DailyFX
Dollar Trading Rate Forecasts for Haven Demand to Maintain Climb
John Kicklighter

DailyFX.com -

Talking Points:

  • Dollar Trading Rate Forecasts for Haven Demand to Maintain Climb

  • Yen Crosses Position For Correction Should Markets Crack

  • British Pound: BoE Decision Doesn’t Stem Retreat in Yield Forecasts

Dollar Trading Rate Forecasts for Haven Demand to Maintain Climb

Market participants are growing nervous. Their faith in complacency and the market’s seemingly undying appetite for yield is crumbling. And, should this previously uncontested conviction give way, investors know they have a lot of risky exposure to tend to in a likely disorderly unwind. For the US Dollar, there are few scenarios more encouraging. The more pervasive and disruptive a flight from risk is, the more essential liquidity becomes. The greenback represents the most heavily used reserve currency as well as a key funding instrument for riskier investments (such as European periphery bonds and Chinese real estate assets) and commodities alike. A mild aversion to riskier assets can turn the tides on these relationships and produce a bid for the Dollar. However, it’s the panicked clamor for safety of funds that can truly flip the switch for the currency.

Even after a 12-week consecutive rally, a stretch of full scale risk aversion can carry the greenback much further and for much longer. The hitch is that changing the tide of conviction is extraordinarily difficult after so many months and years of status quo. What fundamental cue – if any – this past session has further pushed us towards existential doubt? The IMF issued yet another warning that the global markets face the risk of disorderly corrections that could derail recoveries. Director Lagarde also advised emerging markets to prepare for the fallout from the Fed’s stimulus withdrawal (a warning to all really). A broad range of Fed officials would further this challenge as the speakers of the more hawkish ilk seemed to maintain their time frames for hikes – some around mid-2015, others earlier – despite the seeming moderation of the FOMC minutes. With warnings and forecasts considered, the spark this past session was volatility. Realizing losses – even small ones – carries far more weight in shaking complacency. A persistent rise in volatility is the true threat to the half decade of risk proliferation.

Yen Crosses Position For Correction Should Markets Crack

This past session, the Japanese Yen rallied between 0.22 percent (versus fellow safe haven USD) and 0.9 percent (against the Canadian dollar). Next to US equities, this carry trade medium was the most sensitive ‘risk off’ advocates in the financial markets. However, in this correction, most of these liquid crosses have not cleared their respective, high-profile support levels. It is easy to cater to a drop in speculative appetite as long as it falls within comfortable boundaries. Making the systemic shift that unwinds tremendous build up in speculative positioning – which these expensive carry trades have certainly done this past year-and-a-half – is a far more difficult task. Volatility measures and other benchmarks of fear and conviction should be watched closely. Jawboning from Abe and Kuroda will take a back seat for now.

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