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Forex pairs in this Article » USD, GOLD, EUR/USD, AUD/USD, USD/JPY, GBP/USD
Talking Points:

  • Dollar Climbs as Manufacturing Data Adds to Taper Outlook
  • British Pound Further Strengthens Grip after Factory Report, FLS Update
  • Australian Dollar: RBA Decision Holds Key to Changing Tack
Dollar Climbs as Manufacturing Data Adds to Taper Outlook

Is the market moving to price in the probability of an earlier Fed Taper? The performance of the dollar and other key markets are offering us a barometer of speculation surrounding this important and inevitable fundamental event. Looking at the greenback’s performance to start the week; notable gains against the euro, yen and a noteworthy recovery versus the sterling sets the scale amongst the various majors that are dealing with monetary policy changes moving forward. The S&P 500’s mild slip (0.3 percent) Monday could be considered a risk-based corroboration of the QE reduction theme, but better measure comes from the performance of Fed’s targeted assets. US 10-year Treasury yields have moved back up to 2.80 percent while the iShares MBS (mortgage-backed securities) ETF dropped to a two-month low on heavy volume. The biggest spark for Taper speculation will be Friday’s NFPs, but positive data like today’s ISM factory report grinds out greater speculation.

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British Pound Further Strengthens Grip after Factory Report, FLS Update

With the exception of the New Zealand dollar, the sterling outpaced all of its major counterparts Monday. A rally for currency matched by a jump in the 10-year Gilt yield two two-month highs suggests yield forecasts had a strong hand in the currency’s performance. On the docket, an early released Hometrack housing prices index presented the fastest pace of inflation in six years; while the November manufacturing activity report unexpectedly soared to its highest level since February 2011 (58.4). That extends the trend of economic improvement and building inflation pressure that has quickly moved the sterling to hawkish extreme of policy speculation. But it doesn’t mean a hike is around the corner…

Australian Dollar: RBA Decision Holds Key to Changing Tack

The Australian docket is stocked this week. We have already absorbed data on trade, manufacturing, inflation and housing health; but the greatest potential lies with today’s RBA rate decision. The Australian dollar is perhaps the most prominent ‘carry currency’ amongst the majors, yet its performance has severely lagged currencies with significantly lower yield as well as other risk-favored asset classes (like equities). This could be a symptom of market concern with China’s future growth prospects (and Australia’s export business with the country) or perhaps fear of local financial stability issues; but the draw of risk-reward cannot be ignored for long. The fastest way to reunite the currency’s performance to traditional risk themes is to see a market wide risk deleverage shake loose moderate long-carry interest in the Aussie dollar. Yet, a more favorable development for the currency would be measurable speculation of an RBA hike through the foreseeable future. A move from the 2.50 percent benchmark at this meeting is highly unlikely. Yet, rhetoric and forecasts can offer far more drive for the currency. Before the meeting, swaps are pricing in 19 bps worth of tightening over the coming 12 months. If that rises, so will the currency.

Euro Traders Bide Time, Speculation Until ECB Decision

There is little doubt that the ECB rate decision is hanging heavily in FX traders’ minds. That preoccupation can distort the currency’s flow through normal fundamental and speculative developments. A view towards Thursday’s fireworks certainly curbed the market’s response to the November manufacturing statistics released Monday. The second read for the Eurozone’s factory activity offered a modest uptick from the initial reading (51.6 versus 51.5 initially reported) – though the sector is still running at a 29-month high. In the upcoming session, Portugal is expected to carry out a bond exchange whereby it will buy debt due to mature in June 2014, October 2014 and October 2015 and in turn sell October 2017 and June 2018 paper in its place. This is a bid to reduce possible risk as the country plans to soon leave the comfort of its Troika bailout. This is likely to be play out smoothly, but this is a general Eurozone transition we should nevertheless watch closely.

New Zealand Dollar Outpaces All Majors After 3Q Trade Report, China Data

The New Zealand dollar put up the best performance of the majors Monday by a wide margin. The high-yield and recently-underappreciated currency tallied rallies between 0.8 percent versus the British pound up to 1.4 percent against the Japanese yen. That represents the biggest kiwi-favorable move for GBPNZD in six weeks and the strongest NZDJPY drive in 10. The surge was in part leveraged by the surprisingly strong 3Q Terms of Trade report. The 7.5 percent increase – an increase suggests the same amount of New Zealand exports could purchase a greater amount of imports – was the sharpest increase in 40 years. The details of the report show a 24 percent increase in dairy prices led the 8.9 percent increase in net export prices. At the same time, the Chinese manufacturing report offered another point of buoyancy. Yet, the influence of both headlines may be transient. Risk appetite and an appreciation for RBNZ rate hikes is still the best opportunity to generate trend.

Yen Crosses Hit New Highs, 2-Year JGB Yield Hits 8 Month Low

Momentum behind the yen crosses carried through to this week’s open. The Japanese currency was lower against all of its major counterparts this past session with a notable advance above 102.50 for USDJPY. While this benchmark currency pair isn’t forging the multi-year highs that EURJPY and GBPJPY have, it is very close to setting its own headlines. Back on May 17, the pair peaked with a near five-year high close at 103.21 in the wake of the April 4 BoJ stimulus program. The probability of a second round QE in Japan is relatively high – a scenario that the market has been aware of for some time. Yet, what makes such a priced-in forecast more market moving now (five months out from the planned April tax hike) than three months ago? A market that is more responsive to monetary policy overall helps to reposition currencies according to the new filter. Alternatively, the distraction from ‘risk trends’ means the slide in shares Monday wouldn’t distract the yen crosses.

Gold Nears Three-Year Low Should We Close Below $1,200

It was a troubling way to open the week. Gold tumbled 2.7 percent – the worst daily performance for the precious metal since October 1 – and in turn posted its worst close since June 27. That comparison should concern gold bugs. The June 27/28 period represents the current floor to the bear wave of the past year. Should we close below $1,200 in the coming days, it would be the first time the market has slipped below the level since August 2010. There are a number of speculative measures to support this trend as ETF holdings of the precious metal have dropped to fresh three-and-a-half year lows and COT figures show net speculative holdings in futures collapsed 45 percent last week. Looking at the fundamental side, the reinforcement of traditional fiat as reserves is the backbone of the decline. The more recent catalysts though are speculation in stimulus plans. With the Dollarup while MBS and Treasury ETFs down, Taper concerns may keep pulling gold down.

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ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

0:00

NZD

ANZ Commodity Price (NOV)

1.3%

Half a percent below 12-month avg

0:01

GBP

BRC Sales Like-For-Like (YoY) (NOV)

1.1%

0.8%

This proprietary indicator is a leading sales report

0:30

AUD

Retail Sales s.a. (MoM) (OCT)

0.4%

0.8%

Expected to halve best reading in seven months reported in Sept

0:30

AUD

Net Exports of GDP (3Q)

0.35

-0.04

Will confirm or contradict fear of a slowdown in foreign demand for Australian natural resources

0:30

AUD

Current Account Balance (Australian Dollar) (3Q)

-11.5B

-9.4B

1:00

CNY

PMI Non-Manufacturing (NOV)

56.3

Manufacturing PMI beat estimates of 51.1 coming in at 51.4 over the weekend.

1:30

JPY

Labor Cash Earnings (YoY) (OCT)

0.1%

A measure just as important as employment for BoJ officials

3:30

AUD

Reserve Bank of Australia Interest Rate Decision

2.50%

2.50%

RBA will be the main event risk of the day. Although the rate is likely to remain at 2.50%, policy statement comments in regards to the Aussi have the potential to cause volatility.

9:30

GBP

Purchasing Manager Index Construction (NOV)

59.0

59.4

Rapidly rising home prices can still support growth through a subsequent rise in construction

10:00

EUR

Euro-Zone Producer Price Index (MoM) (OCT)

-0.2%

0.1%

Though an upstream inflation report, important ahead of ECB

10:00

EUR

Euro-Zone Producer Price Index (YoY) (OCT)

-1.0%

-0.9%

14:45

USD

ISM New York (NOV)

59.3

ISM Manufacturing yesterday beat estimates of 55.1 coming in at 57.3.

15:00

USD

IBD/TIPP Economic Optimism (DEC)

43.0

41.4

An important gauge of Taper speculation

21:45

NZD

Value of All Buildings s.a. (QoQ) (3Q)

4.8%

-0.4%

A broad measure of supposed housing trouble for New Zealand

22:00

USD

Total Vehicle Sales (NOV)

15.75M

15.15M

US auto sales are expected to have grown last month, a possible side effect of consumer health

22:00

USD

Domestic Vehicle Sales (NOV)

12.10M

11.73M

22:30

AUD

AiG Performance of Service Index (NOV)

47.9

A complimentary drop from services to the recent factory update could denote domestic weakness

GMT

Currency

Upcoming Events & Speeches

9:30

GBP

BoE Financial Policy Committee Meeting Minutes

18:00

EUR

ECB's Ewald Nowotny Speaks on Euro Economy

SUPPORT AND RESISTANCE LEVELS

To see updated SUPPORT AND RESISTANCE LEVELS for the Majors, visit Technical Analysis Portal

To see updated PIVOT POINT LEVELS for the Majors and Crosses, visit our Pivot Point Table

CLASSIC SUPPORT AND RESISTANCE

EMERGING MARKETS 18:00 GMT

SCANDIES CURRENCIES 18:00 GMT

Currency

USD/MXN

USD/TRY

USD/ZAR

USD/HKD

USD/SGD

Currency

USD/SEK

USD/DKK

USD/NOK

Resist 2

13.4800

2.1000

10.7250

7.8165

1.3650

Resist 2

7.5800

5.8950

6.5135

Resist 1

13.2400

2.0850

10.5000

7.8075

1.3250

Resist 1

6.8155

5.8475

6.2660

Spot

13.2063

2.0404

10.2752

7.7523

1.2564

Spot

6.5674

5.5108

6.1227

Support 1

12.6000

1.9140

9.3700

7.7490

1.2000

Support 1

6.0800

5.3350

5.7450

Support 2

12.4200

1.9000

8.9500

7.7450

1.1800

Support 2

5.8085

5.2715

5.5655

INTRA-DAY PROBABILITY BANDS 18:00 GMT

\CCY

EUR/USD

GBP/USD

USD/JPY

USD/CHF

USD/CAD

AUD/USD

NZD/USD

EUR/JPY

Gold

Res 3

1.3640

1.6476

104.16

0.9170

1.0726

0.9190

0.8280

141.01

1250.59

Res 2

1.3614

1.6445

103.88

0.9151

1.0705

0.9167

0.8256

140.64

1243.73

Res 1

1.3588

1.6415

103.61

0.9132

1.0685

0.9144

0.8233

140.26

1236.87

Spot

1.3537

1.6354

103.06

0.9094

1.0644

0.9098

0.8185

139.51

1223.15

Supp 1

1.3486

1.6293

102.51

0.9056

1.0603

0.9052

0.8137

138.76

1209.43

Supp 2

1.3460

1.6263

102.24

0.9037

1.0583

0.9029

0.8114

138.38

1243.73

Supp 3

1.3434

1.6232

101.96

0.9018

1.0562

0.9006

0.8090

138.01

1250.59

v



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