Talking Points:

Dollar Ends Longest Bull Run in 14 Months
Euro May Find Rebound in Pre-Event Risk Unwind
Australian Dollar Rallies Ahead of RBA Decision

Dollar Ends Longest Bull Run in 14 Months
The USDollar broke stride on its strongest bull-run in 14 months. Monday’s 0.3 percent slip from the Dow Jones FXCM Dollar Index brought to a close a six-day consecutive rally. Historically speaking, the end of such moves does not necessarily translate into impending trend reversals. This situation is likely to prove consistent with this aversion to a technical fate. Fundamentals are critical to the benchmark’s next move. The most significant cues for what truly matter to the dollar – risk trends and stimulus schedules – aren’t due until the end of the week. The US 3Q GDP (due Thursday at 13:30 GMT) and October NFPs (Friday at 13:30 GMT) reports are beacons for FX traders, and there will be considerable hesitation to building into trends (bullish or bearish, risk on or risk off, Taper earlier or later) until the data clarifies probabilities for the crowd. Meanwhile, the event risk from this opening session offered a mixed picture. Data (factory orders and New York manufacturing activity) was lower tier, but the Treasury’s upgraded quarterly borrowing estimate ($266 billion) reminds us we likely have another debt stand off early near year. More immediate, multiple Fed officials spoke; and it seems they are trying to desensitize the market to a Taper.

Euro May Find Rebound in Pre-Event Risk Unwind
Last week’s 2.3 percent EURUSD slump was the largest since the July 6, 2012 tumble. That is a good historical comparison. Looking back to the 3 percent drop 16 months ago, that was a plunge that preceded the ECB’s (European Central Bank) introduction of its open-ended vow to backstop the sovereign debt market should another financial crisis arise. That move was intended to suck the oxygen out of a seemingly relentless cycle of bailout requests and catastrophe for the region. This time around, we have seen a drop not on instability, but rather on diminished expectations for ‘return’. With the drop in the region’s inflation reading last week, there is now room for the ECB to further ease to support countries struggling with recession and a return to the market. With the ECB decision Thursday, there is reason to deleverage exposure.

Australian Dollar Rallies Ahead of RBA Decision
Shortly before the RBA (Reserve Bank of Australia) meets, overnight index swaps projected the 12 month forecast for Australia have swelled to 22 bps. While that is still short of certainty of a quarter-percent rate hike over the coming year, it is nevertheless the most hawkish forecast from this forward looking market since June of 2011. This optimism found its way through to the currency as the Aussie dollar advanced against all of its major counterparts through Monday’s trading session – with a surprisingly uniform 0.5 percent (versus the Swiss franc) to 0.8 percent (against the Canadian dollar) performance. As consistent as the performance was though, it is still a correction for a prevailing bear theme from the past few weeks. In these fluid yield expectations, we see the market can indeed be influenced by the central bank’s policy guidance. Should the statement note any foreseeable pressure for a rate hike, there is a lot of room for yield forecasts and the AUD to rally.

British Pound Advances as Growth Forecasts Upgraded, Construction Report Beats
There was a material improvement in traditional event risk this past week, but does it truly tap into the sterling’s primary fundamental interests? Stealing the headlines was Markit’s construction activity survey for October which printed its best reading (59.4) since series data is available back to 2008. Adding to the sense of optimism on the day, the CBI (Confederation of British Industry) upgraded its UK growth forecasts with an outlook of 1.4 percent 2013 performance and 2.4 percent next year (previous forecasts were 1.2 and 2.3 percent respectively). Today’s service sector report may carry a little bit more influence, but the focus is still on the outlook for monetary policy clues from the Bank of England. Unfortunately, the central bank is unlikely to offer anything material after its policy gathering Thursday.

New Zealand Dollar Firming as Yield Outlook Improves, Jobs Data Ahead
Similar to the revival in rate expectations for the Australian benchmark, we have seen a marked rebound in New Zealand’s yield forecast. From the slump below 60bps last week, the 12-month yield forecast for the region’s benchmark interest rate is back up to 81 bps. That represents a sizable premium over all of the kiwi’s counterparts. We can see this optimism bolstering the yield gap between the New Zealand currency and its more prominent carry counterparts (dollar, yen, pound); but its advantage is proving relatively restrained versus fellow high-yield peers. In the coming trading day, we have a range of 3Q labor statistics due for release. Of particular interest will be the employment change and unemployment rate for the period. There is plenty of room for surprise on both accounts with a 6.2 percent jobless rate forecasted.

US Oil Now Down Nearly 16 Percent from Late August High
US oil – specifically the active futures contract for West Texas Intermediate – closed higher for the first time in five trading days Monday. Yet, the 1 cent increase to $94.62hardly puts the bulls in the driver’s seat. The commodity is tracing out a remarkably durable bear trend against a market backdrop where risk-sensitive assets are finding at worst chop and best sustained buoyancy. In fact, from its August 28 peak (itself a two year high), the crude benchmark has dropped over 16 percent through its Monday low. Given regulators’ efforts to curb speculative activity in the popular commodity – they are far from locking traders out – we are perhaps seeing a systemic shift towards more traditional supply-and-demand factors. Ignoring the stimulus (and thereby risk) implications of weaker economic data, there is fundamentally a reduction in demand for oil. Meanwhile, the 4 week average for the DoE’s US inventories has hit its highest level since April 13, 2013 (5.035 million barrels).

Gold Matches Longest Bear Wave in 5 Months
Despite the dollar’s break from pace, gold extended its stumble. With Monday’s 0.1 percent drop to $1,314, the precious metal won the unflattering distinction of a five-day consecutive decline – the longest series of losses for the commodity since May 15. Yet, there is a material difference between the move that followed the failed recovery from April’s collapse (over 15 percent in two-days) and the current 4.1 percent peak-to-trough move. There isn’t nearly as much one-sided speculative exposure for the market to deleverage on a technical break or volatility swell. Nowadays, we need a more concerted fundamental motivation to drive the market to a lasting trend. With two key monetarypolicy events (Thursday’s ECB and Friday’s Fed decision) due later in the week, there is a fundamental dampener on this metal. That being said, there doesn’t seem to be too much concern ahead of the event. The CBOE’s Gold volatility index is currently at 20.3 percent – at the lower bound of the past 7 months’ range. Meanwhile, ETF volume was the second lowest in three months.
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