Talking Points:

Dollar Rising Too High for Fed’s Liking?
Euro Discounts Draghi Talk, Bigger Concerns Looming
New Zealand Dollar Suffers Biggest Drop in 15 Months

Dollar Rising Too High for Fed’s Liking?

Earlier this week, New York Fed President William Dudley remarked that the US Dollar’s rapid rise could hinder growth and undermine the central bank’s effort to boost inflation to target levels. FOMC officials don’t often comment on the level of the currency, which made these particular comments stand out. Nevertheless, the concerns could be considered benign enough as they are so infrequent and there were little mention of what recourse can be taken to rectify the situation. However, this past session, a second official echoed similar sentiments that a buoyant currency was posing a potential problem. Atlanta Fed President Dennis Lockhart said the currency could go higher, but its climb was a budget on exports. Will policy officials alter their forecasts because of the greenback’s run? Will the market’s hawkish run on the dollar cool because of these concerns?

On pace for a 10-week consecutive rally, the market will naturally be on edge over the endurance of the USDollar’s climb. Further opening doubt over the path to timely rate hikes, we have also seen a revival of ‘Currency War’ concerns – though they are not so clearly labeled just yet. The RBNZ’s recent efforts have brought FX ‘guidance’ back into view. And, while the Fed will not likely embark on such a blatant move as Governor Wheeler; there is a certain precedence from the central banks of the Eurozone and Japan. The former drew a line in the sand nearly five months ago when it said an expensive currency was a policy burden as EURUSD hovered just below 1.4000. The BoJ was far more explicit with its intentions two years ago with USDJPY coming off a record low.

For now, a policy response to the Dollar’s rally is only a nagging buzz, but it could quickly turn into justification if traders are looking for a reason to bow out. Meanwhile, another fundamental theme seems to be supplementing rate speculation. Traders have grown deeply skeptical of a true risk version from the financial markets after so many false starts, but the slow build in volatility and slip from SPX is unsettling.

Euro Discounts Draghi Talk, Bigger Concerns Looming

ECB President Mario Draghi was on the wires again this past session reiterating a vow to offset an economic slowdown and reverse a disinflation risk by doing whatever is necessary. Once again referring to unconventional policy as a tool, speculators will be looking forward to next Thursday’s rate decision. At the last meeting, the central banker said details of an asset purchase program would come after the October meeting. It is not clear if the press conference is the venue for these particulars though. Yet, as we await more clarity; other concerns are starting to popup. Region-wide lending continues to drop, budget targets are deteriorating and sovereigns are throwing off safety nets.

New Zealand Dollar Suffers Biggest Drop in 15 Months

I was too skeptical of RBNZ Governor Wheeler’s influence. NZDUSD posted its biggest since June 2013 after the central bank chief issued thinly veiled threats against the New Zealand dollar. His suggestion that the currency was ‘unjustifiably’ and ‘unsustainably’ high is modestly more aggressive than past assessments. In the past, the market has shrugged off similar comments because the means for intervention was minimal. Yet, with the Kiwi already reeling from the central bank’s pause in its rate hike regime; this warning was taken seriously.

British Pound: Carney Keeps to Controlled, Hawkish View

Under normal circumstances, the Eurozone and German investor sentiment surveys from ZEW generate limited response from the shared currency and the region’s capital markets. That said, its importance should not be overlooked. While the focus has been on the implications of a loosening of monetary policy on yields and the currency – which is furthered by this week’s first Targeted-LTRO placement – a greater potential risk is what happens should the foreign capital that flooded the region were to reverse course. A drop in sovereign bond yields and disproportionate drop in EZ markets would have a reverberating impact on the currency.

Japanese Yen: Will Abe’s Currency View Translate into BoJ Shift?

Japanese Prime Minister Shinzo Abe was arguably the driving force behind the Bank of Japan’s adoption of its open ended stimulus program (QQE) back in April 2013. So what does it mean that he remarked that the government was watching the impact that the weak yen was having on the local economy? Harmless rhetoric misinterpreted or the first stages of a policy shift? How would officials engineer a Yen correction?

Emerging Markets Drop, Volatility Index Jumps to Four-Month High

The MSCI’s Emerging Market ETF rebound Wednesday didn’t last long. This past session, the measure for this riskier asset class gapped lower to a fresh, four-month low. Confirming the surprise and conviction of the move, the JPMorgan EM Volatility Index has advanced to a four-month high. On the FX side, every one of the major EM currencies lost ground to the Dollar –the Brazilian Real collapsed 1.8 percent.

Gold Consolidating for Breakout Pressure as Currency Wars Flare Up

There is limited talk of a revival of the currency war fears from past years yet, but the influence from central banks is growing a little more consistent and overt. If these efforts persist and lead to overlapping efforts to devalue multiple liquid currencies, the financial market’s concern over manipulated exchange rates and subsequently asset values could guide capital back to one of its few major alternatives to traditional ‘fiat’: gold. For now, the metal continues to suffer the dollar’s strength and the appetite for yield. But keep watch.

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ECONOMIC DATA

GMT

Currency

Release

Survey

Comments

23:01

GBP

Hometrack Housing Survey (MoM)

0.10%

Tracks housing prices which have been increasing this year on a YoY basis and a MoM basis as well; if house price increases turn out to be strong, it may put pressure on the BoE to increase rates.

23:01

GBP

Hometrack Housing Survey (YoY)

5.50%