Talking Points:
Dollar Ends Day Lower but FOMC Holds Back the Bears
Euro Advance on Inflation, Growth Updates Under ECB Watch
Yen Crosses Retreat as BoJ Further Quells QE Upgrade Hopes
Dollar Ends Day Lower but FOMC Holds Back the Bears
This past session offered up a remarkably weak 1Q US GDP release which made the Federal Reserve’s decision to uphold withdrawal from stimulus even more surprising. Yet, through this back and forth, neither the dollar nor broader risk trends would win a critical breakout or forge new trend. Isthis unwavering stoicism a reflection of the market’s general state – where complacency is so engrained that the market’s will refuse to reevaluate even under duress? Or is this the perfect balance of positive and negative event risk that the currency and general risk trends can hold steady? It’s likely a mixture of both.
In underlying market conditions, the grip of complacency is difficult to miss. Implied (expected) volatility measures have collapsed, assets have traded trends for range and participation has withered. Under this sort of lassitude, the market is dulled to changes in the traditional fundamental landscape. In other words, the hurdle is not to measurably improve or impair a currency’s outlook against its counterpart to necessitate an exchange rate response. Rather, we need something that can disrupt contentment and generate volatility in speculative positioning. An unexpected stall in the world’s largest economy (0.1 percent growth versus 1.2 percent consensus) sets a troubling precedence for general risk trends. That is further complicated by the FOMC decision to maintain their $10 billion Taper pace – QE3 is now running at a $45 billion-per-month clip – and an optimistic outlook that reinforces the mid-2015 target for the first Fed hike.
A market-wide ‘risk aversion’ move is the most capable theme for reviving activity levels in the global financial system. Yet, until that seismic change is realized, this past session’s event risk poses another interesting fundamental picture for the greenback. Alone, the GDP reading could have soured the market’s outlook for the return of a hawkish rate regime. Skepticism that the slump was transitory on weather related issues, however, was reinforced by the central bank’s unwavering commitment to the stimulus wind down. While Treasury yields slid on the day, this combination may prevent a more substantive dollar slide. If the Fed’s position in the interest rate ranks holds, a dollar slide will likely be limited – and Friday’s NFPs will carry greater weight in further shaping rate timetables.
Euro Advance on Inflation, Growth Updates Under ECB Watch
Pressure is building once again. Between a round of positive Euro event risk and the response to the week US GDP release, EURUSD closed at its highest level Wednesday since the pair gapped lower over the weekend on April 14. The 0.4 percent rally was a break from character for the pair that has averaged a sparse 0.1 percent daily change over the past three weeks. Looking to the crosses, the Euro’s strength was broadly based. In economic data, Spanish GDP met expectations for a rebound while Germany and Italian labor markets improved. More important to central bankers and ultimately currency traders was the Eurozone CPI reading. The 0.7 percent reading was a bounce from record lows – but also below consensus and well short of the ECB target. Far more concerning than inflation though to the ECB is EURUSD eying 1.4000.
Yen Crosses Retreat as BoJ Further Quells QE Upgrade Hopes
Lingering hope for an upgrade to the Bank of Japan’s open-ended stimulus program has all but vanished following the central bank’s most recent policy meeting. While the decision itself was status quo – maintaining a target of a ¥60-70 trillion growth in the monetary base – this particular event was noteworthy for its updated projections. With expectations of inflation hitting its target by fiscal year 2016 and growth seen continuing its “virtuous cycle”, there is little impetus to upgrade. This eases the forcible yen devaluation. If risk aversion were to arise…
British Pound Hits Four-Year High as UK Situation Further Contrasts US
The sterling closed out the trading month at a four-year high against its US counterpart. That is an appropriate position given the persistent buoyancy in the BoE yield forecast. The tepid US GDP release served as a bright backdrop to the still robust performance of the UK’s own reading earlier this week.However, the FX schadenfreude doesn’t offer the sterling a universal bullish lift. The market’s timeframe for the first rate hike is still well priced in. Further progress from cable and pound crosses needs further drive. And it’s easier to disappoint.
Australian Dollar Economic Activity Readings Miss While Price Measures Beat
The Aussie docket was crowded this morning – though its listings didn’t carry the weight that its European or US counterparts sported. There were two speeds in the data. The AiG manufacturing PMI fell further into contractionary territory (and a 9-month low) and the housing price figure stalled. Meanwhile, 1Q import and export inflation nearly doubled expectations. This isn’t rate fodder just yet though.
Chinese Yuan: Onshore and Offshore Differential Grows
The offshore (CNY) and onshore (CNH) Chinese currency exchange rates are sporting a 70 pip spread. This isn’t particularly unusual, but it has recently signaled a catch up move from the laggard that favors further depreciation of the Renminbi / Yuan. This morning’s docket brought with it an uptick in the government’s manufacturing PMI for April, but the market seemed to limit its interest.
Emerging Markets: Ukraine Economy Slumps, Outlook for Russia to Do the Same
Global political hotspots were in focus this past session for the Emerging Market segment. Ukraine released a 1Q GDP figure that was modestly better than estimates but still a painful 1.1 percent contraction. The IMF released projections for a 5 percent drop this year for the country and a return to 2 percent growth in 2015. Meanwhile, Russia’s Ruble was surprisingly steady given the IMF’s downgrade of the country’s growth forecast for the year from 1.3 to 0.2 percent. Meanwhile, the EM ETF slipped 0.2 percent and sovereign bond index rose 0.2 percent.
Gold Finds Little Exploit from Dollar, Risk Trends
Gold bulls can’t get no satisfaction. On a day loaded with event risk and monetary policy kindling, the metal would find neither alternative-asset appeal stoked. Risk trends were firm on the day and the Fed made sure to keep the Taper pace in place. Despite the modest (0.3 percent), third consecutive decline, derivate volume jumped to its highest in a month.**Bring the economic calendar to your charts with the DailyFX News App.
ECONOMIC DATA
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CLASSIC SUPPORT AND RESISTANCE
INTRA-DAY PROBABILITY BANDS 18:00 GMT
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— Written by: John Kicklighter, Chief Strategist for DailyFX.com
To contact John, email jkicklighter@dailyfx.com. Follow me on twitter at http://www.twitter.com/JohnKicklighter
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Fundamentals: Dollar Ends Day Lower but FOMC Holds Back the Bears
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