Talking Points:
- Dollar Drops as Equities Selloff Picks Up
- British Pound: Can the BoE Keep on Track for an Early 2015 Hike?
- Euro Suffers Downgrades in Policy, Growth and Ratings
Dollar Drops as Equities Selloff Picks Up
That’s unusual. We don’t expect the US dollar to be the more reticent ‘risk appetite’ actor when compared to the S&P 500. Yet, that is exactly what happened through the opening session of this trading week. The epitome of endurance in sentiment – what many consider complacency – the equity index picked up where it left off last week with a 1.7 percent tumble. That notches the third consecutive day of 1 percent or greater loss for the heaviest decline over a similar range since January 2010. Perhaps more symbolic, this opening move has also driven the market below the 200-day moving average for the first time in nearly two years;ending the most persistent bull trend since August 1998. It would seem that the tides are turning as even the most resolute bullish sanctuaries are capitulating. So, if a move to delever risk is playing out, why has the FX market’s most prominent ‘safe haven’ not found a comparable bid?
Some will note the discord between S&P 500 and dollar and conclude that the currency is no longer a haven. However, that assumption is perhaps a little early and extreme. Each asset class and market has a different association to underlying investor sentiment. For the Dollar, its appeal comes through at the extremes. When the need is for liquidity with little or no consideration to yield; the market turns to US Treasury, money markets and the dollar. Have we hit that extreme yet? Considering the yen crosses didn’t capsize, emerging markets were higher and volatility measures (outside equities) were steady; it would seem that sentiment was more stable than panicked headlines would suggest. Does that mean we maintain these goldilocks conditions where we deleverage excessive risk without tipping the system into a disorderly unwind? Unlikely. Though, as long as there is risk aversion without the appetite for liquidity, another aspect of the dollar will come under pressure: rate forecasts. Fed Funds futures are projecting their most dovish forecasts in 17 months.
British Pound: Can the BoE Keep on Track for an Early 2015 Hike?
US interest rate forecasts are fading quickly, and we are seeing the effects on the Greenback. Yet, with the cooler forecasts for global activity and inflation pressures, can the majors most hawkish-leaning currency keep its pace? The Bank of England (BoE) is the only major central bank that was – until last month – expected to hike its benchmark rate before the Federal Reserve. Considering how quickly speculation has faded for the Dollar, this relative hawkish position for the Pound still remains; but does that mean the Sterling will retain its hawkish bearings versus its other counterparts? Not according to rates. The 2-year Gilt yield has dropped to a range low for much of 2014 around 0.65 percent, and 1-year-2-year swaps have fallen to an 8-month low 1.605 percent. Ahead, this controlled descent could be stabilized or accelerated by the September inflation statistics. The headline, year-over-year CPI reading is expected to cool to a 5-year low 1.4 percent.
Euro Suffers Downgrades in Policy, Growth and Ratings The Euro’s performance Monday was another that was unexpected. A regional economy that is downgraded on a near weekly basis and is forcing the ECB to ramp up its stimulus effort seems like the kind of combination that would meet general risk aversion with a hefty capital outflow. That said, the euro rose against most of the majors through the session. Should fear dig into the market moving forward, the past two years of capital inflow into Eurozone’s government and private assets will start to start reversing current. Yet, in this grace period, those currencies that have outperformed with their hawkish bearings are relinquishing ground to this dove haven. It is appropriate that the upcoming session offers up the ZEW investor sentiment surveys for the Eurozone and Germany.
Yen Crosses Follow Rate Forecast More than Carry Appetites
Like the other majors, rate expectations seemed to play a bigger role in deciding the Yen crosses’ performance than general risk appetite trends did. If we were in a full-bore deleverage move, these carry trades would have dropped across the board. Instead, their performance was split down the middle. The USD and GBP notably lost ground where the tepidly seated EUR and AUD gained. That said, one-month risk reversals for USD/JPY – at a 7-month low -0.73 – show the market is still distinctly concerned of volatility and reversal.
Australian Dollar Rises as China Reports Strong Imports to Match Exports
Not only have rate expectations not recovered for the Australian dollar – a favored carry currency in more favorable winds – but the economy’s most reliable source of growth has been significantly hobbled. Yet, perhaps there is light at the end of the Chinese tunnel rather than a credit crisis. China’s September trade balance fell sharply, but it did so on a rise in both exports and imports (7.0 percent on the later).
Emerging Markets and Currencies Rise Despite ‘Risk Off’ Mentality
Thanks to a strong positive gap on the week’s open, the MSCI Emerging Market ETF closed 1.0 percent higher Monday. Showing a similar blasé attitude to US equities’ selloff, the segments volatility measure was steady and most EM currencies were actually higher versus the dollar. The biggest exception was the Russian Ruble (down 0.3 percent). Intervention is not working for Russian authorities.
Gold Advances Against All Major Pricing Currencies
Gold rose 1.0 percent in dollar terms Monday. That pushed the precious metal to its highest close since September 11 and furthers the notion that a larger reversal off a multi-year range low was gathering traction. Fundamentally, it would seem that this was a ‘dollar’ move rather than direct gold performance. Yet, the metal rose against all of the majors. Softening growth translates into softer monetary policy globally.