Dollar Advances Alongside Equities As Market Debates September Taper

The positive correlation between the US dollar and S&P 500 is solidifying again – which is a disappointing sign for those looking for an extended and momentous advance for the currency. It is absolutely possible that both the safe haven currency and sentiment-tied benchmark equity index can rise in tandem, but such a climb would be slow and choppy for both. Feeding stocks just off record highs as economic growth maintains a lackluster pace, earnings growth forecasts fade and cheap money evaporates is extraordinarily improbable – borderline impossible. The alternative would be a wave of ‘sidelined’ capital returning to the capital markets. To assume that that will / must happen with asset prices still near record highs falls into the category of ‘hope’. A deleveraging is likely inevitable, and that will no doubt usher a break of the positive correlation and spur the dollar to a much more prolific and momentous climb.

Switching from the big picture to the more immediate tides behind the greenback, the market was once again focusing in on speculation surrounding the ‘Taper’ time frame. There were two explicit highlights for market participants to work with. The first quarter GDP figure proved the source of a considerable debate. Though a ‘final’ reading – second update with more data following the flash reading – the sizable reduction from a 2.4 percent to 1.8 percent pace of expansion does stir concern. Personal consumption’s 0.8 percentage point slip to 2.6 percent was the principle catalyst for the general slowdown. Weaker growth can be interpreted as reducing the probability that the Fed will reduce its monthly QE purchases from $85 to $65 billion at the September meeting – the current consensus amongst economists – but not by much.

The same taper delay / risk booster / dollar weight can be drawn out of Minneapolis Fed President Kocherlakota’s comments this past session. A dovish non-voter, the central banker repeated his lament that the market’s reactions to the Fed warnings were ‘outsized’ and that dates shouldn’t be given on QE. In contrast, Richmond Fed President Lacker – a hawkish non-voter – said he would be “fine with tapering it off right now”. This is a balance of commentary that seems to support a general belief – that pumping the breaks in September seems to be the outcome FOMC members expect as well. In the upcoming US session, we will see the Fed headlines actually increase. On deck, we have Dudley (voter), Powell (voter) and Lockheart (non-voter). Pay particularly attention to the voters. Also, a 7-year Treasury auction is scheduled. The 5-year sale this past session met its lowest demand since August 2009. QE has plenty of influence on speculation alone…

Euro Faces Short-Term Volatility on Data, Lasting Turbulence on Financial Issues
There is plenty going on in the world of Euro-area event risk, but it has yet to generate much consistent influence on the currency. This past session, there were a number of comments that should have caught investors’ attention. ECB President Draghi (and a few of his fellow board members) found it necessary to repeat the bank’s readiness to act should financial conditions seize in the region. The EU’s Dijsselbloem reminded us of Cyprus, saying the country must stay its austerity course. Greek officials also remarked that recent failures in national asset sales towards privatization would not result in a funding gap for the country. Though once moving, it is difficult to stop; it takes a lot to get the ‘Euro Crisis’ theme rolling. Those watching the crisis track will watch the EU Summit details. Short-term traders: German jobs figures.

Japanese Yen: Looking for Stimulus Success in Data, Volatility
How successful has monetary policy in Japan been? How do we measure success – growth and inflation or a cheaper yen? We will wade into this debate in the upcoming session. On tap, we have a dense round of key economic indicators due Friday morning (Thursday evening for the Western world). May data on retail sales, factory activity, household spending, employment and inflation hits all the keys areas of the economy and covers approximately two months of stimulus influence. In the meantime, true success is keeping market volatility under control.

British Pound Drops after BoE Warns of Vulnerability, Osborne Presents Cuts
Under an active stimulus regime – where weak data or policy concerns leads to increased external support – poor data can actually be interpreted as a positive. That isn’t the case for the UK and the sterling where bad news is met by a monetary policy authority that has no plans to play the knight in shining armor. This past session, Chancellor Osborne laid out his plans for cutting an additional £11.5 billion from spending after April 2015; while the BoE financial stability report said UK banks were ‘vulnerable’. Not encouraging without a stimulus counterbalance.

New Zealand Dollar Traders: Keep an Eye on RBNZ’s Currency Report
Reserve Bank of New Zealand (RBNZ) members have been unusually vocal over the past 24 hours. Yesterday, the central bank released the annual Statement of Intent and Governor Wheeler lamented the negative effect of the still-high kiwi dollar. This morning, Deputy Governor Spencer said a rate rise was not an option as it would put pressure on the kiwi dollar – policy via exchange rates? The pinnacle of central bank talk though comes later with the Monthly Assessment of Currency Flows. Did they intervene again? Do they see need to do so soon?

Swiss Franc: EURCHF Poised for Break as SNB Bulletin Due
While we haven’t seen EURCHF return to the SNB’s strictly enforced 1.2000-floor in the past nine months, the pair also hasn’t moved far from the hard floor. The central bank has essentially found itself unsuccessful in materially turning the trend on its currency – the franc- for two full years (when we first dropped below 1.2000). The longer we linger in this area and Euro uncertainty persists, the greater the need for forcible action. We have an SNB Bulletin due today, but it is unlikely to give guidance. A short-term break out is likely from the 1.2300 – 1.2225 range.

Gold Sets Another Multi-Year Low on Another Jump in Volume
Another 4.0 percent ($51) collapse from gold pushed the metal to its lowest close since August 2010. The pain simply doesn’t stop because the diehard holdouts for an ever-lasting bull run continue to jump ship. We are two days from the end of the quarter; but we can already see how the high time frame view will look unless there is a dramatic, last-minute rebound: awful. Currently, the second quarter 2013 has seen gold bleed 23 percent of its value – the most dramatic loss on record.