The US Dollar finished the week roughly unchanged against other G10 counterparts, but a key surge through Friday’s S&P 500 declines leaves short-term momentum in favor of further Dollar appreciation. An SEC complaint that Goldman Sachs failed to disclose clear conflicts of interest in Subprime Collateralized Debt Obligation offerings sent the financial titan’s stock down an impressive 12.8 percent through Friday alone. Such sharp declines elicited sympathetic moves in firms such as Morgan Stanley and Bank of America, forcing the S&P 500’s Financials sub-index 3.7 percent lower through the day’s close. Whether or not the allegations prove true may matter little in the court of public opinion, and the mere accusation greatly increases the probability that financial market regulation will pass both houses of the US legislature. What this means for financial market risk sentiment is, in this author’s opinion, relatively clear.
The US Dollar stands to appreciate further if the S&P 500 and other key financial market risk sentiment barometers head lower in the coming week of trade. This is especially true against currencies such as the recently high-flying Australian and Canadian Dollars. Recent CFTC Commitment of Traders data showed that Non-Commercial traders remained incredibly net-short US Dollars against both the AUD and CAD. The leverage that typically goes into these futures positions leaves them especially susceptible to unwinds as traders receive cash calls in other leveraged securities, and it will be critical to watch the trajectory of risky assets in the week ahead.
A comparatively empty week of economic event risk leaves the Greenback at the whims of broader financial market moves. The volatile situation surrounding Greece only adds to potential catalysts of market turmoil; as we saw this past week, the safe-haven US Dollar stands to gain on further deterioration in the Euro Zone’s dilemma. Possible exceptions may include Producer Price Index, Housing Price Index, Durable Goods Orders, and New Homes Sales reports. Nothing especially stands out as far as consensus forecasts are concerned, and it would be a stretch to claim that the US dollar would react to anything but the largest surprises in these indicators.
The all-important question remains whether we can expect further S&P 500 pullbacks. The S&P Volatility Index (VIX) saw its largest single-day advance since the sharp market corrections we saw in early February. Further deterioration in conditions and heightened fears of volatility could push the S&P 500 lower and the recently-resurgent US Dollar higher. - DR
Euro Could Face Additional Headwinds as Greek Uncertainties Linger
The Euro failed to maintain the rebound from the monthly low (1.3282) and slipped back below the 50-Day SMA (1.3576) as investors held a cautious outlook for the region. The European Central Bank maintained a dovish outlook in its monthly report as President Jean-Claude Trichet expects growth and inflation to remain "moderate" over the medium-term, and policy makers reiterated that “current rates remain appropriate” as the central bank expects to see an “uneven” recovery this year.
At the same time, the highest-rated economic institutions in Germany argued that the International Monetary Fund should lead the bailout efforts for Greece as the bilateral loans from the EU goes against the Maastricht Treaty in “spirit,” and went onto say that “the spending-cut targets set by the government in its stability program and consolidation plan don’t seem to be realizable” as economic conditions remain weak. In addition, European policy makers argued Portugal’s initiatives to balance its budget is “ambitious” after Fitch cut the nation’s rating and held a negative outlook for the region, and the group went onto say that the nation should take further steps to bring its public finances back in-line with the stability pact. Nevertheless, Credit Suisse index swaps are currently 60bp higher after rising as much as 75bp in March and the uncertainties surrounding the economic outlook may drag on the interest rate outlook over the following week as the Governing Council aims to balance the risks for the countries operating under the single-currency.
Nevertheless, the economic docket for the following week is expected to show a rise in German producer prices, while investor and business confidence in Europe’s largest economy is expected to improve further in April, and the data could instill an enhanced outlook for the Euro-Zone as the recovery gathers momentum. In addition, manufacturing is expected to expand at a slower pace, while the PMI services is forecasted to increase to 55.2 in April from 54.9 in the previous month, but currency traders may turn a blind eye to the economic developments as the uncertainties for Greece linger. - DS
Japanese Yen Volatility Ahead as Carry Trades Track Stock Performance
The Japanese Yen is likely to continue looking to stock markets as the dominant driver of price action amid another busy week of first-quarter earnings reports and the apparent return of acute uncertainty over the sovereign debt crisis inside the European Union.
Currency markets – and carry trades in particular – are likely to remain highly sensitive to risk sentiment. Indeed, a Deutsche Bank index tracking G10 FX Carry Trade performance now shows a hefty correlation reading of 0.88 with the MSCI World Stock Index. A good deal of carry trades are financed cheaply in Yen, tying the Japanese unit to the ups and downs on Wall Street ahead of another week of first-quarter earnings reports, this time from such heavy-weights as American Express, Johnson & Johnson, Coca Cola, and Boeing.
The Greek debt crisis and the following bailout fiasco further complicate the risky asset landscape. Indeed, investors have turned restless once again after the dust settled around the latest European Union rescue plan, with the yield spread between Greek 10-year bonds and those of Germany (the region’s benchmark) widening to more than 400bps for the first time in a week. Indeed, Greek Prime Minister George Papandreou is scheduled to begin a series of talks with EU and IMF officials – the principals behind any bailout effort – beginning on April 19. Athens has insisted that it still means to finance its budget shortfall in the markets, but traders will be acutely tuned in to the summit’s proceedings for signs that the southern European country will in fact pull the trigger on activating outside aid. - IS
British Pound May Find Support on Improving Domestic Picture
The British Pound erased most of the gains that it built during the past week at the end as a surge in risk aversion saw sterling lose ground against the safe haven dollar and yen. An SEC fraud suit against Goldman Sachs derailed equity markets potentially signaling an end to the impressive rally that has seen stocks rise over 70% from the credit crisis lows. If risk aversion continues to generate greenback support we could see the GBP/USD look to test support levels as the pair has seen its correlation with risk strengthen with the BoE on hold. Prior to the blockbuster case, Cable had extended its two week rally on the back of an improving political picture and strong exports. The U.K. trade balance saw its budget deficit narrow to 3.329 billion as exports surged 9.5 percent.
Strong demand from abroad increases the odds of a sustainable recovery, but consumer confidence sliding to 72 from 81, the most since July, 2008 is evidence that domestic growth isn’t ready to take the torch. The BoE has maintained that there is a great deal of slack in the economy and with credit conditions remaining tight consumer and business spending is expected to remain subdued. The central bank has left their asset purchase program on hold and will refrain from commenting on monetary policy until after the May 6th elections which leaves this week’s release of the minutes from their last policy meeting as the last time markets can gather insight before the MPC’s next decision. The central bank has been unanimous regarding their decision to leave QE open but some members have started to see increasing upside risks to inflation. Therefore, any dissenting votes to maintaining the option of adding to the asset purchase program could raise expectations for its termination at the May 10th decision.
Inflation data will cross the wires before the meeting minutes with economists forecasting a rise to 3.1% to put consumer prices back above the threshold and justifying members concerns. The economic calendar overall is full of event risk with the employment report, retail sales, mortgage approvals, the budget deficit and first quarter GDP. An improving labor market and improving consumer consumption will raise the outlook for domestic growth. Signs of continued strength combined with a positive frist quarter growth reading could spark sterling support as it will begin to raise interest rate expectations. However, if broader risk aversion continues the positive fundamental data could be overlooked or at a minimum offset.-JR
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