DailyFX
Forex: Dollar Rebound Stalls as Equities Bounce, Yields Slip
John Kicklighter

Talking Points:

  • Dollar Rebound Stalls as Equities Bounce, Yields Slip

  • New Zealand Dollar: RBNZ Hikes and Douses Volatility

  • Euro Keeps the Pressure EURUSD as Market Rates Rise

Dollar Rebound Stalls as Equities Bounce, Yields Slip

The Dollar’s three-day advance was brought to close before the market had to really question its intentions for developing a new, lasting trend. As it happens, the tumble in equities (a proxy for investor sentiment) leveled off just before investors would start claiming a major break had been made. These are fluctuations within low-restraint technical boundaries – exercising the market of its natural volatility without making the jump in conviction necessary to establish lasting trends. Risk bulls frustrated by pace and bears who await their cue for a turn are asking the same thing: when does the dithering end and commitment begin?

There are few themes that can inspire a uniform awakening to a common fear/hope from global investors, but risk trend and monetary policy are the stalwarts. The trouble is the catalysts. A uniform slip in ‘higher return’ assets from equities to yen crosses to emerging markets this week has stalled before it has turned into a self-feeding cycle of deleveraging. The most pressing threat this week remains the geopolitical and leverage feedback loop from the emerging markets through the Ukraine standoff with Russia over Crimea. Yet, even though the confrontation remains, developed world risk has smoothed over the threat quickly. This is a significant contrast to last August where capital flight from India inspired a market-wide stumble and near-5 percent correction from the S&P 500.

Aside from a ‘trip and fall’ start to a sentiment-based move, the best potential for fundamental encouragement comes through monetary policy expectations. This past session, we have seen the first developed economy central bank (the RBNZ) switch to a tightening regime. While we are a long way off from the global shift to higher yields, the contrast to the Fed’s position is nevertheless clear. Next week, we have the next FOMC meeting with new forecasts and new Chair Janet Yellen’s first press conference. Before we hit that high profile event, the upcoming session will offer up the Senate confirmation hearing for three Fed board candidates in Fischer, Brainard and Powell. Will these three accelerate the first rate hike or stymie it? Meanwhile, import inflation and retail sales are top data listing.

New Zealand Dollar: RBNZ Hikes and Douses Volatility

Have we seen the turning point for global interest rates? The first of the major central banks lifted its benchmark lending rate this morning – and the RBNZ has made it clear that this was a regime rather than a one-off. Since the Great Financial Crisis (GFC) through the opening months of 2009; monetary policy authorities have stuck to exceptionally accommodative policy to support financial stability, growth and inflation. Yet, five-years on, there is heavy debate over the need and efficacy of maintaining the ample stimulus. This is just the beginning of a larger fundamental discussion that will unfold over months. In the meantime, the first mover on such a systemic shift typically leads the tremendous shift in capital. Yet, there was a tangible lack of progress found from the kiwi to the confirmed 25bp hike to 2.75 percent. Why? The market had fully priced in this hike – and had further priced in 135 bps worth of easing over 12 months. RBNZ Governor Wheeler said he suspected rates could rise 200bps through 1Q 2016 (a repeat) but an extreme would be 125bps in hikes through 2014. He endeavored to ‘meet expectations’.

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