Talking Points:

Dollar Gains a Pre-FOMC Correction to Bleed
Risk Exposure British Pound Tumbles – But was it Data Derived?
Australia Dollar Drops after RBA Governor Forecasts Tumble

Dollar Gains a Pre-FOMC Correction to Bleed Risk Exposure
The USDollar advanced for a third consecutive trading session through Monday. Taken at face value, this would seem a remarkable performance considering the S&P 500 has pushed on to record highs and FX volatility is basing at 2013 lows. The bullish performance would seem to defer fundamental expectation of a mild risk-positive lean from the broader markets. Is that a reflection of a particularly bullish performance from the dollar is a dubious strength of in sentiment? Though there are multiple points to the sentiment assessment, we are likely witnessing an uneven backdrop for risk taking. This is not unusual in the lead up to major event risk.

Oftentimes, when the market is heading into a major fundamental event that can materially alter the makeup of risk appetite – like Wednesday’s FOMC rate decision – the speculative ranks will stand to the sidelines and/or deleverage particularly risky exposure. This reduces market depth on both sides, thereby curbing momentum potential – though short-term volatility can also be amplified by these conditions. Another aspect of the repositioning is that prevailing trends often see a modest correction either through profit taking or leverage throttling. For the USDollar which has dropped nearly 6 percent since its early July swing high, a pullback is bullish. But trend-worthy this move is not.

British Pound Tumbles – But was it Data Derived?
The sterling suffered a steep drop into Tuesday’s Asia trading session. Though not particularly robust on an historical basis, it was remarkable given the event risk that lies ahead. In fact, the push was strong enough to drive GBPUSD below 1.6100 after more than a week of congestion and leveraged EURGBP to a two-month high. There was no meaningful fundamental data released around this aggressive move, which suggests this was a heavy market moving without the immediate backing for follow through. The docket was not completely barren Monday, though. The CBI business group reported its October sales figures to significant surprise. The 2-reading was far worse than the expected 32 forecast and the biggest point drop since January 2005. Coming up, we have consumer lending figures for September.

Australia Dollar Drops after RBA Governor Forecasts Tumble
The Australian dollar was holding up pretty well through Monday’s session. A tepid performance for global equities was keeping the currency buoyant thanks to its yield. If general risk trends were the only factor to the Aussie’s performance, it would still be in a decent position for the week through this morning. Yet, a few comments from RBA Governor Glenn Stevens insured the high-yield currency would find no peace. In a speech, the central banker said he expected the local fiat would likely be “materially lower” at some point in the future. Those are hefty statements from a policy official, but by no means unusual. Nowadays, policy officials attempt to talk down their currency any chance they get. These thinned out conditions helped amplify the move though. A number of Aussie-crosses are close to notable breaks.

Euro: EURUSD Activity Hits a Six-Year Low as Breakout Pressure Builds
There is a considerable log of heavy event risk scheduled for EURUSD less than 36 hours into the future. And yet, the five-day (one-week) average daily trading range for this benchmark currency pair dropped to its lowest level in six-years through Monday. That is an extremely quiet backdrop contrasting an exceptionally tumultuous forecast. Though not a guarantee, this is a high probability breakout scenario. A preemptive – and possibly ‘false – break is possible, so traders must be cautious. Despite the focus on short-term volatility, there are deeper fundamental themes playing out in the backdrop. Through Monday, Spain was given a voice of support by the EU’s Dijsselbloem who said the country could be the leader in the region’s recovery. This came at the same time total mortgage lending figures for August reported a 38.1 percent year-over-year drop. The 3Q Spain GDP and a scheduled €21 billion in bond payments this week should straighten it out.

New Zealand Dollar Sees its Rate Forecast Plunge Before RBNZ Decision
A strong ‘risk appetite’ sentiment leverages high yielding currencies higher as investors are put on the hunt for competitive return. Yet, there is another facet to this fundamental drive: changes in interest rate expectations themselves. Neither of these factors was factors has been working in the kiwi’s favor. An uneven risk backdrop was more than outranked by a slide in the yield forecast for the Reserve Bank of New Zealand. According to swaps, the central bank is now expected to raise its benchmark lending rate by 61 bps over the coming 12 months. Two weeks ago, that forecast was 81 bps; and a month before that, it was 96 bps. It seems the market has overextended its expectations and is now working them back. That is not good timing given the condition of risk appetite and the impending RBNZ rate decision.

Japanese Yen: A Nikkei 225 Bounce Saves USDJPY from a Premature Breakdown
USDJPY was just one trading day removed from a floor that has held the pair up for the past nine-months. A similar affliction of near bearish breakdown seems to afflict all of the yen crosses as risk trends fluctuate. The Nikkei 225 is under pressure, but has yet to suffer any fatal moves – such as a slip below 14,000. Meanwhile, the Deutsche Bank carry trade index is consolidating after last week’s 2 percent tumble and the aggregate yield of the majors (the foundation for carry) has dropped back to two-month lows. These are unflattering developments for yen-based pairs, but they can be rendered moot quickly depending on the Fed’s policy course later this week. In other news, the Japanese economic docket was offering evidence of economic strength and perhaps stimulus success. The unemployment rate for September ticked down to 4.0 percent while household spending for the same month grew 3.7 percent – far better than expected.

Gold Advances for a Third Straight Day…Alongside the Dollar
Though not a particularly robust performance, gold’s 0.1 percent climb through Monday reflects the third consecutive daily advance from the metal. This is not particularly remarkable in terms of historical performances. The run through October 17 was a four-day stint that forced a short-term bear trend into retirement with a $1,300 breakout. We have surpassed no serious levels with this particularly move. That is to be expected given the heavy event risk that we face with Wednesday’s US monetary policy. A disturbance in the fiat landscape can materially alter the alternative-store-of-wealth’s appeal. In the meantime, that impending event risk is warping the metal’s primary correlation to the US dollar. In fact, the short-term (one-week) correlation between currency and metal has risen to 0.55 – an unusually strong, positive relationship.
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ECONOMIC DATA

GMT

Currency

Release

Survey

Comments

01:00

JPY

Small Business Confidence (OCT)

49.8

03:00

EUR

GfK Consumer Confidence (NOV)

7.2

7.1

03:45

EUR

Consumer Confidence (OCT)

05:30

GBP

Net Consumer Credit (SEP)

0.8B

0.6B

If mortgage approvals meet expectations, this will be the highest reading since the spring of 2008 when approvals were on the decline.