Talking Points:

Dollar at Risk of Breakout on GDP, Trend May be NFPs Call
Euro Ready to Rally or Collapse on ECB’s Word
British Pound: BoE Decision Unlikely to Feed Yield Speculation

Dollar at Risk of Breakout on GDP, Trend May be NFPs Call
There are few indicators as comprehensive in assessing the US economy’s health as the quarterly GDP readings; and for that reason, the upcoming 3Q update can generate meaningful volatility for the dollar and capital trends. On the other hand, there is a difference between tapping into volatility and taking control of the market’s overall trend. For the growth report, the standard for influence rests in its ability to redefine the FOMC’s Taper time frame and/or alter investor confidence. Though the GDP report has scope, it is a dated release and will not likely alter policy efforts unless there is an extreme deviation from the acceptable bounds of Fed and market forecasts. Meanwhile, Friday’s October NFPs is already tormenting yield forecasters that want QE to continue ad infinitum and those that want it to Taper posthaste.

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Euro Ready to Rally or Collapse on ECB’s Word
The euro has made relatively little headway this week following the hefty tumble the shared currency suffered the previous week. The disappointing Eurozone inflation report last Wednesday in particular revived a dormant concern for a currency otherwise enjoying a quiet bid from reserve diversification: the possibility of fresh stimulus. With EURUSD over 2 percent off the two-year highs set on the October 25, we are in a sweet spot for speculators where the euro has plenty of room to either rally or collapse depending on what the ECB (European Central Bank) decides with its monetary policy decision. If, on the one hand, the group decides to maintain a tacitly hawkish bearing (the repayment of the LTRO loans by banks is reducing the central bank’s balance sheet steadily); the recent pullback could leave the euro open to a bounce. It should be said, however, that a relief rally requires ECB President Draghi avoid stoking expectations of an eventual rate hike or stimulus increase anytime in the near future in his press conference (13:30 GMT). Alternatively, if policy setters decide disinflation and persistent trouble for the periphery warrants more accommodation, there is plenty of premium for the euro to work off.

British Pound: BoE Decision Unlikely to Feed Yield Speculation
In contrast to its Eurozone counterpart, the UK central bank will struggle to elicit volatility from the British pound. Expectations heading into the BoE’s (Bank of England) policy gathering are uniform for no change to either the 0.50 percent benchmark lending rate or the £375 billion bond buying program. And, Governor Mark Carney seems content with following the tradition that no change in policy warrants no updates from the Committee. For the sterling trader, that means there is no rhetoric with which to speculate a time frame on the eventual rate hike from. We’ve seen a general rebound for the pound so far this week which suggests that some rate speculation has built up on recent, robust economic data. No satisfaction from local monetary policy channels may leave the sterling exposed to big euro moves.

Australian Dollar Drops after Jobs Report Dampens Rate Hopes
With another disappointing fundamental turn, AUDUSD quickly returned back to 0.9465. That is the same level the benchmark pair fell to Tuesday morning after the RBA refused to reward hawkish forecasts and again repeated its lament over a high currency. This time around, though, the Aussie dollar’s drop was more aggressive and its catalyst less ambiguous. The 55-pip drop this morning was sparked by the disappointing showing in the October labor figures. The 1,100-position increase in net payrolls was below consensus (10,000), but the real concern was in the details and what it means for the currency’s bigger selling point. A general trend in the jobless rate finds the percentage just off four- year highs. Equally troubling, total full-time employment levels have started to pitch lower. This matters to FX traders as a downturn in labor trends curbs the RBA’s need to raise rates as it would unduly pinch growth. The rate outlook is down 6 bps this morning.

Canadian Dollar Rallies on Strong Business Activity Report
The Canadian dollar proved the strongest of the majors this past session. Though its rally (0.1 percent versus the euro to 0.5 percent against the yen) wouldn’t match the magnitude of the kiwi before it, the consistency was unmistakable. This move was clearly data derived – and thereby offers little hope for follow through without a further catalyst to reinforce the drive. For Wednesday, expectations for volatility originating from the data on tap was set low. The softer than expected 1.7 percent rise in building permits disarmed fundamental traders. That said, the Ivey business activity survey for October more than compensated. The 62.8 reading was the biggest positive ‘beat’ for the series since March 2011 and was an encouraging read for a currency troubled by the recently softened tone from the BoC on an eventual rate hike.

US Oil Posts Biggest Advance in 5 Weeks – Breather Rather than Trend
Oil (the active WTI contract) prices jumped 1.5 percent this past session. As the largest bullish jump in five weeks, that may seem an encouraging development for bulls. When put into context, however, optimism quickly cools into caution. The hearty jump was made from a five-month low following a 17 percent peak-to-trough, two-month bear wave. In the meantime, we find a material deviation from the US-based crude’s performance and the rest of the energy complex. While both natural gas and heating oil diverged were off course, it was Brent oil’s (the UK benchmark) tepid performance that suggests that the jump is more volatility than trend. We don’t have to look far to find the source of the off-balance move. The US Dept of Energy’s inventory figure for last week dropped back to 1.58 million barrels – the lowest since September 13 – while implied demand rose from a five-month low to 14.86 million barrels. A risk move today can prove a ‘great equalizer’.

Gold Breaks Bear Trend as Traders Await Stimulus Updates
A small victory for gold bugs. The precious metal advanced 0.5 percent through Wednesday’s session and subsequently broke a six-day bear trend – the longest slide since May. Yet, the positive close is a technicality rather than the institution of a meaningful trend. Whether we are looking at the second lowestvolume day for gold ETF and Futures trading in three months or the lower tier event risk on the economic docket, there wasn’t a strong push to be found for the market. We won’t be so afflicted over the next 48 hours. The kind of traditional event risk that stirs gold to volatility and trend taps into its ‘alternative asset’ appeal. That is the perfect the position for today’s ECB rate decision and US GDP report. As the only major central bank actually seeing its balance sheet contract (due to the LTRO reductions), a change in course could materially alter the pace of global stimulus. Yet, for full stride, gold may very well wait for guidance from its primary FX alternative – the US dollar. While the growth report will no doubt stir the greenback, it will likely be Friday’s labor data that sets a dollar trend.

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ECONOMIC DATA

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0:30

AUD

Employment Change (Oct)

10.0K

9.1K

Employment trends are starting to take a downward tack which in turn could stymie the RBA’s eventual shift towards tightening monetary policy