Dollar Mixed as Risk Winds Stir, Treasury Auction Warns of Inflation

• Dollar Mixed as Risk Winds Stir, Treasury Auction Warns of Inflation
• Euro Dodges a Bullet on Spanish Auction, Still Plenty of Trouble Ahead
• Canadian Dollar will Put its New Found Hawkish Bearing Up to CPI
• Australian and New Zealand Dollar Rate Forecasts Meeting in the Middle
• British Pound: Posen Keeps up the Optimism…and the Currency
• Japanese Yen Sliding as BoJ Vows to Boost Stimulus to Hit CPI Target
• Gold Breaks its Worst Bear Trend in Months With a Similarly Lackluster Bounce

Dollar Mixed as Risk Winds Stir, Treasury Auction Warns of Inflation

Technically, the Dow Jones FXCM Dollar Index (ticker = USDollar) closed Thursday with its third consecutive advance – matching the most robust bull trend for the benchmark in five weeks. Yet, direction does not tell us the full story. To gain a full appreciation of the dollar’s performance, we should look at the activity level as well. Using the Average True Range (ATR), we find that the greenback is the most sedentary we have seen since the Index series’ range stats began (almost exactly a year ago). Looking at the two most fundamentally-expressive components of the equally-weighted composite, we are offered similar assessments. Top liquidity player EURUSD has a one week activity reading of 88 pips while the favored carry pair AUDUSD has tallied only 74 pips, but the weakest readings since December. Technical traders recognize the implications: exceptionally quiet markets often precede meaningful breakouts and potentially even trend generation. Yet, this isn’t just a technical observation. Price action matches fundamentals better than many appreciate.

This past week is a reminder of the pressure that has built behind existing exposure and future intentions for investing. Perhaps the most concerning disconnect comes through the lack of reaction for the wave of first quarter earnings. On my docket of important US banks and blue chips, only three firms printed below the consensus estimate so far. Yet, despite all of the better-than-expected readings, we find the S&P 500 has been neatly contained to a less-than 30 pip range. Notwithstanding the conspiracy theorists that put the entire equity market’s health in Apple’s hands (their numbers are due next Tuesday), this is a decidedly bearish situation whereby positive developments are not encouraging risk taking. Perhaps the markets are better appreciating the influence of stimulus and flexible accounting rules.

Another interesting development over the previous session was the take on five year TIPS (Treasury Inflation Protected Securities). The record $16 billion sale of inflation-hedged government debt drew a previously unheard of -1.08 percent yield. That is a significant, negative return to accept and is a clear sign that the market is concerned about the inflation implications that the Fed’s stubborn policy approach will lead to. Worth considering is that if inflation is considered such a concern going forward, the Fed may find be encouraged to move up its time frame for hikes.

Euro Dodges a Bullet on Spanish Auction, Still Plenty of Trouble Ahead

Expectations were high for Spain’s first 10-year bond auction since January 19. Ever since the near-failed auction of medium-term debt earlier this month, we have seen the market’s sensitivity to Spanish financial troubles peak. Yet, the fear of an impending bank or sovereign-level financial crisis leading into necessary bailout must not be that prominent as the euro seemed soothed by the fact that demand was health and the full allocation was sold – even though yields continue to rise. If this is the extent that tangible fundamentals raises, headlines may not be enough to develop a trend. Barring a wholesale shift in risk trends, euro traders will now keep the focus on the upcoming French election.

Canadian Dollar will Put its New Found Hawkish Bearing Up to CPI

Earlier this week, the market interpreted the Bank of Canada’s suggestion that the removal of stimulus “may become appropriate” as a sign that the group is preparing for its first hike. However, it is important to determine whether the time frame for change is akin to the RBA (which is already active in policy changes) or the Fed (where the debate is between late 2013 or 2014). We may receive a good sense of time frame with the upcoming event risk. The March consumer inflation data is expected to slow sharply (with the annual, headline figure dropping from 2.6 percent to 2.0 percent). That isn’t the reading to encourage a hike, and a deflation of that 20 percent probability of a hike could weigh the loonie.

Australian and New Zealand Dollar Rate Forecasts Meeting in the Middle

Interest rates and interest rate expectations are critical in the currency market – but nowhere are they more important than with those pairs at the extreme of the yield spectrum. The Australian and New Zealand dollars claim to fame in the FX market is their carry trade appeal. That said, both may have impressive yields, but their advantage is expected to wane further moving forward. According to current interest rate expectations, the RBA’s 12 month forecast is calling for 97 bps worth of cuts while the RBNZ is looking at an 8 bps increase. These are both reduced compared to recent history. To best take the temperature of rate expectations, take a look at AUDNZD.

British Pound: Posen Keeps up the Optimism…and the Currency

I was surprised the other day when the BoE minutes reported that member Adam Posen had backed off of his call for additional stimulus, voicing concern over the persistence of inflation. That surprise was further fed this past session when the central banker further stated that the economy would perform better than upcoming data would likely suggest. Pound traders recognize what that means – without a strong dovish presence to lead the way, no additional bond purchases in May. Those trading the currency should watch 10-year gilts to keep an eye on policy expectations.

Japanese Yen Sliding as BoJ Vows to Boost Stimulus to Hit CPI Target

Another day and another vow to do all that is necessary to drive the Japanese yen lower under the auspices of leveraging inflation. Bank of Japan Governor Shirakawa vowed to hit the central bank’s 1 percent inflation target by keeping the rate near zero and leveraging asset purchases to get there. Given the mid-February boost had a meaningful impact on all yen crosses, traders are willing to give them a wider berth. That said, before that, all warnings and even program announcements fell on deaf ears. How much ‘jawboning’ will the market accept.

Gold Breaks its Worst Bear Trend in Months With a Similarly Lackluster Bounce

Up until the past trading day, gold was carving out its longest bear run in months. Yet, the four-day decline hardly covered any ground at all. As such, it is appropriate that the break of that trend was equally lifeless. The 0.05 percent increase Thursday was essentially an unchanged reading, generally matching the most quiet conditions the metal has seen since July. Without a meaningful dollar run, a fresh global financial crisis or worldwide inflation issues, gold will be relegated to the same hold on activity as the FX market.

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--- Written by: John Kicklighter, Senior Currency Strategist for DailyFX.com

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