Dollar Sees Critical Surge Higher as S&P 500 Bull Trend Collapses It’s difficult to appreciate the fundamental scope of the dollar’s rally this past session from the Dow Jones FXCM Dollar Index or any individual pair alone. Sure, the Index rallied to a six-week high and the greenback managed remarkable rallies against both the euro and Australian dollar (the most fundamentally-active and yield-intensive currencies respectively), but a full appreciation for the currency’s performance requires a market-wide analysis. The greenback rallied 0.7 to 1.1 percent against all of its liquid counterparts with the exception of USDJPY. That is a remarkable move for the single currency and the holdout of the FX market’s other preferred safe haven / funding currency should tell us what the impetus for the move was: risk aversion. There was no missing the plunge from equities this past session. The European equity benchmarks posted the largest decline Tuesday, but it was the S&P 500’s 1.5 percent plunge (the deepest since December 8th) that stood out. Having developed an incredibly consistent bull trend since before the beginning of the year, this was a symbolic shift for broader underlying sentiment. A sustained unwinding of overwrought risk exposure would certainly play to the dollar’s advantage, but sentiment will either need to run under its own momentum or we’ll need something to encourage the move along. In fact, we may have difficulty leveraging the break into a definable trend through the immediate future. With the Greek PSI results due Thursday, the EU Ministers vote to release the rest of Greece’s second rescue package Friday and NFPs also on Friday; market participants may be frozen in the fundamental headlights. Euro Performance Uneven as Greek PSI Fears Swell The euro was sharply lower against the yen and US dollar (a clear reflection of risk aversion to the safe haven contingent) this past session, but the currency would struggle to make any progress against the more risk-sensitive counterparts (the Australian, New Zealand and Canadian currencies). There are two primary fundamental themes at play currently: in the struggle of pairs like EURAUD we find that uncertainty in the European financial situation carries as much weight as the traditional risk trends tides. Were there any major, tangible developments surrounding the regional crisis this past session? Not really. Yet, the Financial media did its best to stir speculation about possible, troubled outcomes for the Euro-region’s financial and sovereign issues. There were plenty of headlines about the private Greek bond holders that planned to hold out, while Irish and Portuguese issues with deficits were also popular fodder. That said, the latter issue is one for that won’t present an immediate risk for some time and the PSI results will have confirmation Thursday. As for final 4Q GDP figures, there was little change thereby little surprise. Australian Dollar Hammered by Risk Trends, Not 4Q GDP Figures We have run through two of the Australian dollar’s meaningful fundamental drivers for this week. The RBA rate decision didn’t really alter the course of monetary policy going forward, but the market seems to have been hoping for a more definitive shift towards neutrality – in other words less scope for further rate cuts. However, Governor Glenn Stevens and crew left the door open to further cuts should domestic demand ease and expose softening inflation expectations. This maintenance of the dovish regime started to push the Aussie dollar down before its dive really kicked in with the risk aversion move on the day. With the 4Q GDP figures, we had an opportunity to add to the Aussie’s drop even as sentiment leveled off. However, the 0.4 percent reading (though half the forecast) wasn’t enough to shake the currency loss. Now on to jobs figures. New Zealand Dollar Traders Weigh the RBNZ Scenarios Even before this recent risk aversion move kicked in, the kiwi dollar was under pressure. Leading the Aussie dollar (typically the most sensitive currency to risk trends thanks to its yield) is a feat. That may leave the New Zealand currency in a relatively oversold condition that the right fundamental development can help exploit. Of course, if risk aversion picks back up in the coming session where it left off, a rebound will be exceptionally difficult to encourage even with a fundamental push from region’s top event risk: the RBNZ rate decision. Anything short of a warning to an upcoming rate hike would fall short in offsetting deeper risk trends. Alternatively, if basic risk trends are flat, it would be ripe ground for the market to cover short-term speculative shorts with the realization that the central bank plans to keep its rate competitively elevated. Japanese Yen Puts in for Biggest Rally Since its Tumble Began There was only one currency that managed to gain ground against the liquidity-favorite, US dollar – the Japanese yen. Having suffered a massive tumble across the board between February 2nd and March 2nd, the funding currency was in a good position to generate a natural (if temporary) correction. With risk aversion underway, carry unwinding would reverse the flow of capital from the high yield currencies back to the constant funding player. It’s in this anti-carry flow that the yen would leverage its correction potential against its fellow safe haven. Swiss Franc Showing More Difference for Euro Link than Safe Haven Just referencing the Euro and franc’s performance against most third party counterparts gives us a sense of where the fundamental guidance for the latter comes from. Despite the clout that the Swiss franc has enjoyed as a safe haven for the global capital markets over the decades, the currency is now more sensitive to Euro-Zone developments that pure sentiment trends. This link has always been there, but the SNB has certainly exacerbated its influence. Speaking of the central bank, foreign currency reserve figures for February are due in the upcoming session.

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