Talking Points:
- Dollar Crawls to Fresh Five-Year High as Markets Focus on Rate Contrast
- Euro Finds Too Little Traction, Too Late
- Yen Crosses Advance after BoJ Downgrades Growth Assessment
Dollar Crawls to Fresh Five-Year High as Markets Focus on Rate Contrast
A drain in liquidity often translates into a moderation in heavy exposure or one-sided trades. Yet, the approach of this week’s holiday drain has yet to turn the Dollar around. Though its progress has slowed compared to last Wednesday’s jump, the Dow Jones FXCM Dollar Index (ticker = USDollar) still managed to scrounge its highest close since March 2009. Concerns over what is lies in store for the financial markets come 2015 – a continued emerging market route, more severe global economic headwinds and perhaps even the long-awaited unwinding of ‘excessively risky positions – no doubt contribute a sense of potential. But, the proactive theme for the currency remains its monetary policy bearings. Last week, the Fed only deepened the market’s belief that the USD will return to a hawkish rate regime well before its counterparts. Dropping the ‘considerable time’ language from its policy statement, the Central Bank lit the fuse for a six-month time frame the market had attributed to the language.
The contrast of the FOMC’s bearings is so significant compared to counterparts like the ECB, BoJ and PBoC that the anticipation of a return to tightening overrides the negative implications of the downgraded forecasts for interest rates through 2015 and 2016 – from 1.375 and 2.875 percent to 1.125 and 2.50 percent respectively. Looking at Fed Funds and Eurodollar futures, we could see that the market was already pricing in this moderation. What’s more, investors are still discounting the central bank’s more conservative views by another 50 and 93 bps. As we close in on that first move, that skepticism will ease and the Greenback will benefit. We will see this picture clear up significantly moving into the opening months of 2015, but we will find plenty of speculation on this side of the year-end drain. On Tuesday’s docket, we have plenty of event risk due; but the data with monetary policy weight is the November PCE (the Fed’s favored inflation statistics) and the Treasury’s auctions. The market-favored CPI reading last week cooled to 1.3 percent, and the annual PCE clip is expected to hit 1.2. That sets a low bar to impress on. As for auctions, a five-year fixed and two-year floating-rate note sale is perfect for measuring market rate expectations – similar to the two-year sale Monday which offered up the highest yield since March 2011.
Euro Finds Too Little Traction, Too Late
The Euro opened the week with gains against most counterparts – though progress was tepid at best. For key pairs like EURUSD and EURGBP, we are within stone’s throw of setting new multi-year lows. For data, the Eurozone’s consumer sentiment survey for December offered much-needed relief with a better than expected -10.9 reading. However, put in context, there is little relief to be found here in growth, monetary policy or financial tension expectations. The ECB’s balance sheet still refuses to budge in the aftermath of its most recent stimulus upgrade (adding asset-backed securities to its open purchases of covered bonds). If the central bank considers its €1 trillion balance sheet increase a necessary objective for growth and stability, a full-scale QE program is far more likely. And to that growing concerns over the capital flow should risk aversion strike and renewed tension for fiscal players like Greece, and there is too much at risk moving forward.
Yen Crosses Advance after BoJ Downgrades Growth Assessment
The Yen crosses were the best performers amongst the majors Monday. A continued recovery effort by Asian, European and US stocks saw the S&P 500 close at a fresh record high. This in turn, reinvigorated the ‘status quo’ theme and drew out the ‘Santa Claus Rally’ believers. As with the Dollar bulls, the ‘risk’ longs are refusing to reduce their exposure into the week’s speculative rebalance. Here too, monetary policy places a strong back brace. Following Abe’s election win last week, the BoJ’s economic statement Monday dimmed its view and raised the lights on QE.
British Pound Data: A Lot of Smoke, Little Fire
There is plenty of scheduled event risk on the UK docket this session. Yet, its quality in terms of market impact is very lacking. Final third quarter readings on GDP will offer little in the way of update for what truly matters for the pound – rate forecasts. The November BBA home loans will sharpen a blurrier image, but it is unlikely to single-handedly move up short-sterling speculation of the first hike before September.
Australian Dollar Faces a ‘Necessary Break’
We often find markets put in a position of a ‘necessary break’ – a diminishing range that inevitably runs out of room. A technical cue like this can sometimes lead to a new trend development. Yet, it is unusual when it lacks a fundamental backing in the form of a discreet catalyst. It is further extremely unlikely when the market is making preparations for a full liquidity withdrawal.
Emerging Markets: Year-End Liquidity Drain May be a Blessing
According to the MSCI’s ETF, Emerging Markets closed up for a fourth consecutive day through Monday’s close. A fading volume does little to truly engage confidence though. Given the high volatility of this market group, moderation on the extreme bearish view seems more readily available. Though, for the class’s recent symbolic leader – Russia – it would be extremely risky to grow complacent on its hazards.
GoldSees Little Year-End Demand from Metal Speculators or Doomsday Bearers
Year-end optimism in capital markets, a hawkish view for the Fed (and more moderate dovish pace projected for ECB stimulus), and persistent Dollar advance combined for another 1.7 percent drop for gold this past session. Gold is a haven that requires more dedication – and capital exposure – than cheap hedges for unexpected volatility through liquidity lulls. That will work against the metal for the next few weeks.