Talking Points:

Dollar Finds Little Impetus from Fed Taper, 4Q GDP Ahead
Euro Heads into Event Risk: Spain GDP, German Employment
New Zealand Dollar Drops after Expected RBNZ Hold

Dollar Finds Little Impetus from Fed Taper, 4Q GDP Ahead
As expected, the Federal Open Market Committee (FOMC) decided to cut its immense QE3 stimulus program by another $10 billion. Yet, as sensitive as risk trends have been this past week, the news didn’t spark a broader unwind of exposure. The S&P 500 – as a measure of investor appetite – retreated in the wake of the news, but key levels of implicit support (like the confluence at 1,775) remained standing through the media wave. In turn, the greenback would fail to gain the safe haven bid that could have complimented the building appeal related to the United States’ improved position in the ‘stimulus wars’. What does this mean for the financial markets and the dollar?

From the central bank decision this past session, we learned that the open-ended stimulus program was reduced a second time to $65 billion in purchases of Treasuries and MBS per month. As this was heavily expected amongst economists and market participants, its ‘surprise quotient’ wasn’t very high. In other words, there were few investors that would be caught off guard and thereby have to adjust after the update. Yet, the move certainly carries serious implications for the investment landscape moving forward. A unanimous vote by the group indicates that there is a strong belief in the pace of a steady unwinding moving forward and under the new leadership of Janet Yellen. This sets a rather clear view for timing the end of QE (December if the bank continues at its $10 billion pace) and further shapes speculation for the eventual shift to interest rates as a tool (first half 2015). For the FX market, that kind of clarity is a boon for rate expectations – a key valuation element for currencies. The untapped potential though is the implications that the Fed’s absence holds for moral hazard that has fueled leverage, risk exposure and the S&P 500 to record highs. When will the complacency break down?

In summation, the FOMC decision has failed to live up to the requirements of a catalyst, but still shifts the sentiment balance nonetheless. Perhaps upcoming event risk will carry more influence. The first reading of 4Q US GDP is due at 13:30 GMT, and the consensus is for a softer 3.2 percent annualized pace. At this point, a disappointment would likely revert to a capital market drop. Taper faith has been set.

Euro Heads into Event Risk: Spain GDP, German Employment
For those traders keeping tabs, the Euro-area docket offered yet another overlooked but disconcerting fundamental update. The Eurozone money supply growth through December cooled to 1.0 percent – the slowest pace since September 2010.This is further fuel to add to the deflation risk argument that is gaining traction amongst doves. And, with the three-month Euribor showing steady funding pressure for the region’s financial sector, the case for a preemptive ECB move to fortify the market with stimulus is growing. In the meantime, definable fundamental catalysts are still the best source of volatility. With the upcoming session, we have two particularly important pieces of data to watch out for. Germany’s January labor statistics are known for generating volatility with notable ‘surprises’. As for Spain’s 4Q GDP reading, there is greater scope for regional stability questions – but that is only significant if the market is focused on EZ stability fears.

New Zealand Dollar Drops after Expected RBNZ Hold
A hold by the RBNZ this morning was expected by 12 of the 15 economists that submitted their forecasts to Bloomberg and 65 percent of the market (according to swaps before the release). Therefore, when the central bank did hold its 2.50 percent benchmark, there was a segment of the market that was unprepared for the outcome. The bullish rate speculators eased back their positions and pulled the kiwi down against its benchmark counterparts. Yet, the start of a new hawkish regime is nearly at hand. Governor Wheeler remarked in the statement that the first hike will be “soon”. And, once that first move is realized, his forecast for 225 bps of hikes through 1Q 2016 will be taken more seriously.

Yen Crosses: BoJ Versus Market Uncertainty
Though we have yet to jump start a longer-term trend (bullish or bearish) for the yen crosses, the volatility readings on these pairs is still vibrating. In fact, the one-week realized (historical) volatility measure for USDJPY is 11.6 percent – the highest since August 12. Escalation risk is exceptionally high for this currency as it is particularly sensitive to risk trends. And while the market is still weighing the eventual probability of a BoJ upgrade to its open-ended stimulus program, that distant bullish driver for the crosses would do little against carry unwind…

British Pound Bulls Disregard BoE Gov Carney’s Reassurances
Bank of England (BoE) Governor Mark Carney is using every speaking engagement he attends to reiterate the policy group’s commitment to keep rates exceptional low. He did so again this past session. The market recognizes either rates or his credibility in forward guidance have to give. And, the market is still betting on the former. Without a data collapse, this situation won’t be resolved until the Quarterly Inflation report.

Australian Dollar Selling Pressure Returns as Yields Sink to Three-Month Lows
The Australian dollar’s rebound wasn’t very long lived. The currency has stumbled this morning in wake of the disappointing Chinese Manufacturing activity report from Markit. Beyond the stodgy trade relationships, yield potential is also dropping quickly. Two-year Australian sovereign bond yields have dropped back to 2.65 percent while the 10-year has dropped to a near three-year low 4.00 percent.

Emerging Markets: South Africa Surprise Rate Hike Quickly Reversed
Emerging market policy officials have put in an incredible and somewhat coordinated effort to curb outflows from the categorically risky economies that fit the designation. Volatility has certainly steadied, but the outflows have not been staunched. This past session, a surprise South African central bank rate hike (50 bps) rallied the Rand for mere minutes before it went on to drop 3.2 percent.

Gold Unsettled between Taper and Emerging Market Trouble
On the one hand, we have the Fed Tapering its incredible stimulus program that in turn diminishes gold’s appeal as a fiat-alternative. On the other, Emerging Market outflows generate the kind of panicked interest that drive capital to a safe haven like gold. The problem is that both themes have steadied. This past session gold volume jumped to its highest level since year-end liquidation.
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