Talking Points:
- US Dollar and Yields Slide Despite Improved US Data
- Euro Steady Despite OECD’s Labeling Region a Global Threat
- Yen Crosses Underpricing Volatility Risk
Dollar and Yields Slide Despite Improved US Data
Though the Dow Jones FXCM Dollar Index (ticker = USDollar) marked a fresh five-year high on an intraday basis, the benchmark marked little progress at the end of the day. In fact, the Greenback lost ground against most of its major counterparts this past session – with AUD/USD and NZD/USD doing their part to offset more moderate performances. This currency performance comes hand-in-hand with a drop from 10-year Treasury yields as well as diminished rate forecasts measured in Fed Fund and Eurodollar futures. Therefore, moderated rate forecasts seem to have taken the wheel this past session. That diminished view came amid a swell of economic data.
Among the economic listings this past session, the most distinctly ‘dovish’ release was the Conference Board’s consumer sentiment survey for November. Against a consensus forecast for a seven-year high, the optimism gauge unexpectedly dropped at its fastest pace in 13 months. Yet, despite this decline, the general trend is still firmly rising. The other high-profile update of the session was the second reading – the first revision – of the US 3Q GDP report. Here, the economy was unexpectedly growing at a faster 3.9 percent clip with a notable boost to personal consumption. On net, this looks like a modest tempering of the hawkish lean in rate expectations, but only a ‘modest’ one.
Small adjustments in policy forecasts yield small movements from the Dollar. To leverage a bigger move from this currency backed by a very disparate view on monetary policy to the likes of the ECB (Euro), BoJ (Yen) and PBoC (Yuan); a substantive change from more important data could prove far more motivating. In the forthcoming session, the docket crams three days’ worth of data into a single session because of the Thanksgiving holiday. Amid the flood, the personal income and spending data for October is an important economic update. However, for monetary policy influence, the PCE update – the Fed’s preferred inflation measure – will carry the most influence.
Euro Steady Despite OECD’s Labeling Region a Global Threat
Technically, the Euro gained ground against all of its major counterparts Tuesday. Yet, that performance did little to turn the tables on long-standing suffering for the single currency. Nor does the fundamental basis for the move offer encouragement for follow through. For scheduled event risk, Germany’s updated GDP statistics offered greater detail into the contents of its economic performance. Encouraging turns for private consumption and exports certainly helps to balance Europe’s largest ship. On the other hand, it does little to compensate from the Bundesbank’s financial stability report warning about excessive risk taking in the region or the OECD labeling the Eurozone a risk to the global economy – while also suggesting more stimulus. The market wants to know if the ECB will seek for QE. Data will be judged on that scale.
Yen Crosses Underpricing Volatility Risk
With the US capital markets soon to go offline for the shortened week, the assumption turns to a seasonal moderation in sentiment swings and market volatility for the global financial system. USD/JPY and other yen crosses are certainly motivated by heavy changes in risk bearing due to their carry trade appeal over the past decades; so extending this relationship seems fair game. However, the FX market’s focus on monetary policy has proven a more effective motivator and separate from the normal ebb and flow of confidence. That said, one-week implied volatility for USDJPY dropping by nearly a third from less than two weeks ago seems an underappreciated risk.
New Zealand Dollar: RBNZ Doesn’t Need to Move Until 2016
Just four months ago, the RBNZ hiked rates for a fourth consecutive meeting. No other major central bank was even close to contemplating its first move. How quickly things change. Now, the market is growing increasingly skeptical that the central bank will be able to hike again in the foreseeable future. Feeding this dovish view, the RBNZ’s own survey of two-year inflation expectations dropped to a near-15 year low. Meanwhile, a NZIER quarterly forecasts projected the central bank will not have to up interest rates until 2016.
British Pound Apathetic to Carney’s Belief Next BoE Move Will be Hike
Economic and financial conditions have softened in the UK – but apparently not enough to put the BoE off their path towards its first rate hike. Speaking with some of his fellow MPC members at a Treasury Select Committee hearing, Governor Mark Carney made clear the central bank’s next move would be a hike rather an easing step. That doesn’t necessarily leverage an earlier time for the first move, but it does curb some more of the aggressively dovish views. Short Sterling futures are still pricing the most dovish December 2015 forecast in 18 months.
Emerging Markets Suffer Equities and Ruble Drop, FX Balanced Moderately Bullish
The FX rankings amongst the Emerging Market set were generally bullish. However, the progress marked was modest. Furthermore, the group’s capital markets were offering a less encouraging view with the MSCI ETF down another 0.6 percent to further retrace Friday’s gains. For stand out performance, the Ruble’s first drop in six trading days was also the sharpest in three weeks.
Gold Pushes Deeper into Breakout Territory but Motivation Unreliable
On a 20-day (1 trading month) basis, the average daily range for gold is just coming off its most active pace for the year. However, on a shorter, weekly time frame; the activity levels are dropping fast. The impending liquidity drain from the US session with the holiday can very well disrupt this market. Yet, given the lingering activity for the Dollar and general FX markets focused on monetary policy, it is worth being cautious.