Talking Points:

Dollar Opens Weak Despite Risk Dip, Fed Warnings
Yen Crosses Slide Prompting Government Stimulus Reminder
Euro: How Long Can it Defy Fading Yields, Rate Forecasts

Dollar Opens Weak Despite Risk Dip, Fed Warnings
Risk trends were little changed on the day Monday and so too was the greenback. A record high for the Dow Jones Industrial Average was more symbolic than inciting. That is fortunate for the dollar which retains the title of a safe haven. Looking forward, we are six weeks until the end of the year – a period in which market conditions typically settle and prevailing trends slowly keep pace. So, while a turn in market-wide sentiment would be a rousing development for the greenback, it is not a high probability scenario to hold out for through 2013. There is a more active driver for us to focus on – one that carries risk implications: the Fed’s Taper. The assumption after the government shutdown and as the US courts Janet Yellen as its next Chairperson of the Fed was that the tightening move would simply be pushed out to the distant future. However, we are seeing regular, provocative commentary from Fed speakers like Plosser who said missing the September Taper undermined Fed credibility.

Yen Crosses Slide Prompting Government Stimulus Reminder
It may seem a modest move, but the yen’s appreciation Monday has stirred speculative appetites and policymakers’ concerns. The 0.2 percent slip from USDJPY symbolically left the pair a pip below 100-mark, EURJPY eased only the second time in seven days and GBPJPY was pulling back from multi-year highs. There is a passive bid for these crosses. The Japanese government’s and central bank’s ambitions to end deflation and support growth add up to a formidable stimulus effort. Yet, Prime Minister Abe’s ‘Three Arrows’ and the possibility of a second stimulus program for the BoJ are heavily engrained in the market’s expectations. Unless something significantly escalates these aspects imminence or scope, we are riding precariously on the stability of a carry trade that is offering little-to-no return. The BoJ decision Thursday is on tap.

Euro: How Long Can it Defy Fading Yields, Rate Forecasts
There is a considerable amount of complacency when it comes to the euro. Despite the long-run uncertainties surrounding the economic and financial health of the region, the substantial reduction in Eurozone break up fears following the August 2012 OMT (Outright Monetary Transactions) program vow has tamed volatility and reversed the capital outflow from the region. Yet, this repatriation effort is no doubt growing mature. Fresh waves of funds to prop up the euro and its capital markets are increasingly a speculative endeavor rather than a rebalancing one. What will be the tipping point for this habitual capital flow to stall? Most likely yields – the risk side of the risk-reward scale. The ECB rate cut from two weeks ago was more than an admission that conditions warranted support, they reduced the baseline rate of return in the region. Short-term Euribor rates (3-month) have eased while the 12-month rate forecast measured through swaps is at its lowest level in six-months. Where intangible systemic risks are easily ignored, a drop in return for a market reaching for yield is not. Investor sentiment is noteworthy event risk for the next 24 hours; but the real impact comes from Thursday Eurozone PMI and Greece 2014 budget submission.

British Pound: BoE Rate Hike Timing Moved Forward to 2015, Now What?
Those that maintained hawkish rate forecasts through the BoE’s (Bank of England) initial forward guidance road show were vindicated this past week. The central bank eased its expectations for no move on the benchmark rate until 2016 with the Quarterly Inflation Report. But, where do we go from here? Admission to the possibility of a hike in the second half of 2015 means we are still nearly two years away from a higher benchmark. Meanwhile, carry-based alternatives (Aussie, kiwi) are sporting higher return and likely to hike well before this time frame; and a Fed Taper can generate far greater strength from the dollar than the sterling has derived from its own change of fate. The pound needs a fresh fundamental drive to overtake levels like 1.6250 on GBPUSD or 1.7300 on GBPAUD. The Minutes on Wednesday may not be up to the task.

Australian Dollar: RBA Minutes Reiterate A$ Concern but Optimism Shows Through
There weren’t many surprises from the minutes from the RBA’s (Reserve Bank of Australia) policy meeting two weeks ago. The most remarkable comments – that the option to further ease rates was still on the table and that the high Australian dollar was a concern – have long ago been taking into account by carry traders. A forecast for growth to remain close to 2.5 percent through the coming year, downside risk in consumer spending and reduced mining spending, and upside by a continued pick up in home prices is similarly boiler plate. Meanwhile, the two-year government bond yield (the time frame most central banks are being observed for rate forecasts) is struggling to return to – and overtake – the 2.85 percent threshold.

New Zealand Dollar Tips Lower as Yield Forecasts Slide More than Inflation Outlook
The data that has crossed the kiwi’s ticker through the opening 36 hours of the trading week has been moderately supportive. Yet, that hasn’t helped the New Zealand currency as it is currently down against all of its counterparts on the week. The modest sentiment shift certainly has a hand in this performance, but that doesn’t account for pairs like AUDNZD and NZDCAD. The kiwi is sporting its own troubles. A near-six year high from the Service sector activity reading for October was an outright support while the slight tempering in the 2-year inflation forecast for the 4Q (2.34 percent from 2.36 percent) likely carries more weight for the carry currency. RBNZ Governor Bollard has warned about exactly what carry traders are looking forward to – that an eventual hike will likely prop up the currency. Yet, the timing of that first move is still intangible – even if the 12-month forecast is calling for a cumulative 84 bps of hikes.

Gold Ends Rebound Effort, A $1,265 Break Dangerously Near
A hard-won rebound from gold through the second half of last week carried little of its optimism over to Monday. The metal dropped 1.2 percent to bring the four-month range low around $1,265 dangerously back into view. On all three of the commodity’s traditional measures of fundamental appeal, the day should have been a positive one. Risk trends that started in the green through the opening day were washed by the end of the US session. These past few weeks have offered a consistent easing in global inflation figures. And, the USDollar offers the alternative-to-currency appeal. Nevertheless, gold closed in the red. Gold bugs should take this as an indication of latent bearish bias for the metal – a market that minimizes ‘positive’ factors but readily acts on the ‘negative’, is bearish. Meanwhile, ETF gold holdings hit a fresh three-and-a-half year low 60.04 million ounces and speculative futures holdings – from the COT report – dropped the most since the week of December 7, 2012 (a net 34,671 contracts).

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