Talking Points:

Dollar Run Finally Slipping as Capital Market Advance Wavers
Euro Traders Focused on ECB Stimulus Await Key Data
British Pound Rate Forecasts Take Another Blow on ‘Linkers’ Auction

Dollar Run Finally Slipping as Capital Market Advance Wavers

After a six-week run – the longest in 15 months – the Dow Jones FXCM Dollar Index (ticker = USDollar) looks as if it may finally pause to catch its breath. The Index’s decline this past session was the largest the last bear trend ended on June 30. However, this sharp move alone shouldn’t be taken as assurance that the tides have turned for the currency. There are material headwinds in store for a motivated bear trend from taking root through the end of this week. Traders who have grown impatient for meaningful opportunities in this volatility drought likely view the multi-month highs the greenback has forged versus the Euro, Pound and Yen as prime opportunities. Yet, market conditions could trump both technicals and fundamentals. Already facing a historically quiet trading backdrop, we are currently heading into a seasonal drain in liquidity for the financial system. While the Labor Day holiday (Monday, September 1) only closes the US and Canadian markets, the absence of this big speculative contingent mark the height and close of the ‘summer trading lull’. It is difficult to develop trend and momentum – whether continuation or reversal – under this cumulative emptying of the market.

Participation levels considered, there is still a good chance for a dollar move in the interim. A reduction in volume would actually do more to feed a correction with profit taking and book balancing. Those looking for more palatable, fundamental justification can point to the disparity between currency performance and lack of rate speculation building in favor of an early Fed move. Market rates and yield products (like Fed Funds futures) have shown little of the conviction the currency seems to reflect. The swell in equities – as a gauge for trader appetites – can also be claimed a contrast to the safe haven’s performance. Yet, therein lies a paradox. If moderation tips the S&P 500 into a meaningful retreat, it could revive the dollar’s safety appeal. If an equity retreat is slow and steady alongside the volume drain, though, they can retreat in tandem.

Euro Traders Focused on ECB Stimulus Await Key Data

This past trading session, a Reuters report quoting unnamed ECB sources stated the central bank is unlikely to act on the lingering asset-purchase-program threat that has been made over the past months. While the market is not likely fully pricing a QE-like program from the policy group when they announce policy on September 4, its tumble has likely seen bears latch on to its potential. After ECB President Draghi voiced his concerns and willingness to do more moving forward at Jackson Hole this past week, there is still a probability – and market concern – that further easing is not far off. If upcoming event risk shows continued weakness or further deterioration, that time frame will likely be moved forward. On the calendar through the upcoming session, sentiment surveys will take a back seat to Germany’s employment and CPI figures. The largest EU member acts as a proxy for the region. But we won’t have to use a proxy long. Eurozone jobs and CPI data is due Friday.

British Pound Rate Forecasts Take Another Blow on ‘Linkers’ Auction

The UK’s Debt Management Office sold £900 million pounds in index-linked government bonds – referred to colloquially as ‘linkers’ – due in 2040 Wednesday. Demand and the yield the adjustable paper drew slipped compared to other long-term, indexed bond sales over the past months. Meanwhile, swaps have further eased while the three-month Libor hovers at a 22-month high. Rate speculation is still a key driver for the Sterling, but its retreat makes it less sensitive. Perhaps the upcoming employment, business and housing surveys can offer a spark.

Yen Crosses Still Diverging, Nikkei Ready to Break

Not all Yen crosses look alike. USDJPY and AUDJPY continue to outperform most of the other pairings at their respective multi-month highs. That said, the rally has cooled; and bulls are starting to look around to where the other crosses are standing. When correlation is so high amongst such assets, disparity is a bad thing – and it is rarely the lone rogue that sees the rest of the market catch up to it. The Yen crosses’ next move is looking to what drives carry appetite. The Nikkei 225 is a good stand-in, and it is looking suspect this morning.

Canadian Dollar Rally Heats Up as Tim Horton M&A Draws Interest

Crowds build around activity. The Canadian dollar was already pushing gains across the board Tuesday as news of the Burger King (US) – Tim Horton (Canada) merger ran the headlines. Though this $11 billion deal is unlikely to having a long-lasting impact on the exchange rate, the speculative interest alone drew new traders in. What was ultimately the biggest USDCAD decline in 12 months would also generate the heaviest volume in six-months. Loonie traders are looking ahead to 2Q trade and GDP figures to set up the BoC’s tone for next week.

Emerging Markets Rally A Third Day, Currencies Join the Fray

The MSCI’s Emerging Market ETF rose for the third consecutive session, but the performance saw another downgrade in progress. Furthermore, volume slumped on the push to the fresh multi-year high. The broader market’s appetite for yield is in charge of this move’s progress, but with the most recent move; something changed – currency’s started to participate. The Brazilian Real and South African Rand led most EM FX players up against the dollar with a 0.7 and 0.6 percent move respectively. Ahead lies Friday’s Brazilian and Indian GDP data.

Gold Crawls Higher as Volume Collapses

Bulls are struggling to put gold on pace. This isn’t particularly surprising given the dollar’s stubbornness and the lack of motivation through financial stability and inflation concerns. Through the upcoming sessions, a dollar retreat or a run of inflation data may look to stir more live from the metal. That inspiration is needed as volume in ETFs and futures trading has collapsed.

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