US Dollar Rallies Sharply on Goldman Sachs SEC Complaint, S&P 500 Tumbles

• US Dollar Rallies Sharply on Goldman Sachs SEC Complaint, S&P 500 Tumbles
• Euro Outperforms Despite Confirmation of Formal Greek – EMU/IMF Talks
• Australian Dollar, Canadian Dollar see Major Losses as S&P Pulls Back
US Dollar Rallies Sharply on Goldman Sachs SEC Complaint, S&P 500 Tumbles
The US Dollar rallied sharply against all major currencies except the Japanese Yen on sharp S&P 500 tumbles sparked by an SEC complaint on financial titan Goldman Sachs. A substantial 12.8 percent in Goldman’s share price elicited sympathetic moves in firms such as Morgan Stanley and Bank of America, forcing the S&P 500’s Financials sub-index 3.7 percent lower through the day’s close. The SEC alleges that Goldman knowingly promoted Collateralized Debt Obligations and failed to disclose a key conflict of interests on behalf of major client Paulson & Company—sparking a veritable hailstorm of scorn from legislators and magnifying pressure to enact financial reform. Whether or not the allegations prove true may matter little in the court of public opinion, and the mere accusation greatly increases the probability that proposed regulation will pass the US legislature. What this means for broader risk sentiment is, in this author’s opinion, relatively clear.
Continued declines in financial stocks could quite easily derail impressive S&P 500 gains, and today could very well mark an important turning point in financial market risk sentiment. Already we see that the S&P 500 Volatility Index (VIX) jumped to fresh month-to-date highs on today’s declines—its largest one-day gain since a similar flare-up intensions through early February. We cannot ignore the possibility that this will prove to be a very short-term correction within the context of a much larger advance. But many signs point to extremely one-sided financial risk sentiment and underline the risk that stocks could see a much bigger move lower. This would very likely send the US Dollar higher against high-yielders such as the Australian Dollar and other key counterparts.
Markets ignored disappointments in an early-morning University of Michigan Consumer Confidence survey, and a relatively empty economic calendar leaves the Greenback to trade off of moves in the S&P 500. Follow our real-time FX news stream for more up-to-the-minute information.
Related: Discuss the US Dollar in the DailyFX Forum, EURUSD Exchange Rate Forecast
Euro Outperforms Despite Confirmation of Formal Greek – EMU/IMF Talks
The Euro was surprisingly one of the better-performing major currencies against the US Dollar despite further deterioration in the ongoing Greek fiscal crisis. Major news outlets reported that Greek officials began holding direct talks with Euro Zone and International Monetary Fund officials just recently. All those interviews unsurprisingly denied that Greece sought an activation of the fiscal bailout, but continued surges in Greek bond yields make such an outcome increasingly likely.
According to Bloomberg’s over the counter bonds data, buyers are demanding an amazing 7.52 percent yield on Greek 3-month Treasury bills. Said interest rate represents a 739 basis point premium over the benchmark German 3-month yield. Though we must stress that such securities are relatively illiquid and accurate pricing is difficult to determine, even halving that yield spread would suggest that investors place a high probability of further fiscal crisis. The coming weekend could prove just as market-moving as the last, and we urge that traders use caution against excessive leverage in Euro-denominated currency pairs.
Related: German Finance Minister Fans Fears on Greek Bailout
Australian Dollar, Canadian Dollar see Major Losses as S&P Pulls Back
Sharp pullbacks in the US S&P 500 unsurprisingly coincided with similarly sharp retracements in the previously high-flying Australian and Canadian Dollars. We have written quite frequently of the vastly one-sided Futures and FX Options positioning on both the AUDUSD and USDCAD and warned of a turnaround if traders unwound their bets. The critical factor has always been timing the correction, and we have frankly been early in our calls for major pullbacks on several occasions now. Time will tell if this finally proves to be the start of a much bigger move, and it remains critical to watch near-term developments in the S&P 500 and other barometers of financial market risk sentiment.



Written by: David Rodríguez, Quantitative Strategist for DailyFX.com
E-mail: research@dailyfx.com
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