- Dollar: Fed Forecasts and 1Q GDP Promising Breakout Catalysts
- British Pound will Put Modest Hawkish Upgrade to the Growth Test
- Australian Dollar Traders Have a Clear Expectation for Tuesday’s CPI
- New Zealand Dollar Measured its Reaction to Inflation, How About the RBNZ?
- Euro Traders Should Watch French Election, IMF Response and Crisis Headlines
- Japanese Yen Not Seen as a High-Level Volatility Risk, Good Setup for the BoJ
- Gold May Finally Find Impetus in Rate Decisions, Inflation and Growth Readings
Dollar: Fed Forecasts and 1Q GDP Promising Breakout Catalysts
With the dollar’s close this past Friday, it managed to carve out a weekly range that fit neatly within the breadth of the previous period, which in turn fit within its predecessor. In other words, the greenback has worked itself into significant congestion – the perfect setup for heavy event risk in a FOMC rate decision and US GDP reading to force a critical breakout. To assess the situation heading into this loaded week of trading, we first must understand the greenback’s stubborn congestion as of late. The lack of drive through risk trends is the most prominent disconnect. As long as the SP 500 (as a benchmark for sentiment) is set adrift, a strong bull or bear run will be difficult to generate for the premier safe haven. A further complexity that has ensured the dollar can’t build any steam is the diminished premium of the subtle shift in rate expectations.
It is the recently deflated outlook for the an early exit to the Fed’s excessive stimulus regime that where we likely find the greatest potential for a meaningful change in the dollar’s tone – and possibly even in the character of underlying risk trend. Wednesday afternoon, the central bank is schedule announce the decision after its two day monetary policy deliberation. There is little doubt that the central bank will hold both rates and balance sheet unchanged. The real interest is in the updated forecasts for fund rates, growth and inflation that are also due, as well as Chairman Ben Bernanke’s press conference to follow. We have oscillated from a consensus for QE3 from the market ranks to a tentative outlook for a 2013 rate hike (insinuating a withdrawal of stimulus), but currently the views are more finely balanced. This could break that stalemate.
An outlook for accommodative policy for the foreseeable future or one of the most massive policy programs being worked down has direct implication for the currency, but it also directly taps into underlying risk appetite. Securing a clear break from equities is likely a requirement for the dollar itself to pick up a lasting drive, but so far 1Q earnings has proven unable. Perhaps everyone is waiting for Apple’s figures. If that isn’t the case, perhaps the advance reading of 1Q GDP can deliver. Though due Friday, it may be more impediment than catalyst.
British Pound will Put Modest Hawkish Upgrade to the Growth Test
After the Bank of England minutes tipped the scales away from expectations of another round of bond purchases come May, the sterling took to a notable climb. Yet, as we have seen with many currencies in similar positions, removing the burden of dovish policy does not necessarily translate into a hawkish regime. For that, we need an active catalyst to encourage appreciate. We won’t be seeing any hawkish/bullish favor on the monetary policy side of things, so perhaps the pound can compete on the fiscal/growth side. The UK took a gamble by proactively pursuing deficit reduction, and there have always been detractors to the effort. Depending on the 1Q GDP reading, policy approaches could be changed.
Australian Dollar Traders Have a Clear Expectation for Tuesday’s CPI
After the previous Reserve Bank of Australian (RBA) rate decision, Governor Glenn Stevens suggested to the markets that the probably for dovish action at the following (May) policy meeting was high; but an actual cut would depend on the state of inflation. The market has taken that to mean a cut for sure, but such a clear bias leaves the door wide open for surprise. To be sure, the sizable drop in the year-over-year, headline CPI figures (from 3.1 percent to 2.2 percent) would justify the 95 percent probability of a 25bp May rate cut, but does it clear the way for the 94 bps of cumulative cuts over the coming 12 months. Even if the market deftly prices in the next move, there is still wider berth further on.
New Zealand Dollar Measured its Reaction to Inflation, How About the RBNZ?
There is little chance of a change in policy from the exceptionally consistent RBNZ policy path according to the markets. That said, we are working with markets that are far more adept at working with the subtleties of the changes in expectation further out in the future. Looking at the adjustment error-size 5 percent probability of a rate cut and collective 9 bps of hikes seen over the coming year, it is clear that expectations are set to neutral. Yet, we’ve just recently seen a very weak CPI reading from New Zealand and China reported a significant slowdown in growth (an issue for all of Asia). Will Governor Bollard adjust for these developments? It’s a possibility that the market isn’t well positioned for.
Euro Traders Should Watch French Election, IMF Response and Crisis Headlines
Fears of financial crisis are starting to fade, though only in the financial headlines. If we look at the sovereign rates, we find clear trouble in the health of Spain certainly, but also Italy, Greece and Portugal. Notable through this past week, Spanish and Italian 10-year rates closed in on the six-percent market (the seven percent threshold is seen as the bailout mark); Greece’s four largest banks reported record losses on the order of €24 billion; and Portugal said it would not ask for lenient conditions similar to those for Greece. Clearly, there are still issues. However, we need action…catalysts. First stop is the French election, though that will likely just introduce a May 6 vote. We also have a notable round of data.
Japanese Yen Not Seen as a High-Level Volatility Risk, Good Setup for the BoJ
Another fundamental event that is flying under many traders radars (not surprising when advance quarterly GDP readings and contentious monetary policy decisions are vying for our attention) is the upcoming BoJ policy decision. At the last meeting, there was heavy speculation that the central bank would fold to government pressure and follow up with its February expansion of its asset purchase program hoping to exert the same force on the Japanese yen. The disappointment was clear when the group refused. This time around, there is little expectation for the same. Yet, if they deliver, that means many market participants will be caught off guard. That said, can such a move rouse the same reaction?
Gold May Finally Find Impetus in Rate Decisions, Inflation and Growth Readings
Whether we look at the daily or weekly chart, the constraint on gold is clear. The fresh, nine-month low from the CBOE’s gold ETF volatility index (16.7 percent) perhaps summarizes the situation best: that market conditions are too quiet. That is an interesting position to be in when the question of stimulus (and therefore the demand for an alternative store of wealth to traditional fiat currencies) comes up multiple times over the coming week. Volatility of course is a consideration, but the real concern is direction. A bearish move could crack a multi-year bull trend.
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