Chinese Yuan: A Better 1Q GDP Outcome for Reassurance or Stimulus Motivation?

Talking Points:

• Dollar’s Yield Forecast Hemorrhage Staunched by CPI Data
• Chinese Yuan: A Better 1Q GDP Outcome for Reassurance or Stimulus Motivation?
• British Pound Loosing Fundamental Traction as Inflation Hits 4 Year Low

Dollar’s Yield Forecast Hemorrhage Staunched by CPI Data

US yields continue to rise alongside FX-based volatility measures. Both developments indulge the dollar’s primary fundamental values, so it comes as little surprise that the Dow Jones FXCM dollar Index (ticker = USDollar) has advanced for three consecutive tradingdays. Yet, consistency does not account for conviction. While the benchmark extends its reversal from a five-month low 10,400, momentum has been held in check. The currency’s safe haven appeal is its weaker source of strength through the remainder of this week. Though the balance of sentiment trends through this past session was mixed (emerging markets up, yen crosses holding ranges), the strong run for US equities into the close lifts the markets off key technical levels and significantly reduces breakdown risks as the Friday liquidity drain looms.

A more practical source of strength for the greenback is yield forecasts. The tumble for the currency over the past two weeks distinctly conformed to the drop in Treasury yields – one of the preferred measures for interest rate expectations. This past session’s CPI data holds significant sway over the time frame for the first Fed hike. The headline reading picked up to a 1.5 percent pace while the core measure picked up from a near three-year low to 1.7 percent. Ahead, data takes a back seat to a dense round of Fed speeches – including Chair Yellen.

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Chinese Yuan: A Better 1Q GDP Outcome for Reassurance or Stimulus Motivation?

An important round of Chinese data came out better-than-expected overall…slightly. Retail sales, industrial production and fixed investment figures for Mach as well as first quarter business sentiment surveys were second tier to the first quarter economic activity (1Q GDP) report. According to the government’s figures, the world’s second largest economy grew 7.4 percent in the year through the first quarter. That matches the slowest rate of expansion since the Great Recession after a 7.7 percent pace previously, but it was still modestly better than the 7.3 percent forecast. The question is whether this is ‘good enough’ to salvage stall fears or ‘bad enough’ to necessitate fresh stimulus. It likely satisfies neither. USDCNH at a fresh 13-month high, but China may soon gain prominence as a catalyst for broader risk concerns.

British Pound Loosing Fundamental Traction as Inflation Hits 4 Year Low

The sterling rose against all of its major counterparts this past session despite a disappointing round of inflation data. Though we would cover all levels of price measures (retail, factory, housing), the reading with monetary policy implications was the CPI round. Both headline and core met expectations and in doing so hit a four-and-a-half and five-year low respectively. Expectations dampened the immediate impact this data would have, but the longer-term implications are significant. Expectations for 1Q 2015 BoE hikes are looking less and less likely.

Euro Traders Wonder if There is Anymore Drive to be Squeezed from CPI Data

EURUSD has fallen for three consecutive sessions, but the euro doesn’t look any closer to tripping into a strong bear trend. That is no doubt a disappointment for European monetary policy officials. The modest 6-pip decline for this benchmark pair reflects an equally tepid performance for the shared currency across the board. The restraint is noteworthy given the surprisingly explicit threat Draghi made about adopting more accommodation to ward off the high level of the currency. We’ll see if upcoming EZ CPI figures can offer further justification for a move.

Japanese Yen: Expected Volatility Levels Lowest in 18 Months

Market expectations for USDJPY volatility for the coming week – derived from implied volatility in options – hit its lowest level since October 2012. Given the potential for a significant change in risk-based bearings through the end of this week is tempered by a holiday-based liquidity drain, expectations for restraint over that period aren’t particularly surprising. Then again, the volatility level for the coming month and three months forward is at similar lows historically speaking. While yen cross trends are not as robust as what they projected a year ago, this looks more like an overshoot in expectations for stability and thereby another aspect that will lead to ‘surprise’ when a serious trend is revived.

Canadian Dollar Traders Shouldn’t Wright Off BoC Decision

Though the Bank of Canada has not changed its benchmark interest rate since 2010, the central bank’s meetings have generated greater swells for the loonie with the past few gatherings. The change began subtly when Governor Stephen Poloz backed off of the hawkish rhetoric that his predecessor – Mark Carney, now at the BoE – championed before him. That neutral stance turned dovish though when he suggested rate cuts were an option if inflation remained soft for too long. Since that warning, USDCAD rose nearly 1000 pips to the March peak. Since the last meeting, CPI has eased but factory activity, trade and jobs figures have all improved.

Emerging Markets Signal Serious Bearish Reversal

Where global equities were mixed and Yen crosses were unyielding at their major trendline support, there was little restraint from Emerging Markets. Perhaps this ‘risk’ measure was more prone at its recent bull wave high while other measures had measurably retreated in recent weeks, but the day’s drop was particularly severe. On heavy volume, the MSCI Emerging Market ETF gapped lower to open the day and lost as much as 2.7 percent on the day. In the FX rankings, the losses ranged from BRIC countries (the Brazilian Real was down 1.1 percent), liquid benchmarks (the South African Rand and Mexican Peso fell 0.5 percent), and political hotspots (Russian Ruble down 0.7 percent). This is less likely a leading risk measure and more likely a catch up to a correction other benchmarks have already made.

Gold Volatility Soars with an Initial 3.4 Percent Plunge

Short-term volatility levels behind gold hit their highest levels of the year this past session. The 1-day historical volatility reading behind the metal surged to 22.8 percent – the highest since December 31 – following an unexpectedly aggressive intraday reversal. A steady decline through the Asia and European sessions exploded just before the release of the US economic data with a near $19 drop in the span of less than a minute. The severity of the move and quick rebound suggests a technical move that tripped stops. Despite the rebound, the day’s peak-to-trough tumble measured a hefty 3.4 percent and has once again cast severe doubt over the metal’s ability to mount a consistent recovery for bulls. If the rebound in inflation pressures steadies US rate forecasts, gold may make a bid for $1,250 rather than $1,350.**Bring the economic calendar to your charts with the DailyFX News App.

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--- Written by: John Kicklighter, Chief Strategist for DailyFX.com

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