Dollar Gains Increasingly Relative

Talking Points:

• Dollar Gains Increasingly Relative
• British Pound Faces Top Event Risk on Inflation Data
• Yen Crosses Shaken But Not Broken on Recession Announcement

Dollar Gains Increasingly Relative

The traditional means for Dollar strength weren’t catering to the currency’s advance Monday, but that didn’t prevent the greenback from closing at a fresh multi-year high through the session’s close. As has been the case for a good portion of the past four-month’s rally for the currency, gains were instead found on the basis of weakening counterparts. Warnings of softer monetary policy stances by Euro-area and UK central bank heads as well as an unexpected recession for Japan (which also inspires speculation of more easing) draw a greater contrast to the United States modest but as-yet persistent move towards normalization. Amongst the potential avenues of fundamental influence, this is proving the most capable driver with plenty of motivation and unencumbered by the complacency inspired in other themes.

As we monitor the Dollar as the springboard for its most liquid counterparts, we should also perspective of its own developments. News of Japan’s economic slip fell short of triggering a global appeal for havens. However, 1-month implied (expected) volatility in the FX market advanced to its highest level in 14 months (9.55 percent). For the Fed’s own policy bearings, rate speculation softened notably. Fed Fund and Eurodollar futures showed a drop in implied rates through 2015 while Treasury yields (which can also reflect risk appetite) slipped. Research from the San Francisco suggested inflation could remain below target rates through 2016, while the Philly Fed’s Survey of Professional Forecasters showed a downgrade of 2015 PCE forecasts from 2.0 to 1.8 percent. Today, the docket prints factory inflation, dated (September) TIC capital flow data and dovish (Kocherlakota) Fed speak. We are bidding time to Wednesday’s FOMC Minutes and Thursday CPI.

British Pound Faces Top Event Risk on Inflation Data

UK interest rate expectations continue to tumble. Following up on the softer policy language in last week’s BoE Quarterly Inflation Report, a few MPC officials reinforced the temperance theme Monday. Governor Mark Carney remarked on “huge deflationary forces” from its trade partners while Chief Economist Haldane said he is watching inflation expectations “like a dove”. According to Short Sterling futures, the market is now pricing in a 0.97 benchmark rate by the end of 2015 – the lowest since last May. Those forecasts can be lowered even further if the inflation statistics due today show that there is little pressure for the UK to act preemptively and possibly undermine growth. Price readings are due for consumer, retail, producer and housing sectors; but it is the first in that list – CPI – which puts the market into motion. No further easing is expected, so a slip would cater to a dovish lean. Then again, a pick up could tip the boat in the other direction.

Yen Crosses Shaken But Not Broken on Recession Announcement

Forecasts for Japan’s 3Q GDP figures were conservative, but apparently not conservative enough. Against a survey of 0.5 percent growth on the quarter and a 2.2 percent annualized pace of expansion, the economy reported a 0.4 and 1.6 percent contraction respectively. That is a technical recession for the world’s third largest individual economy. The monetary policy implications from this unexpected showing are increased speculation of a deferred second sales tax hike, a greater likelihood of a snap election and further upgrade to the BoJ’s stimulus efforts – all three factors that would push Yen crosses higher. And yet, through the volatility, the crosses ended mixed. The data’s contribution to asset-class volatility (risk aversion) seems to generating more deft balance with ‘positive’ implications for the crosses.

Euro Drops after ECB President Draghi Hints at Sovereign Bond Purchases

It starts with hints and vows to do ‘whatever is necessary’, and eventually turns into currency-devaluing policy. The markets have been dubious of the ECB’s commitment and ability to fight dis-inflation as well as economic stagnation through its monetary policy efforts. Vows to increase the balance sheet by €1 trillion have so far seen holdings only level off. Programs to this point have been many but lacking the pull necessary to match the Fed’s previous QE efforts or the BoJ’s own open-ended programs. Traders are looking for the upgrade to outright sovereign purchases, and Draghi hinted at just that Monday. There is still a gap to action though, and it needs to fill to drive EURUSD below 1.2200.

Australian Dollar Losing Ground Despite RBA’s Avoidance of Rate Cut Threats

Calls that the RBA will shift back to an regime of interest rate cuts seem to grow by the week as a controlled cool down in Chinese GDP, a drop in commodity prices and trips in local economic data curb carry calls. Minutes from the group’s last meeting this morning however show the central bank does not believe the situation dire enough to justify this route. That doesn’t seem to have inspired an Aussie bid though…

Emerging Market Currencies Broadly Lower with Russian Ruble, Korean Won the Notable Counterpoints

Emerging Markets took a tumble Monday with the MSCI ETF dropping 1.1 percent on moderate volume. Yet, with this slump, we have yet to establish progress on the previously stalled bear trend. Like US equities – though significantly off its own highs – it seems investors in this asset class are waiting for something more convincing. On the FX side, the performance was heavily in the red versus the Dollar. The notable exceptions were the Korean Won (up 0.6 percent) and the intervention risky Russian Ruble (gaining 0.2 percent).

Gold Unable to Extend its Rally Despite a Recession and Stimulus Warnings

Friday’s rally back above $1,185 inspired little follow through from gold bugs Monday. The precious metal was little moved through the session, dropping 0.2 percent through Monday’s close with limited volume in futures and ETF trade. Meanwhile, the CBOE’s gold volatility index is holding at 13-month highs and COT figures showed a third week of long cuts. Odd given Japan’s recession and fresh stimulus talk.

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ECONOMIC DATA

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CLASSIC SUPPORT AND RESISTANCE

INTRA-DAY PROBABILITY BANDS 18:00 GMT

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

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