Emerging Markets Taking Clearer Steps Towards FX Wars

The Dow Jones FXCM Dollar Index closed out Monday’s session virtually unchanged, which was virtually a repeat of the inactivity on Friday. To some, this quiet following the rebound from two-month lows at 10,650 last week is a relief. In the context that the greenback is holding up while equities have forged a rebound, this can be viewed as intrinsic strength counteracting and overriding an otherwise elemental fundamental theme. However, this can also be viewed as complacency for both currency and capital markets which invariably disregards an inevitable resolution to more elemental market theme. Looking at the USDollar’s chart, there is less than 90 points of room in the past three weeks worth of trade; and the average daily range is approximately 50 points. It isn’t difficult to force a break in these conditions. Furthermore, the S&P 500 has stalled in its recovery effort against August 15th's tumble. There is plenty of ‘justification’ to see equities dive into a deeper correction and thereby drive the dollar higher – a wind down of record levels of leverage, closing a fundamental gap to a markets rate version of fair value, a peak in earnings growth, growth moderation, etc – but until the masses position for these concerns, it should not be considered an active market adjustment. Taper speculation is still seen as the most prominent possible catalyst for a market-wide move, but we need actual fear to evolve from these them rather than just interest rate adjustment. Today, a consumer confidence, home inflation and Fed official commentary may help.

Japanese Yen Crosses Dropping as Nikkei Drops
Most of the yen crosses slid through the opening session of the week; and with a renewed push from Tokyo through early Tuesday trading, we find the Japanese currency significantly higher across the board. Through the session’s open, we witnessed a bearish gap from the Nikkei 225 that speaks to both curbed risk appetite (important for carry trade) and foreign appetite for local assets. We have seen fluctuation on risk trends, but no committed risk aversion theme to significantly undermine the expensive, low-yielding carry build up that has been built up over the past year. Headline-watchers are keeping an eye on the discussion on the sales tax increase, but official comment won’t come until the weekend.

Euro Suffers as ECB Splits on Rate Cut Options, Italian Markets Plunge
Though its losses were relatively modest – in line with the pace of the broader FX market – it was hard to miss the fact that the euro was nevertheless lower against all of its major counterparts. Amidst a relatively quiet day, two themes boiled over Monday. A 2.1 percent drop in the Italian equity markets reflected concern over the threat of Silvio Berlusconi’s political party to bring down the coalition government if they tried to remove the former Prime Minister from his post. In other news, the market took note of the mixed remarks amongst ECB officials over the possibility of future rate cuts. Further easing would likely do little for the economy, but it would undermine the currency’s yield.

British Pound Returns from Holiday to Speculation on BoE Moves
London markets were closed this past session for the Summer Bank holiday. For the occasion, the sterling was little changed against its major counterparts – GBPUSD closed a mere 7 pips higher than Friday’s settle. The absence of UK traders is not the only reason for the pound’s restraint. There has been plenty of talk about Bank of England (BoE) Governor MarkCarney’s speech scheduled for Wednesday in both the financial news and in trading circles. The central banker’s first official policy address, this speech can offer up guidance on what the group plans to do with forward guidance as well as keeping further quantitative easing open as an option. Deputy Governor Charlie Bean remarked in Jackson Hole that more stimulus was “always an option”. If debate of further gilts purchases remains, it could curb the pounds rally.

Emerging Markets Taking Clearer Steps Towards Outright FX Wars
Brazil’s central bank last week announced a $60 billion program aimed at putting a stopper in the currency’s incredible 26 percent depreciation against the US dollar over the past 5 months. The intervention program would use this capital through swaps and repurchasing agreements through $500 million bites Monday through Thursday and $1 billion on Fridays through the end of the year in order to prevent panicked dollar buying on assumption of its scarcity. This exchange rate pressure is mirrored throughout the Emerging Market as investors – frightened by the Fed’s warning of its Taper plans – work to unwind exposure in risky regions as the cheap loans availability dries up. This is yet another move in a currency war that global policy officials will not officially label a ‘currency war’. And, while Friday’s massive 3.6 percent USDBRL drop reflects belief that this effort will gain traction, it is worth noting that the pair advance 1.3 percent Monday…

New Zealand Dollar Rebound Stymied by Shaky Risk Trends
A July trade report from New Zealand – reported early Monday in Wellington – stirred the New Zealand dollar. The NZ$744 million deficit was substantially larger than the modest NZ$16 million gap projected by Bloomberg’s consensus forecast. In fact, that was the largest ‘miss’ in the series’ history (though the forecasts were spotty before 2005). The kiwi responded with a drop, but the currency move was hardly incredible. NZDUSD dropped a mere 30 pips before returning to opening congestion. As important as trade is to the New Zealand economy, the currency’s appeal as an investment in the FX world carries more weight on current price action. In that context, last week’s sharp drop following the RBNZ’s loan restrictions move is pressuring a bullish correction. That rebound though is fully dependent on risk trends cooperating.

Gold Overtakes $1,400 but Intraday Volatility Concerning
If we skipped to Monday’s close, gold looked like it carved out a respective opening day for this new trading week. A $7 (0.5 percent) advance marks the third consecutive advance for the precious metal and the first official close above the $1,400-mark since June 6th. Yet, for those watching intraday price action, there was unusual activity afoot. Towards the very open of Monday’s trading session, spot trading showed a sharp $10 rally followed by an aggressive and quick $15 reversal. Even more remarkable, during that hour-long swing, there were 10-minute candles that produced incredible $6 ‘tails’. That is exceptionally erratic and volatile price action. Futures trading was much the same with the active December 2013 CME contract posting multiple, sharp intraday reversals including an $8 swing during Secretary of State John Kerry’s remarks on Syria. Volume during these swings was particularly low and the CBOE’s Volatility Index remains relatively stable. However, these are conditions are very unusual and should be attended closely with an eye kept to the dollar as well as international hot spots.