US Dollar Declines as S&P 500 Recovers Early Losses: Lehman Hearing Up Next

• Euro Roughly Unchanged Despite Further Greek Bond Price Tumbles
• Australian Dollar, Canadian Dollar Recover On S&P 500 Reversal

US Dollar Declines as S&P 500 Recovers Early Losses: Lehman Hearing Up Next
The US Dollar finished the day lower against almost all major currencies, sliding modestly on a somewhat-surprising bounce in the highly-correlated US S&P 500. The benchmark equity index started the day off in negative territory as few traders seemed willing to buy into recent losses. Yet an apparent improvement in financial risk sentiment left all but the tech-heavy NASDAQ composite in the green at the NYSE close and the safe-haven Greenback fell accordingly.

Attention now turns to tomorrow’s House Financial Services Committee’s hearing on the Lehman bankruptcy and any fallout for the broader financial sector. Fed Chairman Ben Bernanke released a prepared statement ahead of the hearing, claiming that the Fed and other regulators lacked the means to rescue the firm and its collapse was unavoidable. Lehman’s court-appointed examiner Anton Valukas will undoubtedly have his own view on the same, and the entire event should make for an entertaining session of pontificating and grandstanding by officials on all sides of the debate. It may be especially important to watch for clues on the trajectory for financial reform and the SEC’s complaint on Goldman Sachs. According to former President Bill Clinton, the probability of financial reform went from 60-70 percent to 90 percent following the SEC charges against Goldman Sachs. An otherwise nearly-empty US economic calendar leaves the US Dollar to trade off of the whims of broader financial market moves.

Euro Roughly Unchanged Despite Further Greek Bond Price Tumbles
The Euro finished nearly even with the US Dollar despite fresh declines in Greek bond prices (rise in yields). According to Bloomberg’s generic over the counter data, bid prices on 3-month Greek Treasury Bills hit incredible levels of 15.04 percent implied yields. We must stress that these securities have become very illiquid and it’s difficult to determine true market prices. But the equivalent German securities now yield a paltry 0.12 percent, and incredibly large spreads between those and Greek bond yields underline clear market doubts over fiscal solvency. Direct Greek/European Monetary Union/International Monetary Fund talks have been delayed by airspace closures across Europe. Yet soaring Greek bond yields suggest that a solution will need to come sooner or later—likely forcing officials into action in the near future. Traders should likewise keep an eye out for often-market-moving German ZEW business sentiment data due tomorrow morning.

Australian Dollar, Canadian Dollar Recover On S&P 500 Reversal
The highly risk-sensitive Australian and Canadian Dollars saw early declines to start the week’s trade, but a later reversal in the US S&P 500 sparked similarly dramatic pullbacks in both commodity currencies. The most recent CFTC Commitment of Traders report showed Non-Commercial traders—most often large speculators—were increasingly net-long both the CAD and AUD in the week ending April 13. The implications for price action are relatively clear. If we see any renewed flights to safety and declines in financial market risk barometers such as the S&P 500, many leveraged speculators will be forced to liquidate positions in order to raise cash. Given that the AUDUSD and USDCAD have trended for as long as they have, one can reasonably guess that traders have built up sizeable floating gains in their speculative positions. Those paper gains would make AUD and CAD prime liquidation targets in the event of a margin call, and such a dynamic easily explains the link between the similarly leveraged S&P 500 and these commodity currencies.

Tonight and tomorrow promise significant volatility for both the Australian Dollar and Canadian Dollar on key central bank event risk. The Reserve Bank of Australia will release the minutes from their most recent meeting tonight at 21:30 GMT, while the Bank of Canada will announce interest rates tomorrow at 13:00 GMT. It is difficult to predict exactly how markets may react to official rhetoric, but it will be especially significant to watch for signs of monetary policy tightening on the horizon. In the RBA’s case, traders will look to gauge the bank’s relative hawkishness and whether it will continue to raise rates despite global economic headwinds. For the Bank of Canada, traders will be most interested in whether officials will break with their previous commitment to leave rates unchanged until the second half of the year. It suffices to say that either event could force considerable moves in AUDUSD and USDCAD pairs.

For Real Time Forex News, visit: http://www.dailyfx.com/real_time_news/

**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar

DF419a