Talking Points:

Dollar Frozen on S&P 500’s Longest Tumble in 16 Months
British Pound Advances Despite BoE’s Yield Reassurance, Yield Drop
US Oil at Risk of Major Bear Shift Should $102 Break

Dollar Frozen on S&P 500’s Longest Tumble in 16 Months
Activity for the Dow Jones FXCM Dollar Index – measured by the Average True Range – has dropped sharply from last week’s post-FOMC volatility swell. In fact, the benchmark currency is just off its lowest levels of activity in five months. This lack of performance may strike some as unusual given the S&P 500 has extended a five-day drop – its most consistent tumble since May of last year. Yet, as persistent as the slide for the benchmark of risk appetite has been, there is little conviction behind the move. We can measure that in both implied and realized volatility measures. The VIX Index (often referred to as the ‘fear’ gauge) has trended towards six year lows for some time. Yet the measure of actual or realized volatility has itself collapsed to similar lows this week. While a trend in a market index like the S&P 500 can run astray of fundamentals for an extended period due to stimulus and other factors, risk conditions can only remain submerged for only so long.

Japanese Yen Drops Sharply on Confirmation of Impending Stimulus
In the early Tokyo hours, the Japanese was flat-lining when the Nikkei 225 opened to a sharp 1.4 percent tumble below 14,500 – a closely watched, even figure. This break leveraged the potential for an Asia-session risk shift that could generate momentum in an otherwise aimless market and in turn spark a sell off on the carry-backed yen crosses along the way. Yet, that drive was reversed abruptly a few hours into active trade as news roused speculators to optimism. A few headlines hit the newswires, but two stood out. According to the chief of the LDP tax panel, Prime Minister Abe will produce his stimulus plans with his tax policies on October 1. Add to this, a Kyodo report suggested the stimulus announcement would include plans to explore lower effective corporate tax rates to encourage growth. Both are encouraging, however, they are not particularly original. We have heard similar conjecture before. As such, yen crosses will struggle to rise on this news alone.

Euro Unconvinced of Greece’s Assurances No Third Bailout Necessary
According to Greece’s Deputy Prime Minister (and Foreign Minister) Evangelos Venizelos, Greece will not need a third bailout. This has been a point of considerable speculation – though not active positioning – in the FX market as EU officials, Germany Finance Minister Scheauble and others have speculated such an outcome was essentially inevitable. Yet, in an interview with Reuters, Venizelos said the country could avoid asking for a third round of aid with better terms for its existing program and a return to the capital markets. This is exceptionally optimistic for a country that has proven consistently over-reaching with its forecasts. As it happens, another report made the wires quoting Troika sources that suggested officials were skeptical of Greece’s ability to hit a primary surplus – a prerequisite to altering terms on its bailout.

British Pound Advances Despite BoE’s Yield Reassurance, Yield Drop
An improved yield forecast has been a key catalyst in the sterling’s recover over recent weeks and months. However, policy officials have done everything they can to curb speculation that an improved growth forecast and distaste for QE expansion would translate into earlier rate hikes. The Bank of England (BoE) has reiterated its vow to keep rates at their exceptionally low level until 2016. It seemed the central bank did the same with the Financial Policy Committee meeting minutes that were released this past session – even though that deviates somewhat from its focus. The report attempted to play down higher rates as a reaction to growth and Fed Taper fears. Nevertheless, yield forecasts are still seeing a hike in 2015 with a probability of 2014. That said, a lot of hawkishness has been priced into the sterling. Where the BoE may not be able to shake the market’s convictions, disappointing data could. The 10-year Gilt yield has recently dropped to its lowest level (2.75 percent) in a month. Further retracement may evolve into a serious selling point for a yield-hopeful currency.

New Zealand Dollar Closes First Two-Day Drop this Month
It is more testament to the currency’s strength rather than a sign of serious concern. NZDUSD posted its first two-day drop this month with Wednesday’s 0.5 percent slip. The build up that preceded this correction drove the pair 9.3 percent or 715 pips in the span of around three weeks. That is an incredible performance when we compare to more stoic pairs like EURUSD or USDJPY. What does this pair have that others don’t? Interest rates forecasts. The New Zealand dollar is unique in that its rate forecast is substantial enough that traders are speculating on rate hikes at the turn of the year. That is a serious benefit to a high-yield currency and effective fill-in for directionless risk appetite. That said, the 12-month rate forecast is now down 24 bps from its peak two weeks ago and the 10-year government bond yield is 20 bps lower.

US Oil at Risk of Major Bear Shift Should $102 Break
With Wednesday’s close, US oil has fallen for five consecutive trading days. That matches the longest series of losses for the commodity since May 2012. Unlike many other assets with a risk sensitivity, oil has made a concerted drive that can press for further trend development. Standing in the way of a full-scale bear trend is $102. This level is technically-heavy with a confluence of a multi-month range floor, 100-day moving average and other cues. If the fundamental backdrop were allowing a simple focus on the balanced risk backdrop, a ‘normalizing’ bounce would be in order. However, there is another line of premium that can still be worked off through supply-and-demand. In the past week, we have seen the Syrian crisis deflate and US-Iranian relations warm – easing Middle East supply disruption concerns. Meanwhile, DoE oil inventories reported the second biggest jump (2.635 million barrels) in three months while implied demand set an equivalent low (15.33 million barrels).

Gold Flatlines, Fed Looks into Front-Run No Taper Activity
Gold advanced 0.8 percent ($11) Wednesday for the biggest climb in a week. Yet despite the ambition, the precious metal is far from establishing a meaning trend with this push. Participation measures corroborate this restraint. From the SPDR Gold ETF, volume held below its two-week average for the third straight day on 7.5 million shares in turnover. In the futures market, open interest (open positions) is at its lowest level in three months. Given this tepid backdrop, it is difficult to maintain direction – much less momentum. In the meantime, it has surfaced that the Federal Reserve is looking into suspicious trading activity behind gold immediately before the FOMC rate decision last week. A rally in the precious metal would be expected from the ‘No Taper’ call, but charts show the move happened well before. Statements and data are released to news agencies ahead of time on an embargo so that the information can be disseminated more effectively. Pre-event moves are important to watch for; but more importantly, the focus on gold suggests it is perhaps more of a preferred speculative asset nowadays.

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