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

  • Dollar: Where Is the Redemption Rally with the S&P 500 Slump?
  • Euro Finds Little More than Stability with IMF Growth Upgrade
  • Japanese Yen Weigh their Risk Link Through Carry as Equities Dive
Dollar: Where Is the Redemption Rally with the S&P 500 Slump?

Is this the risk aversion move dollar traders have been waiting for? The S&P 500 suffered a 1.2 percent tumble Tuesday – the biggest in drop in six weeks and a clear break of 2013’s robust support. Furthermore, the VIX Volatility Index (considered a ‘fear’ gauge) climbed above 20 percent for only the second time this year. While the benchmark US equity index is a particularly effective measure of speculative appetite as the tradition portfolio’s ‘risk ‘ asset and its further backstop in stimulus support, it does not alone establish the investment habits of the entire market. And, given the headwinds to the greenback in its local debt ceiling risk; the dollar needs the kind of risk aversion that leverages liquidity.

To override the innate trouble of foreign capital turning away from a US fiscal crisis, the dollar needs to see global financial conditions freeze up and thereby leverage fear while also limiting viable alternatives for liquidity. While the S&P 500 and Dow Jones Industrial Average’s trendline breaks are notable first steps, we have not seen the panic and market-wide deleveraging that are the dollar’s true strengths. We see that clearly enough in the Dow Jones FXCM Dollar Index’s (ticker = USDollar) hold to an ever-tightening trading range – less than 40 points. Perhaps a better illustration of the fundamentals behind this lack of contagion in fear though is the level of the FX Volatility Index. Where the equities version has soared to stones-throw of the 2013 high, the currency measure of fear is at a five month low and continues to drop from its June high. If the dollar is to rally – not simply jump higher – sentiment needs to devolve to more dire and desperate levels.

As we keep a close eye on the intensity of investor sentiment, the ingredients for the changing tides must be monitored. Day 8 of the US government shutdown passed with both the White House and House of Representatives digging in on their budget standoff. To that effect, the market is starting to take the risk of at least some short-term US funding issues seriously (any delay in payment is a technical default). Credit default swaps have swelled to levels last seen in August 2011 when a Washington standoff led the United States to a downgrade of its AAA credit rating by Standard & Poor’s. Another sign of trouble, yields on one-month Treasuries have soared to their highest level since 2008 – leading to an inverted yield curve short of the two-year mark. Meanwhile, giving capital market bulls some hope, it was rumored that Fed Vice Chairman Janet Yellen would receive President Obama’s official nomination to replace Ben Bernanke tomorrow. She has been the frontrunner for some time, and the Fed’s Taper timetable is already delayed. It’s hard to imagine Yellen will seriously expand the dovish pace.

Euro Finds Little More than Stability with IMF Growth Upgrade

The IMF released its updated growth forecasts for the global economy, and the general tone was somber. One significant exception amongst the major regions though was the Eurozone. Despite fears of global fiscal imbalance and blurred monetary policy commitment, Euro-area received a growth upgrade from June for 0.4 percent contraction this year and 1.0 percent growth in 2014 (compared to -0.6 and +0.9 percent). This cautious optimism was accompanied by warnings that the ECB may need to step up with more easing – bearish for the euro – but the FX market has reflected selective reasoning when it comes to this region’s fundamentals. The economic docket clears out for the Euro over the coming 24 hours, but currency traders will do well to follow the local equity indexes – which have so far avoided critical breakdowns.

Japanese Yen Weigh their Risk Link Through Carry as Equities Dive

The short-term (5-day) correlation between EURJPY and the Nikkei 225 is exceptionally high at 0.95. That sets this pair – and truly all yen crosses – in a position to be exceptionally sensitive to risk trends. That relationship should put traders on edge, however, until the US dive escalates into a global rout; the Bank of Japan-yoked yen will refrain from structural reversals. In the meantime, the IMF warned that central bank should be ready to upgrade its stimulus effort should fiscal restraint rein in the economic recovery.

Australian Dollar Faces Inflation Survey, Employment Data

With US equities tumbling, we would expect the carry trade to be taking a sizable hit with the Australian dollar leading the way. Instead, the currency managed to gain – albeit modestly – against nearly all of its major counterparts. Carry trade levels were notably stable and the FX volatility measure was showing little of the pressure heaped on US stocks. Meanwhile, the 12-month RBA rate forecast jumped to its highest level since June 2011 (though only 9 bps). Coming up, we have September jobs numbers and October inflation expectations.

British Pound Rate Forecast Keeps Focus on BoE Through Upcoming Data

The sterling is looking at a dense round of event risk over the coming trading day. Yet, unless this data taps into deeper concerns on general risk trends and rate forecasts, pound traders may discount the calendar items to maintain focus on the Bank of England’s (BoE) rate decision on Thursday. Regardless, traders should take stock of the industrial production and trading balance figures for August as well as the NIESR’s September GDP estimate to add to assess short-term volatility impact and medium-term growth forecasts.

Swiss Franc: Effective Forward Guidance – But for How Long?

In a speech on monetary policy Tuesday, Swiss National Bank (SNB) President Thomas Jordan remarked that the policy authority hasn’t had to actively defend their cap on the currency with intervention in over a year. Indeed, we haven’t seen EURCHF at 1.2000 since September of last year. Has the SNB hit upon the most effective unconventional monetary policy effort of its counterparts? While it may be working, it is ultimately currency manipulation and thereby not replicable. As liquidity becomes more highly prized, expect the franc to gain.

Gold Building Pressure as Tight Range Faces US Fiscal Measures

The CBOE’s Gold ETF Volatility Index doesn’t give us an accurate picture of the breakout risk behind the precious metal. The implied volatility measure stands above 25 percent – above the one and three-month averages. Looking at a more price-based Average True Range (ATR), we find gold is trading with $25 average daily range which appropriate reflects the congestion we have developed between the descending trend from late August against the three-month floor at $1,275. Be on the look out for swells in volatility and a possible breakout.

**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

6:00

JPY

Machine Tool Orders YoY (SEP P)

3.50%

-1.7%

If the print meets estimates, it will be the first positive reading since the spring of 2012.

8:30

GBP

Industrial Production MoM (AUG)

0.4%

0.0%

With the GBP at some of the highest levels in the past year, data must meet expectations if traders are to continue to hold the Pound in these uncertain days and week ahead.

8:30

GBP

Industrial Production YoY (AUG)

-0.7%

-1.6%

8:30

GBP

Manufacturing Production MoM (AUG)

0.4%

0.2%

8:30

GBP

Manufacturing Production YoY (AUG)

1.0%

-0.7%

8:30

GBP

Visible Trade Balance GBP/Mn (AUG)

-£8850

-£9853

8:30

GBP

Trade Balance Non EU GBP/Mn (AUG)

-£3700

-£4528

8:30

GBP

Trade Balance (AUG)

-£2050

-£3085

10:00

EUR

Germany Industrial Production SA MoM (AUG)

1.0%

-1.7%

Manufacturing prints missed expectations yesterday morning.

10:00

EUR

Germany Industrial Production WDA YoY (AUG)

-1.4%

-2.2%

11:00

USD

MBA Mortgage Applications (Oct 4)

-0.4%

This will be one of the few data prints to come out of the U.S. due to the government shutdown.

14:00

GBP

NIESR GDP Estimate (SEP)

0.9%

21:00

NZD

ANZ Truckometer Heavy MoM (SEP)

-1.50%

The July print was the highest in the past decade.

21:30

NZD

BusinessNZ Manufacturing PMI (SEP)

5750.00%

The July print was the highest since 2004.

23:50

JPY

Japan Buying Foreign Bonds (Oct 4)

¥672.1B

With the Japanese Yen at key levels against the greenback, data prints out of Japan and comments from members of the BoJ will play a pivotal role in price action in addition to the U.S. government shutdown developments and key levels on the Nikkei and S&P 500.

23:50

JPY

Japan Buying Foreign Stocks (Oct 4)

-¥49.2B

23:50

JPY

Foreign Buying Japan Bonds (Oct 4)

-¥146.9B

23:50

JPY

Foreign Buying Japan Stocks (Oct 4)

¥341.4B

23:50

JPY

Tertiary Industry Index MoM (AUG)

0.40%

-0.40%

23:50

JPY

Machine Orders MoM (AUG)

2.50%

0.00%

23:50

JPY

Machine Orders YOY (AUG)

8.50%

6.50%

23:50

JPY

Bank Lending Ex-Trusts YoY (SEP)

2.30%

23:50

JPY

Bank Lending Incl Trusts YoY (SEP)

2.00%

GMT

Currency

Upcoming Events & Speeches

1:00

JPY

BOJ Deputy Governor Nakaso Speaks and Holds Press Conference

4:00

JPY

Japanese Finance Ministry Meets with Private Sector Experts

6:45

EUR

Italian Defense Minister Speaks at Senate Committee

9:00

EUR

ECB Announces Allotment in 7-Day Dollar Tender

9:00

EUR

ECB Announces Allotment in 85-Day Dollar Tender

11:00

EUR

EU's Van Rompuy Meets Hollande, Gives Speeches in Paris

11:30

EUR

Italian Finance Ministry Responds to Parliament Committee

12:30

USD

IMF's Vinals Discusses the Global Financial Stability Report

14:00

USD

Fed's Evans Speaks on Monetary Policy in Washington

16:00

USD

Fed's Lockhart to Question Chilean Ambassador in Atlanta

17:45

EUR

ECB's Coeure Speaks in Geneva

18:00

USD

Fed Releases Minutes from Sept 17-18 FOMC Meeting

22:00

EUR

ECB's Draghi Speaks in Cambridge, Massachusetts

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

2.0500

10.7250

7.8165

1.3650

Resist 2

7.5800

5.8950

6.5135

Resist 1

12.9700

2.0100

10.5000

7.8075

1.3250

Resist 1

6.8155

5.8475

6.2660

Spot

13.1447

1.9938

10.0063

7.7541

1.2494

Spot

6.4206

5.4978

5.9687

Support 1

12.6000

1.9140

9.3700

7.7490

1.2000

Support 1

6.0800

5.5175

5.7450

Support 2

12.4200

1.9000

8.9500

7.7450

1.1800

Support 2

5.8085

5.4440

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

1.3674

1.6210

97.91

0.9121

1.0390

0.9520

0.8389

132.91

1360.52

Res 2

1.3647

1.6178

97.63

0.9101

1.0374

0.9496

0.8365

132.52

1351.91

Res 1

1.3621

1.6147

97.36

0.9080

1.0357

0.9472

0.8341

132.13

1343.30

Spot

1.3568

1.6085

96.81

0.9039

1.0323

0.9424

0.8293

131.36

1326.08

Supp 1

1.3515

1.6023

96.26

0.8998

1.0289

0.9376

0.8245

130.59

1308.86

Supp 2

1.3489

1.5992

95.99

0.8977

1.0272

0.9352

0.8221

130.20

1351.91

Supp 3

1.3462

1.5960

95.71

0.8957

1.0256

0.9328

0.8197

129.81

1360.52

v

--- Written by: John Kicklighter, Chief Strategist for DailyFX.com

To contact John, email jkicklighter@dailyfx.com. Follow me on twitter at http://www.twitter.com/JohnKicklighter

Sign up for John’s email distribution list, here.

original source
comments powered by Disqus
Trading Center