Dollar Climbs After FOMC Minutes Confirm September Taper

Though some may lament the level of volatility and trend developments that followed this past session’s top fundamental release – the FOMC minutes – the event nevertheless proved bullish for the dollar and bearish for US equities. That is the kind of outcome that promotes the return of the market’s most prolific fundamental theme: risk-defined positioning. We have seen a positive correlation persist between the FX market’s favored reserve currency and the benchmark risk asset (US equities) throughout 2013. This presents a backdrop where the naturally-derived balance between fear and greed has softened while the distortion caused by the central bank’s stimulus program leverages its influence on capital allocation. Yet, as the Taper nears we not only return to elemental sentiment, but the market also recognizes its risk exposure.

From the Fed’s record of discussion points at the July 31st policy meeting we were given further evidence that the central bank will move to reduce its monthly stimulus purchases at the September gathering. This is not a revelation, rather it slowly increases the probability that the first step in a full-scale stimulus withdrawal will begin next month. And, the more likely the event, the heavier the positioning becomes to precede its outcome. The revelations from these minutes were that “almost all participants” confirmed they supported the taper timeline that Chairman Bernanke laid out after the June rate decision. Elsewhere, the transcript showed “a few” were calling for patience before changing the pace of stimulus, and “a few” suggested the need to move was close at hand. Before we consumed this report we had already seen 65% of economists call for a taper in September, while sharp moves from the likes of treasury yields have indicated market complicity for weeks. The next phase of taper speculation is for full scale risk aversion in deleveraging to strike. But, it is unclear what escalates this fear.


Euro May Not Hold 1.3300 if PMI Figures Point to Growth Troubles

When we exclude the proactive moves being made by the dollar and pound, the euro performed well this past session. However, having to exclude these exceptions is an indication that the currency wasn’t under much power on its own. The market backdrop was certainly significant. The euro Stoxx extended an substantial reversal that has developed following a two-month long 14.5% rally, while Spanish and Greek 10-year government bond yields extended their respective rebounds. From the newswires, ECB Member Asmussen tried to play down German Finance Minister Schaeuble’s warning that Greece would need a third rescue – though he did not seem to deny it. Moving forward we will look for a fundamental spark to generate momentum for the euro. On deck, we have the euro-area PMI figures for August. These are timely measures of economic activity, and can thereby give investor a view of the regional growth .


Japanese Yen: Will BoJ Governor Kuroda Talk Stimulus at Jackson Hole?

Given the bearish close for US equities and the 10-month low in the Deutsche Bank carry index, we would expect the yen crosses to continue their retreat. That was not the case however as USD/JPY, EURJ/PY, and other pairings instead maintained congestion. If there were a withdrawal of capital from expensive, yield-bearing positions these pairs would be exposed. Perhaps there is some hesitation on risk aversion or expectations for BoJ Governor Kuroda’s upcoming talk at the Jackson Hole Economic Symposium. It’s unlikely he lifts stimulus.


Emerging Market Currencies Suffer Another Heavy Tumble to Record Lows

The bleeding of capital doesn’t stop for the emerging markets. This past session, the South African rand dropped 2.2%, the Brazilian Real lost 1.7%, and the Indian rupee caved 1.4% against the benchmark dollar. Not only are some of these currencies pushing further into record low territory, but they are gaining momentum along the way. Such a disorderly outflow of investment capital from these high return / high risk regions was exacerbated by the FOMC minutes. With the Fed planning to curb cheap funds, risk assessments will be more fastidious.


British Pound Steady Strength Unable to Push GBPUSD Above 1.5700

Though trailing the US dollar, the British pound was one of the strongest of the majors this past session. The strength wasn’t particularly stirred by specific catalysts from the past day’s docket. The BoE’s Weale had actually suggested further QE was an option and the UK reported its first July deficit since 2010. However, the backdrop for fundamentals is more reassuring. Given the steady rebound in economic health and the trend away from escalating stimulus efforts, the pound can continue to work of bearish positioning. Yet, that passive push can’t offset an active USD.


New Zealand Dollar Suffers Biggest Three-Day Loss in 17 Months

Through Wednesday’s close NZD/USD dropped a cumulative 257 pips through the week. That is the biggest three-day slide for the pair since March 6, 2012. Looking back at similar statistical performances there are times when we have seen such moves call reversals as an exhaustion move by the market. However, direction and momentum are generally more reliant on the conditions behind the market as well as fundamentals unique to the pair. As for the market backdrop, this drop has occurred within a broad range that has been in place for nearly three months. Shifting the balance to a decisive trend has proven out of reach for carry appetite and risk trends – much less this pawn of those themes. Much of the tumble for NZD/USD comes at the hands of a kiwi sell-off instigated by the RBNZ’s announcement of new loan restrictions, and Governor Wheeler’s broken record assessment that the currency is still too high. This drive will burn off tough. We need risk aversion to supplement.


Gold Finds No Relief in Fed’s Minutes, Path to QE Wind Down

Like equities and the dollar, gold was moved by the FOMC minutes this past session. But, there was a definable trend and momentum awaiting us after the dust settled. Having played out a bear wave since last October, and sliding another 13-plus% after the June Fed meeting, it is fair to say that some measure of the taper outlook is currently priced into the precious metal. That doesn’t necessarily mean that there isn’t further anti-currency premium to work off from the metal’s current level, but it will likely take more than the soft reassurance of a consensus time frame for slowing the Fed’s pace of stimulus expansion to upset gold. The market has solidified the $1,380 to $1,355 range which was established following last week’s rally.While ETF holdings level off, CBOE Gold Volatility Index has steadied and derivative volume is settling.