Net Long-Term TIC Flows (SEP) (14:00 GMT; 09:00 EST)
Expected: $75.0B
Previous: -$69.3B

Industrial Production (OCT) (14:15 GMT; 09:15 EST)
Expected: 0.1%
Previous: 0.1%

How Will The Markets React?

After Thursday’s US CPI report, Friday’s event risk may not seem like such a big deal. However, quite the opposite is true as it will be very important to see if net long-term TIC flows can turn positive after plummeting $69.3 billion in August. Indeed, Japan, China and Taiwan sold US Treasuries at the fastest pace in at least five years in August as losses linked to US subprime mortgages sparked a global credit crunch and serious bout of risk aversion. The widespread flight away from Treasuries only exacerbated the biggest sell-off in US financial assets since Russia defaulted in 1998, sparking a massive slump in the greenback to record lows against the Euro. Following the release of the August TIC flow figures, Deputy Treasury Secretary Robert Kimmitt said, "They were for the month of August, a month of quite some market turmoil, therefore I don't think they were particularly surprising. Any prudent investor with a diversified portfolio is going to want to have US securities. That would be true also for sovereign wealth funds." We will see if that is indeed the case with the September TIC flows release. If the report actually shows that there was yet another month of net outflows of US assets, the news could be disastrous for the greenback and US equity markets. On the other hand, a better-than-expected figure could lead the markets to believe that not all faith in the dollar is lost and could create an opportunity for US assets to gain.

Bonds – 10-Year Treasury Note Futures

Treasuries have continued to recover overnight and bulls look to be positioning themselves for another test of the 112-05 high after bouncing Fibonacci support of the November rally at 111-075. The trend remains very much to the upside, but event risk on Thursday and Friday could weight Treasuries down, as CPI is anticipated to jump (Thursday) and net TIC flow are anticipated to show a resurgence in investment in US assets (Friday). Support looms below at 111-17, but a push through 112-05 may take on 112-13.

FX – EUR/USD

EUR/USD has bounced strongly from the 38.2 percent Fibonacci retracement level of the rally from 1.4130 to 1.4751 at 1.4519. However, the 1.4700 level has been able to hold back gains for the pair for now and upcoming US event risk has the potential to spark a round of dollar-buying. Net long-term TIC flows are anticipated to rebound in September after falling negative in August amidst the rapid tightening of the credit markets and flight away from the dollar. If the figures are actually stronger than expected, the US dollar could find itself bid once again and the news may push EUR/USD down to test trendline support near 1.4575, with sharper declines targeting 1.4460. On the other hand, once greenback bears take control, they are hard pressed to let go and if we see that Fed fund futures continue to aggressively price in a 25bp cut, EUR/USD could continue to ascend to the record highs at 1.4751. This chances of this happening will dramatically increase if TIC flows prove to be negative for yet another month – suggesting that foreigners are dumping US assets.

Equities – Dow Jones Industrial Average

The Dow Jones Industrial Average has plunged precipitously over the past two weeks, but the index managed to stabilize and rebound from the 13,000 level to break through 200 SMA and Fibonacci resistance at 13,202. While Wednesday’s price action saw the index pull back, this may simply be a consolidation of the gains. Nevertheless, there is major potential that the index has already topped out. Thursday’s event risk (US CPI) will likely play a greater role in determining directionality for US equities. However, if Friday’s US TIC flow data misses expectations, the news could shake up the markets. An upside surprise would bode well for the Dow, as it would suggest that confidence in the US remains fairly strong as foreigners continue to invest in US assets. On the other hand, if the net result shows yet another negative reading – signaling that countries such as China may be dumping the dollar – the Dow could plummet, with a break of 13,000 targeting the August lows at 12,517.94.

Terri Belkas is a Currency Strategist at FXCM.