Dollar weakens for second consecutive week

International Markets Weekly

extreme financial market volatility swings and talk of US stimulus plans, the US Dollar finished out a second consecutive week in the red. Yet, despite the past few weeks retreat, the currency’s larger threemonth bull trend is still dominating the landscape. That technical view matches the fundamental backdrop. While there have been a few headlines and updates to cool the Dollar’s exceptional climb, there hasn’t been enough of turn the tides back towards the bear’s favor. Moving forward, the anxiety of a fragile gobal investor sentiment, a reinforced path of monetary policy and a possible second wave decline for the the Greenback’s largest counterparts will all support the currency’s medium-term view.

When liquidity returns next week, the first concern for market participants will be the bearings for broader sentiment. Investor confidence passed through two stages this past week. The first half was dominated by heavy selling in capital market assets that confirmed an important break that ended the previous week. Yet through the second half, a rebound for the higher return / higher risk segment and retreate for safe havens developed. In fact, through this heavy swing in confidence, the US currency never seemed to truly find grip through its safe haven status.

There is a difference between an unfavorable move in capital markets and a motivated — risk unwind’. The latter speaks to conviction and a motivation that is more elemental to the financial system. After a fiveand-a-half year climb from the bottom of the worst economic and financial collapse in generations, it is difficult to unmoor complacency and convince market participants to cut exposure and feed speculative shorts. Yet, the recent scope of selling riskier assets and the tremendous rise in implied (expected) volatility herald a more motivated shift is building. Against record leverage, decades low participation and a cooling economic backdrop; investors are increasingly aware of the medium-term gap between price and value.

As the motivation shifts from a modest ërisk off’ to a more systematic deleveraging, liquidity becomes the primary concern for market participants. That leverages demand for US Treasury, money markets and the Dollar itself. It may take time to reach this intensity, but implications are acute and the structural deficiencies to our current situation large enough that it planning is important. As we await the mass’s verdict on the market’s course and potential, a few other factors should be considered while trading the Dollar. The first consideration is a recent flush of hope that the Fed could backtrack on its tightening regimen.

Tepid

This past week, St Louis Fed President James Bullard — not a voter this year and more on the hawkish side with a recent call for a 1Q 2015 rate hike — turned heads when he suggested the FOMC should consider delaying its final Taper of QE3. His suggestion is more targeted towards tepid inflation, but the market in withdrawal and desperate for support reads it as a capital market boon. Realistically though, this isn’t a popular opinion and the Yellen sounded very confident of an October 29 final move at the last meeting. Furthermore, delaying a few months a scaled down stimulus isnt’ the same as an increase for encouraging risk trends. We will see little more on this topic with the media blackout period coming ahead of the next meeting.

A final consideration for those trading the Majors: counterpart activity. This past week’s shudder in risk has clearly exposed the Euro-area’s troubles. Whether a trigger for global risk aversion or a direct counterbalance for the Dollar, this has considerable potential.

The British Pound may face additional headwinds in the week ahead should the fundamental developments coming out of the UK drag on interest rate expectations.

Indeed, Bank of England ( BoE) Chief Economist Andrew Haldane warned ëinterest rates could remain lower for longer’ amid the uncertainly surrounding the economic outlook, and the central bank may look to preserve the highly accommodative policy stance for an extended period of time especially as the Euro-Zone, the UK’s largest trading partner, faces a growing risk of slipping back into recession.

As a result, the BoE Minutes are widely expected to show another 7-2 split, with Martin Weale and Ian McCafferty still voting against the majority, but the policy statement may highlight a more dovish tone for monetary policy as the headline reading for UK inflation slows to an annualized 1.2% in September to mark the lowest reading since 2009. At the same time, the 3Q Gross Domestic Product (GDP) report may undermine the BoE’s expectations for a faster recovery as the growth rate is projected to expand 0.7% after rising 0.9% during the three-months through June, and a marked slowdown in the real economy may generate fresh monthly lows in GBP/USD as market participants scale back bets of seeing higher borrowing costs in the UK

Nevertheless, the technical outlook highlights a more meaningful recovery for GBP/USD as the Relative Strength Index (RSI) breaks out of the bearish momentum carried over from the end of June, and we will continue to keep a close eye on the ongoing divergence in the oscillator amid the string of lower highs in price.

Rollercoaster

The Australian Dollar had another rollercoaster week against its peers as shifts in global risk sentiment swung the high-yielding currency wildly during intraday trade. Meanwhile, medium-tier regional economic data saw a lackluster response from the AUD amid well-anchored RBA policy bets.

Looking to the week ahead, Q3 CPI figures headline the Australian economic calendar. Another deviation from expectations holds the potential to catalyze knee-jerk volatility for the currency. Yet follow-through is likely to prove difficult given it would take a significant surprise to materially alter rate expectations.

Meanwhile, the RBA’s October Meeting Minutes and a speech from Governor Stevens (focused on the Australian payments system) are unlikely to offer fresh insights into policy makers’ thinking. In turn these may prove uneventful for the AUD.

Elsewhere in the region, a raft of top-tier economic data from China is on the docket. The figures from the Asian giant could do little to dent steadfast Reserve Bank bets. Yet disappointing data from the world’s second largest economy may have the potential to feed mounting concerns over global growth and fan risk-aversion, which in turn would be a negative for the Aussie.

The primary threat to the high-yielding currency remains the prospect of a continued surge in volatility, which according to some measures is at its highest since February. While many Aussie carry trades may have already been unwound short positioning in the futures markets remains well off the extremes of last year. This suggests there is plenty of room in the short trade before it begins to look ëcrowded’.

Sellers appear intent on keeping the AUD/USD capped below the 89 US cent handle, leaving the risk focused on the 0.8660 barrier for the pair. If broken on a ëdaily close’ basis it could open the next leg lower to the July 2010 low near 0.8320. For more on the US Dollar side of the equation read the weekly forecast here

Gold prices pushed higher for a second consecutive week with the precious metal rallying 1.27% to trade at $1238 ahead of the New York close on Friday. The advance comes amid continued weakness in broader risk assets with all three major US indices down for a fourth consecutive week. Despite the risk-off environment, the key developments coming out of the US economy may heavily impact gold prices next week after prices rebounded off key technical resistance mid-week.

Federal Reserve speakers have continued their Dovish rhetoric as the FOMC eyes the overwhelming disin-

Natural gas futures declined last week on forecasts for weak heating demand over the next two weeks and continued big storage builds. Natural gas futures on the New York Mercantile Exchange closed at USD3.766 per million British thermal units. Analysts estimated utilities added 99 billion cubic feet (bcf) of gas into storage this week, topping builds of 94 bcf in the prior week, 86 bcf in the same week a year earlier and the five-year average of 70 bcf.

The US Dollar weakened for a second consecutive week for the first time since June as traders pushed out expectations for US interest-rate increases to the end of next year with global economic growth faltering. A gauge of expectations for volatility reached an eight-month high as investors fretted about the prospects for global growth, US monetary policy and the spread of Ebola. The Yen rallied against most major currencies and rose to the strongest against the Dollar in more than five weeks as investors sought a refuge. flationary risks associated with a premature rate lift-off. Indeed, St Louis Fed President James Bullard, who won’t be a voting member on the FOMC until 2016, undermined the bullish sentiment surrounding the US dollar as the policymaker saw scope to extend the QE exit and we may see a growing number of central bank officials show a greater willingness to retain the highly accommodative policy stance for an extended period of time amid the subdued outlook for

The number of Americans initially applying for unemployment aid decreased to a 14-year low last week. In the week ending October 11, the advance figure of seasonally adjusted initial claims for jobless benefits fell to 264,000, the lowest level since April inflation.

As a result, the September consumer price index will largely be in focus next week, with consensus estimates calling for an uptick in the core reading to 1.8% y/y from a previous read of 1.7% y/y while the headline print is expected to downtick from 1.7% y/y to 1.6% y/y. With weakening energy prices, market participants may pay closer attention to the stickiness in core inflation as FOMC voting member Charles Plosser sees