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Big Volatility Drivers Not Including the Fed

Kathy Lien

Even before this week’s Fed policy meeting, the RBA minutes, German ZEW survey, and surprise UK housing data are just some of the factors sending the dollar broadly lower against major currencies.

The US dollar (USD) traded lower against all major currencies on Monday, and we expect this trend to continue ahead of this Wednesday's Federal Open Market Committee (FOMC) rate decision. The amount of asset purchases reduced per month—if any at all—will not be the only trigger for volatility on Wednesday, or in the time leading up to it, for that matter.

Meanwhile, a multitude of factors contributed to today’s US dollar weakness, including economic data, speculation about the next Fed Chairman, and the latest developments regarding Syria.

See related: 3 Factors Dragging Down the Dollar

This Week’s Biggest Eurozone Data

The euro (EUR) appreciated against the US dollar on Monday, but ended the North American trading session well off earlier highs. Eurozone consumer prices and labor costs were the only reports released from the region, and both numbers had very little impact on the currency. The fluctuations in the euro coincided with the moves of other major currencies, which indicate that the market's appetite for dollars was behind the move.

The most important Eurozone report scheduled for release this week will be Tuesday's German ZEW survey of investor confidence. Analysts are looking for sentiment to improve, but with economic data taking a turn for the worse, Italian politics in flux, and Syria still posing a geopolitical risk to the markets, we would not be surprised if investor confidence weakened.

The German election this weekend will also be a focus for the euro, and while Chancellor Angela Merkel will most likely be re-elected, her victory is far from assured. For the financial markets, a third term for Merkel would probably trigger a small relief rally in the DAX and euro because continuity is good for the markets. A big market reaction would occur if the opposition party were to win, though.

Stunning UK Housing Growth on the Way

The British pound (GBP) traded higher against the US dollar on Monday, but GBPUSD has yet to test the 1.60 level. The only UK data released was the Rightmove house price index, and according to the report, prices fell for the second month in a row by 1.5%. The agency attributes the decline to a slow summer season, which the director of Rightmove called the "norm in August."

Instead, investors chose to focus on their projections for a strong rise in prices this year. Rightmove raised its forecast for 2013 prices threefold, from 2% to 6%. It said that "while prices fell during the month overall, the last couple of weeks have seen the start of a turnaround, with more sellers choosing to come to market and pitching higher prices as momentum builds. This month's failure to deliver fresh supply and the resulting fall in property on agents’ books will prime the pump for an autumn price surge as buyer confidence and activity continues to increase."

A rapid rise in the value of homes accompanied by an improvement in the economy could prompt the Bank of England (BoE) to unwind its quantitative easing (QE) program or raise interest rates sooner than 2016.

Inflation plays a big role in that decision, and on Tuesday, UK consumer and producer prices are scheduled for release. CPI is expected to increase, but even with the rise, inflationary pressures in general have been muted.

AUD Extends Higher Ahead of RBA Minutes

The commodity dollars were the leading beneficiaries of US dollar weakness. All three currencies traded sharply higher despite mixed economic reports. The New Zealand dollar (NZD) rose to a fresh four-month high, even after traders learned that service sector activity slowed in the month of August and consumer confidence dipped in the third quarter. Like the manufacturing sector, growth slowed in services last month, but the data represents a retracement from six-year highs.

The hawkishness of the Reserve Bank of New Zealand (RBNZ) caught many investors by surprise last week, and while the latest economic reports may moderate the optimism, both sectors of the New Zealand economy are still in expansionary mode.

At the same time, the housing market is a primary area of concern for the central bank, and the latest increase in house prices could reinforce the commitment to cooling the bubble.

Looking ahead, the focus will now be squarely on the Australian dollar (AUD). The minutes from the most recent Reserve Bank of Australia (RBA) monetary policy meeting will be released this evening. While the market was surprised by the weakness in the labor market, the RBA left interest rates unchanged and removed the words "scope to easing policy further" from the September statement, which many interpreted to mean no more rate cuts this year. If the RBA minutes convey an overall sense of optimism, AUDUSD could test the .9400 level.

By Kathy Lien of BK Asset Management

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