Dollar Saved or Doomed by Delayed NFPs?
It is a dangerous combination: the Dow Jones FXCM Dollar (ticker =USDollar) has slowly slipped to its lowest level in five months while its Thursday trading range was the smallest since the final day of March. An extreme for inactivity and the pressure to edge to new lows would suggests that a serious breakdown could be in the greenback’s future. Yet, a serious catalyst has been removed from the equation for both activity and direction: the September nonfarm payrolls (NFPs). A victim of the as-yet unresolved government shutdown that began on October 1, the Bureau of Labor Statistics is shut down due to the furlough and will neither release last month’s jobs data nor record October’s figures until the lights are turned back on.
While there are scenarios where the data could have both rallied or cratered the dollar, the most market-moving potential from the data would have been in support of the benchmark currency. An in-line payrolls figure would have been a volatility event (Are you a short-term traders ? Take our Trader Personality Survey). However, the jobless rate near 7.3 percent and Fed member William’s remarks this past session that the timeline that Bernanke gave in June was still in place (Taper ‘later in 2013’ and end QE3 by ‘mid-2014’) would have catered to a market that realized the September 18 postponement had merely bought a little time. The jobs data could have also sparked a risk aversion move that the US equities seem one step away from turning into a dominant theme.
So, what does the final 24 hours of this trading week and the view beyond hold for this benchmark currency? The NFPs’ absence does not absolve the dollar or broader markets from the ebb and flow of sentiment. The S&P 500’s return to the trendline floor that has carried the benchmark higher for the past 13 months reflects unrealized potential. We don’t need a newswire event to send confidence spiraling, but the dollar may very well need full-scale risk aversion to mount a recovery. Sentiment remains fragile and the conditions for speculative positioning (record high leverage, exposure to high-level risks to make passable returns) ensure a perpetually explosive backdrop. The ongoing budget standoff in Washington will weigh into this situation. A resolution – particularly over the weekend – could rally the dollar and equities. Yet, mustering a fix does not represent a meaningful opportunity to take on risk – it just negates a lingering risk. If the situation continues to fester, we close in on the important deficit ceiling data – October 17 – and passive risk-taking will start to fall apart well before that date.
Japanese Yen Crosses Offered No Help from BoJ Hold
A market-wide slide in the yen crosses this week has put carry traders on edge. The Bank of Japan (BoJ) rate decision was seen as a possible fix for this pullback, but the central bank showed it would take no steps this time around to prevent a yen rally. In the statement that accompanied the decision to maintain a goal for expanding the monetary base by ¥60-70 trillion per year, the policy authority reflected on a moderate economic recovery and gradual return to the 2 percent inflation target. There is little in these projections to push the central bank to escalate the already-unprecedented $70 billion-per-month-equivalent stimulus program. And, doing so preemptively risks diminishing their ability to react later down the line.
This yen was little moved after the report, but there was likely some measure of expectation that more stimulus would be announced to help offset the Prime Minister’s confirmation of an April sales tax hike and perhaps forestall the pullback in the yen crosses as of late. That is premium that may be unwound should BoJ Governor Kuroda’s press conference later today not reinforce hope for more. Meanwhile, the low-yielding but richly priced yen crosses are exceptionally exposed to any fissures in global risk trends. If equities give, most yen crosses will follow.
British Pound Starting to Ease Back Before BoE
The sterling has seen moderate but concerning corrections across the FX market this past session. In fact, the GBPUSD’s decline Thursday may only have been 0.4 percent, but it is largest slump for the pair in two weeks. Through the session, the currency lost ground against all the majors with the exception of the kiwi. This mild bauble doesn’t fully reflect the precarious position the pound finds itself in. Interest rate expectations have run far beyond policy vows and, few would argue, excessive. Any risk aversion would find an exposed victim here.
Australian Dollar Climbs as Bond Yields Rally
There are two primary fundamental concerns for a carry currency: the appetite for yield (risk trends) and the level of return (yield). While sentiment is shaky, the ASX200 has moderated its losses Friday morning. In the meantime, the benchmark 10-year government bond yield surged 2.8 percent this morning above 4.00 percent. This is thematic boost against fellow high-yielders, but not an offset for any risk winds.
Swiss Franc: Would a Multi-Year Low USDCHF Prompt the SNB?
Many have asked whether the Swiss franc is at immediate risk of reversing lower. Setting aside technical reasoning, there is little immediate fundamental drive to throttle the Swissie. The 19-month low USDCHF has retreated to is not an SNB trigger. The central bank has gone through great pains to tie its intentions to EURCHF and 1.2000, and there is still a 240 pip buffer to that floor.
US Oil Rally Dies Out Quickly, A Return to Dominant Trend?
A day after driving its biggest rally in two weeks and only its third advance in 15 trading days, oil was once again in the red. That is the nature of event risk that does not shift the underlying pricing structure. The news Wednesday of 2013 open for the long-discussed Keystone pipeline was priced in quickly; but the fading Syria premium and burgeoning risk aversion shift carries greater influence.
Gold Pushed Towards Short-Term Break as US Debates Debt
Once again, gold has worked itself into an exceptionally tight trading pattern – one that is almost certain to end in a break. The question is how far a technical break would carry the market in the follow through. That depends on what instigates the move. Dropping below $1,315 would find its greatest leverage through a strong dollar bid: a move best served in risk aversion. Progress on the US budget standoff would likely carry serious weight with this metal. If there is a resolution before – or during – the weekend, gold could see a quick $20-30 premium collapse.