Dollar Shows Follow Through on Bullish Break, EURUSD at 2010 Lows- Euro Drops Across the Board as Market Realizes EU Summit Impotent
- British Pound and Gilt Yields Hit Despite the BoE’s Steady 8-1 Vote
- Japanese Yen Continues its Climb after BoJ Avoids Stimulus Clash
- Australian Dollar Hits Fresh 6 Month Low Against Dollar as Rate, Risk Extend Decline
- New Zealand Keeping Pace with Aussie’s Pain as Its Own Rate Outlook Tumbles
- Gold Marks Epic Bounce Off of 10-Month Support Level
Dollar Shows Follow Through on Bullish Break, EURUSD at 2010 Lows
There was a distinct difference in performance between basic risk trends and the US dollar. Though the Dow Jones Industrial Average briefly tested a new low for the year, it quickly recovered most of its lost ground. In contrast, the Dow Jones FXCM Dollar Index advanced for a second consecutive day to fresh 16-month highs. This conviction was echoed by EURUSD’s slide below 1.2625 (bringing it to its lowest level since July 2010), AUDUSD holding onto six month lows and NZDUSD breaking a multi-year rising trend. Risk aversion keeps this currency on its bullish bearing, but the rebound in US equities can pose a problem. As a liquidity haven, we need aggressive risk aversion to keep the dollar moving.
Euro Drops Across the Board as Market Realizes EU Summit Impotent
The euro dropped against everyone of its major counterparts this past trading session – ultimate safe havens all the way up to high-risk carry currencies. Considering the market was doused in risk aversion through much of the day, it is clear that there was a greater degree of fear surrounding this particular currency than any other. That concern is the deterioration in the financial and economic health of the region it represents. Heading into Wednesday’s session, there was hope that the EU summit that was held in Brussels would provide some meaningful support for Greece and the broader region. That said, every one of the points that could have contributed to recovery were rejected: no Eurozone bonds, no growth measures, no fiscal treaty, no rescue program boosts, but a promise to help Greece if it stays the course. That said, this was disappointing but perhaps not surprising. We need an active catalyst. Perhaps the upcoming PMI readings can play that role.
British Pound and Gilt Yields Hit Despite the BoE’s Steady 8-1 Vote
It is perhaps difficult to appreciate the deteriorating fundamental position of the sterling as we have strong underlying risk trends that are leading high-yield currencies and the euro to greater deleveraging than the pound’s own slide. When there is a wholesale shift away from risky positioning, the sterling outperformers its carry currency counterparts (Australian and New Zealand dollars) as well as its more fundamentally-troubled neighbor (the euro). If we were able to remove these factors, we would better be able to see the struggling that the pound is facing. In the past session, we were reminded of the notable shift that the UK interest rate forecast has taken recently. Not long ago, the BoE was seen as taken a distinctive neutral shift in its policy stance after MPC member Posen withdrew his vote for further bond purchases. In the minutes of the May meeting, we find the vote was once again 8-1 (Posen held neutral). That said, the 10-year Gilt yield is a record low 1.77 percent.
Japanese Yen Continues its Climb after BoJ Avoids Stimulus Clash
There was little chance that policy officials at the Japanese central bank could alter the path of rising yen – that was something that was realized in dramatic form at the previous rate decision in which a 10 trillion yen increase in the asset purchase program roused little reaction from the currency. Perhaps recognizing the diminished utility of increasing its balance sheet with no meaningful payoff for exchange rate impact, the BoJ decided to hold its asset purchases at 40 trillion yen and credit program at 30 trillion. There was some level of concern that a fight would be mounted as the realization that nothing was coming through lead USDJPY (a balanced risk pair) to retreat from 80 soon after. As the European session rolled into US trading hours, the unencumbered yen was picked up by the strong risk aversion sense.
Australian Dollar Hits Fresh 6 Month Low Against Dollar as Rate, Risk Extend Decline
In a distinctly risk-off environment , the Australian dollar was clearly one of the most at-risk currencies amongst the majors. Indeed, the investment currency suffered a sizable hit against its safe haven / funding counterparts. Both AUDUSD and AUDJPY moved to trade at six month lows. However, where capital markets would make the effort to claw back some of their losses through the second half of the New York session, the high-yield Australian dollar would limit its ambitions. We could attribute some of the struggle to the World Bank’s disappointing outlook for Chinese GDP (for which they made distinct connections to Australian GDP through exports), but the more influential element to this bearish drive was deteriorating rate expectations. The outlook for Australian rates has been dovish / bearish for some time, but they grew even more painful this past session. While the probability of a 50bp cut in June eased modestly, the 12-month forecast hit a new 5-month low.
New Zealand Keeping Pace with Aussie’s Pain as Its Own Rate Outlook Tumbles
In the downshift in risk trends through the US session, the New Zealand dollar suffered a critical technical break against the greenback – closing below a rising trendline that has represented the backbone of the NZDUSD’s general drift higher over the past few years. With the overall slump in investor sentiment this past session, this particular decline comes as no surprise. Alternatively, the kiwi’s persistent slide against its Australian counterpart is a little more unusual. While the Australian rate expectations are deteriorating quickly and its sensitivity to risk trends is unsurpassed; the New Zealand currency continues to lose ground. Recent arguments to be made are the renewed expectations for China to bolster growth – considering general risk trends are more finely balanced here. Yet, more likely, the notable shift in rate expectations from neutral to a forecast for tentative marks a bigger shift in tone than perhaps yields suggest. The market is now pricing in a 77 percent probability of a 25 bps rate cut at the next RBNZ meeting and 42 bps worth of reductions over the coming 12 months.
Gold Marks Epic Bounce Off of 10-Month Support Level
Where Tuesday’s about face for gold was a distinct shift in momentum, the real bearish drive for gold happened on Wednesday morning. By mid-New York session, the precious metal was down by as much as 2.2 percent. Had the market close on the low, that would have represented the biggest drop for the market since February 29. However, we didn’t end with this downleg. After the initial decline – leveraged by the US dollar’s own gains – traders were met with the same zone of support between 1535 and 1525 that led to remarkable recoveries three times over the past year (September 26, December 29 and May 16). In other words, extending the larger bearish trend would require a significant upgrade in conviction. From the fundamental backdrop, risk aversion and anti-Euro sentiment is high, while inflation pressures are visibly easing. Under these conditions, the dollar boosts its appeal; but we clearly haven’t crossed the threshold as the metal jumped sharply from its support.
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