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Trader thoughts - the long and short of it

Monetary policy is the prevailing theme for the FX market this week, and the Dollar continues to pull ahead. The DXY Dollar Index marked its first three-day advance through Wednesday’s close since July 4th.

Source: Bloomberg

Meanwhile, those currencies that had done the most to muscle the Greenback down through previous weeks and months were the ones to lose the most altitude recently. Where the Euro and Pound are marking a measured retreat amid softer data and rhetoric from monetary policy officials, the Canadian Dollar has seen one of the more abrupt declines as the BoC leader made a concerted effort to rein in the speculative charge that had seized the currency after its two rate hikes. There is always the chance that risk trends can once again explode – the standoff between the US and North Korea is far from resolved – but the immediate future will present another round of monetary policy-oriented event risk.  

Wall Street: Shares were broadly higher through the close of the US session Wednesday. Appetite for higher ‘beta’ and higher yield indexes was clear in the sliding scale of performance. From the blue chip Dow Average, the most reserved 0.3 percent climb was registered. The more broadly based S&P 500 advanced 0.4 percent. Among the trio of most frequently quoted US benchmarks though, it was the tech-leaning Nasdaq Composite’s 1.2 percent advance that stood out. Yet, that performance was not the most impressive for the day. None of these indexes registered new highs but rather moved back into their range. The Russell 2000’s 1.9 percent charge higher was the sharpest since March 1 on a percentage basis and it represented a remarkable burst to fresh record highs.

RBNZ Holds Rates and Maintains a Dovish Tone: The RBNZ may currently hold the highest benchmark rate of the majors, but that advantage may eventually be lost to more motivated central banks. With new Governor Grant Spencer at the helm, the central bank announced that it would hold rates unchanged at 1.75 for the fifth straight meeting (it last moved with a cut in December). Where rate expectations for the Fed, BoE and BoC are high on expectations for another 25 basis point hike before the year’s end, the chances of an RBNZ move at its final November meeting are set at an anemic 2 percent. Still, the global outlook still sports a hawkish enough garb that swaps are still calling a hike sometime next year with a 93 percent probability. That is commensurate with most other central banks, but if the New Zealand authority continues to drag out the time frame an eventual hike, it can materially weigh on the existential value assigned the Kiwi as the high yield / high credit rating option among the majors. If its fundamental role among the ‘majors’ falters, it could lead to permanent loss of trading interest.

Bank of Canada Governor Taps the Breaks on the Canadian Dollar: On the day of an actual New Zealand rate decision, mere rhetoric from the Bank of Canada’s chief, Stephen Poloz, proved far more market moving. The central banker clearly felt that he had to set the record straight on rampant rate speculation that had built up behind his group’s back-to-back hikes. His carefully selected language from the central banker’s standard playbook said future policy was not on a ‘predetermined path’ and that they would proceed ‘cautiously’. Those that have been keeping score will note this is the same language that has been adopted by the Fed when has attempted to offer forward guidance aimed at lowering speculation of a near term move. Overnight swaps clearly got the hint as the probability of another hike by December dropped from a 74 percent to 65 percent probability. Given how high the Loonie has flown these past three months, this moderation can lead to significant retracement.

A Central Bank Summit Begins Thursday: In honor of 20 years of operational independence, the Bank of England is holding a conference Thursday and Friday that will discussion concepts related to its theory, application and future. This has been a particularly interesting topic for some of the major central banks where pressure to solve economic moderation has increasingly been heapened on the already-burdened shoulders of the central banks. However, this gathering of UK and other country’s monetary policy officials will be eyed by speculators looking for any evidence that traction is gaining or fading for future policy. As it happens, the BoE’s intentions carry some of the heaviest speculation amongst the majors. Following the rhetoric of their last meeting, the markets see a 74 percent chance that they hike on November 2nd and a 79 percent probability that they move on December 14th.

Australia Dollar: The Australian Dollar struggled this past session. While it still managed to outperform the actively pressured Canadiand currency and registered a modest advance against the Japanese Yen amid the modest risk-on mood, it underperformed other major crosses on the day. There is little scheduled event risk for Aussie trades to keep track of through the immediate future. However if RBA Deputy Governor Guy Debelle decides to weigh in on monetary policy and the global markets at the BoE conference later today, traders should take note just in case.

ASX: With the bullish move through European and US shares through Wednesday’s close, the ASX’s Thursday open is looking to register a modest advance for the open. Having dropped back to the frequented 5,650 again this week, bulls are struggling to keep this index in bounds. Should we drop through this floor that has been staged as immediate support over the past three months, it could finally turn months of congestion into the first stage of a bear trend.

Commodities: Commodities were a mixed bag through the mid-point of the week. Perhaps the most impressive move has come on the part of gold which has responded both to the rise and fall in threat from North Korea and the wobble in rate expectations. The precious metal extended its reversal from Tuesday to move below 1,285 Wednesday and set a fresh monthly low. It has been a remarkably productive reversal from its peak 1,357 from just earlier this month.

Market Watch:

S&P/ASX 200 down 6.7 points or -0.12% to 5,664.28

AUD -0.45% to 0.7847 US cents

On Wall St, Dow +0.25%, S&P 500 +0.41%, Nasdaq +1.15%

 In New York, BHP is unchanged, Rio +0.73%

In Europe, Stoxx 50 +0.53%, FTSE +0.38%, CAC +0.25%, DAX +0.41%

Spot gold -0.87% at US$1281.70 an ounce

Brent crude -1.03 % to US$58.44 a barrel

Iron ore -1.23% to US$64.15 a tonne

Dalian iron ore at 465.5 yuan

LME aluminium (cash) -1.12% to $US2101 a tonne

LME copper (cash) -0.80% to US$6353 a tonne

10-year bond yield: US 2.31%, Germany 0.47%, Australia 2.79%


By John Kicklighter, Chief Strategist, IG Chicago

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