Taper fear permeated throughout the majority of asset classes yesterday, causing stocks to crumble and investors scrambling for safety as the patchwork budget deal from Washington bolstered the chance of seeing the Fed ease off its monetary policy accelerator at the December meeting. Decreasing fiscal uncertainty for the upcoming year gives the FOMC less to hide behind when cautioning about economic growth being constrained by fiscal drag, and while the debt ceiling debate still lays in wait, the proactive budget deal provides hope a similar situation to what was witnessed this October doesn’t play out again. Also sparking some anxiety around the future flow of monetary stimulus from the Fed, it was announced that the former Bank of Israel chief Stanley Fischer (hawk) is a front-runner to replace Yellen as the Vice Chair of the FOMC, who in the past has been skeptical in the use of forward guidance. The S&P was pressured lower throughout the day to close down by 1.13%, while cash VIX and its front-month futures contract saw heavy demand, illustrating investors are becoming more nervous around near-term risks (i.e. the impending FOMC meeting next week.)
The Aussie’s recent slide continued overnight, with the Antipodean currency dropping into the low 0.90s against the USD after a better than expected employment report was unable to reverse sentiment. While the employment situation surprised to the upside with the economy adding 21k new jobs and the participation rate remaining steady at 64.8%, it was not enough to stem the bleeding, and after a short spike higher, traders continued to reduce exposure to the Aussie. Although the number of new jobs created bested the median analyst estimate of 10k, the bounce back essentially just recoups the losses seen over the last six months, not necessarily a beacon of hope the job market has turned around just yet. The fact that a decent jobs number didn’t elicit a strong bid tone is an ominous sign for the Aussie, and the potential for a sustained break of the 0.90 handle opening up room for the pair to test the lows seen in August of this year when the pair fell into the mid-0.88s, it might be prudent for corporates naturally long AUD to take some near-term exposure off the table to protect against seeing the pair open up fresh weakness sub-0.9000. As we go to print RBA Governor Stevens decided the weakness in the Aussie was not progressing as fast as he would like, giving an interview in which he said Australia would need its currency to move closer to 0.85 against the USD. While the RBA had been warning it would like to see a lower AUD, the reference to specific target capitulated the AUD longs sending traders rushing for the exits and AUDUSD smashing through 0.9000.
Yesterday’s taper anxiety has infiltrated global markets this morning, where we saw broad weakness across the board in Asia as the Nikkei moved lower by 1.12%. Yen weakness in Europe has lifted USDJPY back into the high-102s, with the carry trade gaining some renewed vigor on more jawboning about Japan’s pension fund increasing its asset allocation towards ones better linked to inflation. The levitation of USDJPY has helped high-beta currencies like the CAD and AUD find some willing buyers overnight (before Governor Stevens decided to take out the whole AUD bid stack with his dovish comments), but has not had quite the same spill-over effect with equities. The nervous taper sentiment has been echoed throughout European trade, where we’re seeing the major bourses well in the red as we head into the North American cross, with S&P futures struggling to keep its head above water before the consumer spending numbers are released.
As we head into the North American open, retail sales in the US for the month of November hit the wires, showing a slight surprise to the upside as consumer spending gained momentum. The headline print showed that sales increased by 0.7% from the month of October, better than the 0.6% economists had envisioned and the same rate of growth as the previous month. The less volatile core reading also came in marginally better than expected, up 0.4% vs. expectations of a 0.2% reading. Mitigating some of the jubilant consumer spending numbers, and hence more momentum in the “taper on” trade, jobless claims came in slightly higher than expected printing at 368k. On the Canadian side of the 49th parallel, capacity utilization in the third quarter surprised to the upside, coming in at 81.7% when expectations had been for a reading of 81.0%. The good domestic economic news has done little to halt the retracement in USDCAD from the fresh-lows it made overnight, with pressure on the Loonie coming from a negative reaction in commodity currencies to the comments from Governor Stevens along with better than expected spending numbers out of the US. After putting in some work south of the 1.0600 level during the Asian session, USDCAD is now back to pivoting around the 1.0600 as the USD gains across the board and DXY nudges up closer to the 80.0 level.
Looking ahead to later in the session, the next key event for Loonie traders will be when Bank of Canada Governor Stephen Poloz speaks in the early afternoon at a luncheon event in Montreal. The speech is on risks to the Canadian economy and financial system, which will focus on external headwinds along with the hazards of an overheating housing market. A good deal of the recent pressure on the Loonie can be attributed to the BoC’s change of tone in regards to the imbalances in the housing industry, placing an equal, if not greater, focus on the downside risks to persistently low inflation. In our view, which was corroborated by the BoC’s financial stability report yesterday, the elevated levels of consumer debt and disparities in the housing market have not subsided by enough where the central bank would want to shift its focus completely towards the sluggish inflation readings; therefore, if Poloz continues to highlight the vigilant nature by which the BoC must keep an eye on the risks of an external shock on excessive consumer leverage, the Loonie may be able to garner some additional attention from investors. A further strengthening of the Loonie that pushes USDCAD into the mid-1.05s would be a good opportunity for corporate hedges to evaluate their medium-term exposures, especially with the FOMC risk looming next week; make sure to speak with your dealing teams and come up with a plan of attack.