Chinese Renminbi, Global Markets Await Chinese GDP

Talking Points:

• Dollar Traders Keep Ear to Ground for Volatility Until Fed Meet
• Chinese Renminbi, Global Markets Await Chinese GDP
• Euro Sees Uneven Advance on News of QE Program Activity

Dollar Traders Keep Ear to Ground for Volatility Until Fed Meet

Though the US Dollar has opened the trading week lower, the market’s motivations are more likely a rebalancing in the face of anticipation of volatility rather than a fundamental shift in view for the currency itself. The Dow Jones FXCM Dollar Index (ticker = USDollar) slipped 0.3 percent Monday but holds within the past month’s range. Passing through a lull in the otherwise steady build in capital market activity and volatility readings, the currency has suffered the ills of a moderated interest rate forecast. A slowing global and domestic growth forecast, already-tepid inflation pressures further drained by tumbling energy prices and a persistent dovish effort from its major peers has significantly hobbled hawkish expectations for the Fed. St. Louis Fed President James Bullard pushed the market even further last week when he unexpectedly suggested the FOMC should pause its final Taper to the QE3 program expected next week. That said, the market seems to have significantly discounted the rate forecast already. With the December 2015 Fed Funds futures implying a 0.43 percent benchmark rate and December 2016 1.295 percent, there is a substantial discount to the bearish side.

What does a dovish view mean for the Greenback moving forward? It will be difficult to further drive the currency lower on downgraded policy views. It would simply offer validation. Alternatively, data or event risk that shakes the certainty of lower rates for an extended time would reinforce the Fed’s – yet unchanged – forecast for a mid-2015 first hike. Already offering a measure of doubt, normally dovish Boston Fed President Eric Rosengren remarked that recent market volatility is not in itself “a bad thing” and believed they were still on pace to end close out QE3 on October 29 (though it should be said, neither is a voter). Rate expectations have garnered greater influence over the Dollar and FX market, but only at the allowance of risk trends. Should the focus on volatility and volume continue to take front and center, the currency’s dalliance with rate forecasting will be abandoned quickly. And, there are plenty of sparks to watch for.

Chinese Renminbi, Global Markets Await Chinese GDP

Top event risk for Tuesday’s trading session – and arguably for the entire week – is the 3Q Chinese GDP release (due at 2:30 GMT). This is the pinnacle among a run of data that includes retail sales, industrial production and fixed assets. Consensus heading into the growth report is for the economy to further cool its pace of expansion to a 7.2 percent clip. That is a remarkable tempo when compared to the US, UK and Eurozone amongst other; but for China, it would represent the worst reading since 1Q 2009 – the height of the global financial crisis and recession. This slowdown is not particularly surprising for economists or market participants as the government is attempting to cool its pace in an effort to transition away from an unsustainable credit-born boom to a more durable consumption-derived growth. What makes this particularly troubling for markets though is that this economy will less effectively act as a counterbalance to another global slowdown.

Euro Sees Uneven Advance on News of QE Program Activity

A spokesperson confirmed that the European Central Bank (ECB) entered the market to purchase assets as part of the covered bond and ABS program adopted at the last meeting. The target and size of the effort is unknown, but media reports suggest the central bank bought short-term French and Spanish securities. This move signals the start of a QE-like program that draws some similarities to the Fed’s and BoJ’s efforts. Indeed, the Euro has tumbled in anticipation. Yet, it is the contrasts that may render this effort deficient. The ambiguity of the size, scope and schedule leave investors doubtful. And, if global and Eurozone slowdowns take hold, the ECB may not be able to manage.

Japanese Yen: Will Pension Fund’s Appetite Support Local Capital Markets, Currency?

The Nikkei 225 posted its biggest rally in 16 months Monday and the Yen crosses were broadly higher on the day. Beyond the general relief in volatility and boost in investor confidence, there was news that the country ‘s $1.2 trillion government pension fund (GPIF) would raise its exposure to domestic equities to 25 percent. Under ideal circumstances, that would stoke demand from investors wanting to front-run the heavy-handed buying and thereby rally the markets. However, this bid would not be enough to offset any global aversions to risk.

Aussie, Kiwi Dollars Climb on Unusual Yield Appetite

Over time, investors naturally favor higher return investments…so long as volatility does not swamp expected yield. Fear has proven the burden of high-yielding currencies like the Australian and New Zeland Dollars as of late. Yet, Monday, both staged the biggest rallies amongst the majors amid tentative risk appetite. Yet, a second day’s climb now depends on how sentiment reacts to the Chinese economic data.

Emerging Market Rebound Drained of Volume, Real and Ruble Still Tumbling

A great representative of risk trends, the MSCI Emerging Market ETF advanced 0.3 percent to start the week, but it did so on the weakest volume in two weeks. In other words, the bulls are not in control. Amongst currencies in the market class, most were higher against the USD on the day. Two notable exceptions were the Brazilian Real (down 1.2 percent) and Russian Ruble (0.8 percent lower) suffering their own troubles.

Gold Advance Slow but Futures Open Interest Hits 3 Month High, Net Long Spec Interest Jumps

How robust is the market’s confidence in gold? Last week, the COT reported net speculative futures interest rose for a third week – 29 percent to a net 85,415 contracts. At the same time, total open interest in the futures market for the precious metal is at its highest since July 22 (404,000). Yet, ETF holdings (a measure of market interest) are just off a 5-year low. It seems the metal is more inspired by USD than actual demand. **Bring the economic calendar to your charts with the DailyFX News App.

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--- Written by: John Kicklighter, Chief Strategist for DailyFX.com

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