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Dollar Torn Between 19-Month Low Treasury Yields and S&P 500 Tumble

Dollar Torn Between 19-Month Low Treasury Yields and S&P 500 Tumble

Talking Points:

  • Dollar Torn Between 19-Month Low Treasury Yields and S&P 500 Tumble
  • Euro Can’t Catch a Break as Docket Holds CPI, Jobs, Greece Auction
  • Yen Crosses Suffer Biggest Drop in Over Four Years

Dollar Torn Between 19-Month Low Treasury Yields and S&P 500 Tumble

The scent of fear hangs heavy in the air. While speculative benchmarks like US equities are only modestly off record highs and leveraged positioning looks to be relatively stable, the hallmarks of ‘risk aversion’ are coming through clearly. Asset classes that are otherwise unconnected (equities, high-yield fixed income, carry trade, emerging markets, etc) are all suffering a significant correction. Few things can align these different markets so readily to heavy selling pressure, and at the top of that list is an elemental need to unwind ‘risky’ positions. Should this fire truly catch, it can sweep through the markets quickly. Yet, we have seen many false starts before. Statistics like a 5-day, 4.2 percent decline from the S&P 500 for the worst start to a year in 14 years adds a level of excitability to the breadth of the sentiment move. Yet, such a wide fundamental turn will come with plenty of mile markers. Recent history suggests it is reasonable to remain skeptical; but should the migration of capital to havens build, investors should be ready to make the trade as probabilities finally flip.

One notable absentee from the list of high-profile risk players to start 2015 is the US Dollar. The Greenback is a safe haven in rough financial seas, yet its performance over the same period has proven uneven. There are those that consider this divergence from character evidence that the currency has changed colors and is now a ‘carry currency’. The Dollar has certainly build up considerable premium the past six months on a hawkish interest rate forecast that marks it as the first of the major central banks expected to hike rates. That represents ground that can be forfeited as the local and global policy view softens. However, the US currency is coming off of a zero bound and even a tempered outlook would place it in a materially-better position than counterparts like the ECB and BoJ. In a modest risk aversion view, pressure on US rates can play through without hitting a sentiment extreme where the Greenback takes up the roll of a liquidity beacon. If sentiment settles or collapses, the Dollar is in a good position to continue gaining ground.

Euro Can’t Catch a Break as Docket Holds CPI, Jobs, Greece Auction

Though it eased its pain, the Euro was still broadly lower through Wednesday’s session. Top scheduled event risk this past session was a round of December service sector and composite PMI figures which are considered good proxy for GDP. While the ‘core’ measures of the Eurozone, Germen and French reports were second readings; fresh readings would come from a few other important EZ members. On the one hand, Spain and Ireland showed improvement. On the other, Italy slipped back into contractionary territory (below 50). When we consider the improvements do little to fundamental change the outlook while weak showings exacerbate an already troubled situation, it is easier to understand the market’s siding with the pessimistic. Ahead, the fundamental headlines will be bigger. Employment figures for Germany and the Eurozone are important growth figures (the former moreso than the latter as Germany is the biggest hurdle to stimulus). The region’s CPI update will give us a definitive measure for just how intense the pressure for ECB President Draghi to push a QE program is. And, though it may be somewhat under the radar, watch for Greece’s 6-month bill auction. This is an opportunity to gauge the market’s confidence in Greece ahead of the election.

Yen Crosses Suffer Biggest Drop in Over Four Years

The Yen was this past session’s strongest major. Though not as stubborn as the S&P 500 as a barometer for investor sentiment, Yen crosses have proven remarkably resilient to false starts in risk aversion – and for good reason as the BoJ’s stimulus drive makes for a convincing counterbalance. Skepticism is starting to crack. The EURJPY and GBPJPY have now carved out hefty three-day declines (the biggest in three and four years respectively). Will Abe or Kuroda panic if the correction continues? It’s unlikely until we are much lower. Watch risk.

British Pound: Interest Rate Expectations Drop, Sterling Hobbled

While much attention has been paid to EURUSD and Yen crosses, the Cable (GBPUSD) has dropped sharply since 2015 trading began. Sterling selling has been hearty enough to offset the Euro’s own weakness to see EURGBP actually rise. The source of this Pound weakness is rate forecasts. Short Sterling futures have further pushed the timetable of the BoE’s first rate hike out to December. It was 1Q three months ago.

Australian Dollar: Local 10-Year Yield Hits Record Low

Australia’s benchmark 10-year Government Bond yield dropped as low as 2.614 percent today – the lowest on record. While low yields isn’t particularly unique in developed economies as investors seek safety, this is a stark reminder of just how little yield there is to be had from even the favored carry / high-returned assets. If risk aversion takes in earnest, it could be a significant correction before we return to a fair balance.

Emerging Markets Suffer But Not With the Same Intensity

Global equities have suffered tumbles we haven’t seen in years, which suggests risk aversion is become serious. And yet, we find the MSCI’s Emerging Market ETF is reticent to follow a similar intensity. Though near an 18-month range low, the ETF hasn’t even slipped below December’s lows. Yet, should conditions improve or worsen; troubles like those with Russia are unlikely to resolve quickly and easily.

Gold Safe Haven Appeal Gaining Traction

It seems we have finally struck a gold bug nerve. Through Tuesday, gold is up three consecutive day for the first time in three months. Between a flight to quality that is not strong enough to have market participants question liquidity (which pushes them to Dollars and Treasuries) is the perfect balance for the metal. However, that means this is another Goldilocks position that is unlikely to hold for long. **Bring the economic calendar to your charts with the DailyFX News App.


22:30AUDAiG Performance of Service Index (DEC)43.8Index has been declining for the year of 2014.
0:00NZDANZ Commodity Price (MoM) (DEC)-1.60%Global commodity prices have been declining in 2014.
0:01GBPBRC Shop Price Index (YoY) (DEC)-1.80%-1.90%Index has been contracting since May 2013.
1:45CNYWestpac-MNI Consumer Sentiment (DEC)111Has been declining in 2014.
7:00EURGerman Retail Sales (MoM) (NOV)0.20%1.6%Measure isn’t likely going to impact the market’s expectations of future ECB policy.
7:00EURGerman Retail Sales (YoY) (NOV)0.60%1.70%
8:00CHFForeign Currency Reserves (DEC)472.0B462.4BHas been rising since the SNB pegged the Franc to the Euro.
8:30EURMarkit Germany Construction PMI (DEC)53.5Last month’s reading showed expansion despite the anemic growth in the EU.
8:55EURGerman Unemployment Rate s.a. (DEC)6.60%6.60%Unemployment rate declined in Germany in 2014.
8:55EURGerman Unemployment Change (DEC)-6K-14K
9:00GBPNew Car Registrations (YoY) (DEC)8.00%Has been rising in 2014.
9:00EURItalian Unemployment Rate (NOV P)13.30%13.20%Unemployment continues to be high in the Italy.
9:10EURMarkit Germany Retail PMI (DEC)52.8All three measures have been increasing since September 2014. Germany is only one showing expansion.
9:10EURMarkit Eurozone Retail PMI (DEC)48.9
9:10EURMarkit France Retail PMI (DEC)47.9
9:30GBPLloyds Business Barometer (DEC)42Has been falling in 2014.
10:00EUREuro-Zone Unemployment Rate (NOV)11.50%11.50%EU unemployment rate might be at a high rate due to the weakness in the periphery countries.
10:00EUREurozone CPI Estimate (YoY) (DEC)-0.10%0.30%Inflation has been growing anemically in the Eurozone and has been trending downward for the EU. Continued weakness in inflation might encourage the ECB to expand stimulus efforts.
10:00EUREurozone CPI - Core (YoY) (DEC A)0.70%0.70%
12:00USDMBA Mortgage Applications (JAN 2)A volatile measure.
13:15USDADP Employment Change (DEC)225K208KHas been expanding at a strong pace this year. Labor market performance is used by Fed when deciding on short term interest rates.
13:30USDTrade Balance (NOV)-$42.0B-$43.4BWeakness in the Eurozone and China might weigh on US exports.
13:30CADInternational Merchandise Trade (Canadian dollar) (DEC)-0.20B0.10BLower oil prices might weigh on Canada’s oil exports.
15:00CADIvey Purchasing Managers Index s.a. (DEC)5256.9Has remained unchanged for 2014.
GMTCurrencyUpcoming Events & Speeches
9:00EURGreece to sell 1.25 Bln in 6 Month Bills (Amid Elections)
10:30GBPUK to sell £950 mln in 30 year Inflation-Linked Bonds
19:00USDFed Releases Minutes from Its Dec. 16-17 FOMC Meeting
23:30USDFed President Evans Speaks on Monetary Policy in Chicago


To see updated SUPPORT AND RESISTANCE LEVELS for the Majors, visit Technical Analysis Portal

To see updated PIVOT POINT LEVELS for the Majors and Crosses, visit our Pivot Point Table


Resist 215.59002.500012.70007.81651.3650Resist 28.74006.85008.4735
Resist 115.00002.400011.87507.80751.3475Resist 18.13756.33257.8360
Support 114.38002.190010.25007.74901.3200Support 17.52005.91007.2945
Support 213.68002.07009.37007.74501.2000Support 27.32855.77756.7280


Res 31.19861.5261120.521.02251.19330.81590.7844143.031243.42
Res 21.19571.5229120.171.01981.19070.81360.7820142.621236.80
Res 11.19281.5198119.831.01721.18810.81130.7796142.221230.19
Supp 11.18121.5072118.431.00661.17770.80190.7702140.601203.71
Supp 21.17831.5041118.091.00401.17510.79960.7678140.201197.10
Supp 31.17541.5009117.741.00131.17250.79730.7654139.791190.48


--- Written by: John Kicklighter, Chief Strategist for

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