Talking Points:

Dollar: US Capital Markets are Closed, But Not the Currency
Euro Heading Into Turbulent Fundamental Seas
Yen Crosses Far More Sensitive to Policy Comments with Risk Sidelined

Dollar: US Capital Markets are Closed, But Not the Currency

With the US heading into its Thanksgiving holiday, liquidity was seen draining from the system. Given that a sentiment benchmark like the S&P 500 has traded to a fresh record high this week, a measure of book balancing and volume would be expected as investors remove some risk during the downtime. Yet, it seems complacency is has overridden standard trade practices. Through Wednesday’s session, volume from US capital markets was generally restrained and the high-risk group showed little settlement. The Dollar, on the other hand, would experience a slip through the close. The Dow Jones FXCM Dollar Index (ticker = USDollar) dropped back from its five-year high framed by a weak showing in data and the lights going out in US banks. Which factor carried more sway will tell us how far this pullback extends.

Cramming in three days’ worth of data into the final active session of the week, the US docket offered a broad array of updates. On the softer side: durable goods orders unexpectedly dropped when transport items were excluded; pending and new home sales came in under expectations; jobless claims jumped to a near three-month high; and both personal incomes and spending in October grew less than expected. Beyond the diminished view of growth forecasts this round of data facilities, it also dims the forecast for that first Fed rate hike. And yet, the market didn’t seem too convinced by the round of event risk. There was little change in the implied rate forecast measured in Treasuries, swaps, Eurodollar and Fed Fund futures. This is no doubt partly due to the market’s existing discount to the forecasts from Fed surveys and the group itself. The PCE deflator – the Fed’s preferred inflation series – likely also contributed. The year-over-year core reading unexpectedly quickened pace to 1.6 percent for the strongest reading since December 2012.

Euro Heading Into Turbulent Fundamental Seas

The effects of a drained US market session on a global FX market that is increasingly steered by monetary policy rather than the transmission of risk trends from one session to the next will be weighed by Euro traders in the upcoming session. The currency’s economic docket is loaded with the kind of scheduled event risk that can materially escalate or tame speculation of an impending stimulus upgrade by the European Central Bank (ECB). With the bank’s balance sheet leveling off rather than growing to meet President Draghi’s €1 trillion increase target and Council members like Constancio suggesting a decision on QE will be made in the coming quarter, market participants are looking to discount the probability of sovereign bond purchases moving forward. Today’s calendar items will hit all the high points. From the region’s largest economy, we have German November employment and consumer inflation statistics on tap. For the Eurozone, sentiment surveys and a financial stability report are important updates. We also have ECB President Draghi due to speakwith Weidmann (who often conflicts the dove) just after.

Yen Crosses Far More Sensitive to Policy Comments with Risk Sidelined

There is no doubt that the Yen crosses maintain a strong correlation to traditional sentiment changes. The 20-day correlation between the Nikkei 225 and USDJPY is currently 0.96 (extraordinarily strong and positive). However, that common guidance through appetite for return doesn’t mean the currency is anchored alongside the index – which will feel the effects of the New York market’s absence. A dense round of data is due for release Friday morning, but the more effective spark for the Yen is commentary from policy officials. Vows by the government and BoJ reinforce a state of building stimulus; but the offhand remarks of an over-extended Yen decline (Aso) have clearly unnerved bulls.

New Zealand Dollar: RBNZ Intervention Efforts Fade

This morning, the Reserve Bank of New Zealand (RBNZ) reported its net FX intervention effort for the month of October. Against a boosted capacity of NZ$10.02 billion, the central bank reported that it only sold a net NZ$1 million last month. That is hardly a ripple in the FX market. That is on one hand encouraging for the RBNZ as it means the depreciation of the past six months is more self-sustaining. Alternatively, it may embolden carry appetite to fight the intervention. If the NZIER’s forecast for no hikes until 2016 is realized, it may obviate this pressure.

US Oil Drops to Fresh Four-Year Low Ahead of OPEC Meeting

The strong jump in WTI oil prices to end last week was quickly squashed. Crude prices have tumbled through the week and this morning have pushed the benchmark futures contract to a fresh four-year low below $73. The renewed bearish drive – in a five month trend – comes amid reports that OPEC members have been unable or unwilling to agree to supply cuts ahead of the official meeting today. A glut of inventory combined with softer growth forecasts (demand) have led to this remarkable bear trend and a large wealth increase in consumer nations.

Emerging Markets: Russian Ruble Collapses a Second Session Towards Record Low

The MSCI Emerging Market ETF jumped 1.3 percent Wednesday on tepid volume. Guided by the general drift higher in Developed World capital market trends, for a modest appeasement without committing to full blown optimism. There remains more drama on the FX side. The Brazilian Real and South African Rand are trying to fight bearish trends, but aren’t going far. Meanwhile USDRUB is just off record highs again.

Gold: How Steady is the Market with Liquidity Drained While Mon Pol Remains Active?

The trading range for spot, derivative and structured product gold markets diminished to virtually nothing through the US close. In these circumstances, a ‘break of necessity’ is highly likely – and that is exactly what we were met with in early Thursday trade. The question from here is whether this move dries up quickly or can keep running. That depends on what progress we find on EZ and Japanese stimulus forecasts.

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