Talking Points:

Dollar Wins First Advance in Five Days as S&P 500 Breaks 7-Day Rally
Euro Fundamentals May Hit a Nerve as Officials Meet on Greece, Cyprus, Economy
New Zealand Dollar: How Far will the RBNZ’s Hawkish Lean Carry the Kiwi?

Dollar Wins First Advance in Five Days as S&P 500 Breaks 7-Day Rally
Though it was a modest effort, the USDollar managed to pull out of a painful four-day slump this past session. It is no coincidence that this move to stabilize by the safe haven currency comes on the same day the S&P 500 ended a seven-day rally. The correction from the benchmark index – a favored measure of speculative appetites and confidence in stimulus – is predictable given the fundamental threat that lies ahead and the incredible run that has pushed the market back within reach of the 1,700-figure and ultimately record highs. There is serious debate over how far the financial markets have gone to price in the likelihood of a $10 to $15 billion reduction in the Fed’s monthly $85 billion-per-month QE3 effort. Some key market barometers like US Treasury yields, emerging markets indexes and gold have suffered sizable adjustments in anticipation of a diminished Fed presence. Yet, US equities have stood as a bastion against a rising tide of speculative deleveraging. The probability of a wind down is certainly not lost on this market, and it is extraordinarily exposed. Such risk presents a considerable opportunity for the dollar. Waiting until the dam breaks bolsters the threat of a disorganized flight to safety – exactly the conditions the greenback prefers.

Euro Fundamentals May Hit a Nerve as Officials Meet on Greece, Cyprus, Economy
Over the past weeks, we have seen the euro press on through event risk that raised the possibility of a rate cut, undermined hopes of an economic recovery and threatened to push out bailouts to an indefinite future. Against this fundamental flood, it would seem that the euro’s progress is unstoppable. Yet, we simply haven’t found the correct mix to expose the troubles the region faces. A general shift away from high ‘risky’ assets via a structural sentiment shift would quickly find the euro regrouped as a risky currency with excess premium. Yet, we also have a series of event risk that can start the fire internally. Eurozone meetings on Greece, Cyprus, the economy and banking union are on deck.

Japanese Yen Gains Traction as Risk Hand Cools, Abe Discusses Tax Hike
As political discussion continue, sources quoted by Japanese news agencies Kyodo and Jiji Press have suggested that Prime Minister Shinzo Abe is planning to go ahead with the April sales tax hike from 5.0 to 8.0 percent. Given Japan holds the title of the largest relative debt load of the developed world and there are reasonable concerns that confidence in Japanese Governor Bonds (JGBs) will collapse if it goes unaddressed, the move is considered necessary by most. The concern, however, is that the increased levy could stall the country’s nascent economic recovery. According to the reports, the solution will be to introduce a $50 billion economic stimulus program alongside the burden. For short-term impact, this news will compete with crosswinds from the US monetary policy expectations. Yet, beyond the Fed event, this move could represent a hurdle to beating deflation while simultaneously dimming the prospect of more monetary policy aimed indirectly at devaluing the yen. If a general ‘risk aversion’ move gains traction in the global financial markets, the yen crosses will be more exposed.

New Zealand Dollar: How Far will the RBNZ’s Hawkish Lean Carry the Kiwi?It isn’t difficult to tell how aggressive the New Zealand rate outlook seems to the speculative markets. Following the Reserve Bank of New Zealand’s (RBNZ) confirmation of forthcoming 2014 rate hikes this past session, the New Zealand dollar rallied against all of its major counterparts – even the safe havens which were gaining a foot hold through the same session. Swaps show a robust 95 basis points worth of expected rate hikes from the central bank through next September – outpacing the hawkish sentiments in all of its major counterparts by a wide margin. That said, the forecast is only 5 bps higher than what was priced into the market before the event. Furthermore, hope for future yield won’t offset meaningful risk aversion adjustments moving forward. For fundamental watchers, the RBNZ will report the percentage of government bonds held by foreign investors for August. That is an important gauge for an ‘investment currency’.

Australian Dollar Fragile after Jobs-Spurred Tumble, Risk Sensitivity Increased
The initial reaction by the Australian dollar to Thursday morning’s disappointing jobs data was sharp; but, so far, there is limited follow through on the short-term breaks from pairs like AUDUSD, AUDJPY and AUDNZD. Certainly the 20-year low in consumer inflation expectations (1.5 percent) and the unexpected 10,800-position drop in August employment carry negative connotations for interest rate forecasts. However, the market’s view for further easing by the Reserve Bank of Australia (RBA) seems to be more restrained than what we were seeing just a month ago. Looking to overnight swaps, the 12-month interest rate forecast is little changed after the data – pricing in little more than a 10 percent chance of another 25bp cut by the central bank within the year. Yet, it is important not to grow contented with the currency’s stability. The one-month correlation between AUDUSD and the S&P 500 hit a five-year low in August, but that relationship is quickly returning to normal.

British Pound Little Moved after Carney Testimony, But Gilt Yields Slide Below 3.00%
A day after GBPUSD made its dramatic break above 1.5750 on to seven-month highs, conviction seems to have dried up for the sterling. In fact, the currency was virtually unchanged Thursday against the majors. Under normal circumstances, the currency may have extended the volatile swell following the better-than-expected employment data reported Wednesday on momentum alone. Yet, the backdrop is proving more introspective of the underlying fundamental conditions than many expect. The downtick in the jobless rate to 7.7 percent draws the economy closer to Bank of England’s new target of 7.0 percent, but rate speculation may have already moved too far too fast. This past session, BoE Governor Carney and fellow MPC members testified to Parliament. The central banker reiterated his 2016 timeline forecast for keeping rates low. While the sterling didn’t suffer for this echo, gilts did gain. The 10-year yield has dropped back below 3.00 percent.

Gold Collapses 3.2 Percent in a Dramatic Break Below $1,355
There have been few, aggressive and volatility-rich moves from the broader capital markets over the past few weeks as investors prepared for the release Federal Reserve’s decision on whether or not to alter its stimulus program moving forward. However, there have been a few standout moves – and gold has just added itself to that list. Having retreated to $1,355 mid-week, the metal was sitting on a level that has arrested momentum both as support and resistance over the past four months. With debate, uncertainty and complacency developing for the metal before the central bank possibly curbs its inflation-stoking QE3 program; short-term speculative interests unwinding their trades before the prominent event isn’t surprising. Gold ETF volume this past session hit its highest level since the market set its peak back on August 28.

**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar

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