Dollar Holds its Range as Traders Look to SPX and NFPs as Loaded Catalysts

Talking Points:

• Dollar Holds its Range as Traders Look to SPX and NFPs as Loaded Catalysts
• Euro: Is There More Easing from a Well-Priced ECB Stimulus Program?
• Australian Dollar Refuses to Break 0.79 Despite RBA Hold, Data, China Improvement

Dollar Holds its Range as Traders Look to SPX and NFPs as Loaded Catalysts

Event risk to start this week has not been concentrated enough to drive the Dollar from its five-week range. Monday’s round of economic indicators was the most potent hit. Manufacturing and construction activity reports bowed to the personal income and spending data for January. Spending eased, but adjusted for inflation driven by items like cheaper gas prices, this foundation for GDP actually grew (0.3 percent). More interesting from this mix was the income component which reinforces the earnings figures seen in the January NFPs data run with another 0.3 percent increase. As for the inflation statistics that are derived from this consumer data – the Fed’s preferred PCE measures – the core figure held steady at 1.3 percent. Moving forward, the focus for Dollar traders should remain on two particular themes: counterpart strength and anticipation for Friday’s labor data. With the ECB set to activate its QE program this week, the PBoC surprising with a cut over the weekend and other major counterparts keeping a weak path; the Dollar looks slightly more attractive each day. But that marginal gain in popularity will be dampened as traders nervously await the Bureau of Labor Statistics to report February jobs numbers.

Euro: Is There More Easing from a Well-Priced ECB Stimulus Program?

The Euro faces a similar quandary to the Dollar: how efficiently have the markets priced in future policy changes? For the Greenback, the market is trying to price the probability and impact of a rate hike sometime ‘mid-2015’. For the Euro, the question is how much depreciation should be wrung from the introduction of a QE program. The ECB confirmed an open stimulus program at its last meeting and speculation of its arrival drove the currency down well in advance of the approval. So, how much further does the market run on established trajectories? That depends on the bearings of its counterparts, the details (particularly triggers for upgrade) of the program and the revival of other factors like Greece.

Australian Dollar Refuses to Break 0.79 Despite RBA Hold, Data, China Improvement

A range of fundamental event risk these past 48 hours has contributed to a measurable improvement in the Australian Dollar’s prospects. And yet, AUDUSD has proven incapable of returning to 0.7900 – much less overtake it. An unexpected hold from the RBA led some doves to shake some of their bearish exposure while 4Q GDP figures that were generally inline with a moderate trend of expansion offer a foundation for the carry currency. Meanwhile, better than expected Chinese PMI figures and easing by the PBoC engendered limited indirect strength.

Chinese Renminbi Hits 6.30 Versus Dollar After Weekend PBoC Rate Cut

The Chinese Yuan hit a two-and-a-half year low against the US Dollar to start this week. The USDCNH surge was in response to an unexpected policy move by the People’s Bank of China (PBoC) on Saturday. The second cut to the country’s benchmark lending rate in four months (to 5.35 percent) is showing an uncharacteristic preference for broad monetary policy tools where historically the group has used more directed tool. This may be a sign of concern for the country’s economic slowdownand raises the probability of a shift to more unorthodox means.

Canadian Dollar Traders Question Whether BoC Can General More Volatility than RBA

After the tepid follow through from the speculative ranks after the RBA decision, interest surrounding today’s Bank of Canada (BoC) policy meeting is likely to be more reserved. Even before the Australian group surprised with a hold on policy, the market was cooler to the idea that Canadian authorities were going to pursue consecutive rate cuts. Looking at consensus forecasts from Bloomberg-polled economists, 22 percent expect the group to lower the benchmark another 25 percent. That creates a more distinct scenario break for market impact however. Holding will have an even more subtle impact on the Loonie than the RBA did on the Aussie. That said, should they actually cut, a far greater portion of the market would be caught off guard and thereby would need to reposition.

Emerging Markets: Brazilian Real Hits Decade Low Ahead of Rate Decision, Ukraine Raises Benchmark Rate to 30%

The Emerging Markets have seen an exceptionally busy start to the week. While the capital markets measured by the MSCI ETF may not reflect the tumult on the newswires, currencies are proving more sensitive. So far this week, the top news aside from the PBoC rate cut was Ukraine’s announcement that it would lift its benchmark rate from 19.5 to 30 percent in an effort to curb capital outflows. Meanwhile, the Russian Ruble gained 1.0 percent on the Dollar as international coverage over Ukraine moved off financial media outlets’ first pages. In monetary policy news, the Reserve Bank of India (RBI) announced an unexpected 25bp cut to its repo rate to 7.50 percent this morning. The Brazilian Real was the biggest movie on the day with a 1.3 percent drop versus the USD ahead of its own central bank decision (expected to be a 50 bp hike).

Gold Returns to $1,200 but is There Greater Value in a Stimulus-Destabilized World?

Gold lost traction on its record breaking run after the Federal Reserve’s first wave of stimulus leveled off. When the pace of expansion of the central bank’s balance sheet started to level off and its limitations made known, the precious started to lose significant ground. The US Dollar represents the world’s reserve currency, so its debasement was a strong motivation to drive funds already reeling from the Great Financial Crisis to an alternative store of wealth. Today, the Greenback has rallied substantially but many of its most liquid counterparts are attempting to compensate. With the ECB starting a QE program while the BoJ continues with its own and the PBoC makes pre-stimulus moves, the alternative appeal of the precious metal builds. Yet, perhaps that tipping point for a market made skeptical by congestion would be a disaster borne of the world’s cumulative stimulus efforts. From futures we saw open interest more than double from the late-2008 low to late-2010 peak of 651,000 contracts. Today, that interest stands at 407,000 with ETF demand slowly trying to rebuild. Perhaps there is interest/fear.

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

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