U.S. Dollar Ducks and Dives for Respect

  • Sterling bulls stung by QIR
  • The “Wonder” from down-under hurt by RBA comments
  • Japan to weaken Yen by any means
  • Swiss gold referendum nears

This market is a natural U.S. dollar lover, nevertheless, investors are still searching for an incentive to help kick-start the buck to regain focus and begin the next leg higher. The U.S. dollar’s rise over the past few weeks is indication that the currency has several drivers that are collectively are powerful, but individually are weak — expectations of stronger U.S. growth, a Federal Reserve rate hike, Japanese pensioners’ purchase of USD, and the possibility of further quantitative easing in Europe. This has lead to current intraday price action to witness some good price moves — JPY, RUB, GBP or AUD — however, it seems that both investors and dealers are finding it difficult to commit or engage.

Dealers’ preference is to keep their powder dry and ride out the remainder of this year holding on to what profits they have already acquired. For them, there is no added incentive to take that extra risk — most of the individuals’ yearly compensation has already been decided, but not communicated. Don’t be surprised that this week’s massive FX manipulation fines will eat into traders’ total compensation, especially as the top financial firms have struggled with capital market returns in the third quarter and are again expected to in the fourth quarter. The lack of dealer participation has managed to reduce volatility month-to-date (down 8.5%). Nevertheless, significant market themes such as Japan and its sales tax, the Bank of England’s (BoE) dovish Quarterly Inflation Report (QIR), a rumored Reserve Bank of Australia (RBA) intervention, the Central Bank of Russia disbanding its trading bands, the Swiss National Bank’s (SNB) gold referendum and so on, is providing significant price action. Within a few weeks, the market will be waiting for the “turn,” before wholeheartedly recommitting to the natural flow of business in 2015.

Sterling Bulls Stung by QIR

The pound outright has hit a new 14-month low in the overnight session (£1.5758). It was expected that investors would shun the currency after the BoE slashed growth and inflation forecasts in yesterday’s QIR. Fixed-income traders have already trimmed back their expectations for an interest rate hike (midyear 2015 was previously their firm target). Governor Mark Carney and company expect the U.K. economy to grow +2.9% next year, weaker than the +3.1% they had forecast only three months ago. They also expect to see inflation dip below the psychological 1% handle within the next six months. U.K. policymakers foresee the first rate rise in the third quarter, 2015. There is little incentive in the short term to want to own GBP, nevertheless, do not be surprised if the market does happen to see better levels to “short” the pound. The lack of market participation has a habit of achieving this, especially when close to any holiday period.

RBA Rumor and Innuendo Keeps AUD in Focus

For a brief period overnight the Aussie dollar looked to be in real trouble. At one point, the AUD briefly fell -55 ticks to A$0.8670 when Reserve Bank of Australia (RBA) Assistant Governor Christopher Kent injected a threat of currency intervention into his remarks. Kent reiterated the most recent RBA position that the AUD exchange rate is still too high relative to fundamentals, and that despite of signs of improvement, the labor market is subdued. This is copybook text from Governor Glenn Stevens, who also happens to try and talk down his own currency at every opportunity. Other comments from Kent were similarly dovish, noting non-mining investment recovery may not be as strong as those in the past, and that mining investment would fall further in the coming year, all leading up to the threat that the “RBA has not ruled out intervention” as a policy option. Note that the dovish remarks were also in spite of consumer inflation expectations hitting a six-month high of 4.1% — well above the RBA’s target range. The “Wonder from Down Under” has since managed to regain its composure, mostly supported by investors that seek a greater investment return using Aussie assets, and for surety purposes (A$0.8752).

Election Talk Dominates Yen

The yen’s current price seems contained between ¥115 and ¥116, just below the U.S. dollar’s recent seven-year high print. The yen briefly weakened once again after another dose of speculation over the fate of Tokyo’s second sales tax increase (supposedly to be announced next month but currently there’s a 50:50 chance it will be implemented). USD/JPY briefly rallied above ¥115.80 on rumors that a Liberal Democratic Party official had confirmed Prime Minister Shinzo Abe will call a snap election in December (which he would win despite recent scandals). That is twice now that the sitting government has had to deny rumors this week. Not helping the yen is the Bank of Japan indicating that monetary policy is an “open-ended policy position targeting 2% inflation, and that the central bank is not concerned with the risk of hyper-inflation.” Japanese pension funds need to diversify and acquire alternative international investments with yield — they are still the biggest yen sellers and they also have the patience. USD/JPY techies are looking for ¥124.00 six months; it’s certainly in keeping with the directional trend, but maybe a tad too rich, too soon.

Swiss Gold Referendum Edges Near

EUR/CHF continues to make lower-lows, edging close to that €1.2000 floor. The market has to chew through some massive EUR bids sub-€1.2020. One has to assume it’s of the “official” (SNB) kind. Though there will be no official confirmation, the market anticipates that the SNB will aggressively defend the Swiss “floor” €1.2000. The bank is not expected to reveal its hand just in case the gold referendum vote on November 30 does not go the right way. It’s all about market perception: the Swiss authorities cannot be perceived as being less eager on anything. For any central bank, to do otherwise will cause it to lose street credibility and policy impact becomes questionable, giving the market a free reign to take a run at the bank.

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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments.
He has a deep understanding of market fundamentals and the impact of global events on capital markets.
He is respected among professional traders for his skilled analysis and career history as global head
of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean
has played an instrumental role in driving awareness of the forex market as an emerging asset class
for retail investors, as well as providing expert counsel to a number of internal teams on how to best
serve clients and industry stakeholders.
Dean Popplewell