Talking Points:

Dollar Dangling Above Deeper Bear Trend Ahead of Next Week’s FOMC
British Pound: Buckle Up for GBPUSD Breakout on 3Q UK GDP
Euro: Liquidity Draining, Rates Rising, Is ECB Contemplating Stimulus?

Dollar Dangling Above Deeper Bear Trend Ahead of Next Week’s FOMC
The tension is clear in the charts. Whether we are looking at the multi-faceted round of support on the Dow Jones FXCM Dollar Index at 10,365 or the tight congestion on USDJPY, the greenback looks like a wound spring. Yet, transitioning this appetizing speculative opportunity into a breakout or trend shift may be more than the market is able to manage before the week closes. As striking as the positioning for the dollar and other capital benchmarks are, the timing of its resolution is hemmed by the docket we are working with.

In little more than four months time, the USDollar has retraced half of the gains it had struggled for beginning with last September’s swing low. The shift has developed around a growing log of bigger fundamental cues that include appetite for yield (which the dollar doesn’t offer), a deferred stimulus exit from the Fed and renewed effort to diversify reserves against the backdrop of regular US political infighting. These themes do not easily develop on individual indicators or events – and they are far more difficult to jumpstart without them. That being said, the final 24 hours of this trading week is lacking for sizable event risk. On the data side, the September durable goods orders and the final reading of the University of Michigan’s consumer sentiment survey are noteworthy but too many degrees removed from foundation concerns.

For scale, a broader current of risk trends can always carry the market; but aligning sentiment without a common banner is rare. Another dynamic that will act to defer traders big position changes is the considerable event risk due next week. In particular, Wednesday is armed with the October ADP payrolls report, the September consumer inflation (CPI) data and the FOMC rate decision. There is no more appropriate mixture of event risk to shape speculation surrounding the Taper timeframe – and the US stimulus program certainly does represent a dynamic that can alter the fabric of risk taking in the global financial markets.

British Pound: Buckle Up for GBPUSD Breakout on 3Q UK GDP
So far this week, two notable Bank of England-related developments have pushed the sterling into position for a much larger trend development. Today’s third quarter GDP data may be the spark that completes the sequence. Interest rate expectations have afforded the pound substantial strength to counteract sizable swings in risk trends and even mute fundamental crosswinds. Yet, neither the BoE Minutes or Governor Carney’s meeting this past session materially altered the currency’s holdover performance from last week. The statement delivered by the central bank head, however, was quite remarkable for rate watchers. Against speculation of an advancing rate hike, Governor Carney announced an expansion of support for the banking sector. A reduced price at the discount window, longer and cheaper loans and allowance for a broader range of collateral is a substantial move. And, while it is not example stimulus, it speaks to easing the reins rather than tightening.

Ultimately, the third quarter GDP release in today’s London session (8:30 GMT) can shift rate speculation more effectively than the central bank musings. Expectations of a timelier rate hike from the BoE – to thwart their own forward guidance – would need a robust economic backdrop. And, these updates are well spaced, which means a new bearing can hold for some time. The consensus forecast is an uptick in the pace of expansion (0.8 percent on the quarter). Meeting the forecast may not upgrade rate expectations though. Hawkishness is set very high. Expect breakouts?

Euro: Liquidity Draining, Rates Rising, Is ECB Contemplating Stimulus?
The ECB’s Excess Liquidity Index dropped below €200 billionfor the first time since December of 2011. Central Bank President Mario Draghi mentioned this as level to watch not long ago when discussing the effects that stimulus (LTRO) repayments by banks could have on financial vulnerability and rates. Short-term market rates – while still historically low – are at 13-month highs and rising. Meanwhile, optimistic forecasts for growth are starting to cool. Next week’s 3Q GDP update for Spain will paint a clearer picture of the need for support.

Japanese Yen Uninspired by Inflation Data, BoJ Due Next Week
Headline, nation-wide Japanese inflation hit its highest level in five years according to this morning’s September CPI figures. Yet, the end of deflation and claims of stimulus success are not being touted by policy makers. Looking to the core (excluding food and energy) price gauge, levels were unchanged. The healthy level of skepticism actually benefits the bullish view on the yen crosses – a stimulus program success would suggest further infusions unnecessary. We will gauge the BoJ’s plans next week with the scheduled policy meeting on Thursday.

Canadian Dollar Extends its Tumble following Dovish BoC Shift
We have seen rate forecasts build slowly over time for most of the majors – whether it be the pickup in yield speculation behind the sterling or the stimulus extensions for the Fed. Yet, the Bank of Canada’s turn from its ‘eventual hike’ rhetoric this week was more aggressive than the FX market was prepared for. Therefore, there is little surprise that the follow through on the BoC neutral shift is still driving the loonie. The USDCAD is up 1.3 percent in two days, but the follow through on this news will be more prominent against fellow carry currencies.

New Zealand Dollar: RBNZ Governor Says 2014 Rate Hike On
The downshift in interest rate expectations for the New Zealand dollar these past weeks has found clear support from the RBNZ itself. Governor Wheeler spoke this morning remarking that the lending limits implemented recently can give scope to delay rate hikes. The central banker made a point to say that a hike is likely due sometime next year, but his lament over the strong currency, housing warning and talk on intervention suggests it is not an easy path. The 12-month rate forecast measured in swaps is currently pricing in 70bps worth of hikes.

Gold Closes at Five-Week High, Stimulus Shift Buoying Commodity
Gold fell short of a close over $1,350 this past session, but nevertheless closed at a five-week high. The dollar’s tumble on the debt resolution last week and NFPs-Taper connection this week have started the move. Follow through, though, likely rests with the global appeal (or lack thereof) of traditional fiat currency. In addition to the Fed pushing back its Taper, the ECB, BoE, BoJ, BoC and RBNZ have all made moves from hawkish to dovish on the stimulus spectrum these past weeks. That broadly deflates ‘currencies’ and promotes appetite for an alternative.

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ECONOMIC DATA

GMT

Currency

Release

Survey

Comments

8:00

EUR

German IFO – Expectations (OCT)

104.5

104.2

Last month’s current assessment print was the highest print since the summer of 2012.

8:00

EUR

German IFO – Business Climate (OCT)

108.0

107.7

8:00

EUR

German IFO – Current Assessment (OCT)

111.4

8:00

EUR

Italian Retail Sales s.a. (MoM) (AUG)

0.0%

-0.3%

Retail sales in Italy have not been positive YoY since early 2012.

8:00

EUR

Italian Retail Sales (YoY) (AUG)

-0.9%

8:00

EUR

Euro-Zone M3 s.a. (3M) (SEP)

2.3%