Dollar Gains on Euro and Emerging Markets, Conviction Still Soft

Dollar Gains on Euro and Emerging Markets, Conviction Still Soft

Emerging markets were rumbling and global equities dove to open the new trading week and month…and the dollar would certainly reap the benefits. The building appetite for safety and liquidity lent the greenback notable buoyancy versus most of its counterparts and the Dow Jones FXCM Dollar Index (ticker = USDollar) rose 16 points off its 18-month rising support. Looking more broadly to the ‘risk’ profile of the markets, the FX-based volatility index posted its biggest jump since September 30 (rising 0.5 ‘vols’ to 8.22 percent) while the equity favorite VIX lurched 2 vols higher to 16 percent for the biggest swell in a month. Furthermore, ‘liquidity’ demand was measured in the developed world’s sovereign bonds. For US Treasuries, the 10-year note’s yield gapped lower on the open and is now at 2.61 percent.

As far as uniform ‘risk off’ assessments go, this was a complete one. The trouble – as it has been for some time – is the conviction in the move. Like a bolder on a plateau, it is difficult to build enough momentum behind a deleveraging effort to make the trend self-sustaining. The newest bout of international financial stability concerns originating with the standoff between Russia and the West over Ukraine (more on that below), certainly command the headlines. Yet, volatility sellers have seen too many false dawns in the past few years to be so easily shaken from attempting to reap the short-term gains they have frequently found after jumps like these. We could still tip the scales; but the pressure would have to be sustained, losses would have to stack up or another catalyst would have to kick in to add traction.

This past session’s docket added further data (manufacturing activity rose, personal income and spending grew, and the PCE inflation figure ticked higher) to secure the steady Taper path for the Fed. Yet, that is already market reality. We need something more tangible to leverage the dollar’s relative appeal. Perhaps speculative of the first Fed rate hike may leverage the dollar like it the BoE’s outlook ramped the pound. Meanwhile, the Senate Banking Committee’s confirmation hearings for Fischer, Brainard and Powell have Today have been postponed.

Emerging Markets Slip, Russian Markets Plunge
Rather than cool over the weekend, tensions over Ukraine’s political situation intensified. That in turn generated significant waves for the financial system. With reports that pro-Russia forces have moved in and taken control of the Crimea region of Ukraine, European and US officials among others have threatened sanctions against Russia for intervening with a military presence. For a country that has a high requirement for foreign capital to support its economy, that proposition is more than troubling. The fear of capital flight was felt as the Russian Ruble dropped to a record low, leading the Bank Rossii (the country’s central bank) to dump a reported $10 billion in the market to halt its own currency’s tumble. Russian ETF’s suffered bearish gaps on Monday’s open and the largest – Market Vector – suffered a near 7.0 percent drop on the heaviest volume in the product’s record. The risk is that this situation will evolve and metastasize into a global situation. Yet, to this point, the spread has proven uneven. While Russian markets collapsed, global equities stumbles and a number of Emerging Market currencies fell sharply (Zloty, Forint, Rand, Lira); the MSCI EM ETF itself fell less than 1 percent. Furthermore, neither dollar nor yen have surged.
Australian Dollar Retreats after RBA Refuses Rate Hike Speculation
The Australian dollar has already waded through a dense round of event risk, and there is plenty more moving forward. The top event risk so far was the RBA rate decision this morning. Though the market fully expected no change to the group’s policy bearings, there was nevertheless a negative reaction to the absence of a timeline for a shift to hikes as well as the reiteration that the currency was ‘expensive’ on a historical basis. None of this is particularly new, so follow through implications are limited. Tomorrow, we follow up with 4Q GDP figures.

Euro Market Hit the Worst on Russia Stand Off
Sorting the majors for performance Monday, the Euro offered the worst numbers Monday. The currency closed in the red versus all of its major counterparts; and its capital markets suffered the sharpest declines. Where the euro slide was relatively restrained (ranging between 0.8 percent versus the yen to virtually unchanged against the pound), the benchmark Euro Stoxx equity Index collapsed 3 percent. While there were a few Euro-data based headlines and Draghi warnings into Thursday’s decision, this is likely economic proximity to the Russia standoff. 

British Pound A Safe Haven?
With capital seeking more robust moorings than European periphery debt has to offer during these increasingly volatile times, we’ve seen some capital flight to the region’s financial harbor: the UK. The 10-year UK gilt yield slipped below 2.65 percent to its lowest level in four months, the appeal doesn’t seem universal. GBPUSD dropped 0.5 percent Monday as the market continues to process BoE expectations through data.

Yen Crosses Drop, but Where is the Momentum?
If concern over the Russia-West standoff were turning into a global financial risk concern, the fear would spread from the Emerging Market measures directly to the yen crosses and then on up the ‘risk scale’. Yet, these over-priced and under-paying carry currencies offered limited retreat Monday. As we wait for the BoJ’s QE decision next month, volatility and risk correlation are the keys to the yen cross bearings.

New Zealand Dollar: Yields Continue to Slip, A Worry for Kiwi and RBNZ?
How much further can we go? That is the question that kiwi hawks/bulls are asking themselves. We have seen the market already fully price in the RBNZ’s first rate hike next week as well as the total tightening expected over the next two years. Now, further gains on rate speculation have to be found above and beyond. Now, it is easier to disappoint than impress. A dangerous proposition with 10 year NZ rates near 6 month lows.