DailyFX
British Pound More Likely to See Rate Speculation in Today’s Data than Later BoE
John Kicklighter

Talking Points:

  • Dollar Drops Despite S&P 500’s Biggest Back-to-Back Decline in 10 Months

  • British Pound More Likely to See Rate Speculation in Today’s Data than Later BoE

  • Japanese Yen Indecisive After BoJ Hold, Kuroda Not Scheduled to Speak

Dollar Drops Despite S&P 500’s Biggest Back-to-Back Decline in 10 Months

The correlation between the dollar and favored risk-measure S&P 500 drifted away from its academic ‘safe haven versus risky asset’ relationship some time ago. Nevertheless, it is still surprising to see the greenback drop against nearly every one of its counterparts at the same time the equity index posts its first back-to-back loss of more than 1.0 percent since June – there have only been four such instances of this in the past two years. Which is better reflects conviction?

Evaluating speculative appetites, there was a notable disparity in the performance of equities and other markets sensitive to the theme. Yen crosses were little changed through Monday, Emerging Markets closed modestly higher and high-yield bonds ticked only modestly lower. As the standout asset class, stocks’ inordinate move may reflect a feedback loop from this past Friday’s sharp S&P 500 drop. That abrupt tumble late last week was notably absent from both Asian and European markets. Therefore, we may have experienced a ‘catch up’ move to conform risk themes across financial time zones over the weekend. Otherwise, the docket was light for event risk that carries the necessary weight to alter the balance between yield and volatility. The same is true of the upcoming calendar items.

Turning the focus back on the dollar, yields paint an unflattering picture. US market-based rates and Treasury yields – the same barometers that have paced growing Fed rate projections – were receding quickly Monday. The two-year Treasury yield that has become a preferential measure of policy plans over the central bank’s ‘medium time frame’ extended its slump and is now (at 0.395 percent) over 15 percent below March’s six month high. Of further concern, the three-month US Libor rate is standing less than a basis point from its record low. The hope for a competitive time frame for US yields is fading, and the currency is suffering for it. Today, a few Fed officials’ speeches (Plosser and Kocherlakota), small business sentiment index and three-year Treasury auction will weigh in on this theme.

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