Talking Points:

Dollar Holding Pattern Tightens as Holiday Trading Sets In
Yen Crosses Rally in Jeopardy in Loss of Risk Drive
British Pound May Pay for Data-Driven Rally to 2-Year High

Dollar Holding Pattern Tightens as Holiday Trading Sets In
The dollar’s performance this week doesn’t look very impressive until we weigh it against other market benchmarks. For example, risk-sensitive equity indexes are surveying multi-year and record highs, while the stimulus-directed US 10-year Treasury yield is just now trying to pull itself out of a dive. These two themes will continue to jostle for influence over the greenback moving forward, but conditions through the final 48 hours of this week may further push control over to stimulus speculation. The Thanksgiving holiday will take US capital markets offline through Thursday’s session and further shorten the trading day on Friday. While the US may be only be one country, its influence over global sentiment trends is disproportionate. Over the past 10 years, the daily ranges for the majors have been significantly reduced (between 25 percent for AUDUSD to 50 percent for USDJPY) on the holiday from the already-slow Wednesday that precedes it. Given the current state of depressed implied (expected) volatility for equities, FX and other asset classes, there is little reason to expect different this year.

Changing perspective from the short-term perspective to the medium, the market’s response to stimulus speculation continues to diverge. Despite the media’s pick up on more timely Taper speculation with the FOMC minutes’ discussion of counterbalances (negative interest rates), we find US equities remarkable unbridled; while mortgage-backed security and Treasury funds remain buoyant. The bullish course for the dollar alongside bearish emerging market and carry paths tell us that the there is nevertheless speculation. We may not see this wandering fundamental drive solidify until next week’s November employment figures settle the dispute.

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Yen Crosses Rally in Jeopardy in Loss of Risk Drive
All of the yen crosses were high through the past session; but special mention goes to the six-month high from USDJPY as well as multi-year peaks adorning the EURJPY and GBPJPY charts. Risk appetite certainly has a hand in this performance. Yet, where it was an active driver in the appreciation of past weeks; it is now acting more like a flimsy backstop. A supporting role has been found in BoJ’s (Bank of Japan) looming, second-round stimulus program. Once again, we findjust how important forward projections on dominant fundamental themes are. If we were to objectively weigh current conditions, we would find the actual yields falling far short of the task of justifying current exchange rates.

A growing dependency on progressive monetary policy by the central bank may in turn put the yen crosses in a dangerous position going forward however. Given the time frame for the government’s April Tax hike, we are likely still months out from realizing a Japanese QE2. Meanwhile, the heavily-priced event may find itself exposed to doubt. Such concerns will be on display with the upcoming trading day’s scheduled event risk. National inflation (CPI), employment, household spending and manufacturing activity reports are due – a comprehensive list for policymakers. Meanwhile, data this morning revealed the third largest net outflow of Japanese capital to buy foreign bonds last week in 14 months (¥707 billion) and the biggest back-to-back foreign inflow into Japanese stocks since early April (¥2.0 trillion) – developments distinctly derived from stimulus activities.

British Pound May Pay for Data-Driven Rally to 2-Year High
The Sterling offered the stand out performance of the day Wednesday with a cross-market rally that measured as much as 1.3 percent against the Japanese yen and won the GBPUSD a key breakout from a multi-year wedge. Yet, does the fundamental fuel to this move justify a strong drive in quiet markets – much less the tremendous technical progress on certain pairs? Looking to the intraday price action of the sterling, it is clear that much of the heft of the bullish performance was found on the 3Q GDP figures. It is important to recognize that these were second readings…updates. The 0.8 percent quarterly growth was unchanged, but the details showed a stronger domestic picture in consumption and fixed investment. That is encouraging; but at the same time, a concern. How long will this strength continue given labor trends and the pace of housing growth? Meanwhile, exports cut 0.9 percentage points from the economy. This optimism may be hard to fortify.

Euro Climbs, Sovereign Yields Fall Ahead of Market-Moving Data
The euro advanced against most counterparts this past session, while the region’s sovereign bond yields eased back. Speculation of another round of ECB stimulus – a longer-dated LTRO story has been circulated in the press but unattributed to a source – has found a fine enough balance that it is marrying with the reach for yield to drive capital into periphery markets to take advantage of higher returns. Yet, a realized program would likely drive down yields and the euro. Looking ahead, keep an eye on Germany jobs and Eurozone confidence figures.

Canadian Dollar Drops on Poor Carry Outlook, Key Data Ahead
The IMF offered up GDP forecasts of 1.6 percent in 2013 and 2.25 percent in 2014, but that wasn’t what piqued FX traders’ interest. The group also suggested tame inflation reduced the necessity of a BoC (Bank of Canada) rate hike until 2015 – not encouraging for a carry currency. Today’s docket offers an important 3Q current account report and tomorrow’s session offers up the GDP report for the same period.

US Oil Hits 6-Month Low as Demand Forecasts Drop
Futures prices for the benchmark West Texas Intermediate grade of US oil dropped 1.5 percent Wednesday – the biggest slide in over two weeks and a six-month low for the benchmark commodity at $92.30. The fading outlook for global growth certainly had a hand in this performance, but specific supply-and-demand data would also contribute. The DoE’s weekly inventory report for November 22 reported a sharp 2.95 million barrel increase. Meanwhile, implied demand dropped a hefty 3 percent to 15.315 million barrels.

Gold Chops to New Multi-Month Low
Technically, gold’s close for the previous session was the lowest in over four months; but the 0.4 percent slip was hardly evidence of a new wave of bearish momentum. As if to reinforce the tame expectations from the metal’s move, volume on derivates (ETFs and futures) was light and the CBOE’s Gold Volatility Index was little changed below 20 percent. Unless there is a meaningful move from the dollar or a particular change in stimulus expectations from one of the major players, gold may succumb to the holiday trading conditions just like the capital markets.

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