Home Lacking Direction

Despite substantial fluctuations over the course of the last week, today’s trading in equities and currencies have taken a passive tone with trading in both the Asian and European sessions lacking a clear trend.     With the sudden reprieve in volatility, Asian equities put in a mixed performance with the Shanghai composite snapping its ten day winning streak closing down .8% and the Nikkei up just .2% which is just a touch away from its 15 year high. With the session not yet over European equities are showing a similarly restrained tone with the FTSE Eurofirst 300 down for the day but still trading within 1% of its seven year high reached last Friday and S&P equity futures indicating that trading will commence on a decidedly pessimistic tone.

Despite today’s mixed, but largely placid mood, it is clear that market participants are operating within what has proven to be a very unusual and volatile environment. Over the course of the last few days we have seen a see-saw movement in the euro versus the USD, as well as its major crosses as the effects of the ECB’s expanded asset purchase program continue to push bond yields to record lows. As these developments in the capital markets continue to unfold the real economy in the Eurozone is now also showing signs of improvement with yesterday’s flash services and manufacturing surveys beating expectations in addition to an uptick in German business confidence.
With the Euro now sitting in the high 1.09’s versus the big dollar, today’s calm is simply a reprieve from prior drama as it was only last Monday when the euro was testing the 1.04 level; sending out alarm bells that the common currency would hit and subsequently breach parity against USD against the background of interest rate rises in the US.   This rebound is impressive and highlights the volatility that has beset a global currency market which is contending with broadly divergent monetary policy in Asia, Europe and North America, and the implications these shifts have on global capital flows.   A large part of what has fuelled the recent volatility in the USD in particular is the trimming of long dollar positions as traders digested the implications of a potentially slower than expected interest rate increase on the part of the Federal Reserve.   While US inflation data released yesterday has raised the prospect that a rate hike in June is still on the table, the US dollar index is sharply down from its recent 12 year highs, unable to buck its relatively weaker performance against both majors and emerging market currencies.

Today’s inactivity in Europe and Asia has extended into trading of the US dollar, with the buck sitting at the high 1.24s versus the loonie, low 119s versus the yen, and low   1.49s versus the sterling.   Despite this morning’s release of durable goods orders metric that sharply missed expectations and showed a 1.4% decline month over month, the USD has shown a less than 25 pip change against all of its major crosses in the last 24 hours, signalling that while market expectation may be for a stronger USD the trajectory of that movement will definitely not be a linear one.

Further reading:

US durable goods orders disappoint by falling 1.4% – USD weakens

Dollar Could Move Even Lower against EUR & JPY – Elliott Wave Analysis