Talking Points:

Dollar Gaps Lower, S&P 500 Higher on Fresh FOMC News
British Pound Looks for Inflation Data to Thwart BoE’s Low Rate Promise
Gold Eyeing $1,300 Despite the Dollar’s Recent Troubles

Dollar Gaps Lower, S&P 500 Higher on Fresh FOMC News
Is the September Taper off? Forex and capital markets traders alike were caught off guard with a sizable gap on Monday’s open on news relating to the outlook for US monetary policy. However, the headline this time was not directly linked to ‘on / off’ speculation surrounding the probability of a moderated stimulus program come Wednesday’s FOMC meeting. Rather, this sharp and all-encompassing move was derived from speculation on the direction and pace of the central bank’s program well after the first the Taper is on the books. Over the weekend, Lawrence Summers – the frontrunner to replace Fed Chairman Ben Bernanke when he is expected to retire when his term ends in January – announced he was bowing out of the race. That was read by the market as a ‘risk on’ development with the dollar dropping to three-month lows while the S&P 500 advanced to an intraday record high. Yet, the fundamental connection between this headline and the market’s reaction is weak; and this event may have exploited heavy speculation to further exacerbate a market imbalance before serious event risk.

Between Lawrence Summers and Fed Vice Chairman Janet Yellen, the former is considered to be more ‘hawkish’ in his views of exceptional monetary policy. Therefore, his bowing out of the contest leaves a relatively more dovish candidate to take the helm at the central bank. However, how much slack does Yellen’s nomination buy a market deeply entrenched in ‘moral hazard’? By some accounts, the FOMC member could reduce the targeted ‘full employment’ level to 5.5 percent (from 6.5 percent) and subsequently push the first Fed rate hike out to 2016. While that would certainly validate a drop from the greenback and record highs on equities, it is an ambitious leap – especially when the market is currently awaiting the Taper. The 52-pip gap down on the Dow Jones FXCM Dollar Index (ticker = USDollar) – the biggest on record – may better reflect the unpredictable and explosive nature of the markets in the lead up to Wednesday’s major event risk. That said, Monday’s equity and dollar move only further leverages risk positioning before a turbulent event.

British Pound Looks for Inflation Data to Thwart BoE’s Low Rate Promise
In the past four months, the benchmark UK 10-year government bond (Gilt) yield has surged nearly 50 percent to top 3.00 percent. Over that same period, the sterling has advanced against all of its major counterparts with particularly strong showings against the ‘high-yield’ majors. This performance has a lot to do with the interest rate outlook that has developed for the country since Mark Carney took over as Governor. In this currency and yield rally, the market has projected a competitive monetary policy regime that would see higher yield for the United Kingdom than its global counterparts can manage. And yet, those same assumptions confound the projections Carney made in his forward guidance to keep rates at their currently level until 2016. A market playing out its doubts is not unusual, but defying policy can only last so long. A key update to how bold the yield forecasts will be comes in the form of the August inflation data. The year-over-year CPI reading is expected to ease slightly to 2.7 percent. This series hasn’t dropped below 2.0 percent since November 2009.

Australian Dollar Climbs on Yield Appetite, Retreats after RBA Minutes
Equities weren’t the only benefactor to the boost in Fed stimulus confidence following Summer’s withdrawal. Yield appetite in the FX market would similarly advance with the Deutsche Bank carry trade index up 0.2 percent through Monday. Yet, that advance was light in conviction with a heavy 290 resistance holding back the measure for a fifth consecutive day. The Aussie dollar was under similar constraints. A warmed yield interest supports the heavily discounted carry currency, but without a heavy bid for yield, it is difficult to carry AUDUSD above 0.9400. The RBA minutes this morning did little to improve the situation. Protests over a high Aussie dollar and keeping further cuts as an option add little.

Euro Unfazed by Deepening Spain, Portugal, Italy TroublesA range of headlines through the opening 24 hours reminds us of the unbalanced conditions in the Eurozone. On the positive side, the IMF approved Cyprus’ €84.7 million aid disbursement after a review following the Eurozone’s own €1.5 billion payment. Yet, other Eurozone members were not so fortunate. Portugal’s appeal for relaxed goals was rebuffed by the region’s finance ministers late last week. Meanwhile, Spain reported its debt-to-GDP topped the government’s goal at 92.2 percent; and Italy is still grappling with a possible coalition government collapse due to Berlusconi’s possible ouster. Coming up, Greece will be the limelight with an IMF review and a series of Samaras meetings.

New Zealand Data Disappoints, Trade Numbers Could Trigger Graver Doubts
Data from the New Zealand docket offered little encouragement to bolster a risk appetite run. From the headlines, we witnessed disappointing turns for August housing sales and service sector reports as well as a slip for a 3Q consumer confidence survey. Yet, all of that data will be superseded by the upcoming event risk. Wednesday brings 2Q trade figures while the subsequent session is set to release GDP for the same period. In the past two weeks, the kiwi has rallied over 1000 pips versus the euro, 600 against the yen and 500 compared to the dollar.

US Oil Gaps Down on the Week’s Open as Syria
The benchmark US oil futures contract dropped 1.5 percent Monday and subsequently led the market to a move below the 50-day moving average as well as the lowest close in three weeks. The presumptions of cross-market influence don’t hold here as there was a general swell in risk positioning on the Fed news that would usually cater to the commodity’s speculative side. This performance was once again a reflection of the supply-and-demand factors that have held consistent sway over the market. The US and Russia agreed to the outline of a deal that would see Syria turn over its chemical weapons and thereby further reduce the probability of an attack that leads to regional instability.

Gold Eyeing $1,300 Despite the Dollar’s Recent Troubles
Has gold’s role as an alternative to fiat currency and specifically the US dollar vanished? Despite the largest bearish gap for the USDollar on record and a universal slide against its major counterparts, the precious metal still dropped 1.0 percent. The connection should not be measured via the simple fluctuations between the two assets – but rather the fundamentals that are encouraging the movement. In this case, the greenback’s trouble is an over-exaggerated dose of risk appetite in the guise of altered Fed policy forecasts. Yet, rather than debate a 2015 vs 2016 rate hike; gold traders are focused on the immediate concern of a Wednesday Taper.

**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar

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