Talking Points:

Dollar Slips Alongside Volatility as FOMC Decision Approaches
Euro Finds Little Conviction in ECB’s Stimulus, Stress Test Reports
Emerging Markets: Russian Ruble, Brazilian Real Disturb Otherwise Quiet Market

Dollar Slips Alongside Volatility as FOMC Decision Approaches

Like US equity indexes, the US Dollar was little changed in the opening trading session of the week. Though there was scheduled event risk crossing the wires, it would lack the gravity necessary to distract from the preoccupation with Wednesday’s FOMC rate decision. The market is brimming with anxiety as we march towards the central bank decision. This policy meet carries obvious, high-profile risk for the Dollar with a timely shift towards tightening or a retreat to accommodation can change the currency’s standings in the relative monetary policy scales. However, this event’s influence runs deeper than just a trend ignition for the Greenback. Stimulus is a critical girder to the market’s buoyant sentiment over the past half a decade. As the market grows more cognizant of its exposure and fundamental environment, anxiety continues to build. In fact, the market may even ensure disruptive volatility as it under-prices the risk moving forward.

Given the enormity of the impending event risk, it will be very difficult to budget the Dollar before Wednesday. Through the previous session, we were met with data that dialed down growth expectations – and perhaps balanced out with a modest padding of stimulus maintenance. Markit released its Service and Composite PMI figures for October. Following the same path as the manufacturing report last week, this figures cooled more significantly than forecasts had accounted for with a fourth consecutive drop for both. These are relatively new data series, so they have yet to prove a strong correlation to the official GDP figure. In the upcoming session, the data offerings are a little more established. The Conference Board’s October consumer sentiment survey, S&P/Case-Shiller home price composite, durable goods and a 2-year Treasury note auction are all noteworthy. Nevertheless, they still fall short of the Fed’s influence.

Euro Finds Little Conviction in ECB’s Stimulus, Stress Test Reports

The first wave of heavy, Euro-area event risk rolled through the markets Monday. The implications of the ECB’s Stress Test and its announcement of last week’s asset purchases are significant, but they lack the force and precision of fundamental influence that the later-released US policy announcement presents. A follow up to a review that drew serious skepticism from the markets, the central bank’s Asset Quality Review found 25 of 130 banks tested failed its assessment. Yet, the numbers used were from 2013, and the ECB said half of the banks on the list had raised sufficient capital since. Under normal conditions, the market would have been more opinionated on its own assessment of this test – especially with some central bankers suggesting it is too light by not taking into account deflation for example – but the Fed is too clear a beacon. Meanwhile, the policy group would also say it had bought €1.704 billion of covered bonds last week (they are scheduled to report weekly purchases every subsequent Monday). This could have been treated as a strong sign of active stimulus or – as equities reflect – a disappointment for comparatively small scale.

Emerging Markets: Russian Ruble, Brazilian Real Disturb Otherwise Quiet Market

The broader emerging markets were following the lead of other speculative assets like equities Monday. The MSCI EM ETF recovered from a gap down to start the week to close just 0.8 percent down on a third day of sub-50 million share volume. FX scales were even more balanced for the most part. Most EM currencies traded less than 0.2 percent from Friday’s close against the US Dollar. The exceptions, however, were extraordinary. The Brazilian Real was the day’s biggest mover. The second round Brazilian presidential vote ended with Dilma Rousseff narrowly retaining power. The MSCI Brazil ETF dropped 5.4 percent on record volume while the Brazilian Real fell 1.1 percent – though it was down as much a 3.3 percent. Another vote in Ukraine ended with a retrenched pro-Western leadership. The Ruble hit a fresh record low.

New Zealand Gaining Ground Ahead of RBNZ Decision

Though the FOMC rate decision is Wednesday’s (really the week’s) top event risk, there is another rate decision due the same day: the RBNZ’s. The New Zealand central bank has a better record of spurring volatility. How – by pausing its aggressive hawkish regime and threatening its currency with more stimulus. The Kiwi has dropped aggressively since the pause – perhaps too aggressively. Markets ‘correct’ before events.

British Pound: BoE Member Plays Down Inflation, Says High Bar to Hikes

The Bank of England published its consultation on Fair and Effective Markets review Monday, and the contents were close to what was expected. Given the reports proximity to what was expected, the market instead paid attention to Deputy Governor Shafik’s comments in a Financial Times interview. Playing down inflation pressures and remarking on a high bar for hikes offered a decidedly dovish tack.

US Oil Moves Into Breakout Formation

US oil (WTI) has worked its way into a congestion pattern that both technical and fundamental traders would recognize as an ‘at-risk’ market to breakouts. The commodity has tumbled as global economic activity has cooled and supply has grown. Yet a unique player in this equation is Saudi Arabia who said it could tolerate oil below $90 (perhaps to $80) “for as long as a year or two” a few weeks ago.

Gold Sliding after Futures Traders Rebound Long Exposure

Speculators’ positioning is proving more volatile than gold itself. This past week, the COT reported net speculative futures interest in the metal jumped another 26 percent (the previous week was a 29 percent jump) to an eight week high. Yet, for Monday, spot gold slipped 0.4 percent to $1,227. It would be a sizable risk to take a gold position so close to the Fed’s final Taper decision.

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ECONOMIC DATA

GMT

Currency

Release

Survey

Comments

1:30

CNY

Industrial Profits (YoY) (SEP)

-0.6%

Previous drop biggest in two years

5:00

JPY

Small Business Confidence (OCT)

48.5

47.6

Has been below 50 for six months

7:00

EUR

German Import Price Index (MoM) (SEP)

-0.1%

Upstream inflation pressures will give benchmark for later CPI

7:00

EUR

German Import Price Index (YoY) (SEP)

-1.9%

8:00

EUR

Spain Total Mortgage Lending (AUG)

9:00

EUR

Italian Business Confidence (OCT)

94.9

95.1

Eurozone sentiment surveys are due later, but Italy is particularly important, and troubled member

9:00

EUR

Italian Economic Sentiment (OCT)

86.6

12:30

USD

Durable Goods Orders (SEP)

0.3%

-18.2%

A volatile reading, this GDP component has drawn far less interest compared to consumption, government activity and wage growth

12:30

USD

Durables ex Transportation (SEP)

0.5%

0.7%

12:30

USD

Non-Defense Capital Goods Orders ex Aircrafts (SEP)

0.6%

12:30

USD

Non-Defense Capital Goods Ship. ex Aircrafts (SEP)

0.1%

13:00

USD

S&P/Case-Shiller Composite-20 s.a. (MoM) (AUG)

0.13%

-0.50%

Housing statistics have started to turn lower in recent months, but has the bull market in real estate truly turned?