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Currencies AUD Dollar Traders Whether FOMC Minutes Will Keep the March Towards Hikes

Talking Points:

  • Dollar Traders Whether FOMC Minutes Will Keep the March Towards Hikes
  • British Pound Fails to Regain Traction after CPI Uptick
  • Yen Crosses Steady after Snap Election Call, Will the BoJ Help Soothe Uncertainty?

Dollar Traders Whether FOMC Minutes Will Keep the March Towards Hikes
The Dollar put in for a mixed session Tuesday despite a stir in risk trends. Perhaps the upcoming FOMC minutes can tap into the currency’s more active fundamental drive: monetary policy. From this past session, EURUSD was the biggest mover amongst the majors (with a 0.7 percent rally). This was certainly not inspired by the S&P 500’s nudge higher – a genuine risk upgrade would have likely leveraged a bigger USDJPY move. Once again, this illustrates how influential a more active counterpart can be in the FX market. For the Euro, better-than-expected investor sentiment survey (more on that below) caught the market off guard. Yet, with that EURUSD charge – the biggest since October 15 – we still wouldn’t turn the benchmark’s pair dominant bear trend. Resilience is still the name of the game for the Dow Jones FXCM Dollar Index (ticker = USDollar) as it remains in a tight holding pattern at five-year highs.

As we head into the new trading session, the question is what it takes to break free of the recent consolidation to transition back into a concerted bull trend. A relative performance – taking advantage of eroding confidence or value in the Euro, Yen, Pound – will offer a few sparks, but their capacity is likely limited. The safe haven appeal in the currency’s tie to the FX Volatility Index is another aspect that is light for known catalysts. That leaves US-central policy forecasts. On that front, we have the minutes from the FOMC’s October 28-29 meeting. That wasn’t one of the quarterly meetings with details and updates on forecasts as well as Chairwoman Yellen’s press conference. In other words, there is plenty of opportunity for clarifying the lines of heavily speculated rate forecasts. Currently, Fed Funds and Eurodollar futures are pricing in a first hike around 3Q 2015 and around 50bps of tightening through December 2015. A sentiment shift from the Fed, can tip this view and the Dollar.

British Pound Fails to Regain Traction after CPI Uptick
Interest rates are a key driver for the British pound, but traders’ expectations are not so sensitive that a modest tick in inflation readings can turn a trend as prominent as the moderation of timing for the Bank of England’s first rate hike. This past session, we were watching the October inflation data closely as an important and tangible benchmark for the central bank’s policy evaluation. After four months of firm depreciation, it is reasonable to suspect some equilibrium in the Fed-vs-BoE rate forecast is being found. If we were very close to that balance, the unexpected uptick in the headline UK CPI figure (1.3 versus 1.2 percent expected) would have rallied GBPUSD. Instead, the market was little moved. This is a modest pickup from a five-year low and still well below the 2 percent-target. Perhaps the upcoming BoE minutes will elicit more.

Yen Crosses Steady after Snap Election Call, Will the BoJ Help Soothe Uncertainty?
The rumor and conjecture was confirmed Tuesday. Japanese Prime Minister Shinzo Abe announced a snap election for December 14. Having come under pressure with news of the 3Q official tip into recession as a fall out to the unpopular sales tax hike, the Prime Minister’s program – Abenomics – has been put into jeopardy. This vote will look to reestablish commitment to this plan and to defer the second sales tax hike another 18 months to April 2017. This creates both uncertainty and hope for more ‘stimulus’ – which weighs yen. Yet, that doesn’t seem to be enough to extend these crosses. Ahead, we have the BoJ rate decision. They are unlikely to offer back to back stimulus upgrades, but stranger things have happened lately. More likely, the focus will turn to what Governor Kuroda and crew’s view of the economic and policy future.

Euro Gains Ground after Investor Sentiment Survey Jumps from Multi-Year Low
The Euro was this past session’s top performing ‘major’. Already on the rise through the morning, the shared currency received a sizable boost from the release of the Eurozone and German investor sentiment surveys from ZEW. For November, confidence in Germany posted its first increase in 11 months and subsequently recovered from the previous month’s negative reading. The region-wide report posted a similar rebound from a hefty tumble. Does this data meaningfully change investors’ view of the region’s investment environment as well as the economy and Euro performance by association? No. If the ECB confirms government bond buys or Thursday PMIs show economic recovery, we may.

Australian and New Zealand Dollars – A Return to Monetary Policy Extremes
The Australian and New Zealand Dollars were remarkably on opposite ends of the monetary policy spectrum earlier this year. On one hand, the RBNZ was on run of four consecutive rate hikes while the RBA was just coming off a spaced series of rate cuts. With a slowdown in global activity (and thereby trade demand), a weakening China, imported disinflation; they may be conforming on the dovish side.

Emerging Market: Russia Tries its Hand at Bond Auctions Again
The MSCI Emerging Market ETF was once again little changed in its tightening congestion pattern as volume dropped to a four-month low. Traders are looking for a clear signal on capital flows for the asset type. One member of this group is making its own progress. The Russian Ruble advanced 0.7 percent this past session amid news the Finance Ministry would try to sell bonds for the first time in five weeks today.

Gold More Inspired by News of Russian Buying, Uncertainty or Stimulus?
What is driving gold? Answering that question better positions us to establish whether there is follow through to be found from the fundamental theme. On the headlines, Russian Central Bank Governor Elviar Nabiullina said in testimony that the central bank has bought 150 metric tons of the precious metal this year – which would suggest a 35 ton purchase since the beginning of October (the most in 16 years). That is material, but not a lasting bid. More staying power comes through updates like Japan’s snap election or the collective shift towards policy easing.

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