Euro Ready for a Short-term Breakout, Trend Revival When Liquidity Returns
John Kicklighter
Talking Points:
Dollar Starting to Regain Some of its Lost Yield Traction
Euro Ready for a Short-term Breakout, Trend Revival When Liquidity Returns
Japanese Yen: Little Mistaking the Drop in Support for More QE
Dollar Starting to Regain Some of its Lost Yield Traction
A fourth consecutive rally for the S&P 500 was an appropriate way to end the active trading week for North America. Less a concerted risk based than a correction of the near push into the abyss of fear that preceded it, we are left with a sense of balance as a long holiday weekend starts. An appetite for yield or liquidity will continue to be the dollar’s and broader market’s most prominent and potential spark, but there are more active considerations to consider until the headlines splash panic or greed. Interest rate expectations continue to shape benchmark majors like EURUSD, GBPUSD and AUDUSD. For the greenback, 2, 5 and 10-year Treasury yields posted hearty rallies into Thursday’s close to put a firm stop on the rate forecast bleed. We will look to see conviction in this trend when liquidity and speculative appetites return.
Euro Ready for a Short-term Breakout, Trend Revival When Liquidity Returns
Activity levels for EURUSD are extraordinary. Regardless of how we measure the trading conditions behind the market’s most liquid currency pair, we are left with an assessment that reveals extreme levels of inactivity. And, extremes do not last. The level of indecision is reflected in the most prominent chop (measuring persistence of intraday correction) in years, average daily ranges are at more-than six year lowsand expected volatility levels for a month out are at their lowest level since 2007. We put this contrarian activity level against tight trading conditions between 1.3900 and 1.3650, and a breakout looks inevitable. If we further consider that the ECB is starting to take a vocal stand against movement up to and beyond 1.4000, we also see the balance of probability for direction. While yield-seeking capital flows continue to bolster periphery Eurozone bonds and the currency in turn, this theme can be disrupted by market forecasts (volatility and risk aversion) or unnatural causes (an ECB move). FX traders should be very careful with this pair, its conflicts and its hot spots.
Japanese Yen: Little Mistaking the Drop in Support for More QE
After the April 8 Bank of Japan rate decision – notably the one-year anniversary of the open-ended stimulus program the central bank is still engaged in – the market better appreciated the diminished potential for follow up accommodation in the form of quantitative easing. For FX traders, that would mean that the yen crosses’ broad advance would need to continue via other means or potentially correct. There are still holdouts for another wave of support for yen cross bulls, but they continue to drop off quickly. In the recent Japanese Cabinet update, the economic outlook was downgraded, but the report stated clearly that further BoJ support was not expected nor needed.
New Zealand Dollar Traders Have to Wonder Why Kiwi Isn’t Rallying into RBNZ
Reserve Bank of New Zealand Governor Graeme Wheeler hiked his country’s benchmark lending rate for the first time in nearly four years at his last monetary policy meeting. What’s more, he would repeat his expectation to lift the rate another 200 basis points (bps) over the next two years. This makes the RBNZ the most hawkish major central bank by a wide margin. And yet, since that first move, the currency has put in for a mixed performance against its lower yielding counterparts. How can such a prominent carry candidate underperform its potential? One, risk trends are not leveraging what are still historically-low carry trades. Can the central bank reignite that appetite next week?
Australian Dollar Run Cools with CPI Update Due Next Week
The Australian dollar has regained significant traction over the past few months. With gains against both ‘weak’ and ‘strong’ counterparts over that period, it is clear that there is an innate fundamental bloom behind the currency. Given driver behind the currency’s tumble over the past years was a dovish monetary policy bearing from the RBA, it is reasonable to assume the strength is a correction of that negative premium. Yet, if rate expectations are picking up, the hawkishness is not yet finding broad support. Where the Aussie dollar has gained, there is little rate speculation seen in bond yields or swaps. Perhaps next week’s expected 3.2 percent 1Q CPI release will anchor the outlook.
Chinese Yuan: No Stimulus Could Mean a Weaker Currency or Financial Instability
While the data that was released this past week was close to or slightly better than estimates, the general trend is clear. The world’s second largest economy is cooling. And, while its pace of growth still makes other nations blush; the country can ill afford a clip below ‘robust’. The further expansion cools in China, the more it exposes the sources of that growth – including a lending boom. Whether we view the Yuan or Renminbi’s depreciation (USDCNH gain) as manufactured or fundamentally based, it does offer some relief. The problem is that it could also encourage a capital flight as those intending for carry gains capitulate and repatriate.
Emerging Markets Rebound Lead by Russian Ruble
Fear of another flood of capital out of the Emerging Market has cooled before the market’s liquidity drained. Looking at the region’s health, the MSCI Emerging Market ETF rose 0.9 percent (to 42.01) while the JPMorgan volatility index tracking the risky segment slipped a second day to 8.43 percent. From the currency scales, it was easy to see that there were a few standouts from a much calmer sea. Most of the higher-risk region’s saw their unit rise or fall within a 0.2 percent bound against the US dollar. A few of the more liquid and high-profile regions reported a little more strength – the South African Rand rose 0.8 percent, Turkish Lira 0.5 percent and Brazilian Real 0.3 percent. The biggest mover though was the Russian Ruble with a 1.1 percent climb. The Russian currency and capital markets jumped on news that an accord had been struck with European and US officials over the Ukrainian affair.
Gold Drops Back Below $1,300 as Dollar and Yields Recover
A third consecutive decline from gold was less technical (yesterday’s slip was $0.09) and far more tangible. The precious metal lost another 0.6 percent through Thursday’s close to close below $1,300 for the first time since April 7. The slip was met with a moderate pick up in volume for ETFs and futures, but neither price action nor turnover would insinuate a bigger move is immediately at hand. With much of the tradable market for the metal offline for the long weekend, it would be difficult to generate the necessary momentum to break the recent impasse. Meanwhile, open interest in gold futures is still exceptionally low and ETF holdings are close to setting new multi-year lows. Speculative appetite has significantly faded from view, leaving gold bugs exposed to the rebound in the US dollar and yields as well as a global trend away from QE.**Bring the economic calendar to your charts with the DailyFX News App.
ECONOMIC DATA
GMT
Currency
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ALL
Market Holiday and Closed Markets for US, UK, Eurozone, Australia
1:30
CNY
Property Prices (MAR)
Tier 3 and 4 cities have recently shown signs of slowing property prices and this spells trouble for the Chinese economy. A further extension of declining property prices to tier 2 is likely to spark more questions in regards to the health of the market and the destabilizing impacts it could bring in the second and third quarter.
8:00
EUR
Italian Industrial Sales s.a. (MoM) (FEB)
1.2%
Industrial Orders is likely to be the most important print here. Although not a big mover in terms of price action, last month’s print was the single best reading since 2011! More of the same could help EUR price action into the weekend.
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