Dollar Back To Bid as Risk Aversion Reigns

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Market Drivers for October 10 2014

AU Home Loans decline

UK Trade Deficit bit better but imports decline

Nikkei -1.15% Europe -1.09%

Oil $84/bbl

Gold $1220/oz.

Europe and Asia:

AU Home Loans -0.9% vs. 0.2%

UK Trade Balance -9.1B vs. -9.6B

North America:

CAD Employment 08:30

Dollar found a bid today in early European session as risk aversion intensified in the equity markets with most European bourses dropping by more that -1%. On a rather listless night of trade with little economic news to move the markets, currencies were most driven by equity flows and remained in relatively tight ranges.

In Asia the Aussie came under renewed pressure when Home Loan numbers revealed a decline of -0.9% versus expectations of 0.2% gain. The news may actually come as a welcome relief to the RBA which has been eyeing the rise in the housing market with great concern.

While mining demand in Australia has cooled considerably this year, much of the economic activity has shifted into the housing sector. RBA Assistant Governor Malcolm Edey noted the “concentration of risk taking, particularly in housing” in a speech today. But policymakers concerns about the housing sector are unlikely to translate into interest rate hikes, as they will likely resort to macro prudential tools first.

In any case the dealing flows in the Aussie were driven more by risk sentiment rather than any fundamental data today and the pair drifted all the way 8706 before finally finding some support. If US equity market continue to decline during North American trade, those levels will very likely be tested again as risk aversion takes center stage in the currency market.

In Europe the picture was generally similar with euro and cable sliding to it sessions lows as equities tumbled. In UK the Trade deficit data printed slightly better than forecast at -9.1B versus -9.6B eyed but the headline number hid a weakness as imports fell to their lowest level since 2010. The news suggests that consumer demand remains tepid and that is likely to keep BoE neutral for the foreseeable future.

In North America today the calendar is barren of US data but Canada has its employment report at 12:30 GMT. The market is looking for a rebound in jobs to 18.7K versus -11K the month prior. The loonie has been badly hurt by the slide in oil prices and is now trading near the yearly lows. A disappointment on the labor front, especially if the data shows two months of contraction in a row could push USD/CAD through the 1.1250 level once again with markets starting to price in the possibility of recession in Canada. On the other hand a beat to the upside may provide only a limited boost for the loonie if risk aversion flows continue to dominate trade as the day proceeds.

Boris Schlossberg
Managing Director

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