Talking Points:
- Dollar’s Current Bull Leg Strongest since Rally Through Crisis
- Euro Stumbles as Inflation Data Raises the Stakes for ECB Thursday
- Japanese Yen: Japan Inc Says Concerned Over Low Currency
Dollar’s Current Bull Leg Strongest since Rally Through Crisis
With Tuesday’s close, the Dow Jones FXCM Dollar Index matched its run two weeks ago. If we close the upcoming session green, it will be the longest string of gains for the benchmark currency since September 2008 – the height of the financial crisis. The comparison doesn’t just stop with this particular leg of its incredible climb. Over the past three months, the greenback has surged on a 700 pip run that now finds us at four-year highs. Is demand for the currency now truly as strong as it was during the height of the worst global economic and financial crunch in modern history? Unlikely.
The epic climb from the dollar through 2008 was far grander in scale even though it was driven by a singular appetite: liquidity. When the interest is something as elemental as access to the market, nothing else matters. In its current state, the currency is certainly finding traction; but it does so through a number of complementary venues. And, none of them are particularly robust enough to ensure a climb through the foreseeable future. As a safe haven, we are still in a controlled burn with some areas coming under more serious pressure (High Yield and Emerging Market) while complacency still rules benchmarks like global equities.
Rate expectations are the primary source of this current run, but that well is not particularly deep. A contrast to an increasingly accommodative Europe, China and Japan can only supply so much indirect strength for the dollar. Its own rate forecasts needs to climb to bolster its carry returns – while appetite for historically-thin yield throughout the broader markets keeps buoyant. From two-year Treasury yields and Fed Funds futures; there has been little progress in pricing an aggressive, hawkish policy. Furthermore, Monday’s PCE inflation indicator and a consistent drop in breakeven rates offer limited potential for a build in the near future. It is against this disparate rate forecast that we head into today’s top event risk. The ISM Manufacturing survey for September is an important measure of economic growth, but it’s the ADP employment change that will speak to primary concerns. A weak showing here will set unfavorable expectations for Friday’s NFPs.
Euro Stumbles as Inflation Data Raises the Stakes for ECB Thursday
We were reminded why the euro has been on the chopping block this past session with event risk that speaks directly to the European Central Bank’s (ECB) accommodative monetary policy stance. While the Germany employment statistics this past session were headline worthy, it was the Eurozone’s unemployment rate and inflation figures that waded into the deeper currents. An 11.5 percent unemployment rate (not far from record highs) and a 0.7 percent core CPI (matching record lows) is added justification for the central bank to push forward with the asset purchase program it announced at its last meeting. The market is certainly positioning itself in anticipation of the details for this effort to be released Thursday after the rate decision. That presents a considerable scenario risk should the ECB not deliver…
Japanese Yen: Japan Inc Says Concerned Over Low Currency
Three years ago, Japanese officials decried the record high level of the Japanese yen, saying that it was an undue burden on their country. Eventually, the effort to devalue the currency took root and we find ourselves today with USD/JPY trading above 110. A weaker currency is generally considered an advantage – particularly for an export heavy economy. However, there are detriments to it as well. And, those disadvantages are starting to show through. Nikkei quoted a survey from the Japanese Chamber of Commerce and Industry that reported 80 percent of companies polled said the current exchange rate is undesirable. Will the government up its game to reverse its own effort?
British Pound Starting to See the Strong Economic Signs Again
In the months leading up to the fear inherent in the Scottish Referendum, the British pound was already in retreat. A moderation in the market’s position on rate forecasts showed bulls overshot the bounds of a reasonable pace for the BoE. Yet, how much excess premium was there to work through. Data will help define market balance. Recently, we have a final 2Q GDP reading that upgraded its initial print and a Deloitte poll showing businesses’ risk appetite was building. Today, we will see if the manufacturing PMI will offer a clear proxy to 3Q GDP forecasts.
Canadian Dollar Drops after GDP Data Shows Economy Stagnated
The Canadian Dollar dropped against most of its major counterparts this past session after Stats Canada reported July GDP unexpectedly stagnated. This slowed the year-over-year pace more sharply than expected (2.5 percent) and further downgrades the currency’s position as a carry candidate. Today, we have a September manufacturing report from the RBC to offer another push.
Emerging Market Suffer Worst Month Since January, Russia Contemplates Capital Controls
September saw a 7.8 percent drop from the MSCI Emerging Market ETF – the first and biggest decline since January. While broader risk aversion has yet to sink in, this group is far more sensitive to speculation on policy changes – particularly those of the Fed. These groups aren’t likely to just sit through the tumult though. The ruble has dropped below a level officials previously said would trigger capital controls.
Gold Sold into the Quarter End
It was an unfavorable ending to the quarter for metals. Gold slipped further to end the day at its lowest point in 2014 on the worst monthly decline (6.2 percent) since the incredible June 2013 plunge. Meanwhile, the final day of the trading month and quarter was a little more dramatic for copper(down 1.6 percent) and silver (tumbling 3.0 percent to a fresh four-and-a-half year low).