Talking Points:

Dollar and S&P 500 Have a Stake in September NFPs
Euro Traders Receive Little Relief from ECB
Yen Crosses Look to Nikkei 225, S&P 500 for Guidance

Dollar and S&P 500 Have a Stake in September NFPs

The US Dollar slipped for a second consecutive day this past session as capital markets stabilized and traders prepared for Friday’s NFPs. We haven’t seen a three-day Dow Jones FXCM Dollar (ticker = USDollar) decline since July 9 – the last stage of congestion before the currency began its current, three-month climb. Yet, if there were a specific piece of event risk that could be expected to knock the air out of such a robust move, it would be the labor data suite. While a recent slide in speculative confidence these past few weeks has contributed to the greenback’s buoyancy, its primary motivator has been interest rate speculation. Though the Federal Reserve’s first rate hike is not likely due until the second half of 2015, the steady march towards tightening draws marked contrast to its major counterparts (ECB, BoJ, PBoC). Yet how much progress does a distant tightening policy afford? What if that time frame is pushed back?

Considering the four-year high the Dollar is currently entertaining, the bar is set very high for rate expectations and its premium has ballooned. In other words, the risk of volatility is greater for the currency should this data disappoint and deflate rate hopes. Much of the initial volatility will be prompted by the release of the NFPs themselves (consensus of a 215,000 – net increase), but it is the ‘qualitative’ figures that the Fed is following for policy guidance. That means the unemployment rate (forecast 6.1 percent), participation rate (62.8 percent) and earnings growth (2.2 percent) may ultimately command trend. That said, while we watch the Dollar’s direct reaction to the data run, don’t forget the currency’s other function as safe haven. If a weak data print finally causes a US equity collapse, the greenback will find a bid.

Euro Traders Receive Little Relief from ECB

Following in the footsteps of the Federal Reserve and Bank of Japan, the European Central Bank stepped up to the stimulus plate. But, rather than mimic its contemporaries by announcing a large and transparent program; the ECB opted for ambiguity. Technically, the President Mario Draghi announced the group’s intention to adopt an asset purchase program at the September 4 meeting. However, the particulars were put off until after this month’s meeting. Details constituted a confirmation that the bank will begin buying covered bonds and asset-backed securities later this month. Beyond that, there was no clear mention as to the ultimate size of the effort beyond suggesting they may fall short of the previously stated goal to drive the balance sheet back up to early 2012 levels. The Euro was perplexed, but capital markets did not take it well.

Yen Crosses Look to Nikkei 225, S&P 500 for Guidance

A third daily decline for the Nikkei 225 – and the biggest in two months – would ensure that traders received the message on the index’s bearish reversal from multi-year highs. Sharing a 0.72, rolling 20-day correlation (a strong positive relationship); the sharp drop for the stock barometer translated into another 0.4 percent slip for USDJPY. Yen crosses are exceptionally dependent on the complacency that equity markets facilitate. The carry that these carry trades offer is sparse and the government is starting to lament the weakness of its currency (a total 180 from two years ago). If true risk aversion were to set in, these pairs will quickly be deemed ‘expensive’ and sell off.

British Pound Finds Rate Speculation Equilibrium

Having initially overshot its reasonable path, the rate forecast for the Bank of England seems to have found balance after bleeding off around two-and-a-half months worth of excess premium. This is not a recipe for a stable Pound however. Instead it increases the sensitivity to data prints going forward. Rather than having a bias run roughshod over important indicators, each release will be evaluated for its contribution to the forecast. Next week, we have plenty of growth-centric data. We also have a BoE decision, but the group will likely remain mum.

Australian Dollar Faces Volatility and Key Fundamental Trends Next Week

The docket for the Australian dollar is looking particularly ominous – or opportunistic depending on your views on volatility. Two particular updates stand out above the others next week: the RBA rate decision and September jobs data. The policy event is expected to pass without change, but the market has been particularly sensitive to tone – as this is a wayward carry currency. The job report is pure volatility.

Emerging Market Investors Await Fed’s Impetus

Further moderation for the USDollar and a hold by the S&P 500 reflected technical and fundamental relief for the Emerging Markets…but they haven’t turned to tide. With the greenback’s retreat, the pricing unit offered an indirect boost to the riskier FX grouping. Despite this, both the Russian Ruble and Chinese Renminbi were little moved, while the Brazilian Real dropped another 0.6 percent. Meanwhile, the MSCI EM ETF was little moved from its fresh 6-month lows. The upcoming US employment data carries great sway over this market segment. Capital chasing the higher yields to be found in these riskier economies depends upon the fragile stability borne from Fed stimulus.

Gold Unmoved by ECB Effort, Risk Rebound

It was an opportunity squandered. Gold has not been able to tap its fundamental role as a last resort safe haven nor its alternative store of wealth function recently, and the appetite for yield and dollars has slowly weighed the metal down in the interim. This past session, traders had their best chance to revive once of these major outlets with the ECB announcing its stimulus effort and US equity indexes reaching critical levels. However, the central bank’s vagueness and another last-minute stay for risk trends meant that neither fuse was lit. The upcoming US jobs report offers a second round, but the impact shouldn’t be considered a direct catalyst. Rather, themetal is more likely to take its cue from USD.
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