Dollar Untroubled by Risk Swell, Rises As Peers Weaken

Talking Points:

• Dollar Untroubled by Risk Swell, Rises As Peers Weaken
• Euro Drops on Rumor of Further ECB Stimulus
• British Pound: BoE Minutes Will Help Gauge Whether 1Q Rate Hike Feasible

Dollar Untroubled by Risk Swell, Rises As Peers Weaken

Investor sentiment – in the form of volatility readings and equity indexes – improved markedly this past session while rate forecasts for the Fed posted comparatively little progress. That is an unfavorable fundamental mix for the US Dollar. And yet, the greenback still managed to climb this past session. Rather than reflect a currency that is impervious to detrimental developments, we are seeing how far the market has priced the Greenback’s underlying themes.

The most prominent story this past session was the biggest rally for the S&P 500 in 12 months and further moderation of volatility measures from last week’s extremes. Both would be considered signals for risk appetite and thereby could weigh a safe haven like the Dollar. Yet this swell of optimism didn’t reach far beyond the equities market – FX, fixed income, commodities and other asset types showed little exuberance of their own. Another caveat to the currency’s risk role is its lack of performance through the first half of October. Despite a material sense of fear and concerted risk unwind, the reserve consolidated. Even if the appetite for return was universal, there was little premium to wash for USD.

A similar discount is apparent in the Dollar’s rate forecast. Treasury yields, Fed Fund futures and other assets sensitive to the monetary policy forecasts have collapsed these past weeks; and the currency has seemingly suffered little for it. This should be taken into consideration with the upcoming September CPI release. Whether we realize or miss the consensus forecast for a further downtick in the headline, annual reading to 1.6 percent; the market’s position for rates is already significantly discounted to even the FOMC view. That doesn’t leave much room for downside surprise. Furthermore, the Fed is in its media blackout period ahead of next week’s policy meeting. What does that leave? Weakened counterparts. In particular, the Euro stumbled on news of further ECB stimulus.

Euro Drops on Rumor of Further ECB Stimulus

The Euro was down across the board this past session as financial media reported a second day of ECB stimulus. Once again, the central bank’s actions are unconfirmed for target, size or future intention – which may curb its effectiveness for stabilizing financial markets, much less deflate the local currency. The general consensus was that the bank purchased Italian covered bonds, but there were also reports of possible German purchases. Italian (and broader Eurozone) yields were down on the day, but it is early to attribute their general trend to this stimulus effort. What is more interesting for the money policy-focused market was an exclusive article from Reuters which suggested the ECB was considering corporate bond purchases. That would be a significant increase in scope even if the details are still lost.

British Pound: BoE Minutes Will Help Gauge Whether 1Q Rate Hike Feasible

There are a few noteworthy pieces of event risk scheduled for release from the majors through the upcoming session, but few hold out the market-moving potential of the BoE minutes. Sterling traders have come to expect the actual rate decisions themselves to be nonevents. When the central bank leaves its policies unchanged, it offers no immediate insight to its reasoning or expectations going forward. Details come from the transcript later on. Rate speculation has intensified for the Pound (as it has for the Dollar, Euro and other currencies) as global growth forecasts have cooled and with a softening of local data as with last week’s five-year low UK CPI reading. If the impetus for a rate hike before April 2015 diminished, the sterling will find it has the most to lose from tempered rate speculation.

Australian Dollar Finds Tepid Guidance from Chinese GDP, How About Aussie CPI?

Though it managed to beat expectations, China’s 3Q GDP reading would still reflect the slowest pace of growth for the hemisphere’s behemoth economy in five years. That is a concern for Australia which drew heavily on its trade relationship with China during the Great Recession to avoid an economic stall of its own. Yet, the growth shortfall wouldn’t move AUDUSD from weeks of congestion. Traders were offered another chance this morning with Aussie 3Q CPI. However, a sharp drop in the inflation read to 2.3 percent would result in a similar lack of response.

Canadian Dollar Rallies Before Bank of Canada Policy Meeting

The Loonie was the major’s best performer Tuesday with a rally that measured between 0.6 percent (versus the USD) up to 1.2 percent (against EUR). The docket was empty, local capital markets generated gains in-line with the rest of the globe and energy prices were little changed. Ahead, we have something a little more tangible – the BoC rate decision and policy statement as well as September retail sales.

Emerging Markets Enjoy Little of the DM’s Risk Appetite

The S&P 500 and other developed market equity indexes may have enjoyed hefty rallies this past session, but that same sense of risk appetite didn’t seem to make it to the Emerging Markets. The MSCI EM ETF was higher on the day, but by a modest 0.4 percent and on tepid volume. The FX standings were mixed, but the Ruble edged 0.1 percent higher despite Russia cancelling a second bond auction.

Gold Futures Open Interest Near Levels that Has Seen Metal Top in Past

Though there are many fundamental considerations going into the appetite for gold, participation figures are showing a consistent picture. ETF holdings of the metal are at five-year lows and volume in derivatives continues to fade as the metal advances. Another interesting exposure figure is futures open interest which is currently at 407,000 contracts – at levels that have lined up to short-term spot prices five times in 2014.

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

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