Dollar Waylaid by Risk Pressure, Yellen Commentary

Talking Points:

• Dollar Waylaid by Risk Pressure, Yellen Commentary
• Japanese Yen: A Tax Hike Adds Pressure to Economic, Inflation Outlook
• Euro Unfazed by Further Drop In Inflation Measures

Dollar Waylaid by Risk Pressure, Yellen Commentary

The Dow Jones FXCM Dollar Index (ticker = USDollar) shows us everything we need to know about the dollar’s performance through the opening session. Despite an active trading day, the dollar ended relatively unchanged for the benchmark. Though its influence is curbed by a general lack of conviction, risk appetite trends continue to work against the safe haven. We have opened the week to a rise in equities, yen crosses and emerging markets to show a broad rise in speculative appetites – even if momentum comes up short. On the newswires, much was made of Fed Chairwoman Janet Yellen’s remarks that there is still considerable slack and growth and inflation. That is consistent with the FOMC’s lean and a steady Taper. Ahead we have manufacturing and consumer sentiment data, but ‘risk’ may prove more volatility inducing.

Japanese Yen: A Tax Hike Adds Pressure to Economic, Inflation Outlook

A wait-and-see approach to monetary policy is becoming an increasingly dangerous proposition. The opening 36 hours of this trading week have not been kind to Japan’s perceived economic and financial stability. On the data front, we met disappointing measures of business sector activity in the country’s March manufacturing PMI and the drop in the February industrial production statistics. The outlook was equally discouraging in quarterly Tankan surveys projecting a material softening. Outside the data front, the backdrop for growth and inflation had an expected pressure heaped on: an increase in the consumption tax from 5 to 8 percent. Despite all of this, market belief in a QE upgrade is still flat-lined.

Euro Unfazed by Further Drop In Inflation Measures

It doesn’t seem the impetus for the European Central Bank’s (ECB) last rate cut in November carries the same clout amongst Euro traders. This past session, the latest update to the Eurozone inflation statistics reported price pressures dropped to a 0.5 percent annual pace – the lowest pace of growth since October 2009 when it was still negative – while the core measure slumped to 0.8 percent. While these aren’t ‘deflationary’ levels, the risk is nevertheless palpable. Yet, what matters from a trading perspective is whether the central bank takes those concerns seriously. Over the past months, they have played down deflation risks; and it seems the market is acclimating. Though, if they ease on Thursday…

Australian Dollar Traders Find Little Surprise in RBA Decision

There were few surprises from the RBA’s rate decision this morning. As expected, the central bank’s benchmark lending rate was kept at 2.50 percent – but more contentious was the language that accompanied the hold. Looking for any distinguishable sign that the group was take a more hawkish or dovish tack from its previous update, rate watchers were ready to drive the Aussie dollar off its recovery path or taking it to new heights. Yet, Governor Glenn Stevens and crew looked to deflate the tension amongst the highly strung speculators. The comments accompanying the decision stuck to a vow to remain accommodative and inflation expectations were consistent with the group’s target. And, to keep the Aussie dollar in the loop, the RBA reiterated its belief that it was still ‘high’. The AUD needs something more proactive.

British Pound: A Difficult Yield Forecast to Tap Into

Next to the RBNZ, the market holds the Bank of England as the most hawkish leaning of the major central banks. According to short-term market rates, investors are pricing in the first hike from the MPC sometime around March. That is significantly ahead of most counterparts – and notably a fully quarter ahead of the consensus estimate for the FOMC. With the knowledge that the UK central bank is historically more flexible when it comes to altering its policy course, the hawks in the trading ranks are comfortable with maintaining the sterling’s advantage – though not materially advancing it from its current perch. Data this week can help with fine adjustments – though they are unlikely to reset trends. This past session, mortgage approvals for February slipped and net consumer credit maintained steady growth. The manufacturing PMI due today carries a little more weight, but a reaction from Gilt yields is needed if the pound is to make a god of it.

Canadian Dollar Tumble Pauses after Strong GDP, Wage Figures

Though the Canadian dollar didn’t make a convincing effort to reverse its recent tumble, the currency threw the brakes against further losses. As lackluster as the effort seemed, hearty event risk was behind its effort at stability. Between the two noteworthy pieces of event risk on deck through the opening session, the January GDP figures were most recognizable. A 0.5 percent advance through the opening month was slightly better than expected and a strong reversal of the previous month’s equivalent loss. Offering a full monetary policy review, an update to average weekly earnings growth through January gave the inflation view. The 3.0 percent income growth was the fastest in 11 months. This is interesting data to fight rate cut fears, but yields – and the loonie – do not seem convinced just yet.

Emerging Markets Extend Rally, Reserve Bank of India Decision Ahead

At the front end of the ‘risk sensitivity curve’ we find Emerging Markets are throwing in with the rise we’ve seen in equities and yen crosses to start the week. However, unlike its counterparts, this more sensitive asset class is more mature in its recovery. Looking at the MSCI Emerging Market ETF, a further 0.7 percent jump Monday sets the 8th consecutive climb for the standard bearer and a new high for the year to boot. Looking at the performance of the various EM currencies, we can see where much of this strength is coming from. The riskiest of this asset class are showing the greatest gains – insinuating a familiar habit for these markets: ‘buying the dip’ that offers the quickest gains. If this is the quality of our market’s strength, it is founded on exceptionally dubious foundation. For event risk, Rupee traders should watch the RBI decision.

Gold Dredges Fresh Lows Despite Dollar’s Weakness

Despite the indecisive performance from the US dollar to open the week, one of the market’s favorite alternative-to-currencies extended its tumble to start the week. Through Monday’s session, gold dropped another 0.9 percent to a fresh seven-week low. Since the market hit its six-month high two weeks ago, the commodity has dropped 7.8 percent and retraced half of the gains the bulls fought for since the start of 2014. In this retreat, volume on ETFs and futures is swelling more consistently. As for conviction, futures open interest on COMEX has dropped to its lowest level since May 2009 (365,000 contracts) while net long speculative exposure posted its biggest drop since December 3 last week. The speculative drive behind the market is starting to fall apart. **Bring the economic calendar to your charts with the DailyFX News App.

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INTRA-DAY PROBABILITY BANDS 18:00 GMT

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

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