Dollar Slides a Third Day as Risk Creeps Higher, Is this Confidence?

Dollar Slides a Third Day as Risk Creeps Higher, Is this Confidence?

There is a difference between a true advance and a mere relief rally. The former is anchored in capital flows and fundamentals and therefore has greater momentum for staying power. The latter is by definition and disposition temporary. The advance we are seeing in high-yield and fundamentally troubled assets is more appropriately labeled a reprieve in a dominant trend. For evidence we can look at market-based factors of conviction (or lack thereof). For our risk-benchmark S&P 500 Index, volume has topped out at around 675 million shares that consistently since the beginning of the year – significantly weaker than the turnover we witness through the previous six months. Furthermore, we note that gauges for the cost of risk (implied volatility, options, relative asset value) are exceptionally cheap. Alone, this wouldn’t be an issue, but when we pair it with the fact that the World Bank downgraded its global growth outlook and warned to prepare for the worst, rating agencies are preparing to claim Greece in default and leverage is hitting new heights; the contrast is too clear. So, while the dollar may slide for now, its run isn’t complete.

Euro: Easing Bond Auction Rates and Hope of a Greece Solution Offers Buoyancy

The euro advanced against nearly all of its counterparts Wednesday (with the exception of the Swiss franc) and subsequently put up its best performance against the benchmark US dollar since November 11th. This must be optimism…right? If we take a look at the fundamental developments through the past session, it would seem that the financial strain on the region is easing and therefore the outlook for the currency improving. Yet, nothing has really turned from negative to positive. Rather, we are seen conditions turn from negative to less negative. A good example of this is the outcome for the session’s bond auctions. This time around, we monitored the sale of 2.5 billion euros in Portuguese debt (in fact, this was the biggest auction since the government asked for its bailout last April). The rate on the three-month maturity was unchanged and it eased for the six-month bill (lower rates reflect greater confidence). This may seem a strong outcome for a country that was downgraded to ‘junk’ by Standard & Poor’s this past Friday, but the meaning is the same as for the others this week (France, Greece, Spain, EFSF) – the maturity is too short-term and therefore not a good gauge.

Everything that we see behind the euro’s fundamental performance speaks to relief from an oversold position rather than a renewed effort to add to outstanding European asset exposure. This is certainly supported by the COT figures in which we have seen a record level of speculative short interest in the futures market. Whether the euro continues its relief rally or not likely depends on whether risk trends maintain their buoyancy and hope in a Greece private bond position can be fed. There is heavy debate and speculation, and a deadline of a Monday Summit.

British Pound Bows to Euro’s Rebound as 16 Year High Jobless Rate Unbalances

Considering the euro’s financial troubles have dragged the sterling lower (by threatening an impending doom as the Euro Zone crisis starts its global spread with a layover in London first), it is only fair that a subsequent rebound for the shared currency would relieve pressure on the pound. Yet, when we measure the two European currencies against each other, we can see clearly who the outperformer was. EURGBP advanced for a second day. The pound’s performance was no doubt undermined by the disappointing November employment figures released in the previous London session. Jobless claims rose for a 10th month by a smaller-than-expected 1,200 positions. Tame as it was, loss of jobs still brought the unemployment rate to a 16-year high 8.4 percent. Adding to that consumer confidence printed just off a series record low.

Japanese Yen Slides as Risk Aversion Effort Curbed, But Not USDJPY

With risk trends on the rise, the safe haven / funding-favorite Japanese yen is naturally on the retreat. In fact, the currency was down against all of its most liquid counterparts – with the exception of its fellow safe haven US dollar, with which it was unchanged. Interestingly enough, despite the pickup in risk trends, the commodity block (Aussie, kiwi and Canadian dollars) were lagging the performance of the European contingent. In fact, it would be its fallen-from-grace safe haven compatriot – the Swiss franc – that posted the largest rally. This is another factor that suggests relief from European fundamental fears are more influential now than a genuine revival in risk appetite.

Australian Dollar Tumbles, Steadies after Volatile but Nuanced Jobs Release

Trading news events can be dangerous. The Australian data released this morning reminds us of this risk. After absorbing a notable uptick in consumer inflation expectations (running at 2.8 percent versus 2.4 percent previously) without a hiccup, we came upon the jobs figures. Despite the staid nature of this market, the reaction to the unexpectedly sharp decline in the headline labor change for December (29,300 positions culled) was dramatic. The immediate tumble for the commodity currency, however, was quickly retraced shortly after the panic receded after traders realized the losses were isolated to part-time positions (53,700). Full-time jobs actually rose by 24,500 positions.

New Zealand Dollar Plunges Immediately after Collapse in Inflation Pressure

The Kiwi dollar gives its Aussie counterpart a run for its money as the most volatile currency in the still young trading session. With the help of a surprise 4Q consumer inflation index release, the New Zealand dollar was spurred into a quick 60 pips slide against the benchmark greenback in early Asia trading. The kiwi dollar has found much of its strength through its high yield (2.50 percent benchmark) and the belief that Governor Alan Bollard was determined to stand pat. Yet, that was when price pressures were still well above his tolerance band. According to the data, it is now below the desired threshold with a 1.8 percent clip. We’ll watch to see if the market starts pricing in cuts in Libor rates.

Gold Rises for 10th Time Since the Beginning of the Year – 13 Trading Days

Though it has been a slow run (what is running quickly in these market conditions), gold has nevertheless advanced 10 times since the beginning of the year. That is a significant figure when we consider that there have only been 13 active trading sessions since we entered 2012. A tame risk appetite advance does little to curb this particular safe haven, because the brand of confidence we are seeing buoy fundamentally-troubled currencies and growth-dependent assets does not tap the deeper concern of long-term, store-of-value concerns.