Dollar Rally Extends And Breaks Key Levels Along The Way

Talking Points:

• Dollar Rally Extends And Breaks Key Levels Along the Way
• Euro: Greece Risk of an Accident Growing
• Japanese Yen Pairs Conviction Uneven but USD/JPY Propelled to 7-Year High

Dollar Rally Extends And Breaks Key Levels Along the Way

The dollar started a strong move through the close of the past week. The strongest weekly launch for the Greenback in nearly two years was a convincing effort from a currency that spent the previous five weeks in retreat. There was only one problem: an extended holiday weekend in the US and a few other key financial centers (UK, Germany, Hong Kong) threatened to thin the ranks and suffocate speculative momentum. Monday’s session was certainly lacking for conviction, but it didn’t encourage the recent swell in speculative interests to simply abandon their post. And, when liquidity filled out this past session, the world’s most liquid currency picked up where it left off.

In the past session’s performance, the dollar gained ground on all of its counterparts and further notched its seventh climb in the past eight trading days. Whether or not this move continues to build upon recent critical breaks – EUR/USD 1.1000, GBP/USD 1.5500, USD/JPY 122 – depends on what has motivated the drive to this point. A revived appreciation for the Fed’s monetary policy lead seems to be taking the reins, and that would be an effective enough motivator to sustain a run with the proper fuel. Building on the strong combination of Friday’s core CPI uptick and Fed Chair Janet Yellen’s remarks for a 2015 first hike, the news feed reinforced the hawkish swell this past session. On the data front, a durable goods improvement led to an upward revision in growth forecasts and consumer confidence marked an unexpected uptick. Meanwhile, following in his colleague’s footsteps, Vice Chair Stanley Fischer seconded the sentiment of a hike before year’s end. There is considerable room for speculation as to how much premium has been afforded the dollar for its advantageous rate forecast, but with Fed Fund futures tables still pricing a first move out in January 2016, there is short-term potential to be squeezed.

Monetary policy may be a ready contributor to the dollar’s advance, but fuel is needed for this long burning fire. That said, the docket ahead doesn’t provide the same type of kindling. Treasury auctions and MBA mortgage applications are the extent of scheduled event risk. Bulls may be able to find supplement to timing the first FOMC hike (and the subsequent pace thereafter) if risk aversion grows legs. This past session, with the return of liquidity the S&P 500 took a tumble with many other sensitive assets following suit. The problem with any ebb in speculative appetite is that complacency has proven consistently a stronger market force. Richmond Fed President Jeffrey Lacker reminded us this morning of the risks that lurk even within our field of vision. He remarked that distorted incentives have contributed to the erosion of financial stability – a different way of noting the ‘costs’ associated with the catchall of stimulus. When will the market pay closer attention and adjust to these more frequent warnings? It seems not yet. As an aside, Lacker said he wouldn’t write off a June hike just yet.

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Euro: Greece Risk of an Accident Growing

The last self-imposed ‘make or break’ deadline for Greece passed a few weeks ago, and there has been little evidence that progress has been made since that transition back into the game of financial roulette. Allianz Chief Economic Advisor Mohamed El-Erian put the risk in perspective when he assessed that risk of a financial ‘accident’ in Greece (running out of cash) was growing. CDS and bond yields support this fear.

Japanese Yen Pairs Conviction Uneven but USD/JPY Propelled to 7-Year High

The yen crosses rose across the board this past session, but the stand out was clearly the stand out. Backed by a general bid for the dollar, this pair cleared seven months of resistance – the top placed after the QQE upgrade in October – and charged to a fresh 7 year high above 122. Yet, not all pairs were showing this motivation. What’s more, the risk backdrop opposed this carry appetite. USD/JPY won’t be able to go it alone.

Australian Dollar Suffers Weak Chinese Data, Tempered Commodity Prices, Weak Housing

One of the worst performing major currencies this past session, the Aussie dollar was plagued by a number of issues. A drop in key commodity prices for which the country is a notable exporter of would saddle the bulls. In addition to the general risk aversion, the data would also find this morning a drop in 1Q Aussie construction and persistent slump in Chinese consumer sentiment. Not much is going the Aussie’s way.

Canadian Dollar Likely Faces No BoC Changes…But Vigilance Worthwhile

As a base case scenario, the Bank of Canada is unlikely to change its bearings on policy today – either officially or through rhetoric in its statement. However, the market has proven exceptionally sensitive to perceived shifts in the ‘comm bloc’ policy groups. At its last meeting the BoC turned dead neutral on its view for policy moving forward. That sets a very fine line to walk and a ripe situation for speculators to respond.

Emerging Markets on Verge of Bigger Retreat, Ruble and Real Selling Gaining Purchase

Emerging Markets have proven one of the more willing asset classes to take a tumble on waning speculative appetite this week. The iShares MSCI Emerging Markets (ARCA:EEM) ETF dropped back to its lowest level in nearly two months this past session on rising volume. Key currencies have also given back ground versus the USD (RUB, BRL, INR). It doesn’t help that the Fed’s Fischer suggested EM is sensitive to FOMC moves but prepared.

Gold Suffers Sharp Drop, Another One-Off?

Like other metals and general commodities priced in Dollars, gold suffered a sharp decline this past session. We have seen abrupt tumbles like these multiple times over the past few months, but they have consistently turned out to be one-offs that would ultimately hold to congestion (rather than revive bullish interests). Whether the precious metal is ready to commit to a serious tumble likely has much to do with the USD.

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Written By: Dailyfx