A bit of a Dollar Weakness… and Treasury strength.

The overnight session was revealed to be a bit ‘agitated’, starting first with a S&P closing at 1,946.16, down 3.8% from its September high of 2,019.22 and its yesterday’s low of 1,941.71 (approaching the July-August 4.35% drawdown), the Nikkei off 420pts bringing USD/JPY with ‘him’ (the pair is down 170 pips from yesterday’s high of 110.08), an overall weaker US Dollar (USD index eased from 86.2 to 85.6) and US 10-year yield trading back below 2.40%.

Clearly, the market isn’t generating good signs, and I am wondering if we are going to have a Buy-The-Dips type of scenario this time (see graph below). What is up with the 2,000 level? Is it just psychological?

With politicians ‘busy’ throwing sanctions to each other, rising tensions in Hong Kong, Middle East on fire [as ever] and now the first Ebola case confirmed in Dallas (yes, Dallas in US), all these factors could be explanations of the recent swings we have seen in the recent months. And now that the Fed is stepping back from the Bonds [and MBS] market, are the ‘swings’ going to be even more volatile?

SP500(Source: Reuters)

The US-Dollar bloc recovered from its recent sharp losses overnight; USDCAD traded below the 1.11 level, AUDUSD went shyly above 0.8800 and NZDUSD hit a high of 0.7925. Canadian fundamentals were disappointing in overall, starting with a lower than expected GDP in which printed flat in July (vs. +0.2% MoM consensus) and a shy (like everybody else) Mfg PMI at 53.5 vs. 54.8 expected.

Like Australia, I expect the Bank of Canada to remain accommodative in the medium term, therefore the US-CA monetary policy divergence will weigh on the Loonie in 2015. Any CAD (or AUD) strengthening episode is seeing as a new opportunity to short those currencies (either against USD or GBP).

Some analysts relate the Aussie strength to the better than expected trade deficit and the smashing building Approvals in August (I disagree and stick with a USD weakness overall). The country’s trade deficit fell to 787mio AUD (vs. 850mio AUD consensus) from 1bn+ AUD in July; buildings approvals came in three times higher than the 1% expected.

However, as we mentioned in our previous research, the slowdown path China has entered for the past few months (could be seen in the sharp decrease in commodities) will weigh not only on the Aussie, but both of the Antipodean currencies. Next week, the RBA meets and we will see what Stevens have to tell us.

Concerning my positioning today ahead of the ECB decision in a few minutes and the ECB conference, I’d stay short Euros as I think the single currency is capped on the topside (against the US Dollar). I believe that Draghi will do whatever is needed to ‘cap’ it anyway. There is clearly more room on the downside on the pair and 1.2500 could be reached today.