Talking Points:
- Dollar Suffers One of its Biggest Drops in 4 Months - a Risk Move?
- Euro Near-Term Outlook Decided by How Extreme Greece Situation Seen
- Australian Dollar Recovers Losses after RBA Cuts Rates
Dollar Suffers One of its Biggest Drops in 4 Months -a Risk Move?
The Dollar took a tumble this past session, and it is unlikely a coincidence that the retreat happened at the same time US equities charged higher. However, the standard connection of a ‘risk appetite’ swell weighing a benchmark reserve currency doesn’t fit the terms we have seen for the currency as of late. A positive correlation between the S&P 500 and US Dollar over the past months has evolved out of a mixed backdrop for speculative returns as well as the premium afforded the Greenback for its relatively hawkish monetary policy lean (on track for a hike where most others are neutral or easing). It is similarly unlikely that Minneapolis Fed President Kocherlakota’s remarks that the central bank should consider the option of reactivating QE purchases should inflation not take root had a profound effect on the market’s compass. Not only the policy official a well-known dove who has made similar suggestions before; but he is facing an increasingly hawkish opposition as commentary from Bullard, Williams and Fisher illustrated at the end of last week.
So, why would EUR/USD rally 1.2 percent – the third largest rally in 18 months? The dramatic reversal from oil the past three active trading days likely points to a more functional explanation. Not only are commodities broadly priced in Dollars – which would infer a mirror performance – but they represent a similar one-sided view in the market. Speculative interests have driven crude and other commodities substantially lower over the past weeks and months; and the same persistence has been evident in the US Dollar’s record-breaking, 7-month rally as well as the record net long speculative futures interest seen in COT data. The question moving forward is whether the speculative rebalancing theme continues or if a new motivation for selling the Dollar specifically arises to supplement. ADP payroll figures are unlikely to motivate a change in Fed rate forecasts ahead of Friday’s NFPs, and a dedicated risk rally is difficult to fuel – not to mention connect to an unused ‘reserve’ status.
Euro Near-Term Outlook Decided by How Extreme Greece Situation Seen
The Euro advanced against all of its major counterparts Tuesday. What’s more, the intensity of the move for pairs like EUR/USD, EUR/AUD and EUR/JPY was especially aggressive. Strength seems unusual in the face of a new QE program that will soon be activated as well as ongoing tensions between Greece and the Troika over the former’s debt. Yet, on both fronts, a considerable amount of bearishness has been priced in. We are unlikely to see a shift in the central bank’s accommodative position and positioning amongst the majors as a top dove, but the fears surrounding Greece can fluctuate. Heading into the Syriza victory, fear of an inevitable exit from the Eurozone grew and was initially confirmed by Prime Minister Tsipras’ vow not to negotiate. However, in true Game Theory (which the Finance Minister is well practiced in) fashion, we have seen the country’s position slowly work back to a more realistic compromise. A meeting with Draghi today is the next milestone.
Australian Dollar Recovers Losses after RBA Cuts Rates
The Australian Dollar illustrates another case of market expectations conditioning the response to high profile event risk. The RBA announced its first rate cut (25 bps to 2.25 percent) since August 2013. Swaps were pricing in a 58 percent probability of this outcome, so there many were unprepared. However, with this cut the rate is still substantial and the RBA remains a ‘dovish’ lean. AUD recovered a lot of ground.
New Zealand Dollar Tumble Has Further To Go According To RBNZ’s Wheeler
In the past six months the Kiwi Dollar has dropped as much as 19 percent against its US counterpart. However that isn’t enough of an adjustment to fit the fundamental backdrop according to RBNZ Governor Wheeler this morning. He said the New Zealand currency remains ‘unjustifiably’ high. Yet, the markets prefer action to commentary. Swaps price in 30 bps of cuts in 12 months – if that tempers, NZD may climb.
Oil Briefly Returns to Technical ‘Bull Market’
The active US crude oil futures contract rallied an impressive 7 percent this past session. More impressive is the three-day rally that at one point saw the market up over 20 percent from last week’s six-year low (the technical definition of a bull market shift). Is this a turn to recover six months of losses? While the short lean on the market may have been clipped, the supply and demand factors haven’t changed materially.
Emerging Market Assets and Currencies Rally Amid Equity Jump, Dollar Slump
With the bid for oversold equities gaining purchase, appetite for higher-yielding emerging market assets would be an expected outcome. The MSCI ETF would jump another 1.9 percent this past session – though on surprisingly tame volume. Meanwhile, the Bloomberg’s EM Sovereign Debt Index advanced to a record high 147.78. Among the FX listings, only three EM currencies would lose ground to the Dollar. Leading the majority of gainers for the session was a 4.8 percent scrum from the Russian Ruble. Following last week’s surprise Central Bank of Russia rate cut (from 17 to 15 percent), the effort to stabilize capital outflow and exchange rate volatility has taken unusual turns.
Gold: Why Didn’t the Metal Take Advantage of the USD Drop?
The broader commodity bloc rallied this past session with the CRB Index posting its biggest single-day rally in two-and-a-half years. However, a notable absentee in this strong performance was gold. The precious metal actually dropped 1.1 percent through Tuesday to firm up the support shaping up just above $1,250. Where short-side speculative covering is likely a contributing factor to the energy group’s jump, there was little of that same one-sided market sentiment setting the stage for gold. In fact, the COT’s net speculative futures positioning statistics have shown net long exposure has grown five straight weeks and currently stands at its highest level since November 2012 (177,605 contracts).