Dollar a Carry Candidate or Safe Haven in GDP Response?

Talking Points:

• Dollar a Carry Candidate or Safe Haven in GDP Response?
• Euro to Measure Severity in Deflation, Traders Still Watching Greek Headlines
• Australian Dollar: Is the RBA Ready for a Rate Hike Next Week?

Dollar a Carry Candidate or Safe Haven in GDP Response?

Both the Dollar and USequities maintained their composure through the FOMC decision. Will bulls on both sides be able to weather the second wave with Friday’s 4Q GDP release? Historically, it is unusual for the benchmark currency and equities to experience a strong, positive relationship. Traditionally, stocks are a ‘riskier’ asset while the Greenback plays the role of liquidity provider – for better or worse. The global influx of stimulus and subsequent low-interest rate environment have changed that relationship. With the investment community debating its confidence in in the central bank safety net, the US is in the unusual position of fueling the most hawkish policy lean of its largest peers backed by relatively strong economic growth. This mix of dependency in stimulus and extraordinary disparity in central bank policy bearing will make it more difficult for the market to sort its expectations for the S&P 500 and Dollar’s reaction to the upcoming GDP report. A strong reading will certainly support the economy’s lead over the Euro-area and Japan, but could it also spur concern that the Fed will be emboldened to exact its first rate hike sooner rather than later – thereby weighing risk trends? Alternatively, would a weak showing be enough a confidence booster for deferring that tightening shift to offset harsher winds befalling the country? It is not clear how much hope there is for Fed leeway and therefore which way sentiment will fall. It should also be said that the Fed’s preferred inflation measure – the Personal Consumption Expenditure (PCE) – will be released alongside GDP. Dollar. S&P 500. One or both of these will have find a meaningful correction soon.

Euro to Measure Severity in Deflation, Traders Still Watching Greek Headlines

The fix has technically already been put into place in the form of a €60-billion-per-month stimulus program, but that doesn’t mean the market won’t stop paying attention to economic and price trends. In the upcoming session, there are two indicators with particular influence on deck: the Eurozone unemployment and inflation readings. The former has been the rally call for growth-minded citizens, lawmakers and policy officials. The consensus is for a hold at 11.5 percent which is off the record high 12 percent but representative of the struggle for a number of countries that are suffering joblessness in the high teens and even twenties. Where the financial-minded will look is the region’s CPI reading for January. A headline forecast of -0.5 percent would drive us to a July 2009 low and turns the focus on the efficacy of stimulus on economic trends.

Australian Dollar: Is the RBA Ready for a Rate Hike Next Week?

Speculation surrounding Aussie monetary policy has leaned dovish for some months. Yet, the call for actual rate cuts in the near future haven’t really found much traction until recently. Over the past weeks, the outlier call for RBA rate cuts in 2015 have slowly built a following. Today, we find not only is the market growing more certain of easing, but it is expected very soon. According to Credit Suisse swaps, the market is pricing in a 67 percent probability that the central bank is going to cutits benchmark rate by 25bps (to 2.25 percent) at its meeting next Tuesday. Having lost significant ground against ‘neutral’ and ‘hawkish’ counterparts these past weeks, a hold could in turn spur a recovery.

British Pound Struggles to Regain Market’s Confidence in ‘Hawkish’ Lean

Where the Dollar seems to be receiving the benefit of the doubt for the Fed’s tightening lean, it seems the Pound is struggling with a troubled Bank of England. Looking at Short Sterling futures, the market doesn’t full price in a hike from the UK policy authority until next year. The tepid inflation figures and recent quieting of the hawkish MPC members in the last minutes certainly dampens the pressure for imminent hikes. On the other hand, growth is still robust with the UK and the group has yet to fold. We may not know until the Quarterly Report on February 12.

Chinese Yuan Pressuring Support Again as Swift Announces Fifth Most Used Currency

China is gaining international market appeal even as the economy slows and the Yuan/Renminbi slip. Over the past few days, we’ve learned from processing group Swift that the Yuan overtook the Canadian Dollar as the fifth most-used currency in the world. Another report from the United National’s said China had topped the US as the primary destination for foreign direct investment in 2014 with $128 billion of capital inflow. Despite these milestones, pressure is building in the FX market with USDCNH returning to 6.27 – the highest since 2012.

Emerging Markets: Russia Central Bank Decision and India GDP Top Event Risk

Emerging Market capital market measures were relatively steady this past session – no doubt heartened by the stability in the developed world. However, the FX rankings for this category didn’t fare nearly as well. The majority of the major EM currencies Thursday ended significantly lower against the US Dollar. The worst performers on the day were the Columbian Peso, Russian Ruble and Turkish Lira – at 2.0, 1.8 and 1.3 percent losses respectively. Ahead, the docket will offer important event risk. The Central Bank of Russia is set to deliberate on policy with the market expecting a hold at 17 percent. Open to more ‘surprise’, India’s 1Q GDP estimate is set for release at 12:00 GMT.

Gold: ETF Demand Rising at Fastest Pace Since 2011

Despite a general easing of monetary policy for the world’s largest central bank and bountiful evidence of a currency war, gold is struggling to generate some of the ‘alternative currency’ appeal it won through the initial waves of quantitative easing following the Great Financial Crisis. After climbing throughout January, the precious metal suffered its biggest drop in six weeks (2.1 percent). The reversal from $1,300 puts bulls off pace, but there may be a growing appetite beneath this setback. The COT figures showed last week the most bullish exposure to gold futures last week since December 2012. Meanwhile, ETF holdings of the commodity have surged 4.3 percent the past two weeks – the strongest demand since August 2011.

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

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