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It seems that owning the dollar is again fashionable – the market is back to “buying dollars, wear diamonds” thanks mostly to risk-averse signals from commodities gaining traction after weak German and Chinese PMIs this morning. The greenback is currently the chosen one, the best of a bad bunch, as global data begins to turn south. Eurozone private sector activity has declined again this month, providing more support for the G20 debate pushed last week – that the eurozone and the U.K. should consider shifting away from austerity and concentrate on policies that stimulate regional growth.

The debate between austerity and more QE is getting louder. Japan was able to sidestep their aggressive easing strategy and weaker currency debate at the G20 only because most members have now shifted their focus towards the global growth debate concerns. At what point is QE too much QE? Next week’s FOMC meeting should have been about an exit strategy, however policy makers' focus seems to have now shifted ever so slightly to renewed worries about U.S. growth and a sharp pull-back in inflation expectations. So, instead of “exit strategy” expect the market to be contemplating discussing "a more" stimulus debate. The problem – there will come a time when the Fed will be buying too much debt product, making it a difficult pill for investors to swallow as yields eventually will be too low and not attractive – eventually the everyday investor will be demanding a higher return.

Earlier this month and according to Draghi, euro-policy makers are “ready to act.” Futures price action is willing him to do so it seems. Investor chatter continues to focus on the “existential risk” to the euro from the debt crisis – the lack of a fiscal and banking union will continue to hamper the EUR’s medium term prospects. If we take the yen’s aggressive Abenomic easing program out of the EUR/JPY equation, then the 17-member single currency will have lost most of its recent dominant support. Business activity for Germany – the eurozone’s suspect "strong" backbone – fell for the first time since November this morning (47.9 vs. 49). If you throw China’s weak PMI (50.5) into the mix, then investors have a cause for concern that the global economy is again faltering and should encourage investors to be better buyers rather than sellers of yen – eventually causing more problems for the market's most crowed trade.

The expectations for an ECB rate cut are beginning to show through Capital Market price action. The next debate will be over how much of an impact would a further ECB -25bp ease have? Will it be enough to help the SMEs? The ECB probably needs to be more aggressive – pushing deposit rates into negative territory would certainly have more of a money market impact. The EU policy of austerity is beginning to lose public backing and Germany's Merkel needs her public for her September elections.

So far this year the yen has been a good little earner, but it still has the capability to continue to frustrate the average investor – everyone and their mother is short yen against something. Yesterday’s worse than expected U.S existing home sales data (-0.6% in March, m/m) was the data instigator that turned market momentum against the mighty dollar in that crowded trade. Instead of the optioned protected strike price of 100 USD/JPY being tested, this market has been testing key dollar support levels well below 99 before hopefully it can proceed on its merry way much higher. The global FX market wants so badly to push USD/JPY with conviction through 100 and beyond – IMM future and spot positions all point to one thing, short-yen positioning. Last week the long USD/JPY positions were sometimes tentative and cautious ahead of the G20 meet. So far this week softer global data is again only providing tentative support.

No longer is there strength at the core of the eurozone with Germany’s PMI miss this morning. The EUR’s sharp drop in the overnight session could have further to run if egged on by the North American investor. The EUR’s 21-DMA (1.2975) is certainly under pressure and the market’s short single currency positions will be expected to lower their stop-losses to mitigate their own positional risks. The short-term momentum’s objective should be the 200-DMA at or around 1.2930-35. This morning’s U.S. data could provide the dollar further support for the wrong reasons. U.S. new home sales could pull back a tad in March. The level of new home sales should remain well below the long-run average (around +660k), but at +405k for March it would be the first three-month streak above the +400k mark in five-years. A soft headline print will support risk averse positions.

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Source: Forget The Diamonds - Give Me The Dollar?