Talking Points:

Dollar Ready for NFPs Volatility
British Pound Prone to Reversal as BoE Minutes Closes In
Australian Dollar Facing Expected Cooling in 3Q Inflation Figure

Dollar Ready for NFPs Volatility
Both the dollar and capital markets were stoic through Monday’s session as the speculative ranks await the release of a particularly important US employment report. Looking beyond the normal preoccupation with this series and the volatile reactions to ‘surprises’ (deviations from the consensus), this particular update will be uniquely market moving. Typically, this data prints on a Friday which both curbs trend development in the leads up and dampens follow through due to the weekend drain. This Tuesday report, suffers neither disadvantage. Where the September labor report really shines though is not in its shock value, but its implications for important monetary policy assumptions. Following the FOMC’s surprise decision to defer its Taper in September and the tone of uncertainty from Committee members since the US Government shutdown and shaved down growth amid delayed key data, we have seen economists’ forecasts for the first QE3 reduction pushed all the way out until March. The market is likely on the same page. That sets a very dovish, risk-on tone. Yet, that also establishes a heavy bias that can reverse.

British Pound Prone to Reversal as BoE Minutes Closes In
For GBPUSD traders, the focus over the coming 24 hours is clear: a significant change in expectations for US policy bearings and underlying risk trends can stir volatility and a heavy swing for the pair. Yet, individually, the sterling doesn’t have a particularly remarkable exposure to these more dominant themes of ‘risk’ and dollar fitness for reserve status. What guides this currency against its range of pairings is the other benchmark for FX fundamentals: interest rates. Last week, Bank of England Chief Economists Spencer Dale reinforced one of the market’s most aggressive rate forecasts by suggesting that 2015 was a like time frame for the central bank to tighten – despite the forward guidance stating explicitly 2016. BoE member Ben Broadbent made a modest effort Sunday to balance the ship when he said he doubted a hike before the forecast, but the market was unconvinced. The true weigh in comes with Wednesday’s BOE minutes. Will the tone soften?

Australian Dollar Facing Expected Cooling in 3Q Inflation Figure
A day before the Australian Bureau of Statistics releases the third quarter Consumer Price Index (CPI) stats, the market has pulled back on its expectations for a timely RBA rate hike. Looking at swaps, the probability of a 25bp rate hike over the next year has pulled back to 30 percent. The first full hike isn’t expected until well into 2015 according to the curve. While the Aussie dollar maintains a yield advantage over most majors, an aggressive forecast for policy tightening is key to building premium in a market already extended on its exposure to historically-low carry. As such, Wednesday’s CPI data is particularly important. Not a good position for an expected slowing in the headline figure…

Euro Follows Capital Markets, Unconcerned About German and Greek Warnings for Now
There were a few unflattering fundamental updates through the open of the week for the Euro. Aside from the in-line, record 90.6 percent Eurozone government-debt-to-GDPreading for 2012, there was more timely and unaccounted-for headlines. From the Bundesbank (the central bank of Germany), the monthly report repeated its warning that 3Q GDP likely slowed from the previous period’s robust performance while simultaneously issuing a warning that areas of the country’s housing sector may be as much as 20 percent overvalued. From the ‘core’ to the ‘periphery’, there were many unsettling headlines from the more troubled cadre of Eurozone members. Reports that Troika leadership was readying demands for more austerity from Greece amid doubts over primary surplus forecasts were met by accounts that Greek policymakers were going to rebuff further cuts and ask for further debt relief. Elsewhere, Portugal’s Economy Minister said no precautionary credit line was being prepped for its return to the market and Slovenia was told it can solve its own banking issues.

Japanese Yen Stumbles on Record Trade Deficit, More Stimulus?
It isn’t difficult to encourage Japanese policy officials to ever greater levels of stimulus. Yet, they are starting to run out of effective policy room…at the same time that exchange rates and economic data are flagging. From the data front, the calendar opened with Japan’s September trade figures. While better than expected, the ¥1.09 trillion deficit on the month was nevertheless a record. For a county that is struggling to generate growth domestically, this is a troubling trend. Meanwhile the yen crosses have notably struggled to find traction in drive further highs beyond the April peaks immediately following the BoJ’s stimulus induction. Momentum following the unprecedented $70 billion-per-month stimulus program is less influential for follow through than an appetite for carry that finds the yen feeding yield demand. Therein lies the problem for a market already over-reaching for tepid yield.

Canadian Dollar Traders Absorb Retail Sales Before BoC Decision
Ten-year Canadian sovereign bond yields dropped two a two-month low this past Friday. Still above 2.50 percent, it would seem that there is plenty of buoyancy to this yield. However, this currency falls far short of the carry trade clout that its Aussie and Kiwi counterpartsflaunts. In fact, using 10-year Treasury yields as a benchmark, the US provides a higher yield than Canada. And, it has maintained that premium for 110 consecutive trading days. That is the longest stretch since November 2007. While short-term rates are still significantly in the loonie’s favor, the relative carry strength of the currency is apparent. Despite a benchmark rate of 1.00 percent, the Canadian dollar is still short on meaningful yield while investors are scrambling for any return they can make. An outlook for rate hikes that precedes counterparts can potentially reverse this disadvantage. Before Wednesday’s BoC rate decision, we will look for economic strength in August retail sales.

Gold Ready for NFPs Turbulence Following Quietest Day in Six Months
The daily range for gold through Monday’s session was a mere $11.03. That is exceptionally quiet – in fact, the most reserved trading session since April 1. The comparison should stand out to metal traders. Conditions changed dramatically for gold on April 12 when it began a two-day, 14 percent plunge. Since that remarkable stumble, both actual and expected volatility have carried a trace of tension seen both in an elevated daily range and medium-term implied volatility (from the CBOE’s Gold ETF Volatility measure) above 20 percent. It is no coincidence that this return to silence comes just after a meaningful trendline break and before an important US-based event risk. Given the NFPs’ ability to tap into Fed monetary policy expectations, this data is particularly important for commodities traders. Should we see confirmation of a topped off QE3 for the next five months, the low-yield environment and fiscal uncertainties push more capital towards gold.
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ECONOMIC DATA

GMT

Currency

Release

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1:30

CNY

Property Prices (SEP)

With property prices in tier one cities rising in excess of 10% MoM, market participants may begin to grow wary of this unsustainable trend.

2:00

CNY

Conference Board Leading Economic Index (SEP)