developments from global counterparts can all play a part in shaping rate hopes/fears…and perhaps risk trends.

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Japanese Yen: A Collapse in Household Spending Before Tax Hike

While there have been a few bouts of volatility from the group, the yen crosses in general are still carving out congestion and seeking guidance. Pairs like USDJPY and EURJPY are carving out exceptionally small ranges as expected (implied) volatility measures retreat. This is the type of quiet that should set traders on edge. Not only is the level of activity we have seen as of late unusual against the backdrop of the past year, it is cooling before critical fundamental developments. Next week, the Japanese docket will release industrial production, manufacturing activity, investment flow and the quarterly Tankan updates. Yet, what is truly concerning is the transition of fiscal years. On April 1, Japan will introduce an increase to the nation’s consumption tax – from 5 to 8 percent. This could have a significant impact on domestic demand (and thereby the economic activity) as well as the goal to beat deflation. The BoJ’s next rate decision is April 8, and the speculation of a QE upgrade that was so prominent six months ago is all but gone now. Will fears of a stimulus cap and economic slowdown sink the yen crosses?

Euro Has Adjusted for Dovish View on Next Week’s ECB

The Euro has dropped against most of its counterparts this week. Ranging from a 2.5 percent plunge versus the Australian dollar and 0.3 percent correction against the equally distraught US currency, this uniform retreat reflects on an innate concern with the Eurozone. That is an interesting performance given the steady rise in the region’s sovereign bond yields suggests capital is still flowing steadily into the euro. There are two ways the currency’s and region’s outperformance can be disrupted. If there is a concern that next week’s ECB rate decision will up stimulus, yields will slip. Much more disruptive - if volatility picks up, leveraged periphery exposure would likely collapse.

British Pound Recent Pop Limited but Bullish Bearing Tenacious

A surprisingly strong retail sales report Thursday helped lift the sterling to further short-term gains versus the dollar, euro and yen. The concern with this move, though, is that this historically-volatile series is unlikely to progress the time frame for the BoE’s first rate hike. Therefore, its impact is likely limited. As it stands, market rates show investors are pricing in the first MPC hike around March 2015 and a follow up move by the end of the third quarter. This is notably earlier than the assumptions for the Fed, and the advantage is a zero-rate world is material.

Australian Dollar Rally Continues, Will the RBA Slow It?

The Australian dollar is perhaps the most resolute mover amongst the majors. Its gains versus the majors reflect the impact that a change in monetary policy expectations can have in the FX world. Yet, it isn’t a rate hike that we are looking at just yet for the Aussie dollar – it is merely a retreat from concerns of further rate cuts. Shifting from dovish to neutral is key, especially for a carry currency during a global yield turn.

Canadian Dollar Recovery Begins Before Next Week’s Data Dump

There is a week each month for the Canadian dollar that the data comes heavy. That week lies ahead of us. On the docket looking ahead, we have local employment data, January GDP, trade figures and manufacturing activity. Given the loonie’s impressive run this week, this data can prove integralto upgrading the currency to a true bull trend or it may simply return us to the prevailing bear trend.

Emerging Markets ETF Hits 2014 High, Crisis Adverted?

The MSCI Emerging Market ETF rallied 1.3 percent this past session and in turn pushed the developing world barometer to its highest level of the year. This is a significant change in tack from where we were just a few weeks ago. Are concerns like Crimea, Venezuela and Turkey simply ‘priced in’? Broader volatility figures will determine this segment’s stability. Meanwhile, Russian GDP and a Brazil rate hike lie ahead.

Gold Drops Back Below 200-Day SMA as Stimulus, Panic Retreat

Those hard-won gains are being unwound. Gold officially closed below $1,300 this past session and found its way back below the 200-day moving average having just last month overtaken this trend measure for the first time in a year. This weakness alongside the dollar likely reflects a moderation in speculative appetites. Anti-inflation and anti-currency demand have never really materialized. **Bring the economic calendar to your charts with the DailyFX News App.

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--- Written by: John Kicklighter, Chief Strategist for DailyFX.com

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