Talking Points:

Dollar Hits 12-Month High Versus Euro, S&P 500 Crosses 2000
Euro Sinks as Market Rate Slides to Record Low
USDJPY Climbs for a Seventh Straight Day

Dollar Hits 12-Month High Versus Euro, S&P 500 Crosses 2000

Where were the balloons? The S&P 500 marked yet another milestone in its line of records by closing above the 2,000-mark for the first time. Yet, the same doubts over conviction behind this speculative benchmark’s bull run were plainly showing through. Volume supporting this landmark advance was the lowest non-holiday turnover in over a decade. Meanwhile, the traditionally safe-haven US Dollar extended its own progress. The Dow Jones FXCM Dollar Index (ticker = USDollar) set a new six-month high while EURUSD has slid further down to 12-month lows. Which is the better gauge of investor conviction? The positive correlation between the world’s most liquid currency and one of its premier measures of investor appetite reflect neither a faulty gauge nor a strong rise or fall in sentiment. Rather, it is a sign that speculative conviction is absent. Unmoored by a strong demand for return or flight to haven, complacency and secondary themes take control.

For EURUSD, volume is in fact trending higher – the 20-day average is at its highest level for 2014. While this pair is especially sensitive to a potential shift and engagement in risk trends (due to the capital inflows into Eurozone assets after its crisis waned), the disparity in interest rate expectations has taken up the pair’s cause. That said, the rate outlook for the Fed and dollar seem to be running hot. Fed Fund futures, Treasuries and other yield products are far behind the USD in terms of hawkish pricing. Will rate hopes or the dollar close the gap?

Euro Sinks as Market Rate Slides to Record Low

While selling momentum is not exactly extreme, the bear trend is still distinctly in control. The Eurozone docket wasn’t feeding the currency’s burn, but it wouldn’t be necessary. Leading the actual increase in the ECB’s balance sheet – increase in stimulus when the first Targeted-LTRO program takes effect next month – Euro-area rates are dropping to new lows. In fact, the three-month Euribor is currently at 0.175 percent, its lowest level on record. As the market works off the perceived policy advantage the Euro built up through the central bank allowed its balance sheet to shrink with the original LTRO repayments, many are waiting for ‘the next shoe to drop’. Approving an asset purchase program would be just one bearish development. A turn in sovereign bond yields or reversal in capital inflows could prove even more damaging.

USDJPY Climbs for a Seventh Straight Day

Another sign that the appetite for yield is uneven, the Japanese Yen crosses were a mixed bag this past session. AUDJPY and CADJPY managed gains while the rest were either little changed or in retreat. USDJPY was a story unto itself. With a modest advance for the day, the pair has secured a seventh consecutive advance for one of the strongest runs in years – some may draw comparisons to October 2012 when the larger bull wave began. However, in this phase, we have neither an undervalued carry nor the expectations of a BoJ ‘bazooka’ stimulus.

British Pound The Worst Performing Major on the Day

The Sterling slipped against all of its major counterparts Tuesday. The only data on the docket this past session was the BBA lending figures for July. While the slip in the booming housing sector – which both BoE Governor and Prime Minister warned could be pose a threat if it collapsed – is fundamentally noteworthy, it was not a serious adjustment. Meanwhile, both 2-year government bond yields and 3-motnh Libor rates are up.

Canadian Dollar Top Performer as Market Considers Mergers

‘Tax Inversions’ were already gaining traction in the financial headlines, but they have just recently found a big push – alongside USDCAD – with the news that American firm Burger King was looking to purchase Canadian chain Tim Hortons for $11.4 billion. From an FX perspective, the merger accounts for a hefty FX tab. From a financial perspective, governments like that in the US are paying closer attention to companies looking to move their headquarters in different countries in order to reduce their tax bills. As corporate profits continue to outpace consumer incomes in the developed world, this theme will build interest – long after the M&A FX impact is long passes.

Emerging Markets Advance to 3-Year Highs, Confidence Doesn’t Immediately Follow

Keeping on the coattails of US equities, the MSCI Emerging Market ETF advanced 0.6 percent Tuesday to close at its highest level since August 2011. Yet, conviction was once again lacking. Volume for the capital market measure did pick up, but was far off levels earlier in the year when the advance began. Looking more closely at participation behind the move, interest in the ETF is still well below the 2013 peak and 2012 peak before it – a considerable divergence in price and involvement. In the FX rankings, performance was split compared to Monday’s uniform EM selling. The Brazilian Real stood out with a hearty 1.2 percent rally versus the dollar. Meanwhile, the South African Rand mustered only a modest 0.3 percent advance a 2Q GDP figures fell short of the growth expected. Indian and Brazilian GDP data is due Friday.

Gold Breaks Higher But Is Unable to Hold Onto Gains

As expected with price activity measures fading rapidly, gold was led to a meaningful jump in volatility this past session. However, as often happens when the market is backed into a technical corner and doesn’t have a strong fundamental prop to stand on, the metal was unable to hold onto much of its gains by the end of the day. Spot gold closed out Wednesday with a 0.3 percent advance, but was up as much as 1.1 percent through the European session. To upgrade a speculative break into a lasting trend, one of three major themes would be useful in building momentum: financial instability, a surge in inflation expectations or a broad distaste for ‘fiat’ assets. None of these themes were in evidence this past session. Volume on continues to deflate and interest in the SPDR Gold ETF is near the lost in over five years.

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