Dollar at Risk of Bearish Trend as Taper, Deficit Fear Eases
The Dow Jones FXCM Dollar Index (ticker = USD) fell for a fourth consecutive trading day through Wednesday. That is a bearish observation, but not nearly as disconcerting to dollar bulls as the general position of the majors. Looking across the market, we have seen the EUR/USD close at 8-month highs, the GBP/USD overtake a multi-year trendline resistance and the USDJPY threaten a breakout from congestion with a slip below 97.50. While we have yet to see heavy momentum follow in the wake of these developments, it speaks to an exceptionally exposed greenback. The possible next stage of a dollar selloff may align to notable technical cue should USDdrop below 10,475.
The fundamental drive behind the benchmark currency’s slump is well established in its association to risk trends. Over the past weeks, we have approached serious, thematic event risk that holds the authority over sentiment to stir fear and leverage the dollar’s safe haven status. Yet, those big ticket items have fallen short of the mark; and there is excess dollar premium to work off. The slide began nearly a month ago as the market’s favored ‘fear’ index, the VIX, retreated despite the approach of the September 18 rate decision. When it was announced the Taper had been deferred, a major stability threat was removed, fear dissipated and the dollar suffered. This week, a realized US Government shutdown has taken it a step further by suggesting speculative positioning is robust enough to counter financial huddle.
Moving forward, the Taper and deficit impasse themes will hold different levels of influence. The government standoff has suspended the NFPs release for Friday and signaled to the market that an October Taper is likely off as well. As for the shutdown itself, the situation may revive stability fears; but moreso in the context of a more important deficit ceiling standoff – still weeks off. The dollar traders must watch risk trends.
Euro Rebound Depends on Extent of Recent Italy Crisis, Stimulus Fears
The euro traders witnessed relief in two notable points of event risk this past session. The most pressing trouble for the shared currency was the trembles in the Italian government. Prime Minister Enrico Letta called a confidence vote to test the commitment of the PdL party’s threat to withdrawal support of the coalition government and send investor confidence in the country into a tailspin. Party leader – and former premier – Silvio Berlusconi recanted his threat as the number of possible defectors grew. Meanwhile, the ECB confirmed what the market has suspected – that no new policy moves would be taken, but the group stood ready to do everything necessary to curb excessive market rates.
Japanese Yen Traders Should Beware the BoJ Friday Morning
While the fears of an impending Taper in the US have eased, the thought remains in the back of global investors’ minds. How does that connect to Japanese Prime Minister Abe’s announced support of the April sales tax hike (from 5 to 8 percent)? Those are two concerns for yen traders as they weigh the risk of volatility against a historically anemic carry trade return. If cost is seen outweighing return, the risk of a deleveraging wave is dangerously real. That will no doubt be a topic of conversation at tomorrow’s Bank of Japan rate decision.
British Pound: BoE’s Q3 Bank Liabilities Survey to Measure Lending Health
How much yield premium is built into the sterling? That is perhaps the currency’s most pressing fundamental quandary. Over the past three months, the pound has advanced between 7.9 percent versus the dollar to 1.6 percent against the kiwi – gains versus safe haven and high-yield currency alike. That reflects a strong increase in yield forecasts. The BoE’s 3Q Bank Liability Survey will not likely tap into this concern.
Emerging Market Looks to Take Advantage of Further Taper Delay
If the US government standoff is going to delay the Federal Reserve’s eventual exit from its expansive stimulus program, the situation is a boon for emerging markets (EM). With an extended period for the world’s largest safety net to remain in place, investors are encouraged to chase higher yields in the more unstable areas of the world. From Monday’s pre-Shutdown low, the MSCI Emerging Market ETF has rallied 3.0 percent. On the FX side, the Turkish lira has risen 1.3 percent versus the dollar, the Brazilian real 1.2 percent and Indian rupee 0.2 percent. Follow through on this theme in this segment will be a good gauge of risk appetite as stimulus may not be enough anymore to put the market back into its care-free mentality. In other news the IMF’s COFER report reports that central banks unwound nearly 30 percent ($20 billion) of their holdings in emerging market currencies from their reserves.
US Oil Posts Biggest Rally in Weeks on Pipeline News
US-based crude oil (West Texas Intermediate or WTI) soared Wednesday. The 2.0 percent rally was the biggest for the commodity in two weeks and is only the third advance in the past 15 consecutive trading days. This particular move is striking for technical traders because it has pushed the market back above the $102 level (on its way to an eventual high of $104.20) and thereby thrown cold water over bearish momentum that guided crude prices to three-month lows on the slow wind down of ‘crisis in Syria’ premium. For sparks, some were confused as the US DoE reported the third biggest jump in oil inventories in 2013 (5.472 million barrels) for the week ending September 27. However, the more influential headline was an update for TransCanada’s Keystone pipeline would carry oil before the end of the year. This open shipping will reduce supplies in Cushing, Oklahoma which is the delivery point for the WTI contract. Meanwhile the spread to the UK Brent contract narrows.
Gold Volatility Continues with a Reversal Back Above $1,300
Short-term (one week) realized volatility in gold futures trading is rising quickly. This surge in actual – as opposed to expected – activity levels comes as the precious metal has experienced another heavy move through Wednesday’s session. The commodity rallied 2.2 percent through the past trading day – maintaining the heft but flipping the direction of Tuesday’s 3.1 percent tumble. From a fundamental perspective, there was little in the ongoing US government shutdown that would add or alter the backdrop by which the ‘safe haven’ ignored the passing deadline. For those trading the metal, much of the activity began around the US ECB President’s press conference and US data release. The vow to do whatever is necessary to curb rates in the euro-area and the ADP’s curtailing an October Taper are both gold-bullish. That said, they are not consistent drivers. The pullback in volume and fresh multi-year low in ETF holdings (61.929 mln ounces) reflect a trend of constraint.