Dollar Posts Another Rally But Still Short of Bull Trend

The dollar posted a remarkable performance this past session. Leveraging a rally against all its most liquid counterparts – between both high yield currencies like the Australian dollar and fellow safe havens like the Japanese yen – the greenback managed its strongest move in nearly 10 months. Putting a number to the performance, the Dow Jones FXCM Dollar Index (USDollar) enjoyed a 0.8 percent rally – the best move for the benchmark since June 21, 2012. Fundamentally speaking, this performance wasn’t too surprising. There was a clear sense of risk aversion that fed the greenback’s safe haven status.

From the regular measures of ‘fear’, the S&P 500 put in for a substantial 1.4 percent drop (completely wiping the previous day’s gains), while the VIX volatility index temporarily jumped above Monday’s high and settled at 16.5 percent. Widening our gaze, a more convincing picture of concern was seen from the concert ‘risk off’ move seen in equities, commodities, Treasury yields and FX carry trade exposure. Yet, as significant as the sentiment move through the cross-market picture; it is clear that we have not yet made the critical transition where fear overtakes greed (complacency?) and leads a self-sustaining bear trend. From a technical perspective, the S&P 500 is still supported by 1,545 and the USDollar has not revived its effort to overtake 10,600.

To transition to a market-wide effort of risk deleveraging, we need a push that offsets the anesthesia delivered by the central banks’ incredible stimulus program. The Fed Beige Book released this past session was a weak contributor to this theme. Showing ‘moderate’ growth across the country, it tempers the need for ongoing QE; but it doesn’t meaningfully move forward the end of the program. Meanwhile, the progress of the 1Q US earnings season seems unable to convince investors to throttle back on cost cutting-led revenue growth despite a weaker showing from Bank of America. Moving forward, the G20 meeting may stir competitive stimulus conversations as well as Eurozone crisis issues; but that is far from action. If the scales are to tip this week, it would likely be an unforeseen event or purely the heft of speculative interests.

Euro Tumbles as Market Makes Currency Pay for Undeserved Rally
The euro’s performance Wednesday was the antithesis of its strength the previous day. That is fitting given that the headlines offered little support for that140-pip advance. Once again, the headlines were particularly unflattering for the shared currency. Traders were talking about Cyprus’ announcement that it would have to vote whether to agree to the rescue package – where many believed that agreement was implied. Ratings agency Egan-Jones announced it had downgraded the region’s anchor (Germany) from A+ to A and left it with a ‘Negative’ outlook. Former ECB member Bini-Smaghi said the ECB would look to keep the euro from appreciating going forward which focused market participants’ focus on Bundesbank head Weidmman’s comments that rate cuts may become necessary in the future. Then there was the IMF’s Financial Stability report that essentially named the Eurozone periphery as the world’s greatest threat.

British Pound Ignores BoE’s Refusal of Stimulus, Hit by Jobs
The sterling was a mixed bag yesterday. On the fundamental side, the docket served up serious concern about the state of the UK’s economy when the National Stats Office reported a concerning view of the labor market. While jobless claims for March dropped by 7,000 filings, the ILO measure of total unemployed jumped by 70,000 – the biggest increase since November 2011. With the unemployment rate rising to 7.9 percent and stagnate wage growth, that recovery looks further off. This unfavorable data print could have been overlooked had the market acted on overleveraged BoE stimulus expectations. The minutes showed the BoE ignored the Exchequer’s remit and voted again 6-3 to hold policy as is. Yet, that reality did little to feed a fundamental recovery from the pound. Winning the stimulus war isn’t doing much for the sterling.

Japanese Yen Thwarts Tumble as US Equities Anchor to Support
Having suffered a three-day slump through Monday, the yen crosses were coming dangerously close to turning the tides on the Bank of Japan’s carefully crafted bull trend. We are still above the critical levels that define the bullish momentum for the various pairings, but risk aversion this past session has prevented a move to truly revive the USDJPY’s and other pairs’ run. With the BoJ working to devalue the currency, we need a concerted and active catalyst to rally the yen. Meanwhile, the distortion is obvious and appealing. The Japanese Ministry of Finance’s weekly capital flows report showed ¥1.57 trillion in foreign purchases of Japanese stocks last week – a record.

Canadian Dollar Eases Against USD Despite Carney’s Hawkish Rhetoric
USD/CAD put in for a noticeable advance for the day, but the Canadian dollar eased back against all of its other major counterparts. The loonie felt the appeal of risk aversion through the day, but more mundane fundamentals took over for the rest of the market. The Bank of Canada (BoC) kept rates unchanged and Governor Carney reiterated the next move would be a hike, but he also downgraded growth forecasts.

Australian Dollar Risks Growing as Bond Yields Drop, Risk Trend Unstable
Risk aversion is good enough reason for most FX traders to move out of the high-yield Australian dollar. However, the fundamental degradation went deeper than this elemental connection. The benchmark 10-year Australian government bond yield, dropped to a four-month low 3.174 percent this morning. This could be a sign of demand, but recent bond auctions don’t support strength – nor does futures volume.