Talking Points:

Dollar’s Smallest Range in 7 Months Warns of Volatility
British Pound: CPI Data Round One for Breakout Risk
Euro Bests All Majors after Greece Avoids No Confidence Problems

Dollar’s Smallest Range in 7 Months Warns of Volatility
The Dow Jones FXCM Dollar Index (ticker = USDollar) traded in an incredibly tight 18.8-point daily range Monday – the lowest level of activity in seven months and the second most restrained reading in six years. Extremes don’t last by their very nature and this is certainly a severe reading of inactivity. There is plenty of thematic, fundamental fodder for FX traders to use to put the currency back on pace; but a meaningful trend may be out of reach of anything short of a clear risk trend move or obvious shift in the timing of the Fed’s stimulus wind down. The opening session for the week was light on such high-level catalysts. Over the coming session, we have a few indicators and Fed speeches that will offer small sparks. The NFIB small business optimism report for October along with Kocherlakota’s and Lockhart’s talks is top event risk.

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British Pound: CPI Data Round One for Breakout Risk
The British pound was lower against all but the Australian dollar through the opening day of the trading week. Yet, as wide as the decline was, it pace was tepid. The sterling’s docket was empty of major releases Monday, two days of heavy event risk begins with the inflation data due London time today (specifically 9:30 GMT). With a market transfixed on the bearings for monetary policy and proactively contradicting the Bank of England’s forward guidance for low rates through 2016, sterling traders are battening down the hatches. In the wave of data, we will have factory, housing, retail and consumer-based inflation readings. For market influence, the CPI data will be the beacon for news traders and yield forecasters alike. Looking at the positioning for GBPUSD and EURGBP, the sterling is still pricing in an optimistic time frame (2015 versus 2016 first hike). If price pressure ease, the 8.5 bps priced in though the next 12 months can quickly evaporate…and the sterling drop.

Euro Bests All Majors after Greece Avoids No Confidence Problems
There wasn’t much data on the Euro’s calendar this past session, but there were plenty of headlines for the market to work with. Perhaps the most synopsis-worthy was Greek Prime Minister Antonis Samaras surviving a No-Confidence vote in Parliament called by leader of anti-Euro party Syriza, Alexis Tsipras. There was little worry in the market that this vote would send the country into another power struggle that threatened its participation in the Eurozone. Yet, a market that has selective attention for ‘positive’ outcomes may have helped this news gain more traction against its major counterparts than it would have otherwise. Meanwhile, there were other financial headlines that were not as favorable to the shared currency. Portugal’s rescue program was under discussion with the EU saying the country was on course, while the country’s Foreign Affairs Minister suggestion a yield below 4.5 percent was needed from the market to fund the country going forward.

Yen Crosses Jump, USDJPY Nears 100 as Amari Talks Down Intervention
The Japanese yen took a spill Tuesday morning (yen crosses rose) as the Nikkei 225 climbed as much as 1.9 percent through the early hours of the session. The medium-term (60-day, rolling) correlation between the Japanese equity index and USDJPY isstill positive but it is also at its lowest level in 12 months. This diminished risk connection is a side effect of a market in congestion. Both yen crosses and the Index have carved out broad ranges that carry a sense of eventual conclusion to them. The question facing yen traders is two-fold: what direction will the initial break present and will it offer follow through? Two prominent powers are vying for control over these outcomes – risk trends and Japanese policy officials. While risk trends are still buoyant, skepticism is now the norm rather than the exception. A move to deleverage risky positions would hit the yen-based carry as hard as any other market. That said, there is limited upside on risk trends alone given those same anemic returns. Yen cross bulls’ greatest hope going forward is further stimulus. Japanese Economy Minister Amari today remarked that he would reassure US Treasury Secretary Jack Lew that Abenomics is not targeting exchange rates. But a weaker yen may depend on that.

Australian Dollar Drops as Local Data Fails to Offset China Numbers, Risk
The economic docket was heavy with event risk that would compel the Aussie dollar – though much of the most market-moving event risk wasn’t even Aussie based. On a market-wide drop against its major counterparts Monday (between 0.6 percent versus the euro to 0.1 percent against the pound), the Australian currency was faced with rather solid data. Investment and home loans grew in September. Yet, those trading the high-yield currency were perhaps more absorbed in the Chinese data. Australia’s largest trade partner reported near-inline retail sales, fixed investment and industrial productive figures over the weekend. Yet, the ChineseOctober new loans figures hit a 10 month low and aggregate financing posted its second weakest reading since October 2011. Meanwhile, the Deutsche Carry Harvest index is trying to recover from a serious drop at the end of last week and the ASX50 struggled to recover from a morning loss Monday.

New Zealand Dollar Rate Outlook Rising Again Ahead of RBNZ Stability Report
Two indicators have crossed the New Zealand wires over the opening 24 hours of the trading week, but their influence over the kiwi is likely minimal. October card spending increased the most in 14 months and the REINZ’s read of housing start cooled to the second most temperate pace since April 2011. Both are readings that give a little more room for the RBNZ to return to its unencumbered hawkish policy lean. After dropping back to below 60 bps, the 12-month interest rate forecast for the country is now back to 92 bps and just off the highest level in two-and-a-half years. Interest rate forecasts are key to the New Zealand dollar which has been battered by a diminished appetite for anemic carry in general. If the upcoming RBNZ Financial Stability Reports signals strength, it can further lift NZ interest rates and thereby the kiwi.

Gold Down 9 of Past 10 Trading Days – A Rare Occurrence
In the past 10 trading days (2 full weeks), gold has closed in the red nine times. That is an unusual occurrence. In fact, over the past six years, we have only seen four instances of that degree of consistency. And, for each of these instances, a short-term bounce was found. The problem is that each of these bull waves proved extremely short-lived with deeper corrections awaiting the commodity soon after the relief was found. This current pattern of unusual circumstances has a similar technical and fundamental backdrop. In the current bear wave, the market has dropped a tame 6 percent as the Gold Volatility Index has dropped to a 7-month low (19.2 percent). The spark here is the fundamental picture. Gold was little supported this past week by the ECB’s rate cut and the BoJ’s lean towards more QE. The BoE Quarterly Inflation report on Wednesday is another possible spark this week, but the true verdict on trend may rest with the FOMC’s Taper timing.

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ECONOMIC DATA

GMT

Currency

Release

Survey

Comments

0:01

GBP

RICS House Price Balance (OCT)

58%

54%

0:30

AUD

NAB Business Conditions (OCT)

-4

Even if this data beats estimates, it will be overshadowed by event risk surrounding China’s third plenum this week.

0:30

AUD

NAB Business Confidence (OCT)