Dollar Climbs 5 Straight Days Yet Lacking Drive
Look to where the money is. This past session, the FX market’s most liquid currency pair – EURUSD – posted a massive 1.1 percent. That is this pair’s biggest dollar-favorable move in over a year, yet it does not necessarily reflect a particularly robust dollar. Monitoring the other ‘majors’, we found the benchmark’s performance was far less consistent. Doubt following the FOMC rate decision Wednesday has yet to pervade speculators’ optimism that the dreaded Taper will come any sooner than the March 2014 policy meeting. And yet, the probabilities of a December or January reduction in the QE3 program were materially improved by the central bank’s decision not to heighten its dovish rhetoric. The dollar is up five straight days (matching the longest run since May 2012. If the precarious S&P 500 leads a risk aversion move, the dollar’s drive will find reinforcement. Otherwise, we will look ahead to next week’s 3Q GDP and October NFPs to gauge Taper.
Euro Suffers Biggest Drop Since June 2012
The Euro was the biggest mover of the majors by a wide margin this past session. Across the majors, the shared currency suffered losses between 0.3 percent (EUR/CHF) and 1.6 percent (EUR/CAD). Of course, the most media-coverage was given to the EUR/USD’s biggest drop in 16 months and EUR/JPY’s reversal from multi-year highs. These two pairs tap into a deeper fundamental appeal for the FX markets – risk appetite. Yet, the euro’s universal itself is quite exceptional. Not only does it alter a consistent bull trend that has developed over the past few months, its impetus suggests that we would be in for a bigger capital shift away from the region. From the docket, we would see September unemployment for the broader Eurozone hit a fresh record high of 12.2 percent while the October CPI reading sank to 0.7 percent – a four year low. Persistent economic pain and price pressures turning to disinflation raise the probability that policy officials will respond with more stimulus. That is auspicious timing as we have the ECB’s next policy meeting next week.
Japanese Yen Crosses Slip as BoJ Avoid the ‘S’ Word
Following the Federal Reserve’s decision to use a softer tone on monetary policy – and thereby reinforce global risk appetite – there was some expectation that the Bank of Japan (BoJ) would do something to offset the neutral shift. It is in the Japanese policy authority’s interest for speculative appetites to build more so than many other countries. In Japan’s efforts to build an economic recovery while simultaneously correcting structural problems with items like debt, an assessment of success would theoretically lift the yen as capital flowed in and the central bank eventually abandoned a zero interest rate policy (ZIRP). Japan does not want the currency ‘benefit’ in its plans without first experiencing some of the growth benefits as trade would suffer. Feeding carry is an important component of their path, yet they have little control over that global drive. Introducing a second wave of stimulus is one of few options. Yet, the BoJ showed little ambition for this.
Australian Dollar Little Moved China Data, RBA Next Week
This morning’s data has offered distinct support for the Aussie dollar’s fundamental backdrop. However, if risk trends don’t hold up their end of the bargain, the interest in forecasts for tepid rate hikes will garner little market appetite. Looking at the data, both the AiG manufacturing survey and Rismark home price indicator for October offer room for optimism. The factory activity report extended its surge to its highest reading (53.2) since July 2010 – in part a sign of success for easy monetary policy. China – Australia’s largest trade partner – would also report its own manufacturing progress report. A 19-month high bolsters fears of a fading export industry, but confidence in this trend is still shaky. A balance of growth and inflation are important moving forward if the Aussie dollar is to regain some of its sheen as a growing carry candidate – especially as speculative appetites dry up. The RBA decision is due next week, and swaps show no chance of a 25bp hike within the coming year.
Canadian Dollar Rallies after Strong August GDP Reading
It isn’t the norm that a Canadian data release can generate significant volatility from the FX market. This is certainly true of the monthly GDP figures that the country releases. Yet, the August growth numbers printed Thursday leveraged more than its fair share of loonie gains. The 0.3 percent pickup for the second month of the 3Q was a significant moderation of the previous month’s near-three year high figure. However, averaged out, the quarterly figure is on a strong pace. This strength will likely increase the market’s sensitivity to Canadian data through the coming week – a good time for it. On the docket we have the Ivey business survey, housing starts and employment figures.
Swiss Franc: SNB Tallies Losses on Gold Holdings
Given the correlation between the Swiss franc and the Euro (the 20-day rolling link between EURUSD and USDCHF is -0.92), it comes as little surprise that the former was significantly lower through the past session. The fundamental link is one of economic connection – if the country’s largest trade partner is seeing economic or financial uncertainty, Switzerland itself will receive the same international treatment. Looking beyond the external influences, there were local news headlines. The Swiss National Bank reported its 3Q figures. According to their figures, the central bank suffered a 6.4 billion franc loss so far in the year on its holdings. Its FX holdings lost 1.76 billion francs through the three-month period through September but were still 4.0 billion francs up on the year. Meanwhile, their gold holdings are still floating the group a loss of 10.7 billion on the year. As long as the SNB maintains a hold-to-recovery policy, much of these losses will be overlooked.
Gold’s Third Daily Drop, Biggest in 4 Weeks
The tentative, bearish turn for gold was punched with a significant exclamation mark Thursday. The precious metal dropped 1.6 percent through the session for the biggest one-day loss in four weeks and a move that suggests the bulls have been quieted. Looking to the traditional, fundamental counterpart for the commodity; the dollar’s gains were certainly a factor to the move. However, the greenback’s ‘Taper hopes’ gains were relatively restrained. Furthermore, the European data suggested the world’s second largest reserve currency could be looking at another large-scale asset purchase program (LSAP). When we look at the metal in euro terms, the session was still a bearish one, though the progress was far more reserved. Even the Bank of Japan’s policy bearings should have some latent sway over gold. Though the central bank didn’t mention its appetite for a second round of support to preempt the negative implications of the upcoming tax hike, investors no doubt expect the move at this point. Notably, neither volume on gold ETFs nor futures was particularly hearty.