The benchmarks for risk trends have edged ever higher and the Dow Jones FXCM Dollar Index has found itself struggling to keep its head above a trendline that has kept the greenback heading higher for over a year. A collapse and aggressive reversal no doubt looks seductive to those that have been holding out hope for some measure of consistency (regardless of direction) from markets that have deferred to congestion with a controlled drift for the past two months. Yet, just as the threat of a major bear trend in underlying risk trends failed to take root not long ago, so too will this tide change struggle to build a self-generating momentum.
We are still missing a few critical ingredients for a new cycle: a steady increase in market participation and fundamentals to fortify conviction. From the speculative side of the equation, daily volume (on a rolling one-month average) for the benchmark risk measure S&P 500 has dropped to its lowest level since the beginning of 1999, while the ICI’s mutual fund flows report has shown capital bleed from US equities.
Without the proper level of market depth, it becomes extraordinarily difficult to carry markets (whether an individual asset or the speculative market as a whole) on a lasting trend. Yet, the proper mixture of fundamentals can entice sidelined money back into the market to feed a building drive. That said, the current risk-positive bearing for the capital and FX markets counters the outlook for growth, numerous sources of global financial troubles, historically low benchmark rates of return and already extreme lows in implied volatility measures.
In other words, it will be exceptionally difficult to feed a climb in high-yield and high-risk assets until the proper backdrop forms – which could take months. On the other hand, a wholesale risk aversion move (which is the foundation for dollar strength until it revives a competitive yield) would naturally equate to deleveraging from risky exposure. Yet, participation levels are already reduced.
What does this mean for the dollar? Short runs on fear or exuberance-based volatility but ongoing struggle for trend. In other words, a thin docket could make this week the epitome of summer doldrums.
Euro Traders Debate SMP, Greece And Spain
The euro was virtually unmoved Monday against its major counterparts. The biggest move the shared currency could muster to start the week was a 0.35 percent gain against the British pound. Its other liquid pairings were far more restrained. This restriction in activity is a dramatic about face in comparison to the high-level volatility from last week.
We can see quantifiable evidence of this shift in the one-week implied (expected) volatility measure for the EUR/USD. Heading into the ECB rate decision, the reading peaked at 13.4 percent. By Monday’s close, the reading plunged by 4.59 "vols." It may seem remarkable that the euro could shift to neutral given the level of volatility related to its financial troubles this year, but we have interest in the well-known fundamental issues for the eurozone ebb and flow numerous times in the recent past.
This week, euro traders seem less determined to drive the market on the assumptions that the ECB will either follow through or fail in their efforts to pull Spanish and Italian government bonds down via the reactivation of the SMP program (or mere threat of it). In the meantime, officials have managed to buy time for both Spain and Greece through various means. In the upcoming session, we will see markets judge their confidence in Greece and the EFSF with bond auctions for each. There is better impact potential, though, in the first reading of Italian 2Q GDP.
Australian Dollar: What To Expect From An RBA Hold
The RBA’s rate decision doesn’t look to carry much weight this week as Governor Glenn Stevens has made it clear in the past weeks and months that there is better balance in the Australia’s fundamentals – diminishing the need for more immediate accommodation. The economist consensus reflects a virtual certainty that there will be no change this go around.
The markets agree with a 9 percent probability of a 25bp cut. An expected curb in the RBA’s dovish approach has further eased the 12-month rate forecast to its most neutral level since March 22 (53 bps of cumulative cuts). Just as the specter of aggressive rate cuts leveraged the previous risk aversion drive, a rebalancing can feed a rebound.
British Pound Finds Little Support From Euro Strength, Factory Data Look Ominous
If the greatest threat to the United Kingdom’s economy and financial markets is the eurozone’s troubles (as policy officials like to say), then the settling of key European assets (Spanish yields, IBEX, euro) should help out the sterling. That wasn’t the cast Monday however.
The sterling dropped against all its most liquid counterparts. In the upcoming session, we should watch the fundamental docket for potential volatility-stoking event risk. The June industrial production reading is expected to report the biggest drop since June 2002, and the NIESR July GDP figure is due.
Swiss Franc Sees Sharp, Temporary Drop Against Euro Ahead Of Reserves Update
The average daily range for the EURCHF over the past week was a mere 10 pips through the end of last week. The pair has come to a virtual standstill as the SNB continues to offset franc bids around the 1.2000 level and Europeans continue to seek shelter for their capital in the country. That said, Monday’s range ballooned to more than 5-times the norm in mere minutes. It is difficult to pinpoint the cause, but it is likely a covering of a speculative bet that the floor falters. In the upcoming session, we’ll measure the SNB’s efforts with July reserve levels.
Japanese Yen Little Convinced By Azumi Dollar Facility Extension, JGBs Still Rising
Japanese Finance Minister Azumi was on the wires early Tuesday morning announcing that the government’s emergency lending facility would be extended through March of 2012. This is another program that has had dubious influence on correcting the yen’s ascent. In the meantime, JGBs are showing little relief from the buildup in interest through recent months. The BoJ Is later this week, but expectations are low.
We are still missing a few critical ingredients for a new cycle: a steady increase in market participation and fundamentals to fortify conviction. From the speculative side of the equation, daily volume (on a rolling one-month average) for the benchmark risk measure S&P 500 has dropped to its lowest level since the beginning of 1999, while the ICI’s mutual fund flows report has shown capital bleed from US equities.
Without the proper level of market depth, it becomes extraordinarily difficult to carry markets (whether an individual asset or the speculative market as a whole) on a lasting trend. Yet, the proper mixture of fundamentals can entice sidelined money back into the market to feed a building drive. That said, the current risk-positive bearing for the capital and FX markets counters the outlook for growth, numerous sources of global financial troubles, historically low benchmark rates of return and already extreme lows in implied volatility measures.
In other words, it will be exceptionally difficult to feed a climb in high-yield and high-risk assets until the proper backdrop forms – which could take months. On the other hand, a wholesale risk aversion move (which is the foundation for dollar strength until it revives a competitive yield) would naturally equate to deleveraging from risky exposure. Yet, participation levels are already reduced.
What does this mean for the dollar? Short runs on fear or exuberance-based volatility but ongoing struggle for trend. In other words, a thin docket could make this week the epitome of summer doldrums.
Euro Traders Debate SMP, Greece And Spain
The euro was virtually unmoved Monday against its major counterparts. The biggest move the shared currency could muster to start the week was a 0.35 percent gain against the British pound. Its other liquid pairings were far more restrained. This restriction in activity is a dramatic about face in comparison to the high-level volatility from last week.
We can see quantifiable evidence of this shift in the one-week implied (expected) volatility measure for the EUR/USD. Heading into the ECB rate decision, the reading peaked at 13.4 percent. By Monday’s close, the reading plunged by 4.59 "vols." It may seem remarkable that the euro could shift to neutral given the level of volatility related to its financial troubles this year, but we have interest in the well-known fundamental issues for the eurozone ebb and flow numerous times in the recent past.
This week, euro traders seem less determined to drive the market on the assumptions that the ECB will either follow through or fail in their efforts to pull Spanish and Italian government bonds down via the reactivation of the SMP program (or mere threat of it). In the meantime, officials have managed to buy time for both Spain and Greece through various means. In the upcoming session, we will see markets judge their confidence in Greece and the EFSF with bond auctions for each. There is better impact potential, though, in the first reading of Italian 2Q GDP.
Australian Dollar: What To Expect From An RBA Hold
The RBA’s rate decision doesn’t look to carry much weight this week as Governor Glenn Stevens has made it clear in the past weeks and months that there is better balance in the Australia’s fundamentals – diminishing the need for more immediate accommodation. The economist consensus reflects a virtual certainty that there will be no change this go around.
The markets agree with a 9 percent probability of a 25bp cut. An expected curb in the RBA’s dovish approach has further eased the 12-month rate forecast to its most neutral level since March 22 (53 bps of cumulative cuts). Just as the specter of aggressive rate cuts leveraged the previous risk aversion drive, a rebalancing can feed a rebound.
British Pound Finds Little Support From Euro Strength, Factory Data Look Ominous
If the greatest threat to the United Kingdom’s economy and financial markets is the eurozone’s troubles (as policy officials like to say), then the settling of key European assets (Spanish yields, IBEX, euro) should help out the sterling. That wasn’t the cast Monday however.
The sterling dropped against all its most liquid counterparts. In the upcoming session, we should watch the fundamental docket for potential volatility-stoking event risk. The June industrial production reading is expected to report the biggest drop since June 2002, and the NIESR July GDP figure is due.
Swiss Franc Sees Sharp, Temporary Drop Against Euro Ahead Of Reserves Update
The average daily range for the EURCHF over the past week was a mere 10 pips through the end of last week. The pair has come to a virtual standstill as the SNB continues to offset franc bids around the 1.2000 level and Europeans continue to seek shelter for their capital in the country. That said, Monday’s range ballooned to more than 5-times the norm in mere minutes. It is difficult to pinpoint the cause, but it is likely a covering of a speculative bet that the floor falters. In the upcoming session, we’ll measure the SNB’s efforts with July reserve levels.
Japanese Yen Little Convinced By Azumi Dollar Facility Extension, JGBs Still Rising
Japanese Finance Minister Azumi was on the wires early Tuesday morning announcing that the government’s emergency lending facility would be extended through March of 2012. This is another program that has had dubious influence on correcting the yen’s ascent. In the meantime, JGBs are showing little relief from the buildup in interest through recent months. The BoJ Is later this week, but expectations are low.