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 Francs Fraught with Risk

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 dollars 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 Fed rate hike, Japanese pensioners purchase of USD and the possibility of further QE 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 the investor and dealers are finding it difficult to commit or engage.

Currently, 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 to eat into traders total compensation, especially as the top financial firms have struggled with Capital Markets returns in Q3 and are again expected to in Q4. The lack of dealer participation has managed to reduce volatility month-to-date (down 8.5%). Nevertheless, significant market themes – Japanese and its sales tax, the BoE’s dovish QIR, rumored RBA possible intervention, CBR disbanding trading bands, SNB’s gold referendum and so on, is providing significant price action and with that opportunity. 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 sting by QIR

The pound outright has hit a new 14-month low in the overnight session (£1.5758), and is currently showing no signs of wanted to be purchased. It was expected that investors would “shun” the currency after the BoE slashed growth and inflation forecasts in yesterday’s Quarterly Inflation Report report. Fixed income traders have already trimmed back their expectations for a first rate hike in interest rates (mid-year 2015 was previously their firm target). Governor Carney and company expects the U.K economy to grow +2.9% next year, weaker than the +3.1% they had forecasted only three-months ago. They also expect to possible see inflation dip below the psychological 1% handle within the next six-months. U.K policy makers foresee the first rate rise in Q3, 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 closer to any holiday period.

RBA rumor and innuendo keeps AUD in focus

For a brief period overnight the Aussie dollar looked in real trouble. At one point the AUD briefly fell -55 ticks to AUD$0.8670, when RBA assistant Governor Kent injected a threat of currency intervention into his remarks. Kent reiterated the most recent RBA position that AUD exchange rate is still too high relative to fundamentals, and that despite of signs of improvement, labor market is subdued. This is copybook text from Governor 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 “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 6-month high of 4.1% – well above the RBA 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 (AUD$0.8752).

Weaken Yen by any means possible

Yen’s current price seems contained between ¥115 and ¥116, nevertheless Japanese whispers have been causing some “Ping-Pong” price action just below the U.S dollars recent seven-year high print. Yen briefly weakened once again after another dose of speculation over the fate of the second round of the sales tax (supposedly to be announced next month – currently it’s a 50:50 chance). USD/JPY briefly rallied above ¥115.80 on rumored report an LDP party official had confirmed that PM Abe appears to have made a decision to call a snap election (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 BoJ 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 diverse 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 Francs Fraught with Risk

EUR/CHF continues to make lower-lows, edging close to that €1.2000 floor. The market is, and has to chew through some massive EUR bids sub-€1.2020. One has to assume it’s of the “official” (SNB) kind. There will be no official confirmation, nevertheless the market anticipates that SNB will aggressively defend that Swiss “floor” €1.2000. They are not expected to reveal their poker 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 loses “street credibility” and policy impact becomes questionable giving the market free reins to take a run at the bank.