Talking Points:

Dollar’s Strong Rally Finds EURUSD, S&P 500 Unresponsive
Euro Firms Outside of EURUSD, Surge in Investor Appetite
British Pound Collapses Despite Data

Dollar’s Strong Rally Finds EURUSD, S&P 500 Unresponsive

The return of North American liquidity seemed to bring with it a strong demand for the dollar. The Dow Jones FXCM Dollar Index (ticker = USDollar) posted the biggest rally of its two-month bull trend in a move that drove the benchmark back to highs not seen in seven months. For those assessing the currency’s performance through the majors, confusion arose with EURUSD’s indifference. Having developed one of the most prolific trends amongst the majors – and in the dollar’s favor – the assumption would be that this pair should have made another thrust down to 1.3000 with the bid for the reserve. This is not a shortfall for the dollar. Rather this was a precarious balance founded in an equally-motivated counterpart. The Euro posted an impressive, market-wide rally of its own Tuesday. Don’t expect this stalemate to last though…

Given the greenback’s innate strength, we have to appraise the progress of its two dominant fundamental themes to see whether we have momentum moving forward. From the ‘safe haven’ perspective, there was another misleading barometer in the form of the S&P 500. As the personification of speculative appetite built on the chase for yield, the index was virtually unmoved on yet another sub-400 million share (low volume) day. However, that wasn’t the full story on speculators’ confidence. Looking at FX-based volatility measures, the one-month implied (expected) activity gauge for the currency market has hit its highest level in four months. Meanwhile, while there is still a considerable gap in the timing for rate hikes laid out by the FOMC and what the market is pricing in; there was a hawkish shift on the day. The US 2-year Treasury yield jumped 7 percent this past session and Fed Fund futures nudged higher, helped along by reports of the strongest pace of manufacturing growth (ISM report) in three years, a two-year high in construction spending and improvement in an economic sentiment survey (IBD). Ahead, the Beige Book is a minor holdover for NFPs, so watch risk trends.

Euro Firms Outside of EURUSD, Surge in Investor Appetite

If EURUSD’s performance was a distorted view of the Dollar’s health, it would similarly give a false read on the Euro. Aside from the benchmark pair, the shared currency gained between 0.6 (EURCAD) and 0.9 percent (EURGBP) versus its counterparts. The source of this strength seemed less bound by data and more a reflection of speculative positioning before significant event risk – the ECB rate decision on Thursday. The only indicator of proper scope on the Euro-area docket this past session was the factor inflation figure for August, which showed a persistent deflationary pressure. The same limited impact is seen in the upcoming session’s listings (service and composite PMIs). What we are likely seeing from the Euro is repositioning (profit taking, hedging, etc) after its hefty downdraft heading into the policy meeting. It is worth noting that the largest Europe ETF (Vanguard FTSE) recorded a record day of volume Tuesday. Is this hedging, speculation, profit taking?

British Pound Collapses Despite Data

Data over this past 24 hours from the UK seems to have raised the profile of the BoE rate forecast. The UK construction activity PMI unexpectedly hit a record high and the BRC’s retail inflation reading marked an unexpected moderation to its deflationary trend. Yet, that seemed to inspire little confidence in the FX ranks as the sterling lost ground to all counterparts – including a 0.8 percent drop for GBPUSD. Ignoring encouraging data is the sign of a ‘bearish’ sentiment. Expect greater impact if the PMI data disappoints today.

Yen Crosses: USDJPY a False Prophet?

There were a lot of exceptional moves this past session, and USDJPY was one of the most headline-worthy. The pair cleared 105 for the first time since January and has reinforced bulls’ confidence that a lasting trend is in place. However, again it is important to separate USDJPY performance from yen cross performance. The dollar’s outsized move and a rally from the Nikkei 225 provided a strong boost for this key pair. Yet, neither the other yen crosses nor other region’s equity indexes backed this move. Momentum is founded on theme, not single players.

Swiss Franc and Australian Dollar Little Swayed by Local GDP Figures

Both Switzerland and Australia released 2Q GDP figures this past session – and neither generated much in the way of consistency for their respective currencies. For the Aussie figures, a modest beat (0.6 versus 0.5 percent expected) offered little consolation to the material downgrade in activity from the previous quarter. For Switzerland, the miss was far more substantial – stagnation rather than growth. However, even that wouldn’t distract the markets from the focus on EURCHF and the march towards the SNB’s 1.2000-floor.

Emerging Market Currencies Unsettled by Rebound in Volatility Alongside Volume

The return of liquidity did little to inspire a return to one of the financial system’s most risky and stimulus-dependent asset classes: Emerging Markets. The MSCI ETF dropped for a third consecutive trading session (0.2 percent), the Bloomberg Sovereign Bond Index suffered its biggest decline in a month (0.3 percent) and the JPM EM Volatility Index jumped 2.5 percent. Volume and volatility are this group’s troubles.

Gold Suffers Major Break on Heavy Volume, Metal’s Volatility Reading Swells

A 1.6 percent drop was gold’s worst performance in eight weeks and unceremoniously drove the market through support on a 2014 ‘wedge’. This heft of this move was certainly amplified by the dollar’s own strength. However, even when we swap out less active currencies as pricing measures, the metal would still lose ground. Given the strength in the FX market’s top two liquidity currencies, limited scope on financial risks and a lingering appetite for yield; none of the checklist items for gold bulls were ticked off this past session.

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