Dollar’s Impressive Breakout Needs Follow Through – Risk Trends?

• Dollar’s Impressive Breakout Needs Follow Through – Risk Trends?
• Euro Traders Hungry for FOMC Minutes-Like Volatility from ECB
• Australian Dollar Shudders on RBA Rate Cut Warning, Not That Surprising
• Japanese Yen: Long-Term Decline Paused by Short-Term Risk, JGB Boost
• British Pound May Find a Sizable Boost if Services as Strong as Construction
• New Zealand Dollar: Does the IMF’s Assessment of More Room for Cuts Matter?
• Gold Tumbles Across the Board as FX Devaluation on Hold

Dollar’s Impressive Breakout Needs Follow Through – Risk Trends?

Sometimes the absence of a fundamental development can have a greater impact than its manifestation on the newswires. Clearly, a large enough segment of the currency market was expecting commentary on fresh Fed stimulus from the FOMC minutes because when it failed to show, the dollar posted an impressive rally. In fact, the Dow Jones FXCM Dollar Index (ticker = USDollar) put in for its best daily showing in nearly a month with a 0.8 percent rally. If the magnitude of the index doesn’t convince you, the consistency of its gains across the majors and the meaningful technical progress that was made on various pairs should. Perhaps the most conspicuous showing was from EURUSD which called an end to a three-week rising trend channel with a dramatic break below 1.3300.

The question that should be asked now is whether this volatile turn is a true trend shift with immediate momentum potential to back a meaningful drive. When we approach the assessment from that angle, the scenario is not as bullish and convincing as recent volatility has suggested. The turning point for the greenback over the past 24 hours was hard to miss. Minutes after the Fed released the minutes of its last monetary policy meeting, the currency started its run. The fuel for the move arises from preconceptions by high profile market participants (Goldman Sachs among others) who were expecting the group to satisfy speculation that there would be some kind of confirmation that another round of easing would be just around the corner. Nothing of the sort was found in the text. In fact, the statement noted that there was no need for further loosening unless growth slowed. In the meantime, growth was said to be improving, labor markets firmed and housing was starting to recover.

We have seen speculators become stimulus addicts – rallying capital markets when their hopes for additional government buying is fulfilled and deleveraging when opportunities for further injections are missed. However, we should note something interesting from this particular neutral outcome: where the dollar held onto its gains, the S&P 500 (as a measure of risk appetite) regained its losses. For the greenback, curbing stimulus expectations undermines the currency’s funding status; but it doesn’t make it a high-yielder. We need risk aversion to add momentum.

Euro Traders Hungry for FOMC Minutes-Like Volatility from ECB

Fresh off the volatility following the FOMC minutes, it shouldn’t surprise anyone that the FX ranks may be leveraging their expectations for a similar level of activity to follow the ECB rate decision. However, we should run through the tacit market consensus to deduce whether we will indeed garner similar levels of excitement. With the FOMC minutes, there was a significant argument arising to contrast the consensus for no change to the neutral stance the group projected. With the ECB, we are once again overlooking the benchmark rate (which will almost certainly remain unchanged) to gauge the time frame for the next move. At the last meeting, President Draghi was surprisingly hawkish with suggestions that the economy was firming, financial troubles were past and inflation could become a problem sooner rather than later. Since that last press conference, nothing has exploded – but we haven’t had robust recovery signs either. Expectations are variable and he likely remains neutral.

Australian Dollar Shudders on RBA Rate Cut Warning, Not That Surprising

It’s ironic that the minutes of the Fed meeting should be market-moving than the actual rate decision for the RBA. That is the power of market positioning and expectations. For Aussie dollar traders, there was a notable segment of speculators projecting a rate cut against economists’ expectations (overnight swaps had the probability set at around 35 percent prior to the release). In fact, rates were held unchanged, and the Aussie popped for it. But bears didn’t run back up too far. Governor Stevens hinted that a cut was likely if 1Q CPI offered greater scope.

Japanese Yen: Long-Term Decline Paused by Short-Term Risk, JGB Boost

The yen crosses certainly reflected some level of the volatility and risk aversion that the dollar amplified in the wake of the FOMC decision, but there was a clear lack of progress comparatively. This comparison between the dollar’s advance and relatively restrained progress of carry unwind tells us the deferment of QE3 doesn’t necessarily spell market-wide risk aversion. That said, a bigger risk aversion move is a constant threat to medium to long-term depreciation potential for the Japanese currency. Another complicating factor: rising JGB rates.

British Pound May Find a Sizable Boost if Services as Strong as Construction

We are starting to get a good sense of what the UK’s economy was looking like through the first quarter. After a 10-month high in the March manufacturing PMI reading and 21-month high from the construction activity survey for the same period, we now await the service sector gauge. This represents the largest segment of the UK economy so a significant deviation from the previously released data can undermine building optimism that the austerity / growth balance will pull in Prime Minister Cameron’s favor and make the pound uniquely stable.

New Zealand Dollar: Does the IMF’s Assessment of More Room for Cuts Matter?

There weren’t any official central bank announcements from the RBNZ this past 24 hours, but the IMF did weigh in. In its annual review, the fund suggested that the central bank had the capacity to lower rates further if export demand faded or global financial issues derailed its “modest” recovery. These are discouraging words, but do they boost the threat of a dovish move on the central bank’s part? Not really. Governor Bollard is notorious for his hawkish bias and general transparency (if last minute). That said, his term does expire this year…

Gold Tumbles Across the Board as FX Devaluation on Hold

With the greenback on the rise, gold found itself retreating. However, this was more than just a case of direct valuation as the precious metal fell heartily against most of its counterparts. With the Fed’s decision not to pursue plans for further stimulus, the world’s most aggressive printer is remaining firmly on the breaks and preventing a wholesale search for alternative stores of value outside of the traditional fiat assets. We haven’t dropped through serious support yet, but the risk rises if the rest of the world shows the stimulus binge is coming to an end.

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

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