Dollar Finds Capital Market Uncertainties Offset Wavering Fed Rhetoric

Talking Points:

• Dollar Finds Capital Market Uncertainties Offset Wavering Fed Rhetoric
• British Pound Tops Majors’ Performance as Focus Returns to BoE
• Euro Pressure Remains as Consumer Confidence Falls, Draghi Commits to Stimulus

Dollar Finds Capital Market Uncertainties Offset Wavering Fed Rhetoric

While Fed rate speculation tempered its support for the US Dollar to start the week, a shift in sentiment moved in to supplement the bulls. Having passed last week’s fireworks (Fed decision big amongst the high profile event risks) without risk trends imploding, we still find investors uneasy about the future’s prospects. From the usual list of suspects, we would see a substantial dimming in speculative confidence. Most prominent on the day was the drop in global equities which pulled indexes from the US to Europe to Asia back from multi-year or record highs. Joining the fray was a sharp drop in Emerging Markets, a high-yield debt slip and fresh multi-year low for the CRB commodities index. A uniform drop from these very different asset types implies sentiment itself is shifting course rather than an individual market simply causing ripples.

However, in the slip for optimism Monday, the FX market offered up the most measured response. Where the equities-based VIX jumped 13 percent (to 13.7) for the day, the FX volatility measure ticked down modestly. It should be noted though that the market’s activity measure is generally a more deliberate and trend-prone measure. As for the greenback’s haven status, the intensity didn’t seem to hit the fervor associated to blind liquidity demand. A good litmus test for full-scale fear would be a dollar climb against all counterparts with the exception of USDJPY – which would experience a carry unwind before liquidity would come into play.

If it weren’t for the market-wide adjustment, the Dollar’s own fundamental offerings would have likely seen it slip further. On the docket, the August National Activity Index from the Chicago Fed slipped back into negative territory unexpectedly and existing home sales for the same month dropped 1.8 percent. Between two Fed speeches, Kocherlakota maintained his outright dovish stance; while Dudley was noncommittal by saying he would like to see a hike in 2015, but the move couldn’t be rushed. Ahead, the Markit manufacturing survey for September is a higher-profile release, and a range of Fed engagements (from Bullard, Powell, George and Kocherlakota) will keep rate watchers busy.

British Pound Tops Majors’ Performance as Focus Returns to BoE

The Sterling advanced against all of its major counterparts Monday – a considerable feat given its performance these past weeks. The spark for bulls was not found in event risk as the docket was clear. Rather, the passing of the cloud of uncertainty surrounding Scotland’s independence vote (which ended with a ‘no’ majority) has put the focus back on a theme that has been supportive on the balance of the past year: rate expectations. Looking at the various instruments particularly sensitive to policy changes, we have seen a clear balance after the retreat measure from mid-July. Gilt yields, swaps, Libor rates and even the pound had all found some level of balance before the Referendum came into view. Has the currency exercised its premium excesses? Data will have a more tangible impact with BBA home loans a first step today.

Euro Pressure Remains as Consumer Confidence Falls, Draghi Commits to Stimulus

Despite unflattering headlines, the Euro managed to recover lost ground against the bulk of the majors – though not enough to inspire expectations of a committed bull trend. ECB President Draghi reminded us why a change course will be difficult for the shared currency. In his testimony before the EU Parliament, the central banker reiterated the group’s dedication to easing monetary slack and boost its balance sheet in the wake of a small uptake on last week’s Targeted-LTRO allotment. Meanwhile, data may give officials – and markets – a firmer grip on the need for unorthodox support with September PMIs on tap after Monday’s disappointing turn for the consumer sentiment read.

Japanese Yen: OECD Suggests Currency Not the Most Important Factor for Exports

A weaker currency may not solve what ails Japan’s trade troubles – much less its broader economic ills. Monday, OECD Deputy Secretary-General Tamaki joined those pointing out the disconnect between the nation’s foreign business and considerable drop in the Yen. While officials (government and BoJ) have not maintained the intensity of their verbal campaign to see the currency driven lower, the sense of hope has been difficult to mistake. If global growth fails to materialize and/or local troubles deepen, the Yen crosses can paradoxically tumble.

Australian Dollar Jostled by Chinese Headlines

The Aussie dollar has had a volatile start to the week with a range of Chinese event risk to work its fundamental connection to the economic giant. For the bears, the CBB’s ‘Beige Book’ for China reported the economy was ‘stuck in low gear’ for 3Q and a bottom was still not visible. Yet, this morning, the HSBC manufacturing PMI printed better-than-expected. It’s little surprise AUDUSD swung 100 pips so far.

Emerging Market ETF Collapses Through Support, Liquid EM Currencies Tumble

While there was a broad range of asset classes that succumbed to a ‘risk aversion’ sentiment this past session, the Emerging Market’s arguably lead the drop. The MSCI ETF dropped 1.5 percent – the biggest drop in seven weeks – to trade at lows last seen in early June. From the FX side, the more liquid currencies were deep red. Risk aversion and stimulus moderation leverage the EM pain.

Gold: Speculative ETF Holdings Hit Fresh 5-Year Low, Leads Commodities Lower

Gold was ultimately little changed Monday, but that does little to brighten the mood. Measuring the appetite for the commodity, speculator futures demand (via the COT) saw a fifth consecutive week of selling long positions while ETF holdings dropped to a five-year low. Gold is just one commodity that has slipped as the dollar gains and global manufacturing economies (like China) have moderated.

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

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