Talking Points:

Dollar Rebounds but Bulls Need Risk, Perhaps US Debt Concerns
Japanese Yen Crosses Rally Across the Board Despite Detrimental Risk Winds
US Oil Threatens Deeper Reversal as Volatility reading drops to Three-Month Low

Dollar Rebounds but Bulls Need Risk, Perhaps US Debt Concerns
The enthusiasm for yield-bearing and discounted risky assets following the Fed’s surprise ‘No Taper’ decision seems to have stalled quickly. That takes the pressure off the safe haven US dollar, but it doesn’t in turn open the door to a strong recovery. There is no doubt further premium held over from the misplaced assumptions of an immediate wind down of the central bank’s stimulus program that can still be worked off. That potential energy will likely curb easy runs by the troubled benchmark. Yet, there is still room for bulls to fully regain control given a more proactive backdrop for key fundamental themes. Risk aversion is still the most capable possible current to redirect capital flows – and in turn the dollar. We are already seeing a flag in exuberance through this quick stall in benchmarks like the S&P 500 to the extension of the QE3 program. An inevitable exit against the backdrop of excessive leverage and stagnate participation can soon take over the consensus outlook. A definable risk to focus concerns would best serve this scenario however. Coming just in time to flatten stimulus optimism, the debt ceiling debate is heating up once again. A contentious funding measure vote may be held today in order to avert an October 1 federal shutdown.

Japanese Yen Crosses Rally Across the Board Despite Detrimental Risk Winds
The bullish drive in capital markets was soundly halted through the US session of this past trading day. That same restraint should have theoretically percolated into the FX market by taming the carry trades. Instead, same yen crosses that were slow to react initially to the news of the Fed’s maintenance of loose monetary policy were forging notable breakouts when equities were flat-lined. Pairs like EURJPY, GBPJPY and AUDJPY posted notable breaks to multi-year and month highs; but the yen in fact dropped against all its major counterparts. This is an opportune time for monetary policy officials to press their hand. Instead, this morning’s BoJ Kuroda commentary was rather tame. If the broad appetite for higher return doesn’t build in the capital markets today, the yen crosses will level off.

Swiss Franc Boasts Market-Wide Climb after SNB Keeps 1.2000 Floor, Upgrade GDP Forecast
In a market made frantic by the quickly changing tides in risk trends, the typically submissive Swiss franc proved the strongest currency on the day this past session. Top event risk was the Swiss National Bank’s (SNB) policy decision. As expected, the group maintained the 1.2000 cap placed on EURCHF along with the threat to buy unlimited quantities of foreign currency in order to protect its artificial franc ceiling. Moving further and further form the global consensus of optimism and financial stability, the group repeated its concerns of a possible return of structural strife in the European region as one of its key reasons for maintaining the barrier. The threat hasn’t dissuaded the Swiss currency however. In fact, after writing off remarks that the currency is still viewed as expensive, the market picked up on the upgraded growth forecasts by the policy authority – projecting 1.5 to 2.0 percent growth versus 1.0 to 1.5 percent previously – as well as upgraded SECO GDP expectations.

Australian Dollar Tumbles Despite Strong Demand for Government Bonds
Fed by the backdraft in risk appetite following the Fed’s hold, there was a meaningful swell in for the Australian dollar heading into early Thursday trade. That strength was reversed however the following day. Has the demand for yield reversed so quickly? Looking at the sovereign debt market – a good baseline for carry trade interest – the 10-year yield dropped a massive 4.4 percent through the day. Yields move inversely to bond prices, so this is a robust sign for a currency that makes its name in the carry circuit. Meanwhile, the government auctioned off A$800 million in 5-year debt with a 5.5 percent coupon earlier today. The demand for 4.15 times the subscription was higher than the August auction while the 3.1923 percent market yield (another sign of confidence) was lower than the last sale.

Euro Investors Prepare for Weekend German Election
Risk measures have fallen across the globe in the wake of the Fed’s policy decision. That was no different for European markets. Whether we are looking at the equity-based VSTOXX’s 7 percent tumble, a near 25 percent drop in short-term implied EURUSD volatility figures or the 2.6 percent tumble in the Italian 10-year sovereign bond’s yield (to 4.287 percent); there is a material sense of reduced risk. For the last of that series of measures, we have an issue that still has room to play out. Following former Italian Prime Minister Berlusconi’s prepared statement on the possibility of his being expelled from Parliament – in which he didn’t use any language to threaten the fragile coalition – the market is assessing a lower risk of trouble arising from the Eurozone’s third largest economy. Yet, where fear may have been a little overblown for Italy, the market may be underplaying the possibility of trouble with Germany’s upcoming election. German Chancellor Angela Merkel is projected to maintain per position with a solid coalition, but any trouble here would be serious.

US Oil Threatens Deeper Reversal as Volatility reading drops to Three-Month Low
There are few capital market assets that do not benefit from lower volatility. For a market like equities, a greater overall level of activity for the market can translate into possibly dramatic moves against a trader’s position. Yet, for oil, the supply-and-demand factors behind the commodity mark volatility as a boon. That said, the tamed price pressures from a calming of the Syria conflict and the Fed’s move to support lower yields this week are calming the flood of demand for the natural resource. From the CBOE’s Oil ETF Volatility Index, we find expected activity levels (what many generally accept as a ‘fear’ measure) has dropped to 21.5 percent – the lowest reading since June 20. After two-and-a-half months of congestion, the $105 support is looking increasingly dangerous.

Gold Follows Incredible Rally with Tepid Follow Through
Wednesday’s 4.1 percent rally from spot gold – the biggest single day advance since last June – didn’t inspire much follow through. Where other markets are facing concerns over the sustainability of an escalating risk position, the metal doesn’t expose itself to such ebb and flow in traditional sentiment. In fact, gold’s own bullish effort is far more troublesome to support than those markets simply looking to exploit risk appetite. With a primary role as an inflation and dollar hedge, the commodity is finding little serious traction to promote its drive higher. Fed Chairman Bernanke made it a point to remark that inflation was not a risk, while the group’s forecasts reinforced that sentiment. The ‘No Taper’ decision would seem a natural booster as it dampens the dollar’s strength. Yet, this is not an expansion of a program – only a delay to its trimming. After the discount for that outcome is reversed, gold will once again fail the alternative safe haven litmus due to its volatility.

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