Talking Points: - Dollar Draws Limited Reassurance from CPI Uptick, Fed Surveys
- Euro Slips after Weak PMIs But is ECB QE Any Nearer?
- Yen Jumps after Japan’s Finance Minister Says Drop ‘Too Fast’
Dollar Draws Limited Reassurance from CPI Uptick, Fed Surveys
The outlook for monetary policy normalization is one of the dollar’s primary fundamental drivers. It is also a theme that the market has vigorously priced in – motivated by counterparts moving more aggressively in the opposite direction (easing). Given this focus, the past session’s consumer inflation data would certainly be considered a high level event risk. For the headline measure (including energy and food), there was no growth over the month but the year-over-year reading policy officials prefer unexpectedly held its 1.7 percent pace through October. Meanwhile, the ‘core’ measure through the same period would unexpectedly tick up to 1.8 percent. That is still below the Fed’s 2-percent target, but keeps the argument for a return of price pressures firmly in place for hawks. Meanwhile, the New York Fed released the survey of Primary Dealers policy expectations. Countering a market that has pushed its first hike projection to September according Eurodollar futures, those banks that must bid on Treasuries believe the first move will still be June. Furthermore, their projected pace is materially faster.
So, tangible inflation figures tick higher and forecasts made by those closer to the central bank itself expect a more hawkish regime than the market itself. Traders that expected this to give the Dollar another push higher would be disappointed however. The Dow Jones FXCM Dollar Index struggled to gain any traction at all against euro, yen or pound. As skeptical as the markets are, the Greenback already enjoys considerable premium over its counterparts. Further drive on this theme may take deeper conviction. Looking for that certainty in the final 24 hours of this week is unlikely. The docket is light aside from a few Fed speaking engagements ‘Next week’ always brings new opportunities. The data is certainly thick. That said, we will be working against the burden of a well-known liquidity drain. The Thanksgiving Day holiday will take the US markets offline on Thursday, and global markets feel the impact through risk channels.
Euro Slips after Weak PMIs But is ECB QE Any Nearer?
There was little going in the Euro’s favor fundamentally this past session. Top billing were the PMI figures for France, Germany and the Eurozone. These useful proxies to otherwise infrequent government GDP figures showed the extension of an unfavorable pattern. Economic activity in the region continued to cool through the current month with the Eurozone’s Composite measure (combining services and manufacturing) dropping to 51.4 – its lowest level in 16 months and on a troubling trajectory. Further, the region’s consumer confidence report for the same month defied an expected improvement to further the reversal from May. The recession fear this stokes is only as market moving as it influences fears of the global slowdown. On monetary policy, it has to bring the ECB’s QE move closer. It seemed to check neither.
Yen Jumps after Japan’s Finance Minister Says Drop ‘Too Fast’
For two years, Japanese officials (government and central bank) have run on a consistent theme that the Yen was overvalued. Their concern was included in the decision on monetary and fiscal policy decisions to materialize a desire to see the unit lower. Recently, the warnings have cooled. Yet, against the backdrop of a return to recession for Japan in 3Q, a snap election and the upgrade to the QQE program; we wouldn’t expect anyone to step in front of the Yen crosses rally. Therein lies the surprise when Finance Minister Taro Aso this morning commented that the currency’s recent decline has come too quickly. Are rising import costs going to draw offsetting policy to stimulus for the FX rate?
British Pound: Swaps Show Weakest BoE Rate Forecast in 6 Months
Six months ago, the Bank of England was seen as one of the hawkish leaning central banks. Though the MPC would repeatedly say decisions were data dependent, a robust economic recovery and expectations of wage growth led the market to believe the first hike in the new regime would come very early 2015. Now, the first move is seen in 3Q. In fact, overnight swaps see only 22 bps worth of tightening by this time next year – the lowest level in six months. If the Pound further moves to neutral under the Eurozone’s weight, it has a lot of premium yet to lose.
Swiss Franc: EUR/CHF Slowly Firms after Referendum Bias Shifts
Swiss Franc and Gold traders were sent for a loop not long ago when a regional survey showed heavy support for the November 30 Gold Referendum vote which would require the SNB to hold 20 percent of its reserves in the precious metal – rather than its current 8 percent. The risk that the central bank would have to abandon the 1.2000 EURCHF floor it has defended since September 2011 looked less like conspiracy theory. It is debatable that they could still keep its floor vow if the proposal passed or that they could introduce new policy, but that may not be as serious a concern. According to the more recent gfs.bern poll, 47 percent now oppose it, 38 percent are for it and 15 percent are undecided.
Emerging Market: India, Brazil and South Africa 3Q GDP Due Next Week
If there is no sudden shock of volatility to end this week, the iShares MSCI Emerging Markets ETF (ARCA:EEM) will end with its second smallest weekly range in over a decade. Regional troubles, the Fed’s move to cap stimulus and the hangover of October’s risk slump seem to have faded into the backdrop. Nevertheless, this quiet won’t last. Next week, we have 3Q GDP for India, Brazil and South Africa.
Gold Rebounds after US Inflation Mix, Volatility Drop
The CBOE’s Gold Volatility Index posted one of its biggest drops (11.4 percent) in years this past session. A softer view on inflation from the FOMC minutes and a tip in the scales for the Swiss ‘Save Our Gold’ drive removes some of the pressure. However, lower implied volatility doesn’t necessarily pave the way for bulls. ETF holdings have dropped to fresh 5 year lows and the Dollar is still holding its ground.