Dollar Rallies for 8 Weeks Straight after Strong NFP-Friday Close
Perhaps the only thing more
remarkable from the market’s this past week than the Dow Jones
Industrial Average hitting a record high was the US dollar’s incredible
run. Though the Dow Jones FXCM Dollar Index (ticker = USDollar) can only boast a two-and-a-half year high, the currency has climbed for eight consecutive weeks.
That is the longest rally the benchmark has sustained since historical
price action became available back on 1999 (with the introduction of
EURUSD – a quarter of the index). The critical, fundamental question
here how one of the world’s move recognizable safe havens can advance
with such abandon at the same time the most basic risk measure is on a
record breaking run. This isn’t a fundamental shift in the dollar’s
orientation to risk, but a side effect of the manipulation in risk itself: stimulus.
The final trading session of
this past week gives us a prime example of how the market is focusing
in on stimulus and investor sentiment. The February nonfarm payrolls
(NFP) report hit the wires in the morning hours of the New York session
with a much-better-than-expected 236,000 net addition- the second
largest increase in a year. Stronger employment trends speak to general
growth and thereby confidence in investing. That was the initial thought
process as we could see from the climb in S&P 500 futures (the
report was released before the shares market opened). Yet, despite the
implications this data has for the needs of a last resort safe haven;
EURUSD responded to the same news with a 135-pip drop. Why did the
dollar gain so much ground? Because the unemployment rate unexpectedly dropped to a four-year low 7.7 percent.
The subtext here is very different. The Fed has stated that its
inevitable cap on stimulus and turn to tightening will come when the
medium-term outlook for the unemployment rate was 6.5 percent.
Given the pace of employment
improvement over the past year, the central bank’s unemployment target
could be reached as soon as April of next year. They would project that
eventuality well before it would be met. In this fundamental
calculation, we can start to see a rough time frame for the slowdown in stimulus
(before the end of the year) and a shift to tightening in either rates
or balance sheet (1Q or 2Q 2014). That is a serious boon for the dollar.
Though that time frame is set well into the future, the market has
priced in a lot for the dollar. Seeing the end of the road while a steep
hill is just appearing for currencies like the yen and the pound
represents a serious shift.
Euro: How will the Market React to the Italian Downgrade?
Two weeks ago, FX trades
were delivered an unpleasant surprise when Moody’s announced it had
downgraded for the UK from its AAA status. That gave plenty of time for
pound traders to brew for the new trading week, but the torrent never
came for the sterling the following Monday. Things might be a little
different for the Euro this coming week after Fitch announced its downgrade of Italy.
Admittedly, the UK lost a more prized rating, but it was already under
significant selling strain, and it was expected. The Eurozone, however,
is attempting to stave off the disaster of a returned financial crisis
for the region and Italy is at the center of the latest flare up after
its election left the country incapable of making the decisive moves to
answer recession and deficits. Watch the euro specifically during the
European session Monday.
British Pound Dives to Two-and-a-Half Year Low Versus DollarThe
bleeding doesn’t seem to stop for the sterling. The currency tumbled
against most of its counterparts this past week, but the GBPUSD’s epic
drop stood out of the crowd. The four-week plunge has torn the sterling
down nearly 1500 pips from its peak on the opening day of the year. Why
is the cable at a two-and-a-half year low?
The dollar certainly has something to do with it, but the pound is
bigger player here. Where the market is starting to see the finish line
on the US stimulus horizon, the Bank of England seems to be walking up to the starting line.
The fact that the sterling didn’t rally after the BoE held rates this
past week suggests expectations for easing are growing extreme.
Japanese Yen Reversal Window Closing as Stimulus Closes In
What does the future hold for the Japanese yen – aggressive easing by the country’s monetary policy body. There is no doubt about the Bank of Japan’s (BoJ) efforts
and how committed the group will be; and that means that the yen will
suffer for it. The question is whether the central bank will act as
quickly and forcefully as speculators are pricing in. Traders await
confirmation one way or another. This past week, the Governor and two
Deputy Governor nominees clearly vowed their commitment to accelerate
their easing to compete with the Fed. We will hear more of the same when
they speak in the Upper House next week. We have until April 4 until the next meet, will we have a risk pullback by then?
Canadian Dollar Struggles to Hold Gains After Strong Jobs Report
As expected, USDCAD was
exposed to serious volatility between the Canadian and US employment
statistics. Yet, the positive stimulus reaction from the greenback
obscured a remarkable move from the loonie in response to particularly
strong data. In February, the world’s eleventh largest economy added
50,700 jobs (33,600 of them permanent). Far better than the forecast,
implications for the BoC keeping to its rate hike threat are reinforced;
and the currency winds a significant fundamental upgrade.
New Zealand Dollar Traders Look Ahead to RBNZ Rate Decision
The kiwi was on the lam
through the end of this past week, though momentum is not yet on the
sellers’ side. In the upcoming week, we have a key release to
contemplate – the RBNZ rate decision. In the past weeks we have seen the Governor Wheeler lament the level of the currency, inflation expectations ease and a change to more democratic meetings for policy. Could this precede a warning of possible easing?
Gold’s Activity Lull this Past Week an Indication of Near-Term Breakout
Inordinately quiet or active
markets naturally return to a norm. That’s what we should remember with
gold heading into the new trading week. This past week, the metal managed a range of only $25
through the entire week. A particularly quiet market at the end of a
multi-month decline often piques speculators’ interest as they dream of
how quick a reversal could be on an extended trend. Yet, we should be
open to the alternative as well: a burst of momentum behind the
prevailing trend could break $1,500. The deciding factor: the net
stimulus outlook.
Source: Dailyfx
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