Gold Gains but no Closer to $1,400 – Will the Fed Will Provide?
Dollar Builds Breakout Pressure Ahead of FOMC Minutes
While EURUSD soared to a six-month high this past session, the Dow Jones FXCM Dollar Index presented a currency dangerously restrained ahead of dangerous event risk. A measure of activity, the USDollar’s 5-day Average True Range is the lowest we have seen since May 18. That happens to draw a comparison to a period of quiet that preceded a remarkable greenback rally. Technical considerations and inter-market relationships suggest the benchmark currency is indeed positioned for a breakout. However, a high probability volatility event does not insinuate a specific direction. That likely depends on how the FOMC minutes are interpreted by market participants. If the transcript undermines the September Taper time frame, the deferment may not salvage risk trends but it could still force a bearish dollar break. Alternatively, reinforcing the progression in the wind down will run on two gears: mild reassurance that modestly boosts the USD and unleashing pent up risk aversion.
Euro Rallies Despite Tumbling European Stocks, Bonds
The euro was a contradiction Tuesday. The currency rose against most counterparts – with the exception of the Swiss franc – yet market conditions and the fundamental backdrop did little to support the move. Looking to European capital markets, the benchmarkequity indexes were a sea of red with the Euro Stoxx Index posted a 1.3 percent slump. Meanwhile, sovereign yields offered up a material drop in periphery bonds with the Greek 10-year yield rising 25 bps and Spain’s advancing 5 bps. Furthermore, the newswires did little to inspire bulls. The Bank of Greece reported an uptick in its dependency on ECB liquidity through July while German Finance Minister Schaeuble remarked the country will require yet another aid program. Yet, without a footnote of refusal to participate, this can be read as preapproval of Germany’s support. Today, ECB Asmussen will be in Athens discussing the adjustment plan with Greek officials.
Emerging Markets Currencies and Bonds Collapsing on Flight to Quality
Over the past three months, many of the Forex market’s better-known emerging market currencies have been battered. The Brazilian Real has led the tumble with a 14.8 percent plunge – an incredible move that reflects something more prolific than a localized economic or financial shift. According to a recent report by Bloomberg, emerging market ETFs have suffered withdrawals of $8.4 billion so far this year while the influx of funds into US-based funds swelled. This is a flight to quality move for capital spurred by concerned about rising costs in maintaining the high-risk and historically low return of emerging market-backed carry. Officials in Brazil, India and other EM countries have recognized the outflow and its spark – the Federal Reserve. Calls for the US central bank have ranged from maintaining QE3 to better clarifying their intentions.
New Zealand Dollar Suffers Biggest Drop in Six Weeks after RBNZ CommentsThe New Zealand dollar was by far the worst performing of the majors this past session with a slide that range between 0.7 percent (NZDCAD) and 1.9 percent (NZDCHF). Given the leveling off in equities as the day progressed from Asian to European to US session, a simple ‘risk aversion’ theme does not accurately cover the particularly poor performance. We were dealing with something particularly inherent to the currency. On the calendar, the pickup in the RBNZ’s 2-year inflation expectation indicatorfrom a 13-year low in 2Q to 2.4 percent for the current period is a reading that would support bulls. That said, the kiwi dropped as did the 12-month rate forecast (down 12 bps from its two-year high 86 bps measured Monday). The source of this move was the RBNZ’s announcement that it would limit new mortgages for over 80 percent of property values to only 10 percent. And, for good measure, Governor Wheeler said the kiwi was still overvalued.
Australian Dollar: RBA Minutes Suggest Cuts are Still Possible
After the RBA’s 25bp rate cut on August 6th, the Australia dollar proceeded to rally against the dollar and Japanese yen amongst other pairings. That was an unusual outcome for a high-yield currency that had just seen its return shrink. That response revealed how exposed the market is to rate speculation and how heavily discounted the cut was ahead of time. The statement that accompanied the decision offered a subtle change in tone that suggested the central bank was near the end of its rate cut regime. Traders responded by bidding the currency higher and leading swaps to project no further easing from the RBA over the forthcoming 12 months. However, the market leveraged a rather minute shift. In the minutes from Tuesday morning, the group made sure to reiterate further cuts were ‘possible’ if not ‘imminent’.
Canadian Dollar Tumbles after Sharp Drop in Wholesale Sales
Though there wasn’t much in the way of scheduled event risk for the majors this past session, there was enough to drive the Canadian dollar lower against most of its major counterparts. Typically, the Wholesale Sales report is considered and treated like a second-tier economic release – meaning the market accounts for the downstream adjustments to data like GDP and labor trends but otherwise avoids short-term volatility on its release. Yet, with a significant enough outcome, most secondary indicators can stir the market (as it is easier to make the connection to those considerations that really matter to FX and rate traders). The 2.8 percent drop in sales for June was the sharpest since January 2009 and broadly based. For USDCAD traders, the 10-year yield spread is currently13 bp. If that gap increases, the pair will continue to climb.
Gold Gains but no Closer to $1,400 – Will the Fed Will Provide?
A modest 0.4 percent advance Tuesday for gold notched a rebound from Monday’s reversal back below the 100-day moving average and tallied the fourth advance in five trading days for the metal; but we are no closer to taking out $1,400. If there weren’t a prominent event risk that threatened the US dollar in the coming 24 hours, the currency alternative may have been able to develop better progress. However, knowing that the greenback is prone to a breakout and faces the Fed’s transcript from last month’s meeting as a possible catalyst; the commodity will struggle to move on secondary considerations – like a speculative rebound. Meanwhile, the discussion of demand for gold across different products has developed traction. ETF holdings of the precious metal have dropped 26 percent since the December – though it has recently leveled off. Futures interest has suffered a similar rout as speculative positioning measured by COT is just off an eight-year low and recently open interest has dropped 14 percent. That leaves physical demand. Difficult to measure, that demand should reach derivatives.
Yesterday’s RBA meeting minutes seemed to suggest consideration for further but not imminent easing by the central bank. Economic data pointing to slower economic growth in Australia and its trade partners could lead traders to speculate for monetary action in the near term.
1:00
AUD
DEWR Skilled Vacancies (MoM) (JUL)
-1.80%
2:00
CNY
Conference Board China July Leading Economic Index
In June, credit card spending grew the most year-over-year since December 2011. As expectations for the RBNZ to raise interest rates build, a report that indicates higher consumption could further fuel such speculations.
This is yet another measure of domestic consumption. This sector could see a decline as recent sales figures from convenience stores and department stores have reported year-over-year decline.
The UK is expected to be a net lender for the month of July. Having surplus funds could be favorable for economic growth. With the recent reversal in economic performance, the potential for higher growth could fuel speculation for tighter monetary policy from the Bank of England.
8:30
GBP
PSNB ex Interventions (JUL)
-2.9B
8.5B
8:30
GBP
PSNB ex Royal Mail, APF (JUL)
-3.1B
12.4B
8:30
GBP
Public Finances (PSNCR) (Pounds) (JUL)
-8.7B
3.1B
10:00
GBP
CBI Trends Selling Prices (AUG)
3
2
10:00
GBP
CBI Trends Total Orders (AUG)
-8
-12
11:00
USD
MBA Mortgage Applications (AUG 16)
-4.70%
Home sales are expected to increase for the month of July. More home sales could lead to higher consumption as sellers spend their capital gains. However, the key US event risk will be the release of July FOMC meeting minutes. Investors will likely be dissecting its rhetoric to weigh their expectations for Fed monetary policy.
14:00
USD
Existing Home Sales (MoM) (JUL)
1.40%
-1.20%
14:00
USD
Existing Home Sales (JUL)
5.15M
5.08M
14:30
USD
DOE Cushing OK Crude Inventory (AUG 16)
-1359K
14:30
USD
DOE U.S. Crude Oil Inventories (AUG 16)
-1500K
-2812K
14:30
USD
DOE U.S. Distillate Inventory (AUG 16)
1000K
2027K
14:30
USD
DOE U.S. Gasoline Inventories (AUG 16)
-1500K
-1169K
23:50
JPY
Japan Buying Foreign Bonds (Yen) (AUG 16)
¥1614.8B
Japanese purchases of foreign bonds have been increasing since June 21, reaching its highest level since 2010 two weeks ago. Demand for Japanese assets has also increased since June.
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