The week feels as though it's not starting off like any other normal week. Today has a heavier tone. Typically when we walk into the office on a Monday morning there is some air of enthusiasm for a hot new theme – some sense of a fresh start. But today the fact that the dollar is rallying tells us that fewer investors can stand to remain bullish on any recovery theme and that they are throwing hats into the ring in recognition of a worsening environment outside of the United States. Over the weekend the illustrious Barron's Magazine threw its hat into the rang explaining why the exposure of the European banking system to fast-failing emerging market is bad news for the local currency. The opening theme for the week remains one of broad pessimism, which explains why the U.S. dollar is off to the races to start the week.
The potential for euro weakness moving forward is clearly an issue on the table. We have noted this before as we emphasized our global 'race to zero' by the world's central banks in an effort to use stimulative monetary policy as quickly and effectively as possible.
As we survey the landscape of the week, if nothing else matters in terms of economic release, the real deal for investors culminates in jockeying for position ahead of Friday's U.S. jobs report where we should expect no let up in data depicting further economic weakness. Precious little else will matter this week and we see the landscape as being unambiguously dollar bullish through the release. As we have also noted before, the U.S. was first in and is being more creative than anyone else in devising a solution. In that sense the U.S. will be the first out, which means that the dollar will likely strengthen as a crisis venue as far as the eye can see.
We continue to watch investors flock towards the safety of the dollar and the yen, while the relationship between the two remains fixed slightly south of ¥90 per dollar. The alarm bells sounded by the Barron's article will likely crystallize investors' collective attitude towards the European currency. It will be of interest to us to see if investors use the current blip in the Euro to above $1.2800 following a slight recovery in the U.S. PMI index as an entry point to short the euro. Anyone expecting a turnaround in economic activity so soon must be wearing rose-tinted spectacles and the underlying picture remains bleak. Selling the dollar as a recovery trade is for much later in the year.
Late last week the British pound was extremely hot and rebounded from $1.38 to $1.45 against the dollar. Some of the rationale can be laid at the door in Davos by comments from George Soros who said he found little value in ditching the unit below $1.40. Clearly, others motivated by positioning by the billionaire decided to retract their claws too, which forced a huge retracement for sterling right in the face of broad dollar strength. It's interesting to note that today, as Britain has been 'snow-struck' much to the amusement of some commentators, the pound has already become vulnerable to European-style selling. So it looks like that recovery has already passed.
We continue to eye the Swiss franc suspiciously given the fact that the story really doesn't price action doesn't match the safe-haven mantle. The European delinquent-loan theme applies equally to the Swiss franc and therefore it's no surprise to see the dollar up against the Swissy at $1.1622 today. Late last week the euro really went to town rallying sharply against the Swiss franc as increased perception that the Swiss is set for a fall became entrenched. Comments from the SNB that they can stem currency strength in various ways can't be helping the unit either. We imagine that the Swiss would prefer not to tread the same path as the Japanese stuck with stifling currency strength when it's least needed.
Implied currency volatility is little changed at the start of the week with little regard apparent for a larger gain in the dollar, which we could see by midweek.
