Talking Points:

Dollar Reverses NFP-Inspired Rally
British Pound Faces Wave of Event Risk, But Volatility…
Euro Climbs Despite Troubling Fundamental Data

Dollar Reverses NFP-Inspired Rally

That didn’t last long. The most recent leg of the greenback rally – inspired by Friday’s NFPs – was largely washed out by Monday’s close. Yet, a similar move to moderate was cued for the S&P 500. Last week’s labor market report was encouraging. Companies added a net 248,000 new employees to their payrolls in September and the jobless rate dropped to a seven-year low 5.9 percent. Rationally, that offers up further support to the notion that the Fed will pursue rate hikes earlier rather than later. Practically, however, it hasn’t materially upgraded the existing probabilities or time frame for that tightening move. Financial products used to hedge rate forecasts (Fed Funds futures, credit swaps, volatility measures more indirectly) showed little additional concern to what was already being priced in. Yet, where rate speculation seems to be cooling a more pervasive element may be slowly stepping up to take its place. A stalled S&P 500 is an eventful development for a market that has been conditioned by habit and complacency such that a recognizable pattern of buying a pullback and fading a volatility spurt has led to repeated iterations since the beginning of 2013. Should this hesitation prove more caustic to sentiment; the environment of slowly rising volatility, downgraded growth forecasts and de-escalation of leverage offers fertile ground for true risk aversion.

British Pound Faces Wave of Event Risk, But Volatility…

Though the Cable gained on the day, the Pound was generally struggling Monday. With FX traders paying closer attention to efforts by authorities to directly or implicitly intervene on behalf of their currency, UK Business Secretary Vince Cable’s comments made for concerned tape. The politician remarked in a side meeting to the Liberal Democrat party’s annual conference that the currency could be currently “overvalued by 10 to 15 percent”. We’ve heard similar sentiments from central bankers and a few other government officials, but we lack the critical bridge of mere concern to actual monetary policy. In the upcoming session, the docket picks up for rate speculation and thereby may stoke volatility for the sterling. Industrial production, the NIESR’s GDP estimate and BRC’s shop inflation index all speak to rate speculation.

Euro Climbs Despite Troubling Fundamental Data

A Euro advance against all of its major counterparts doesn’t seem to fit the docket. For fundamentals to kick off the week, the economic forecast was faced with a very unflattering 5.7 percent drop in August factory orders in Germany – the biggest drop since 2009. This country’s economic health is particularly important for the broader Eurozone as its largest member. That will also make today’s German industrial production number for the same period an important follow up. Meanwhile, the Eurozone Sentix investor sentiment survey for October collapsed further. This indicator has a particularly strong long-term relationship to the performance of the EZ’s capital markets…a leading relationship.

Australian Dollar: RBA’s Lament Currency ‘Still High’ Not Nearly Enough

If you want to see your currency fall, you may have to do more than that. In the statement that accompanied the RBA’s decision to keep its benchmark lending rate steady, the group noted that the currency was still high against historical standard. This is pretty direct ‘jawboning’ but the game has been elevated far beyond mere talk. The RBNZ has taken steps to actually intervene in the FX market. For the ECB and BoJ, policy decisions have been directly connected to currency movements. In a world of active devaluation, the RBA is falling behind.

Japanese Yen and Capital Markets Little Moved after BoJ Hold

As expected, the Bank of Japan left its monetary policy bearings unadjusted this morning. Aside from keeping its plans for an annual ¥60-70 tillion yen increase in the monetary base (the QQE); the group noted a moderate economic recovery, a weakness in production and an extended period of 1.25 percent CPI (below target). This does not translate into a need to increase its stimulus efforts, and traders recognize as much. However, also absent in the remarks were any notes of the recent rash of concerns that have been voiced about a too-quickly depreciating yen.

Emerging Markets Gap Higher in Sentiment Reprieve

A relief rally leverages the most respitein the most volatile markets. So it comes as little surprise that the MSCI Emerging Market ETF posted an impressive 1.3 percent advance on a gap higher to start the week. The surge closes much of the yawning gap opened in last week’s tumble, but confidence is not exactly innate for this market segment. Meanwhile, the FX ranks show a few noteworthy performances. Amongst strong performances by the more liquid grouping (Turkish Lira up 1.2 percent versus the Dollar, South African Rand 1.18 percent and Mexican Peso 0.7 percent); the Brazilian Real posted a remarkable rally. Having dropped over 12 percent versus the USD in the month leading up to the national election, the correction comes on news that incumbent President Rousseff remains the frontrunner, but falling short of a majority, a runoff with business-friendly Aecio Neves is in store for October 26.

Gold Traders Assess Their Bearings as Market Rests on 4-Year Low

Gold has recovered some of the ground lost to the Dollar and speculative appetite this past Friday. Yet, that doesn’t ease the serious anxiety behind this commodity. A 1.3 percent rally Monday pushes us back above $1,200; but it does not offer much breathing room from the four-year low that is one hard selloff away. With the low set at this week’s open, a third test has been made of the $1,180-level – along with the June 27, 2013 and December 31, 2013 lows. Whether the market finds its appetite for yield or the Dollar continues its explosive rise, the results would not be very encouraging for the metal. From speculators, there is limited confidence. Net speculative interests reflected in the COT futures holdings data offered a modest break with the first net increase in 7 weeks. Meanwhile, ETF holdings are at fresh 5-year lows.

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ECONOMIC DATA

GMT

Currency

Release

Survey

Comments

JPY

Bank of Japan Interest Rate Decision

0.10%

BoJ Gov and Prime Minister have grown more vocal on Yen tumble

JPY

Bank of Japan Monetary Base Target

¥270T