Dollar Slow Advance Sidetracked by S&P 500 Surge

• Dollar Slow Advance Sidetracked by S&P 500 Surge

• Euro Holds Fast Despite Sharp Drop in Inflation

• Yen Crosses Fail to Authenticate Risk Run

Dollar Slow Advance Sidetracked by S&P 500 Surge

Though the US Dollar’s relationship to risk trends has been confused over the past months, a record high from the S&P 500 certainly leverages the occasion of a bearish close from the safe haven dollar. The benchmark equity index managed to overtake the 1,850 range high that has capped the market since we first approached the level on the final trading day of 2013. However, the headline-grabbing move couldn’t muster enough fortitude to keep above the threshold into the close. Digging further into the impetus behind the ‘risk on’ position of the day, we would note that the yen crosses and Emerging markets were little moved. What does this tell us? That the market is still lacking for the bullish commitment that would help us scale resistance and engage a new wave of capital inflow into the financial markets (in other words transition a breakout into a trend). The limited level of confidence translates into limited losses for the greenback. The Dow Jones FXCM Dollar Index (ticker = USDollar) was down 0.2 percent – breaking the five-day run before it but not causing any panic. In the upcoming session, we should focus more on the ‘depth’ of any risk tides. Otherwise, the docket brings a Fed Tarullo speech and a Consumer Confidence survey.

Euro Holds Fast Despite Sharp Drop in Inflation

We should be no strangers to complacency nowadays – the charge in US equities and record use of leverage is testament to that – but the euro’s steadfastness in the face of mounting data goes beyond the calm of a quiet fundamental backdrop. For the euro, the heavy capital inflows that chased the region’s post-sovereign and banking sector crisis yields are facing an outlook of far greater restraint than the economic figures are suggesting. As the ECB is wont to warn, ‘downside risks’ remain for the region. The question is how tangible and concerning those risks look. The central bank has refused acting preemptively since its November rate cut, but Monday, the Eurozone CPI figure for January dropped a record 1.1 percent. We have the EU’s economic forecast update today, while Thursday offers February CPI and January jobs data.

Yen Crosses Fail to Authenticate Risk Run

Perhaps one of the best indications that Monday’s risk move was lacking for momentum that could mount a new wave of optimism was the yen’s performance. Where the currency did drop against its higher-yielding counterparts (the crosses advanced), the move was restrained and cowed by resistance. This doesn’t mean that we won’t eventually find a renewed bullish drive, just that this thrust is not one with terminal velocity. Meanwhile, the CFCT net speculative holdings on yen futures increased a second week. While not a large increase, it halts a 2014 bullish trend.

British Pound: BoE Hike Hopes Fading in Rates Market

Swaps have proven a poor conduit for interest rate expectations for the UK. Far better are the sterling, Gilt yields and Libor curve – in that order Looking to the rates market, we have seen a flat line – or more appropriately, a wedge.This is a threatening development not as in a reversal warning, but an indication that a sharp move is likely on its way. With the sterling still treading just off multi-year highs, an unwind is a real risk.

New Zealand Dollar: Surge in Inflation Expectations Cut Short

It’s true that the New Zealand dollar’s backdrop interest rate outlook is the best amongst the majors. And, the hawkishness doesn’t seem to be diminishing. According to swaps, the market assumes a 94 percent probability of a hike in two week’s (14 of 15 economists submitting forecasts to Bloomberg expect the same) and the 12-month outlook is pricing in 115 bps of cumulative tightening. Yet, despite this hawkishness, the bullish opportunity seems to have been tapped.Wehave seen this level of certitude for the past two months – and in that time, most of the majors are little moved vs the kiwi. This morning, the sense that current prices are properly calibrated for expectations was reinforced by the release of the RBNZ’s 1Q 2-year CPI forecast survey. The measured eased a second cord to 2.33 percent – well below the target range top.

Natural Gas Suffers Biggest Drop in Over Six Years: Weather to Expiry

While the US equity performance stole the headlines this past session, the top move for the day belongs to Natural Gas. The energy commodity market favorite suffered an incredible 11.3 percent collapse on the day via NYMEX futures – the largest single-day loss since August 20, 2007. As we say, volatility begets volatility. And, the frequent sharp rallies as of late to five-year highs set the market up for an equally aggressive move in the opposite direction. For other avenues of explanation, the frequently-used ‘weather’ account actually makes sense here as storm activity has settled and temperatures have warmed in the US. In addition, Wednesday is the last trading day for the February futures contract, and rolling into the next contract general starts a few days in advance.

Emerging Markets Mixed Despite Lift in US Equities

At the conclusion of the G20 meeting in Sydney, the world’s largest monetary policy groups vowed to maintain growth-friendly agendas and to consider what impact their moves may/will have on the Emerging Market world. As encouraging as that sounds, the EM currencies seemed to be little impressed. Normally, the Emerging Market currencies and markets are tend to represent the leading edge of the general risk spectrum. Yet, despite the impressive performance by the shares market Monday and the intraday record high made by the S&P 500, there was little guidance or conformity from EM. The MSCI EM ETF was unchanged for the day on moderate volume, while the currency list was split for performance (most falling between 0.2 percent advance or decline on the day). In the upcoming session, keep an eye out for South African 4Q GDP.

Gold Spot Price and Speculative Longs Hit Four-Month Highs

A 1.0 percent rally by spot gold, 1.1 percent surge for gold futures and 1.1 percent run for a key gold ETF (the SPDR Gold Shares) sent all three to four-month highs. This jump happens to coincide with the dollar’s tumble and the CRB Index’s gap to 12-month highs. The traditional fundamental ‘appeals’ of the precious metal were engaged, but certainly not rousing the level of excitement that we would normally associate with pressing to new highs. This looks to be more of a ‘market conditions’ development. A broad advance in commodities – metals, energy and even ‘softs’ – is lifting the broader asset class. Looking at how traders are positioning in the metal, volume behind Monday’s jump was the second highest for the year. From the CFTC’s COT figures, we find speculators in the futures market have moved up their exposure to highest let long position since the week of November 8. Meanwhile, the SSI shows the longest stretch of short interest in years.

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

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