Dollar Traders Watch S&P 500 Deceleration, EURUSD Volatility, G-20

Talking Points:

• Dollar Traders Watch S&P 500 Deceleration, EURUSD Volatility, G-20
• Euro Faces Breakout with Euro-area GDP Figures on Tap
• British Pound Continues to Lose Ground on Rate Forecasts

Dollar Traders Watch S&P 500 Deceleration, EURUSD Volatility, G-20

There wasn’t much to charge Dollar traders this past session, but the fundamental theater looks significantly more treacherous directly ahead. On its current course, the Dow Jones FXCM Dollar Index (ticker = USDollar) is on pace to set a new five-and-a-half year high to end the week; but that is very much dependent on what motivates its next steps. Thursday, the currency was more or less taking the cues from its more active counterparts. From its own newswires, updates weren’t making it to the deeper fundamental waters. For data, the initial jobless claims rising more than expected, an October budget deficit that was slightly smaller than forecast and inline Bloomberg economy survey come up short for traders seeking out fodder for interest rate speculation and signs of liquidity gaps. The most prominent item on the calendar was Fed Chairwoman Janet Yellen’s opening remarks to the joint Fed-ECB meeting on global trends. Yet she would not stray into the speculative.

Ahead, there is tinder for all the high-level matters that can ignite more meaningful Dollar volatility. While there will be plenty of interest on the data scheduled for release (retail sales, import inflation, 3Q mortgage foreclosures and the University of Michigan consumer sentiment survey), activity is more likely to follow the less ‘convenient’ updates. Monetary policy speculation will be fed by Fed speakers – Vice Chair Fisher and board member Tarullo – who are not already pegged for the expected timing for their first rate hike vote. Furthermore, the G-20 meeting Saturday and Sunday will no doubt weigh in on the Fed’s move towards tightening – and much of the global community seems to support its exit from stimulus. The financial system’s appetite for yield or safety will be determined on less definable terms, but a distinct slowing in US equities’ climb will be drawing a lot of concern and negative attention. Perhaps one of the most capable but underappreciated drivers for the Dollar to close the week though is the volatility of its major counterparts, most notably the Euro.

Euro Faces Breakout with Euro-area GDP Figures on Tap

Top event risk through the final 24 hours of the trading week goes to the Euro. The past session’s universal advance (against all of its most liquid counterparts) confuses those that noted the ECB’s survey of professional forecasters downgraded growth and inflation projections, while the central bank’s monthly statement reflected a group ready to further escalate its monetary accommodation. As significant as these sentiments are – especially when contrasted with the Fed – they are a reiteration of a heavily discounted theme. A further shift into a ‘dovish’ monetary policy regime can fuel further Euro losses, but the bar is set higher for progress. The upcoming 3Q GDP readings can materially alter the consensus – for the bulls or bears. Should the data show a ‘periphery’s’ recovery stalling and the ‘core’ moving towards recession, it can cement expectations of an inevitable upgrade to the disjointed stimulus effort to this point. This data could further shape fundamental themes that have yet to be truly tapped: reverse sovereign yields and/or trigger global speculative flows if it strikes a ‘risk’ nerve.

British Pound Continues to Lose Ground on Rate Forecasts

We are 36 hours removed from the Bank of England’s Quarterly Inflation Report, but the Sterling and interest rate expectations continue to lose ground on the update. Though more measured, the currency lost ground to all of its counterparts with EURGBP proving the most costly on a 0.8 percent move. Overnight swaps now put the 12-month interest rate forecast for the Bank of England (BoE) at 26 basis points – pricing in only one fully hike through November 2015 when four months ago it was a 75 bps forecast over the same period. The first hike is now not priced in until the third quarter according to 90-day Sterling futures. Next Tuesday’s CPI figures will help shape this debate.

Japanese Yen Traders Watch the G-20, 3Q GDP and BoJ Decision

With USDJPY testing seven-year highs above 116 this morning, the Yen crosses look steadfast in their climb. However, their bearings are anything but clear. Beyond the exposure to risk – the same sentiment that the Euro and Dollar are tethered to – the fundamental high points through the coming week are profound enough to alter expectations on stimulus efforts, calls to delay the tax hike and worries of a snap election. The weekends G-20 meeting will almost certainly tap on currency manipulation. Next week, we absorb Japanese GDP and a BoJ rate decision.

US and UK Oil Hit Four-Year Lows

US-based WTI crude is trading at $74.21 while UK-favored Brent settled at $77.92. Both of these markets are hitting multi-year lows.Most of the energy complex took a tumble this past session with US reporting production levels last week of over 9 million barrels of oil. The country is producing at the fastest pace in nearly 30 years and the counterbalance in OPEC seems content to stick to its vow not to curb its supply.

Emerging Market: Russian Ruble Drops Despite 3Q GDP Beat

Broadly speaking, Emerging Markets were as lacking in commitment as the developed-world risk benchmarks. Yet, within the group, Russia was once more standing out. The country reported 3Q GDP of 0.7 percent – the slowest expansion since 4Q 2009 but materially better than the 0.3 percent consensus. Nevertheless, the RSX ETF dropped to a five-year low on heavy volume and the Ruble dropped 2.1 percent.

Gold Moves Towards its Breakout with the Global Community Discussing Growth, Stimulus

Gold for most intents and purposes is out of room. A decision will need to be made on a bullish or bearish push over the next 36 hours of active trading (perhaps early Monday). This week’s gold range has shrunk to approximately $20 positioning is growing to greater extremes. With that said, volatility from the Dollar (even indirect) or a G-20 shift on global policy and financial forecast can spur a meaningful break.

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

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