Euro: Should We Worry About Demands for More Currency Intervention?

Talking Points:

• Dollar Advance Stalls as Yellen Comments and Beige Book Chewed
• Euro: Should We Worry About Demands for More Currency Intervention?
• British Pound Rallies on Strong Jobs Data, But Not Enough for Next Bull Leg

Dollar Advance Stalls as Yellen Comments and Beige Book Chewed

With Friday’s liquidity drain closing in, the dollar is focusing even more intently on the ebb and flow in interest rate expectations for its bearings. Against its major counterparts, the greenback moved higher against all but the pound and Australian dollar - both currencies charged by heavier fundamental catalysts. Though generally higher on the day, the lack of conviction would mean the equally-weighted Dow Jones FXCM Dollar Index (ticker = USDollar) would break its three-day rally with a 0.1 percent slide. Yet, if moderation is the course ahead and a rebound in Treasury yields is the course, the greenback may find itself relatively unimpeded in a slow rebound through week’s end.

Market conditions are of critical importance to trading through the final 48 hours of the week. With the a good portion of the speculative world offline Friday (North American, European and Australian markets amongst others), the appetite to take large positions will be low – and the ability to feed momentum behind new trends will be even lower. Under such circumstances, we are more likely to see positions unwound than new ones established; which in turn may pull pairs like EURUSD and GBPUSD back into ranges. In the meantime, monetary policy forecasts will continue to shape the dollar’s bearings. This past session, a Fed Chair Janet Yellen anchored a round of central bank speeches that resulted in a broadly ‘status quo’ outcome. The Fed’s Beige Book – the districts’ economic assessments used for policy decisions – was issued with a tangible optimistic lean for growth and employment evaluations. How did the market read it? Treasury yields were little changed on the day but swap rates extended their gains. Ahead, we have jobless claims and a 5-year TIPS (inflation-protected Treasury) sale to digest.

Euro: Should We Worry About Demands for More Currency Intervention?

Verbal threats against the euro seem to grow by the day. French Economy Minister Arnaud Montebourg remarked in an interview Wednesday that he wanted Eurozone members to meet in the near future to discuss the high level of the euro and evaluate monetary policy. While this is unlikely to result in actual change or a threat to the ECB’s independence, it is a reflection of the pressure that the central bank is under to curb the strength of its currency and fight a downtrend in inflation pressures. We were reminded of weak price growth today with the final readings of the region’s CPI figures. Expected to remain unchanged, the core figure actually ticked down to match a record low 0.7 percent reading. The likelihood of the central bank either cutting rates or introducing new unconventional policy in the near-term is growing. The question is whether this will curb the inflow of speculative capital and take the pressure off 1.4000 for EURUSD and policy officials.

Market conditions change, and our strategy should reflect those changes. We have coded the DailyFX-Plus strategies for Breakout, Range and Momentum to adapt to these market shifts.

British Pound Rallies on Strong Jobs Data, But Not Enough for Next Bull Leg

The UK inflation statistics Tuesday were met by a distracted and tepid pound response. That ultimately worked in bulls’ favor as the data further undermines expectations for an earlier rate hike by the Bank of England considering headline CPI slowed to its weakest pace since October 2009. Where unfavorable data was downplayed, the market would leverage the impact of the positive news this past session. Jobless claims for March dropped by 30,400 – generally in-line with expectations – but the ILO unemployment rate for February unexpectedly dropped 0.3 percentage points to a five-year low 6.9 percent. Yet, when it comes to jobs versus inflation – the latter typically necessitates rate hikes.

Canadian Dollar Modestly Weaker after BoC Rate Decision

Bank of Canada Governor Stephen Poloz left monetary policy untouched – as expected – at the most recent rate decision. However, the dovish lean remained in the central banker’s commentary. A reiteration that the door couldn’t be shut on possible future rate cuts positions the loonie well below the current bearings of the BoE, Fed and even the ECB. Ahead, Canada’s docket holds one of the few meaningful releases left amongst the G10 – March CPI figures. Poloz said any near-term inflation spikes would be transient . Let’s see if that warning was needed.

New Zealand Dollar: Swaps Still Show Certainty for RBNZ Hike, But Kiwi Isn’t Advancing

Is the Kiwi already pricing in an aggressive pace of rate hikes from the RBNZ going forward? Despite the weaker-than-expected 1Q CPI reading released earlier in the week (1.5 percent, where the target zone is 2 to 3 percent), swaps show a 97 percent probability of a follow up rate hike at the central bank’s next policy gathering next Wednesday. That said, government bond yields are floundering against a trend of lower foreign holdings and the New Zealand currency is trading lower. Can the market fully price an additional 200 bps worth of hikes this far forward?

Chinese Yuan Firms Slightly after Premier Li Says No Stimulus

For speculators, one of the silver linings of the notable cooling in the Chinese economy as of late is the potential for fresh stimulus that creates inefficiencies to invest around. Yet, following the soft 1Q GDP figures, Chinese Premier Li Keqiang stated this morning that there are no plans to consider large stimulus programs at the moment. The desire to balance the financial leverage in credit growth with the threat of stall-speed economic activity finds officials acting with restraint. This can significantly dampen the global expectations for high returns.

Emerging Market Rebound in Market Calm, Real Tumbles and Ruble Rallies

Emerging market capital markets recovered some of the ground they lost on Tuesday. However, there was a notable lack of conviction in the bounce in both price and volume. For the MSCI ETF, the 0.5 percent rebound was founded on less than half the volume of the previous day’s tumble. Looking at the rankings for the currencies, the Brazilian real suffered the biggest loss on the day (0.5 percent vs the dollar) on reports authorities may end their support of the currency. A 0.5 rally for the Ruble reflected tempered fears of an escalation over the Ukraine.

Gold Loses Momentum and Volume

A slow but steady bearing for the US dollar and balance in risk appetite across global financial markets equates to an unfavorable backdrop for the world’s ‘alternative asset’ – gold. The metal was virtually unchanged on the day despite a broad trading range through the period. Volume in the derivatives market reflects the lack of impetus. The SPDR Gold Shares ETF recorded turnover two-third of the month’s average. On a participation-basis, open interest in gold futures is slowing picking back up from its five-year low set earlier in the month. **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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