DailyFX
Dollar Retreats as Rate Outlook Outguns Risk Aversion
John Kicklighter

Talking Points:

  • Dollar Retreats as Rate Outlook Outguns Risk Aversion

  • Yen Crosses Face Inflation Data Tomorrow, Tax Hike Next Week

  • Euro: Officials Making a More Obvious Bid to Talk Down Currency

Dollar Retreats as Rate Outlook Outguns Risk Aversion

The Dow Jones FXCM Dollar Index (ticker = USDollar) has dropped for four consecutive days and is now working on its fifth – matching its lowest stumble in six months. For some, this performance is a surprise given the retreat in equity markets – as a proxy for ‘risk’ – this past session. In general, the frequency with which reports of legitimate financial market outbreaks are showing up in global headlines (China shadow banking, China economic slowdown, forecasts of a deep Russian recession, suspiciously low Eurozone lending rates, Fed Taper implications, et) should serve as a warning that the market’s ability to view these as discrete occurrences is winding down. Yet, until the shift from speculative build up – other’s call it ‘yield chase’ – to deleveraging is marked, dollar traders can afford to be complacent on this front. That leaves the active change in yield forecasts as a more proactive driver. While the 2-year Treasury yield continues to push higher as rate watchers price in the early influences of the Fed’s first moves, the subsequent hawkish trend is slow to develop.

Yen Crosses Face Inflation Data Tomorrow, Tax Hike Next Week

Comparing the USDJPY and other yen crosses now to where we were a year ago, we can see the dramatic difference in market bearing. In the lead up to last April’s BoJ meetings, the Japanese currency was pitched into an aggressive and consistent decline. If we were to assign an descriptor to the markets now, it would have to be ‘directionless’. The market’s expectations / hopes that the central bank was due to upgrade its open-ended stimulus program that it introduced nearly a year ago has certainly faded. And, in the absence more manipulation, risk appetite is not offering a motivated alternative. Stimulus expectations will be shaped tomorrow by CPI data, next week by a planned tax hike.

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Euro: Officials Making a More Obvious Bid to Talk Down Currency

It is difficult to miss. The ECB is making a concerted effort to verbally talk the euro down. Following up on President Draghi’s link between a high exchange rate and deflation, we have heard related comments from the likes of Weidmann, Makuch, LInde and others. However, as many policy officials have found out the hard way, the market cares about action – not musings. And, the global search for yield is keeping European assets and the currency bid. Record or multi-year lows in Spanish, Italian, and Greek yields reflects a shift from returning capital to speculative inflow.

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