Talking Points:

Dollar Drops as Commodities Rebound and Equities Slide
Australian Dollar Hits 4 Year Low on High Volume Before RBA
Swiss Franc: EURCHF Doesn’t Rally Far After ‘No’ Vote on Gold

Dollar Drops as Commodities Rebound and Equities Slide

In a day scarred by volatility, the Dollar notably ended the day in the red. While this correction was ultimately mild – the Dow Jones FXCM Dollar Index (ticker = USDollar) was down only 0.1 percent and after setting a five-and-a-half year high in session – it is fundamentally remarkable. From the US docket and newswires there were few items to significantly undermine the currency’s appeal. A few Fed speakers (NY President William Dudley and Vice Chairman Stanley Fischer) remarked on their general optimism for local growth, downplay of dis-inflation concerns and the diminishing efficacy of future stimulus efforts. For data, the ISM manufacturing survey for November reported a stronger than expected reading and just off a three-year high. The inflation component of the indicator, however, did post its biggest drop since June 2012. This measure has a lead on the CPI report, but its composition is significantly different.

Rather than economic cues and relative monetary policy forecasts, the Dollar seems to have found its motivation this past session through its counterparts. If a single reference currency is little moved, it can be strong armed by more active peers. In particular, commodities posted remarkable rallies. Both gold and US-based WTI oil posted intraday rallies from multi-year lows. Given the Dollar is the global pricing instrument for these resources, the momentum reverberates through the FX market. The question heading forward is whether the appreciation to these key Dollar foils continues. Neither growth forecasts nor anti-currency sentiment have regained significant traction. Further, the major currencies are not moving to close the gap with the Fed’s rate forecast. In the upcoming session, we will put to the test a tentative slip in risk trends (the S&P 500 took a spill Monday) and start the engine on relative rate forecasts (with the RBA decision versus more Fed speak).

Australian Dollar Hits 4 Year Low on High Volume Before RBA

Though it managed to recover a lot of the ground it lost against the US Dollar, the Australian Dollar would still end Monday down against all counterparts, hit a four-year low against the Greenback and did so under its highest volume in 16 months. This exceptional level of volatility and indecision connects back to a number of fundamental sparks. Commodity volatility certainly contributed – the country is a well-known exporter – and the disappointing showing for China’s manufacturing PMI further cooled optimism. Expectations heading into the Aussie’s docket would also feed speculators’ uncertainty. With swaps pricing in a rate cut in 2015 and banks starting to jump on board with their forecasts, the RBA maintained a neutral tone with their rate decision this morning. Peace will be short-lived though. The 3Q GDP figure is due tomorrow.

Swiss Franc: EURCHF Doesn’t Rally Far After ‘No’ Vote on Gold

After a few weeks of anxiety for the Swiss government and central bank, Switzerland voted to reject (77-23) a referendum that would have forced the SNB to increase gold holdings to 20 percent of reserves and future divestment of any metal purchased. There is certainly a surprise ‘relief’ aspect to this event risk. Yet, as we can see from EURCHF, that respite offers limited breathing room from the SNB’s imposed 1.2000-floor. That is because the larger issue was not the uncertainty for this vote but rather the overwhelming wave of stimulus the ECB is injecting into the system. At this pace, either the SNB introduces new policy or simply holds the general floor on EURCHF for months.

Japanese Yen Unsettled by Moody’s Unexpected Downgrade

Ratings agency’s Moody’s Investors Service unexpectedly downgraded Japan’s sovereign debt rating one step from ‘A1’ to ‘Aa3’ Monday. The reasoning behind the move is a list of the country’s most pressing issues: expected trouble in hitting deficit reduction goals; uncertainty over the effectiveness of measure meant to help growth; persistent deflation risks; and reduced debt affordability over time. Until recently, ‘bad news’ was considered a Yen cross booster as it translated to more stimulus. Now, that relationship is wavering.

US Crude Oil Reverses: Demand or Short Squeeze?

Following last week’s dramatic tumble in global oil prices following OPEC’s decision not to cut its aggregate production levels, a bounce seemed likely. The timing and severity of the move though was the question. We didn’t have to wait long as Monday would see the largest intraday bullish reversal for US-based WTI in three years – a move made on volume nearly comparable to Friday’s impressive collapse. The question now is whether this is a lasting turn or a ‘short squeeze’. Time will tell, but conviction and fundamentals don’t look very robust early on.

Emerging Market Capital Assets Sink but Russian Ruble Collapses

The ranks of ‘risk’ were offering a mixed view Monday. Developed market equities were mixed or lower, yen crosses were down and commodities were up. There was little consistency should we argue that ‘risk trends’ were in control one way or another. Emerging Markets added to the confusion with the MSCI ETF down sharply (1.7 percent) on heavy volume. On the FX side of the group, the Russian Ruble once again stood out – in a bad way. The currency dropped another 4.4 percent – the biggest drop in nearly six years to a record low.

Gold Reversal the Largest in Three Years – A Turning Point for Bulls?

Similar to oils remarkable turn Monday, gold posted an incredible recover from morning losses. At one point below $1,150, the metal went on to rally nearly $79 to its session peak and closed above $1,210. That is the biggest intraday recovery (reversal) since August 26, 2011 – around the market’s top for record highs. Should we consider this a reversal – bullish or bearish – or is this a side effect of another development (Dollar weakness, commodity short squeeze). The global stimulus argument is compelling but not new. For now, it looks more like a squeeze.

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ECONOMIC DATA

GMT

Currency

Release

Survey

Comments

23:50

JPY

Monetary Base (YoY) (NOV)

36.90%

The high growth rate in monetary base is due to the BOJ QE policy.

23:50

JPY

Monetary Base End of Period (NOV)

¥259.5T