Dollar Drops To 10 Month Low Versus Euro
The dollar dropped to fresh 10-month lows against the euro and four-month lows versus the Aussie dollar the ‘miss’ in the September NFPs. For many, this data is confirmation that the Fed’s unpopular – for capital markets like US equities – decision to Taper its stimulus program would be pushed all the way until March 2014. Yet, it is interesting to note that the dollar reaction was more restrained than the debt resolution and the S&P 500’s exuberance was significantly weaker than the average bullish performance last week. What are we to derive from this? One element of this restrained is the level of speculation surrounding the looser monetary policy conditions. Assets like US equities in particularly seem like they never doubted an ongoing support system. And, in the absence of a ‘relief’ rally on risk, tepid jobs and stimulus don’t exactly spell out the beginning of a long-term bull trend. A more prolific problem that may develop traction moving forward is outright doubt that stimulus will be maintained that long or even be effective in its moral hazard gearing. What happens if the S&P 500 drops even with QE3 at full tilt.
British Pound Looking To BoE Minutes as GBP/USD Faces 1.6250
Where the interest rate outlook for the US may be at the bearish extreme with markets expecting the accelerator depressed on stimulus through the next five months, the sterling is on the opposite end of the spectrum. Rates-sensitive markets have made it clear that the Bank of England’s (BoE) foreword guidance for benchmark rates to be held until 2016 are not believed. An expectation for the first hike to come in 2015 was further reinforced last week when the central bank’s chief economist voiced implicit support of the more hawkish time frame. We will see whether these expectations are indeed overblown or on track with the upcoming BoE minutes. Should the language soften on the adamant dove stance with the GBP/USD so close to 1.6250 – a multi-year resistance – a break may be in store. However, expectations are already stretched; and the group has not strayed from its original guidance. Furthermore, the argument of a hike two years out over three years out doesn’t present a particularly strong bullish line beyond short-term repricing. The greater risk is for a dovish hold and bearish response for the pound.
Australian Dollar Rally On 3Q CPI More Successful For AUD/NZD
With rate making a consistent recovery from the discounts of persistent rate cuts just months ago, the Australian dollar has found recovery traction with a timid risk appetite supporting carry. Yet, the shift so far for the Aussie yield projection has only made the transition to rate cuts to a flat forecast. We have yet to see a material outlook for rate hikes take root. The slow build up was put into jeopardy early this morning when the third quarter consumer inflation (3Q CPI) figures crossed the wires. With the annual, headline reading expected to slow to 1.8 percent and thereby drop out of the RBA’s preferred range, fear of another near-term cut began to creep back in. The 2.2 percent reading mitigated those fears, but it didn’t move forward the time frame on the first hike. Without active carry appetite, this data my garner little strength.
Euro: Greece Readies Troika Demands, Market Weighs Eurozone 2Q Debt
There was little for the euro to work off domestically this past session. Yet, the currency doesn’t necessarily need exceptional data prints to gain. It can flourish in the schadenfreude of the dollar’s pain. If the greenback is losing its appeal as the central bank’s favored reserve holding – or at least the exceptional majority it has made up over the past decades – due to ongoing fiscal standoffs or expansive stimulus programs, there is a disproportionate gain to be made for the euro. As the world’s second most prolific reserve and recovering from serious existential fears over the past few years, the euro stands to gain steady diversification flows. We can see this in the euro’s gain against all but the franc this past session despite a notable sense of ‘risk’. Moving forward, we will have Euro-centric headlines to consider. For data, the Eurozone 2Q debt figures and October consumer confidence report are notable updates. For more pull, Greece’s battle plan for Troika negotiations is heftier.
Canadian Dollar Shows Few Assumptions for BoC Decision
While the rate forecasts for Australian and New Zealand are getting significant attention in FX circles, the once ambitious discussion of a Bank of Canada rate hike to lead the majors has fallen to the wayside. Swaps curves show little of the hawkishness assigned to the higher-yielding majors and the market-based rate spreads that the Canadian dollar was closing quickly have significantly reversed course over the past four months. Abandoned fundamental causes can be reason for a currency to drift, but they can also be a source of substantial surprise. For a currency or market that is heavily pricing in a tightening regime, there is little room for surprise on follow through. Yet, if there is no expectation of such a move, there is a more substantial adjustment in positioning that needs to be done. So, while the expectations for the upcoming BoC decision are low, it is important to have a plan should the market be caught off guard.
US Oil Collapses Below $100 Despite Dollar’s Trouble
Typically, when the US dollar dives, the commodities that are priced against the benchmark typically rise in value. That wasn’t the case for the energy complex this past session. Despite the devalued pricing instrument, US oil futures (West Texas Intermediate) extended its drop below the $100 mark and continued on to $98. More stimulus sloshing around the financial system carries similar connotations for risk appetite here as it does for equities, but the separation between QE and tangible growth is more recognizable for this supply-and-demand equation. Tepid jobs data equates to weaker growth and diminished demand for the fuel that drives expansion. In the meantime, UK-brent was little changed on the day. The expiration of the November 2013 NYMEX futures contract may have contributed to a portion of US dip – but not this full scale.
Gold Posts Most Fundamentally Convincing
While Tuesday’s 1.8 percent gold rally wouldn’t outpace last Thursday’s response to the US debt deal, the fundamental support to this move is far more convincing. The surge back above $1,300 last week was an unusual development considering the catalyst was a development that would reaffirm the greenback’s appeal as a safe haven and thereby curb gold’s alternative-store-of-wealth appeal. Nevertheless, the negative dollar reaction would break the commodity’s six-week bear trend. With the NFPs reinforcing expectations of a distant Taper, the appeal of this anti-currency is further stoked. Yet, it is one thing to gain traction on a catalyst like the US jobs report and another to expect sustained momentum under the metal’s own power. One factor that may substantially alter gold’s troubled standing following its painful indentify shift after the April collapse would be a lower volatility assumption. If the CBOE’s gold volatility index drops below 20 percent, it can compete with fiat.