USD Slips, Oil Slides, Fischer Dithers

The US dollar was under pressure for the third day as stocks markets declined. The Australian dollar finished as the top performer but never climbed above the jobs-spike high; the kiwi lagged. After 7 speakers from the Fed, the US dollar ended lower across the board. Even Vice Fed Fischer's speech on FX & transmission mechanism failed to to reverse the greenback's decline. Japanese industrial production is due later.

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Fischer said the Fed's October decision to delay raising interest was appropriate as it helped offset the economic headwinds caused by the apprecitaing US dollar, adding that “may be appropriate” to raise rates next month. "While the dollar's appreciation and foreign weakness have been a sizable shock, the U.S. economy appears to be weathering them reasonably well". Economics aside, Ashraf tells me it is evident that a 7-10% decline in equities from here til mid Dec, and/or a disappointing NFP as (below 150K), as well as a few bad corporate would undoubtedly force the Fed to stay its had, which is another compelling reason that market dynamics are greater in importance than selective improvements in the macro picture.

The correlation between the US dollar and stock market was tight on Thursday. Repeated rounds of declines in the S&P 500 were mirrored by USD selling.

What's driving the correlation? The US economy is the engine of developed-world growth at the moment and it's attracted significant investment flows. In the past that money would have gravitated to the Treasury market and short-term debt but because of low returns it's been pushed into riskier assets like corporate bonds and stocks.

On Thursday a series of Fed speakers – often conflicting – led to uncertainty and dollar investors edged towards the exits. Throughout the day it was self-reinforcing and peaked at the end of US trading as the S&P 500 fell 29 points and the euro hit a session high.

Importantly, the scope of USD declines is still well within reasonable retracement levels after the sharp moves last week.

The other factor we're watching is oil. Crude is down in 6 of the past 7 days, falling another 3.1% on Thursday. We made the case for oil shorts yesterday on oversupply concerns and today's EIA inventory data showed another 4 million barrel build.What's interesting in FX is that CAD has held up relatively well. That could be a sign of Canadian dollar resilience but it's more likely that CAD-weakness is hidden by the latest blip in USD and Wednesday's holidays.

Looking ahead, keep an eye out for the speech from the Fed's Fischer on "FX Transmission to Output, Inflation” at 2300 GMT. At 0430 GMT, Sept Japanese industrial production is due but it's the final revision and unlikely to move markets.