In the seminal book on the madness of crowds, ‘Mobs, Messiahs, and Markets’, the authors observed – “If there is one thing we know about the sentiments of crowds, it is that they change. Today it is greed. Tomorrow it is fear. But rarely is it doubt”.
Unusual though it is, doubt clearly rules the foreign exchange markets at the moment. With the Chinese leviathan wobbling, US earnings peaking, Europe limping back to health, and Japan in stasis once again, no clear trends are emerging to drive trading activity across the major pairs. Speculators remain on the sidelines after last year’s bloodshed in the emerging market and commodity bloc currencies, and overall volatility levels are plumbing lows not seen in almost a decade.
Markets are effectively directionless this morning, with traders hiding behind the parapets ahead of the barrage of economic events scheduled for the coming days.
The yen is slightly weaker on a trade-weighted basis, but is receiving some support as investors seek safety from geopolitical tensions in the eastern Ukraine. As the threat of outright war increases, crude and gold prices are marginally higher, while equity markets are broadly down across the planet.
The pound is trading near a four-year high, bolstered by a flurry of mergers-and-acquisitions activity over the weekend, as well as expectations surrounding tomorrow’srelease of first quarter growth results. Gross domestic product is expected to gather momentum, driven higher by a strong housing market and accelerating industrial activity. The market is heavily long cable however, setting the stage for a possible correction in the event that the number underwhelms.
Euro bulls are in the ascendant, with the currency propelled higher by a spike in overnight lending rates – as the economic area recovers and risk premia collapse, banks are repaying emergency loans taken out during the crisis, effectively taking surplus cash out of the system. Long positions are also being built ahead of inflation numbers due later this week. Many participants expect to see an increase in price pressures, which could put the European Central Bank’s monetary easing plans in jeopardy.
It is the dollar that is sitting in the cross-hairs however. Four key factors are likely to trigger volatility in the coming days – ongoing corporate earnings releases, first quarter GDP and the Federal Reserve decision on Wednesday, to be followed by April employment numbers on Friday.
As corporate earnings continue to beat expectations, many market participants are beginning to question whether sunlit uplands still beckon. As the Economist suggested over the weekend, the US corporate sector may be near a peak in this economic cycle, meaning that investors could begin to recycle their gains into other currencies in the short run.
First quarter growth numbers are expected to be soft, given the brutal winter conditions that took a toll on so many other indicators over the past five months. In the event that the number surprises to the upside, dollar bulls could come back in force, while a negative result will likely be heavily discounted.
The Federal Reserve is extremely likely to cut back further on asset purchases at its meeting, reducing stimulus by another $10 billion a month. It is the news conference that could be of greater import, with many observers concerned that Yellen will continue to learn on the job, inadvertently sowing confusion in the markets. In the event that she clarifies the Bank’s position on
As per usual however, the non-farm payrolls number on Friday is likely to shake the markets the most. Consensus estimates have coalesced above the two hundred thousand position mark, with numbers below 150k or above 225k likely to spur widespread market upheaval.
Amidst all of this, the Canadian dollar appears to be a hostage to fortune. Domestic factors are unlikely to exert significant influence on the currency this week, meaning that corporate and speculative participants will want to keep an eye on the bigger picture for the time being.
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