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

  • Dollar to See a Breakout Regardless of FOMC Outcome
  • British Pound Mixed after ‘In-Line’ 4Q GDP Reading
  • New Zealand Dollar: A Rate Decision Not to Overlook
Dollar to See a Breakout Regardless of FOMC Outcome

Heading into this week’s top event risk, the Dow Jones FXCM Dollar Index (ticker = USDollar) has worked itself into a position that necessitates a breakout. That looks like a perfect marriage of build up and catalyst from the FOMC rate decision. Yet, despite its technical predicament and the ominous approach of a key catalyst, clearing this congestion does not necessarily mean there is a new trend in store for the benchmark currency. Engaging risk aversion after years of leveraged investment into record high asset prices is difficult to muster. However, all the elements are there to feed the fire should the initial spark catch.

Much of the fundamental debate surrounding the topic of over-stretched risk trends and whether they are destined to correct has centered on valuations. Growth, yields, earnings and other traditional measures offer a worrying backdrop all on their own; but the circumstances surrounding the market’s performance beyond the ‘equilibrium point’ of capital returning after the Great Financial Crisis ended – arguably reached years ago – is where the true risk lies. Stimulus has reduced investors’ fear of market volatility while simultaneously reducing yield. In turn, this has curbed participation, amplified the use of leverage to record levels and forced investors into risky assets they traditionally wouldn’t even consider in order to make returns that exceed the S&P 500. That is not a durable foundation.

Against this backdrop, the world’s most prominent risk underwriter – the Federal Reserve – is starting to de-escalate its stimulus program. The central bank made its first move to ‘Taper’ its $85 Billion-per-month QE3 stimulus program at the last meeting on December 18. That decision was met with a mute response from both dollar and ‘risk-sensitive’ benchmarks. The restrained reaction was in part a function of the year-end trading conditions as well as market preparation. As the Fed further reduces its safety net and exposes investors to volatility riskthough, the passive sentiment will start to crack. A further $10 Billion Taper (to a $65 Bln pace) is the leading consensus – a belief well-supported by officials’ efforts to set expectations in the weeks following the December meet. A curb on the balance sheet growth for the Fed is a positive for the dollar in the ‘competitive monetary policy game’ and via yield forecasts. But, the scale of this event truly rests with the possibility that this regime is perceptible enough that it changes the masses’ view of risk-reward at these heights.

Join Chief Strategist John Kicklighter as he covers the release and market response of the FOMC rate decision Live in the DailyFX-Plus Trading Room!

British Pound Mixed after ‘In-Line’ 4Q GDP Reading

Sterling bulls have been seeking out data that would validate their bullish views of for interest rate forecasts. The stronger the sterling has grown over these past six months though, the more difficult it is to impress. The 4Q UK GDP figures released this past session are robust in general. The 0.7 percent growth in the final quarter of 2013 pushed the year-over-year pace to its highest level in six years. This is a level of growth that certainly supports an eventual hawkish turn. The question is whether it supports expectations of a BoE hike in the coming months. For speculators, the data was merely ‘in-line’. Yields and swaps rate were notably little moved. When strong data doesn’t support bulls

New Zealand Dollar: A Rate Decision Not to Overlook

There are two major monetary policy gatherings over the coming session. Most will focus on the FOMC – for good reason – but the Reserve Bank of New Zealand’s (RBNZ)may prove just as remarkable. There is considerable disparity in expectations for this event. Though Governor Wheeler remarked last month that he expected rates would be 225 bps higher by 1Q 2016, speculation of the first move is notably absent. Swaps see a 34 percent chance of a hike for the 2.50 percent benchmark rate today. Even if they hike, broader risk trends may be an issue.

Euro: Another Sign that Liquidity is Getting Tight

The European Central Bank (ECB) once against failed to sterilize the more than €170 Billion in government bonds it holds from its rescue efforts over the past few years. That is the second time this year – another addition to a series of nagging concerns that liquidity troubles are bubbling to the surface once again. While the overnight market rate (EONIA) has been cut in half from last week, it is still notably elevated. Meanwhile, economic data is far from impressive for the Eurozone, standoffs with Greece continue and bailed EZ members are casting off support lines.

Yen Crosses Advance after Emerging Markets Jump

In the scale of risk sensitivity, the yen crosses are proving to be one of the more susceptible areas of the FX market to fading risk trends. The yen advanced against all its counterparts (the crosses slid) this past session. The upcoming FOMC decision is a clear volatility risk as the Emerging Market’s recent effort at stability leaves much to be desired. There is significant options positioning around spot warning of volatility.

Canadian Dollar Now Suffering Even During Risk Bounce

A Citi research note earlier this week remarked that loonie selling pressures over the past four weeks have been the strongest they had to record. That anecdote certainly fits with the performance of the currency. Risk trends have bounced this week, with both the Aussie and Kiwi dollars taking advantage. And yet, the Canadian currency has declined to partake in the buoyancy itself.

Emerging Markets Continue to Retrace Losses

There has been a lot of emerging market policy activity over the past 48 hours. Rate hikes from the Indian and Turkish central banks have boosted the inflation fight and Argentina’s weekend capital control efforts have looked to stem the outflow. Volatility – particularly selling pressure – has responded by cooling. But is this more a response to these cumulative efforts or regard for the upcoming event risk in the Fed…

Gold Shifts Focus from Emerging Market Stability to US Taper Schedule

As we would expect the day before the dollar faces a meaningful piece of event risk, gold was little virtually unchanged this past session. The small move was matched by an equally tepid volume level in the futures and ETF space. Meanwhile, the CBOE’s Volatility Index for the metal has continued to advance to 18.7 percent – the highest since January 8 and over 4.5 vols from the 9-month low set just last week. There is concern about the upcoming event risk and its influence on the dollar’s appeal.

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ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

23:30

AUD

Westpac Leading Index MoM (DEC)

-0.1%

The gauge came in at 0.1%

0:00

AUD

Skilled Vacancies MoM (DEC)

0.4%

The prior print was revised from 0.4% to 0.2%

7:00

GBP

Nationwide House PX MoM (JAN)

0.6%

1.4%

Highest MoM Expectation since Sept 2009

7:00

GBP

Nationwide House Px NSA YoY (JAN)

8.5%

8.4%

7:00

EUR

Germany GfK Consumer Confidence (FEB)

7.6

7.6

Continue rising since Sept 2008

7:00

CHF

UBS Consumption Indicator (DEC)

1.43

The print has not been below 1.00 since March 2012

9:00

EUR

Eurozone M3 Money Supply YoY (DEC)

1.7%

1.5%

M3 has been on the decline since Nov 2012

9:00

EUR

Eurozone M3 3-month average (DEC)

1.5%

1.7%

9:00

EUR

Italy Business Confidence (JAN)

98.6

98.2

Business Confidence has been above 80 since June 2009.

9:00

EUR

Italy Economic Sentiment (JAN)

83.6

12:00

USD

MBA Mortgage Applications (Jan 24)

4.7%

The print has not been negative since beginning of 2014

15:30

USD

DOE U.S. Crude Oil Inventories (Jan 24)

2250K

990K

DOE US Crude Oil Inventories Est. 1150K last week.

15:30

USD

DOE Crude Oil Implied Demand (Jan 24)

15455

19:00

USD

FOMC Rate Decision

0.25%

0.25%

Fed Tapper Speed will be a major market mover

19:00

USD

Fed QE3 Pace (JAN)

$65

$75

20:00

NZD

RBNZ Official Cash Rate

2.50%

2.50%

Investors waiting on the sideline to speculate on the timeline for ‘225 bps’ worth of hikes

21:45

NZD

Building Permits MoM (DEC)

-5.0%

11.1%

The Nov print was the highest since April 2013

21:45

NZD

Net Migration SA (DEC)

2770

23:50

JPN

Loans & Discounts Corp YoY (DEC)

2.59%

Another record high since June 2009 last month

23:50

JPN

Japan Buying Foreign Bonds (Jan 24)

-¥226.0B

From Dec 2013 until Jan 17 Foreign investors had pull out ¥1.76T from Japan Bond Market

23:50

JPN

Japan Buying Foreign Stocks (Jan 24)

-¥52.0B

23:50

JPN

Foreign Buying Japan Bonds (Jan 24)

-¥14.8B

23:50

JPN

Foreign Buying Japan Stocks (Jan 24)

¥71.2B

23:50

JPN

Retail Trade YoY (DEC)

3.9%

4.0%

The Retail Trade YoY print was revised from 4.0% to 4.1% and the Retail Sales MoM from 1.9% to 2.0%.

23:50

JPN

Retail Sales MoM (DEC)

0.3%

1.9%

23:50

JPN

Large Retailers' Sales (DEC)

0.7%

0.6%

GMT

Currency

Upcoming Events & Speeches

22:10

NZD

Finance Minister English at Select Committee

2:00

NZD

RBNZ Publishes Data on Low-Deposit Home Lending

7:30

EUR

EU's Van Rompuy Meets Italy's Letta in Brussels

8:00

EUR

Letta Meets Barroso in Brussels

10:00

EUR

EC ECB Announces Allotment in 84-Day Dollar Tender

10:15

EUR

EC ECB Announces Allotment in 3-Month Refinancing Tender

13:00

EUR

EC to Release Final Report Fifth Review on Spain Banks

13:15

GBP

BOE Governor Carney Speaks at Event in Edinburgh

16:30

USD

US to Sell Floating Rate Notes ($15 Bln, 2yr) for First Time

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

2.3800

11.8750

7.8165

1.3650

Resist 2

7.5800

5.8950

6.5135

Resist 1

13.3300

2.3000

11.0000

7.8075

1.3250

Resist 1

6.8155

5.8475

6.2660

Spot

13.2758

2.2520

10.8441

7.7572

1.2783

Spot

6.4818

5.4997

6.1694

Support 1

12.6000

2.1000

10.2500

7.7490

1.2000

Support 1

6.0800

5.3350

5.7450

Support 2

12.4200

1.7500

9.3700

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

1.3665

1.6594

105.36

0.9179

1.1059

0.8941

0.8396

143.12

1262.71

Res 2

1.3641

1.6565

105.11

0.9160

1.1037

0.8919

0.8374

142.75

1257.52

Res 1

1.3617

1.6535

104.87

0.9140

1.1016

0.8897

0.8352

142.39

1252.33

Spot

1.3569

1.6477

104.39

0.9101

1.0973

0.8853

0.8308

141.65

1241.95

Supp 1

1.3521

1.6419

103.91

0.9062

1.0930

0.8809

0.8264

140.91

1231.57

Supp 2

1.3497

1.6389

103.67

0.9042

1.0909

0.8787

0.8242

140.55

1226.38

Supp 3

1.3473

1.6360

103.42

0.9023

1.0887

0.8765

0.8220

140.18

1221.19

v



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