Talking Points:

Dollar Extends Longest Drop in a Month, Momentum Still Absent
British PoundRallies Sharply after Strong Jobs Data, Yields Unexpectedly Steady
Australian Dollar Drops Sharply after Employment Data Shows Surprise Drop

Dollar Extends Longest Drop in a Month, Momentum Still Absent
With equities on the rise and the US 10-year Treasury yield easingback from its Taper-driven surge to 3.00 percent, it comes as little surprise that the USDollar suffered its fourth consecutive daily drop. While this is only the longest series of losses in a month, it is all the more remarkable for the fact that it has made serious progress in tracing its way down from the earl-July highs. The same two, key factors remain for the greenback: risk trends and monetary policy forecasts…and both are working against the currency. For the currency’s safe haven status, the benchmark S&P 500 has advanced four a seventh consecutive trading day. We’ve only experienced four instances of such an aggressive run (seven-or-more day advances) by this index in 7 years – and all of them have occurred this year. Meanwhile, the Taper countdown is now under a week. Yet, yield-assets are pulling back from the fear trade. Unless risk aversion takes on the Fed move, the dollar may be in trouble.

British Pound Rallies Sharply after Strong Jobs Data, Yields Unexpectedly Steady
Through Wednesday’s trading session, the sterling took the top spot amongst the majors. Particularly remarkable amongst the pound crosses was the GBPUSD’s surge above 1.5750 to trade at seven-month highs. The catalyst for this breakout move was key event risk that not only sparked short-term speculators’ interests but would also tap into the more fundamental discussion of the Bank of England’s pace on policy. The August jobless claims surprised the consensus with a 32,600-net decline and a further downward revision to the previous month’s reading. Together, the July-August drop in unemployment claims was the biggest two-month slide since 1997. This is yet another point for rate forecasts to doubt the BoE’s ability to avoid cuts before 2016. We’ll see if they confirm this in upcoming MPC testimony in Parliament.

Euro Traders Face Another Berlusconi Discussion, EU Vote on Syria
The euro is happy to drift between the fundamental headlines as the currency maintains a steady path amidst volatility suffered by many of its counterparts. Capital markets were mixed with the Euro Stoxx equity index posting a 0.4 percent advance to a two-year high while other country-specific indexes meandered. On the newswires, the periphery was once again making waves that the global community paid little attention to. ECB Member Coene suggested in an interview that Greece may actually need to seek more than one additional rescue program and the EU’s Dijsselbloem remarked Greece’s problems wouldn’t be over before the end of 2014. Meanwhile Portugal’s Deputy Prime Minister said they would try to negotiate with the Troika for relaxed targets, dampening hopes that they will be able to return to the market soon. Most threatening though is the outlook for Italy. Clearly from Italian yields and default swaps, there is little fear of the coalition government falling apart in retaliation to a possible removal of former Prime Minister Berlusconi from Parliament on his tax fraud conviction. The level of impact such a development would have alongside its not-insignificant probability demands more respective. The Senate will deliberate again today.

Australian Dollar Drops Sharply after Employment Data Shows Surprise DropAUDNZD – normally one of the most stoic exchange rates – is one of the most active pairs today. This performance is fostered by a particularly strong backdrop for the New Zealand currency (more on that below) and an exceptionally painful move for the Australian dollar. Crowding the morning headlines in Sydney was the report of an unexpected drop in August employment figures (10,800) and uptick in the jobless rate to a four-year high 5.8 percent. Adding a little more pressure to the monetary policy implications this data carries, the September Consumer Inflation Expectation survey dropped to 1.5 percent – the lowest reading in 20 years. As significant as these readings are, they are unlikely to spur the RBA to revive the rate cut regime they have just recently pulled out of. Nevertheless, the benchmark 10-year yield dropped 3 percent.

New Zealand Dollar Rallies after RBNZ Confirms Intention to Hike in 2014
In the wake of key event risk, the New Zealand dollar is up against all of its counterparts through early Thursday trade. The impetus for this kiwi climb was the Reserve Bank of New Zealand (RBNZ) rate decision. Though the central bank did not budge on its 2.50 percent benchmark lending rate – as expected by the broader market – the policy authority did offer fodder for speculators to price in tightening through the foreseeable future. Between the policy statement and Governor Graeme Wheeler’s press conference, the comment that most FX traders honed in on was the admission of plans to raise rates in 2014. While that does not meet the level of speculation that we seen in rates market (swaps are pricing in 90 bps of hikes over 12 months), it acts as vindication for the more aggressive prognostications. Meanwhile, regular lamentations about an overvalued currency are overlooked. Active intervention has failed, so ‘jawboning’ has no hope.

US Oil Finds Support in Risk Elevation to Compensate for Deflated Syria Risks
Supply-and-demand – though important – is only one element to pricing US oil. That aspect of the market was downplayed this past session following the US President Barack Obama’s address in which he agreed to Russia’s offer to broker negotiations to disarm Syria of its chemical weapons – and in doing so avoid escalating tensions in the Middle East. For crude, tame supply risks equates to a reduction in ‘panic premium’. To that point, the CBOE’s oil volatility index collapsed 10.3 percent – the biggest ‘relief’ move for the measure since August 11, 2011. Yet that same relief to the risk bid didn’t translate into a price drop. The US standard WTI futures contract rose a modest 0.2 percent Wednesday – picking up on its other primary market role: a speculative asset that rises alongside equities.

Gold Holds $1,355 as Uncertainty Grows
Gold bugs were offered a temporary reprieve from having to make a potentially painful break at $1,355. The 2.0 percent drop by the precious metal over the opening 48 hours of the week contradicted the growing financial threat that surrounded Syria as well as the benchmark US dollar’s steady drop. With the 0.1 percent advance for gold through Wednesday’s session, we see a moderation borne out of a lack of conviction in the prevailing bear trend. Further progress below $1,350 would reflect conviction in a momentum shift – and the traditional fundamental cues are just as lacking for a move lower as they are for a rally. Where the greenback selloff could vault the appeal of an alternative safe haven, the Taper view is keeping pressure under wraps and the risk is not yet in general currencies. Alternatively, if the benchmark currency were to rebound after its four-day slide, gold could risk a break lower. Looking at trading conditions, volume in the ‘derivative’ space hit its lowest levels in a month. Meanwhile, both realized and expected volatility readings continue to however well above pre-April activity levels.

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