Talking Points:

Dollar Gains Post FOMC but Trend Not Yet Set Until S&P 500 Collapses
Japanese Yen Crosses Take in Risk, Ready for BoJ Decision
Euro Survives Spain GDP, Germany Jobs Data but More Ahead

Dollar Gains Post FOMC but Trend Not Yet Set Until S&P 500 Collapses
The Fed tried to remain noncommittal to deter speculation, but instead set the traders to believe their own bias was set too extreme. The result was a modest rebound in the dollar and worrisome correction for the S&P 500 from record highs. The mutual move for these benchmarks – alongside Treasuries, gold, high-yield bonds and other assets – indicates a general ‘risk aversion’ assessment of the FOMC policy decision. That may seem remarkable as little changed between the September 19 statement and the report released for this event. However, it is precisely the lack of alteration that troubles the market. Running under the consensus for March 19th introducing the first Taper, maintaining commentary that “economic activity has continued to expand at a moderate pace” and cutting out prominent concerns about financial conditions suggests that QE3 curb can come in January or December. This is not a ‘one-day reaction’ kind of event risk.

Japanese Yen Crosses Take in Risk, Ready for BoJ Decision
With US equities sliding in the wake of the FOMC rate decision and some of that uncertainty spilling over to Asian shares, the yen crosses were trading lower Thursday morning. Already sensitive to the ebb and flow of risk trends, the yen crosses have seen their concerns with investor appetites grow as the other aspect of carry has dropped off: yield. Bond yields for the high-yield benchmarks – Australia and New Zealand – have dropped back over 7 percent in the past few weeks. Meanwhile, the benchmark US 10-year Treasury rate has dropped back to a four-month low and the JGB itself is back below 0.60 percent for the first time since May. In other words, carry income potential is diminishing. That is a troubling situation given the relative ‘rich’ position of the crosses – particularly EURJPY which is at a four-year high. Should risk aversion kick in, there is a heavy retracement due for these crosses. Meanwhile, the Bank of Japan (BoJ) can attempt to delay this fate. The central bank weighs in on policy today, but there is little expectation that they will introduce QE round 2 this early before the April tax hike.

Euro Survives Spain GDP, Germany Jobs Data but More Ahead
Heavy event risk dotted the Euro docket this past session, but its immediate influence was tempered by the knowledge that the Fed could alter the course of general risk appetite later in the day. That distraction proved unnecessary, however, as the top two indicators on the docket fell in line with expectations. The more prominent offering was the first read of Spain’s 3Q GDP figures. The 0.1 percent reading of growth for the quarter broke a nine consecutive quarter trend of contraction. This is hardly a reading for exceptional strength, but it is another step in the recovery trend. Now if only other EZ members could follow suit. It is worth recalling Italy’s Istat head expected the economy to have contracted over the same period – the official number is due in two weeks. The German employment report was a better short-term volatility spark, but the 2,000 net increase represented a mild ‘surprise’. Ahead, we have Eurozone unemployment and inflation figures – as well as a few secondary readings. Beyond modest volatility implications, this doesn’t often jump start trend. On that front, we must watch ECB policy.

New Zealand Dollar Drops after RBNZ Confirms a 2014 Hike
The Reserve Bank of New Zealand (RBNZ) held rates unchanged at the record low 2.50 percent level it has drug along since March 2011. Yet, that surprised no one. Market participants expected the central bank to hold its course, but speculation over the timing of this group’s eventual hike is perhaps one of the most active points of monetary policy debate in the majors. Recently, swap-derived rate expectations had dropped from pricing in nearly 100 bps worth of hikes over the coming week to 60 bps and the Governor Wheeler offered remarks that suggested the shift to a hawkish policy wouldn’t equate to regular hikes. The statement from this meeting confirmed that sentiment. The bank noted that a hike in 2014 was likely necessary, but currency gains could provide ‘flexibility’ on policy and tightening depends on housing.

Canadian Dollar Expecting Much Cooler August GDP Reading
Historically, Canada’s monthly GDP figures do stir volatility, but the swell doesn’t severely alter market conditions nor establish new trends. This is large part due to the data’s consistency with market expectations. Over the past six releases of this particular data series, the actual print has not deviated more than 0.1 percentage points from the consensus forecast. That means that the market can accurately position before the release and the lack of surprise leaves can curb short-term volatility. Outside of the short-term impact, we should watch this release for its lasting influences over Canadian interest rate expectations. The BoC squashed the currency’s carry trade appeal recently when the group dropped its suggestion that a hike was inevitable in the not-too-distant future.

Swiss Franc: The Swiss National Bank Tallies its 3Q Numbers
The 20-day rolling correlation between EURUSD and USDCHF is -0.94. That suggests that the pairs in the opposite direction at the same pace most of the time. Using the dollar as a common denominator, we can tell in this relationship that the Swiss franc moves generally hand-in-hand with the Euro. To many, this isn’t a surprise. The relationship is facilitated by an economic and financial connection that was strong before the Euro-area crisis and has been revived since. Yet, price action on pairs like EURCHF is still highly irregular. Though we are currently 350 pips off the Swiss National Bank’s (SNB) imposed 1.2000-floor, the pair has refused to establish a meaningful recovery. Without a full recovery in confidence for the region, such a capital flow will remain elusive. In the meantime, the central bank will be on edge, ready to protect its currency from rapid appreciation. The SNB will update its 3Q effort today as well as its currency holdings (likely unchanged).

Gold Retreats, Bears Rule Should We Break $1,335, Dollar Rally
There is ambiguity to the round of monetary policy decisions and commentary as of late, but gold acts as a good ‘gut check’ for the lean towards global stimulus. When the world’s major central bank troupe are overall accommodative, it diminishes the appeal of traditional currencies in general as there is no viable reserve to diversify to. The total balance sheet girth from the largest players (Fed, ECB, BoE, BoJ and People’s Bank of China) stands at a record high $14.94 trillion. Yet, the appeal gold could draw from this is diminished by the Euro which is drawing reserve capital away from the US due to the Fed’s QE3 run and concern over regular fiscal standoffs. Unless the ECB decides to curb rates and undermines its alternative appeal, gold will struggle for the strength of past years. Meanwhile, a slide in expectations for a March Fed Taper weighed on the precious metal. A break of $1,335 would be a strong technical cue, a dollar rally the optimal fundamental signal.
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