Forex: Dollar Rebounds as S&P 500 Threatens to Jump

Talking Points:

Dollar Rebounds as S&P 500 Threatens to Jump
New Zealand Dollar Outlook Has Grown Far More Bullish
Australian Dollar Fails to Leverage Jobs Data

Dollar Rebounds as S&P 500 Threatens to Jump
Where monetary policy speculation falls shorts for the dollar, risk trends can provide it seems. Despite the growing speculation and support for the near-term (perhaps even January) Taper from the Fed, the currency has remained on its back foot. Yet, one – albeit heavy – drop in the S&P 500, and the USDollar retraces all its losses from the previous day. The US benchmark equity index dropped 1.1 percent for its biggest decline in five weeks. Adding to the active ‘risk off’ picture, the VIX Volatility Index jumped 1.5 vols to 15.4 percent for the highest close in two months, the yen crosses dropped across the board and emerging market ETFs slid. As tantalizing as this may be for a volatility- and trend-starved market, the implications for something more prolific so close to the year-end drain are limited.

To establish a realistic forecast for risk trends, we should first identify the driving force behind this past session’s risk aversion move. More than a few headlines defer to speculation of a Fed Taper. This theme certainly does carry more than its fair share of influence, but there was no particular catalyst to feed that hawkish concern. The rumor of former Bank of Israel Governor Stanley Fischer (historically a hawk) leading the candidate pool for the Fed’s Vice Chairmanship came well after the drop was established. Furthermore, the timing of this fundamental theme is likely to curb the development of a sentiment trend as it is to spur it. Having already accounted for a robust round of employment data, optimistic group of Fed officials and close to an impending budget crisis; there aren’t many high-level catalysts to rally the rate hikes to the cause. Furthermore, we often see the period leading up to major event risk like next Wednesday’s FOMC decision dissuades major repositioning. A risk break is certainly a possibility, and it would be supportive of the dollar. Yet, establishing a lasting trend is a tall order.

New Zealand Dollar Outlook Has Grown Far More Bullish
With the Bank of Japan expected to deliver an upgrade to its open-ended stimulus program and the European Central Bank seen introducing a third LTRO-like scheme, there is a growing dovish lean. In a market that is seeking return in the traditional capital asset classes, that would mean the higher-yielding currencies (as well as those that have a hawkish outlook) should be in heavy demand. And yet, the New Zealand and Australian dollars continue to lag in key pairings like the yen and dollar crosses. This lack of strength is likely a side effect of risk-trend based distractions and will likely clear up in the first quarter. Meanwhile, the bullish pressure is growing especially intense for the kiwi. This morning, the RBNZ held its benchmark lending rate at 2.50 percent, but the commentary that came along with it was perhaps more incredible. Though Governor Wheeler suggested the exchange rates are not sustainable at current levels for the long-term, the market was focusing on his outlook for rates. Wheeler remarked that rates need to rise 225bps (2.25 percent) through the first quarter of 2016. This is very unique.

Australian Dollar Fails to Leverage Jobs Data
The Australian docket carried the exact combination of indicators to offer a complete picture of a major central bank’s typical mandate for monetary policy: employment and inflation factors. The December Consumer Inflation Expectation survey was the first release with a lift to 2.1 percent – further lifting the indicator from the 20-year low set in September. Meanwhile, the November labour report printed a 21,000-net increase in payrolls, which was more than twice the forecast. Yet, on both accounts, there is reason for pause. As much as the inflation figure improved, it is still very low. For the jobs report, an uptick in the unemployment rate to 5.8 percent curbs enthusiasm.

British Pound: 55% of Households Expected a BoE Hike in the Next Year
We know that interest rate forecasts amongst market participants have soared, and that has helped leverage an otherwise low yielding sterling against most of its counterparts. Yet, the extent of those expectations may be far more aggressive than many have suspected – leaving both consensus and currency open to normalization. According to a survey conducted by Markit of households, 78 percent of those that took part expected the BoE to begin hiking within two years and a remarkable 55 percent believe it will happen within the next year. While expectations don’t determine policy, the aggressive expectations and their influence on the sterling are worthy of reflection for traders.

Euro Ready for Draghi Speech, ECB Monthly Update
As the Fed debates Taper, the ECB looks to be heading closer to an inevitable stimulus upgrade. According to a Reuters poll conducted this week, over 60 percent of market participants believe a third Long-Term Refining Operation (LTRO) program will be introduced sometime early in 2014. That would be a dovish turn of events, but the scope of its bearishness is not clear. We will watch to see the likelihood of this Taper contrast in the upcoming session as ECB President Draghi testifies to the EU parliament on policy, and the ECB releases its monthly report.

Swiss Franc: What to Expect for the SNB Rate Decision
The Swiss National Bank is scheduled to announce its quarterly monetary policy decision at 8:30 GMT today. As has been the case through the 2013 meetings, this particular gathering is expected to yield no change in the benchmark nor in the central bank’s vow to ensure the 1.2000 EURCHF floor. However, a recent return to inflation, improved growth prospects and stable EU are lifting the costs of a zero-rate policy.

US Oil Drops Despite Second Largest Drop in US Inventories on Record
According to the Department of Energy’s figures, US crude oil inventories plunged 10.6 million barrels last week – a drop nearly four times what was expected and the second largest tumble on record. This reading is most likely season – but the severity is nevertheless extraordinary. Meanwhile, implied demand eased back only slightly from the previous period’s record high. And yet, oil dropped 1.1 percent.

Gold Mirrors the Dollar, $1,250 Now Support
As helpful as the dollar was to gold when it posted its impressive rally Tuesday, the correlation can work against the metal as well as we see this past session. With the dollar’s general advance – mainly against high-yielding currencies – the precious metal slipped 0.8 percent. We are still well enough above the $1,200 level that represents the floor to a more severe bear leg, but the immediate $1,250 support doesn’t present itself to be particularly robust. Taper speculation will be used a lot in this market going forward, so a view of the dollar, Treasuries and stocks is useful.**Bring the economic calendar to your charts with the DailyFX News App.

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