Dollar Extends Gains As FX Volatility Rises And Trade Gap Narrows

For the first time in many weeks, Friday is turning out to be a very active day for the US dollar. While the economic calendar was offering up the monthly trade account to fundamentalists, the dollar?s strength seemed to originate more from a global swell of risk aversion. To confirm the currency?s move was not based on US-based macros, it was easy to see the big breakouts occurred early in the London session.

The EURUSD tore out of a 10-point overnight range above 1.3420 and didn?t let up until reaching 1.3320. For its own dollar move, USDCHF rallied over 100 points from overnight lows on its way to hitting a new three and a half month high. In GBPUSD, the greenback?s two day total for gains rose to more than 300 points as it cleared even number after even number before pausing on a long-term rising trend line at 1.9625. Finally, the pair often used as the risk weather vain, USDJPY, put in another short-lived swing low at 120.75 before bounding to 121.85 as traders look to possibly test last week?s highs.
In the past few months, volatility in the global Forex, equity, debt and derivative markets have hit recent lows. For the currency market, the lack of price action was most apparent in the benchmark EURUSD which saw its lowest level of volatility on record. For traders looking to outperform benchmarks, these inactive conditions have led many to plow capital and leverage behind potentially risky investments like sub-prime loan backed securities or the well-publicized carry trade. The cracks have already begun to show in the debt and derivatives on the jump in defaults among sub-prime loans. More recently, equities joined the club. The benchmark US stock indices, in concert with global equities, fell three consecutive sessions through Thursday. For the Dow, the combined losses have tallied over 400 points and 3 percent. At the same time, treasury yields have bucked the trend as yields on the ten-year note hit five year highs on speculation of a possible rate hike from the Fed this year. So, how does all this affect the dollar? Thus far, the currency has performed well as US investors repatriate capital from foreign markets to protect themselves from risky emerging market trades. It is impossible to say how long these flows could last and in turn support the dollar. There have been more than a few hiccups for global equities in the past, though they have all been overcome.
As traders wait for the market to find its equilibrium on risk appetite again, they can look to the improvement in the US trade balance to speculate on the dollar. The long-standing deficit contracted 6.3 percent in April to $58.5 billion. From the breakdown, there were few surprises. Exports rose a modest 0.2 percent to $129.5 billion while a 1.9 percent dip in the total value of imports to $188 billion made up the majority of the account?s improvement. For the past few quarters, the balance has leveled out, providing hope to economists and policy makers that trade conditions are on the upswing. However, things may not be as rosy as the headline number implies. The contraction in the account can partially be attributed to a weak dollar; and if the currency rebounds, the deficit could quickly balloon. Another interesting circumstance is that contractions in imports is leading the way for recent improvements - a reflection of slowing domestic consumption that is as much a burden to the US as it is a blessing for trade. Potentially the most unsettling shift in this month?s report though was a pick up in the trade shortfall with China. With Congress floating so many pieces of trade legislation, they will jump on these data points in an attempt to push the US onto a more protectionist course that would certainly hurt the US in the long run.
After three days of heavy selling, equity traders cautiously went back into the market to seek out bargains. The Nasdaq Composite led the rebound with a respectable 0.42 percent climb to 2,552.15 15:30 GMT. The S&P 500 was well off the pace with a 0.19 percent rise to 1,493.50 while the Dow trailed with a 0.16 percent gain to 13,288.10. Amid the broad gains, there were a few standout headlines that helped encourage the overall bid tone. Blue chip McDonald?s Cop. saw its shares rise 1.4 percent to $50.94 after releasing an impressive 8.7 percent pick up in global same-restaurant sales for last month. In the tech sector, Qualcomm investors seemed to be shrugging off a ruling by the US International Trade Commission against the firm accusing Qualcomm of using Broadcom?s proprietary technology in its own chip design. Shares of Qualcomm were up 1.7 percent at $41.70 by mid-day.
Treasuries followed up on yesterday?s break below support with another drop; though this follow up was far more controlled. The benchmark T-note was down 5/32nds at 94-31 as its yield added another 2 basis points to 5.151 by 15:30 GMT. Thirty-year bonds lost 14/32nds to move to 92-11 as yields rose 3 basis points to 5.261.