Forex: Dollar Back Three-Month Highs, FOMC Decision Ahead

Talking Points:

• Dollar Back Three-Month Highs, FOMC Decision Ahead
• Yen Crosses Return to Highs Despite Nikkei’s Hesitance
• Australian Dollar Collapses as RBA Governor Stevens Expects Sub-0.90

Dollar Back Three-Month Highs, FOMC Decision Ahead

The dollar rose against all of its major counterparts this past session – even the stubborn euro – and too much credit seems to go to Taper expectations for next week. While there is certainly speculation surrounding this event and its effects on the broader markets (whether the Fed decides to reduce stimulus or not), the argument is not so finely balanced nor the event risk hearty enough to generate such frequent swells. That may change next week, however, as we close in on the meeting. Meanwhile, the S&P 500 made a provocative move as it slipped below 1,780 to trade at a one-month low. While the traditional ‘risk’ theme is as impotent at generating trend as positioning around relative monetary policy at this stage of the year, it can still generate volatility with headline-worthy developments like a ‘head-and-shoulders’ technical break.

Heading into the final 24 hours of trade this week, the only docket item will fail to meet the current, high standards for market movement. The year-over-year, factory-level inflation (PPI) report is expected to pick up the pace from its three-year low of 0.3 percent to a more respectable 0.8 percent clip. This data will be summarily outranked by next Tuesday’s consumer-level (CPI) figure – though it should be noted, that the correlation between the two series is exceptionally strong. The main event next week will no doubt be the FOMC (Federal Open Market Committee) policy meeting on Wednesday at 19:00 GMT. This is one of the group’s quarter events where economic forecasts and a Chairman press conference will complement the usual statement. Though the consensus from the market, economists and primary dealers is for the first stimulus retreat to happen in the first quarter of 2014, there is enough speculation / fear that it happens in December that it can churn the markets. The question is whether there is enough speculative discrepancy or Fed surprise to overcome a seasonal wither.

Yen Crosses Return to Highs Despite Nikkei’s Hesitance

This morning, USDJPY has climbed above the May swing high at 103.74 – the peak following the first BoJ stimulus program – to tread five-year highs. Both the EURJPY and CHFJPY followed suit with new highs, though others were still attempting to scale their own peaks. The yen’s weakness Thursday into Friday morning was uniform, though its drive is somewhat reserved. With equities in the red this past session, it is difficult to feed the yield appetite in the low carry pairs. However, with the transition from the New York to Tokyo session, there was a material rebound in equities in particular. The Nikkei 225 futures were initially in the red in sympathy to the Dow Jones Industrial Average, but the Japanese benchmark was up over 1 percent by mid-day. The focus on trend, the probability of a BoJ QE upgrade next quarter (particularly against a Fed Taper) and steady risk trends alongside falling volatility support a buoyancy when we are in neutral. Yet, sizable risk moves can still disrupt their popular FX trend.

Australian Dollar Collapses as RBA Governor Stevens Expects Sub-0.90

Generally, exchange rates shrug off central banks’ and governments’ assessment of their exchange rates unless there is a genuine threat that it can lead to tangible action. In an interview with the Australian Financial Review Thursday morning RBA Governor Glenn Stevens repeated his concerns about the expensive Aussie dollar and its effects on exports. His suggestion that he would prefer a lower exchange rate rather than lower rates came off as a veiled threat. Yet, he didn’t go so far as to say something would have to be done if the FX market hadn’t behaved as he hoped, only that he expects the AUDUSD rate to be below 0.90 in the medium-term.

British Pound Expecting Another Important Economic Update for Rate Forecasts

Interest rate expectations are the backbone of the sterling’s strength. Looking at the yield differential between two-year UK gilts and US Treasuries, the former is trading at a 16bp premium and has been positive since the beginning of August. This highlights a comparison between two leading rate-distracted currencies. Where the shift in time frame for the BoE’s first hike has moved up from 2016 to 2015 (with some even believing a move could come as early as next year), the Fed has been given limited credit. Looking ahead to next week, we have another round of key data for speculating on UK monetary policy. Most important will be the November CPI and employment figures.

Euro Wavers at 1.3800 as Draghi Talks LTRO, Economic Forecasts Slip

Rather than move on to its eighth consecutive advance and topple a bull record that has last been matched way back in September 2009, EURUSD dropped 0.2 percent through Thursday’s session. As is the pace of current market conditions, this wasn’t enough to signal a major reversal of trend, but it has effectively taken the wind out of the currency’s sails just as a heavy level of resistance has come into view above. From this past session, ECB President Draghi was testifying on the possibility of another LTRO-like program; but nothing decisive was offered.

Swiss Franc: SNB Maintains 1.2000 EURCHF Floor, No Intervention Since 2012

The SNB (Swiss National Bank) kept its zero interest rate policy and its threat to use all the tools in its arsenal to prevent EURCHF from dropping below 1.2000 – should it be needed. From the pair’s bearings this past year, it hasn’t been. According to the central bank, they hadn’t been active in FX since September of last year. They did discuss other options though. Perhaps this continuous hover may elicit more.

New Zealand Dollar: What Does it Take to Draw Capital to Kiwi Yields?

By the end of the first quarter 2016, the New Zealand benchmark lending rate is expected to be 4.75 percent. That is a forecast for 225 bps worth of hikes (2.25 percentage points) and it was made by the RBNZ Governor himself yesterday. So what has that done for the kiwi? Little – besides where the weak Aussie and yen are concerned. New Zealand is stuck in Australia’s wake, but that yield outlook is far more convincing.

Gold’s 2 Percent Drop May Turn into $1,200 Break if Dollar Continues

So much for the bull run. Gold followed up on Wednesday’s slip with a much more convincing 2.1 percent drop this past session. The dollar was a material catalyst to that move – as it was for much of the legitimate store-of-wealth fiat currencies. Looking at ETF holdings of the precious metal, a new multi-year low of 58.3 million ounces speaks to unwinding that is likely to be matched in today’s COT figures of futures speculators (for the week through Tuesday). If a break is made below $1,200, we should be skeptical until the Fed gives us word next Wednesday. **Bring the economic calendar to your charts with the DailyFX News App.

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--- Written by: John Kicklighter, Chief Strategist for DailyFX.com

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