Talking Points:

Dollar Strengthens Alongside Equities on Yellen Testimony
Yen Crosses See USDJPY Above 100, GBPJPY at Four-Year Highs
Euro Slips Versus Dollar, Pound after Tepid GDP Data

Dollar Strengthens Alongside Equities on Yellen Testimony
One of the implicit objectives of the major central banks is to dampen volatility in exchange rates and capital markets. Mission accomplished for the Fed this past session. In releasing the prepared remarks for Federal Reserve Vice Chair Janet Yellen’s confirmation hearing ahead of time, the market capably adjusted for her dovish tone with a S&P 500 nudge to record highs while the dollar slipped the most since it bottomed last month. In her testimony, Yellen maintained the accommodative language we have come to expect from the FOMC overall. The central banker’s insistence that support should not be removed too early – as it would threaten the economic recovery – does little to displace the market’s assumption of a March Taper. At the same time it does keep the door wide open to speculation.

While there is limited revelation from which the masses can build a new trend around from the likely, future Fed Chairperson’s views; there seems a more substantial change in the global financial system. The temperate GDP figures from the Eurozone and Japan have leveraged speculation that the ECB and BoJ have the necessary support to justify fresh rounds of unorthodox monetary policy in pursuit of stability and durable growth. We are returning to a state of ‘stimulus wars’ – no one will admit to trading shots in a ‘currency war’ – and the Fed isn’t the most aggressive group in town. This may work in favor of the dollar even if risk trends rise, but it will also curb momentous trends along the way.

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Yen Crosses See USDJPY Above 100, GBPJPY at Four-Year Highs
This past session, USDJPY closed above 100 for the first time since September 10 and broke a multi-month congestion pattern along the way. Traditionally, clearing a major technical hurdle is considered a signal for a new trend. Yet, overtaking a psychological level does not secure momentum for a trend – and this is particularly true for this pair and the yen crosses in general. The ingredients are there for a sustained depreciation in the Japanese yen. The BoJ already has a massive stimulus program at work, the government is engaging stimulus, there is a reach for yield on the back of carry and there is a serious forecast for QE2 early next year. Yet, risk is not cheap and a April is far off.

Euro Slips Versus Dollar, Pound after Tepid GDP Data
Top event risk for the Eurozone this past session were the first readings of 3Q GDP data. The Eurozone grew 0.1 percent through the quarter – in line with expectations. From the core, Germany cooled while France and Italy contracted 0.1 percent. The periphery continued to show improvement but both Cyprus and Greece were still deep in recession. Overall, this is kind of soft data that a dovish leaning market will interpret as evidence that a new large-scale asset purchase program (LSAP) is sound policy for the ECB. Indeed, short-term market rates are at a 5-month low. Yet, we should also keep an eye on the discussion of rescue programs as some are soon to exit and others are grumbling.

British Pound: Where is the Follow Through on Reinforced Rate Expectations?
You would hardly be able to tell from the sterling’s performance that earlier this week, the Bank of England endorsed bulls’ expectations that a 2015 rate hike was a real possibility. With the central bank opening the door to a more timely return to higher rates with the updated forecasts from the Quarterly Inflation report, there is vindication but little repositioning. The swaps curve shows little adjustment to a more bullish future and the 10-year gilt yield dropped 5 bps Thursday to 2.76 percent (a mere 6.5 bp premium to the US). This may be a sign that the market effectively priced in the more aggressive outlook starting in July – despite of the BoE’s consecutive guidance through that period. This speaks to a greater equilibrium than some may otherwise expect and/or hope for. A ‘priced-in’ run could work against a pair like GBPUSD.

Canadian Dollar Sees Mixed Picture as Data Improves, BoC Dovish
Ever since the Bank of Canada changed its course of persistent warnings of a necessary rate hike in the foreseeable future to a genuinely neutral path, the fundamental picture for the Canadian dollar has growth increasingly muddled. As a carry currency, the two-year (appropriate time frame for expected first monetary policy changes) Canadian note’s yield is a modest 81 bps over its US counterpart. Meanwhile, the loonie stands at a hefty discount to its Aussie and kiwi counterparts. On the data front, there is limited support for that hawkish return. Housing sector inflation has tempered recently (a bubble risk) and the international trade deficit has contracted, but these are hardly policy changing developments. With a tepid global growth forecast and thin return, both AUDCAD and USDCAD may make moves higher.

US Oil Attempts to Consolidate after Bear Wave, Trend Ominous
The bear wave is starting to cool. US oil closed Thursday a modest $0.13 lower, further reducing the commodity’s close-to-close moves. Consolidation is an encouraging sign for bulls as it can act as a launching point for an eventual recovery. Of course, a level bearing is not a bullish one. Another sign that stimulus hopes are not readily translated into growth expectations, we find crude prices are showing little of the buoyancy that would be expected in a second wave of global monetary easing. Meanwhile, the traditional measures of supply-and-demand have offered a mixed picture. The US Department of Energy inventory figure for last week unexpectedly jumped 2.64 million barrels, though the implied demand figure increased the most in five months to 15.45 million barrels. For a trading assessment, the discount of WTI to Brent (US to UK standard grade) is at an 8-month high $14.78, while open interest on US futures is at a similar record low (1.709 million contracts).

Gold Has Seen Surprisingly Little Traction on ECB, Fed Dovishness
By most accounts, the tally on global monetary policy has taken a turn towards greater easing. This past session, Janet Yellens’ confirmation testimony reaffirmed her bearish sentiment – even if it is not a confirmation of QE forever – and European GDP figures further legitimized any easing plans the ECB is preparing to implement. Yet, despite the sentiment surrounding these key programs (not to mention the tangible outlook for the BoJ’s second stimulus move), gold has gained decidedly little traction. Though up two days in a row and 2.0 percent from its swing low, this is not the clamor for an alternative to devalued currency one would expect. This is no doubt due in part to questions over the reasonable expectations for expanding central bank balance sheets, but there is also a sense of doubt on the metal’s part. The severe bouts of volatility gold suffered on the retracement and the permanent reach for yield (no income is gained on this asset) are keeping the market under wraps. Meanwhile, aggregate open interest in futures has hit a three-and-a-half month high while ETF exposure remains at a multi-month low.

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