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

  • Dollar Wins First Advance in Five Days as S&P 500 Breaks 7-Day Rally
  • Euro Fundamentals May Hit a Nerve as Officials Meet on Greece, Cyprus, Economy
  • New Zealand Dollar: How Far will the RBNZ’s Hawkish Lean Carry the Kiwi?
Dollar Wins First Advance in Five Days as S&P 500 Breaks 7-Day Rally

Though it was a modest effort, the USDollar managed to pull out of a painful four-day slump this past session. It is no coincidence that this move to stabilize by the safe haven currency comes on the same day the S&P 500 ended a seven-day rally. The correction from the benchmark index – a favored measure of speculative appetites and confidence in stimulus – is predictable given the fundamental threat that lies ahead and the incredible run that has pushed the market back within reach of the 1,700-figure and ultimately record highs. There is serious debate over how far the financial markets have gone to price in the likelihood of a $10 to $15 billion reduction in the Fed’s monthly $85 billion-per-month QE3 effort. Some key market barometers like US Treasury yields, emerging markets indexes and gold have suffered sizable adjustments in anticipation of a diminished Fed presence. Yet, US equities have stood as a bastion against a rising tide of speculative deleveraging. The probability of a wind down is certainly not lost on this market, and it is extraordinarily exposed. Such risk presents a considerable opportunity for the dollar. Waiting until the dam breaks bolsters the threat of a disorganized flight to safety – exactly the conditions the greenback prefers.

Euro Fundamentals May Hit a Nerve as Officials Meet on Greece, Cyprus, Economy

Over the past weeks, we have seen the euro press on through event risk that raised the possibility of a rate cut, undermined hopes of an economic recovery and threatened to push out bailouts to an indefinite future. Against this fundamental flood, it would seem that the euro’s progress is unstoppable. Yet, we simply haven’t found the correct mix to expose the troubles the region faces. A general shift away from high ‘risky’ assets via a structural sentiment shift would quickly find the euro regrouped as a risky currency with excess premium. Yet, we also have a series of event risk that can start the fire internally. Eurozone meetings on Greece, Cyprus, the economy and banking union are on deck.

Japanese Yen Gains Traction as Risk Hand Cools, Abe Discusses Tax Hike

As political discussion continue, sources quoted by Japanese news agencies Kyodo and Jiji Press have suggested that Prime Minister Shinzo Abe is planning to go ahead with the April sales tax hike from 5.0 to 8.0 percent. Given Japan holds the title of the largest relative debt load of the developed world and there are reasonable concerns that confidence in Japanese Governor Bonds (JGBs) will collapse if it goes unaddressed, the move is considered necessary by most. The concern, however, is that the increased levy could stall the country’s nascent economic recovery. According to the reports, the solution will be to introduce a $50 billion economic stimulus program alongside the burden. For short-term impact, this news will compete with crosswinds from the US monetary policy expectations. Yet, beyond the Fed event, this move could represent a hurdle to beating deflation while simultaneously dimming the prospect of more monetary policy aimed indirectly at devaluing the yen. If a general ‘risk aversion’ move gains traction in the global financial markets, the yen crosses will be more exposed.

New Zealand Dollar: How Far will the RBNZ’s Hawkish Lean Carry the Kiwi?It isn’t difficult to tell how aggressive the New Zealand rate outlook seems to the speculative markets. Following the Reserve Bank of New Zealand’s (RBNZ) confirmation of forthcoming 2014 rate hikes this past session, the New Zealand dollar rallied against all of its major counterparts – even the safe havens which were gaining a foot hold through the same session. Swaps show a robust 95 basis points worth of expected rate hikes from the central bank through next September – outpacing the hawkish sentiments in all of its major counterparts by a wide margin. That said, the forecast is only 5 bps higher than what was priced into the market before the event. Furthermore, hope for future yield won’t offset meaningful risk aversion adjustments moving forward. For fundamental watchers, the RBNZ will report the percentage of government bonds held by foreign investors for August. That is an important gauge for an ‘investment currency’.

Australian Dollar Fragile after Jobs-Spurred Tumble, Risk Sensitivity Increased

The initial reaction by the Australian dollar to Thursday morning’s disappointing jobs data was sharp; but, so far, there is limited follow through on the short-term breaks from pairs like AUDUSD, AUDJPY and AUDNZD. Certainly the 20-year low in consumer inflation expectations (1.5 percent) and the unexpected 10,800-position drop in August employment carry negative connotations for interest rate forecasts. However, the market’s view for further easing by the Reserve Bank of Australia (RBA) seems to be more restrained than what we were seeing just a month ago. Looking to overnight swaps, the 12-month interest rate forecast is little changed after the data – pricing in little more than a 10 percent chance of another 25bp cut by the central bank within the year. Yet, it is important not to grow contented with the currency’s stability. The one-month correlation between AUDUSD and the S&P 500 hit a five-year low in August, but that relationship is quickly returning to normal.

British Pound Little Moved after Carney Testimony, But Gilt Yields Slide Below 3.00%

A day after GBPUSD made its dramatic break above 1.5750 on to seven-month highs, conviction seems to have dried up for the sterling. In fact, the currency was virtually unchanged Thursday against the majors. Under normal circumstances, the currency may have extended the volatile swell following the better-than-expected employment data reported Wednesday on momentum alone. Yet, the backdrop is proving more introspective of the underlying fundamental conditions than many expect. The downtick in the jobless rate to 7.7 percent draws the economy closer to Bank of England’s new target of 7.0 percent, but rate speculation may have already moved too far too fast. This past session, BoE Governor Carney and fellow MPC members testified to Parliament. The central banker reiterated his 2016 timeline forecast for keeping rates low. While the sterling didn’t suffer for this echo, gilts did gain. The 10-year yield has dropped back below 3.00 percent.

Gold Collapses 3.2 Percent in a Dramatic Break Below $1,355

There have been few, aggressive and volatility-rich moves from the broader capital markets over the past few weeks as investors prepared for the release Federal Reserve’s decision on whether or not to alter its stimulus program moving forward. However, there have been a few standout moves – and gold has just added itself to that list. Having retreated to $1,355 mid-week, the metal was sitting on a level that has arrested momentum both as support and resistance over the past four months. With debate, uncertainty and complacency developing for the metal before the central bank possibly curbs its inflation-stoking QE3 program; short-term speculative interests unwinding their trades before the prominent event isn’t surprising. Gold ETF volume this past session hit its highest level since the market set its peak back on August 28.

**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

01:00

NZD

ANZ Consumer Confidence Index

123

June’s print for total consumer confidence was the highest reading since May 2010

01:00

NZD

ANZ Consumer Confidence (MoM)

2.7%

03:00

NZD

Non Resident Bond Holdings

67.9%

04:30

JPY

Industrial Production (MoM)

3.2%

Industrial Production YoY last month reached its highest level since May of 2012.

04:30

JPY

Industrial Production (YoY)

1.6%

04:30

JPY

Capacity Utilization (MoM)

-2.3%

07:15

CHF

Producer & Import Prices (MoM)

0.2%

0.0%

The YoY print recovered to a positive reading in June, but estimates for this print looks to slightly decline.

07:15

CHF

Producer & Import Prices (YoY)

0.4%

0.5%

08:30

EUR

Italian General Government Debt

2075.1B

The debt has not seen a meaningful reduction in recent years.

08:30

GBP

Construction Output SA (MoM)

2.1%

-0.7%

YoY growth has been increasing since June 2012.

08:30

GBP

Construction Output SA (YoY)

1.3%

1.9%

09:00

EUR

Employment (YoY) (2Q)

-1.0%

Employment YoY was at February 2010 lows last month and hasn’t shown an increasing print since September of last year.

09:00

EUR

Employment (QoQ) (2Q)

-0.5%

12:30

CAD

Capacity Utilization Rate

80.6%

81.1%

The second quarter of 2012 set a multi-year high at 81.4%.

12:30

USD

Producer Price Index (YoY)

1.3%

2.1%

These are some of the last data points before the Fed’s FOMC meeting and announcement. So long that the data points do not extremely disappoint market expectations, traders may begin to position themselves prior to the announcement of a possible reduction in asset purchases.

12:30

USD

Producer Price Index Ex Food & Energy (YoY)

1.3%

1.2%

12:30

USD

Advance Retail Sales

0.4%

0.2%

12:30

USD

Retail Sales Less Autos

0.3%

0.5%

12:30

USD

Retail Sales Ex Auto and Gas

0.3%

0.4%

13:55

USD

U. of Michigan Confidence

82

82.1

14:00

USD

Business Inventories

0.2%

0.0%

GMT

Currency

Upcoming Events & Speeches

01:00

AUD

Australia Plans to Sell A$800 Million 5.75% Bonds Due 2016

03:00

CNY

China to Sell 26 Billion Yuan in 30-Year Bonds

06:45

EUR

Eurozone Finance Minister Meet to Discuss Greece, Cyprus

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

13.5900

2.1000

10.7250

7.8165

1.3650

Resist 2

7.5800

5.8950

6.5135

Resist 1

13.4800

2.0500

10.5000

7.8075

1.3250

Resist 1

6.8155

5.8475

6.2660

Spot

13.0982

2.0310

9.9724

7.7544

1.2699

Spot

6.5246

5.6157

5.8904

Support 1

12.8900

1.9750

9.3700

7.7490

1.2000

Support 1

6.0800

5.5600

5.8700

Support 2

12.6000

1.9075

8.9500

7.7450

1.1800

Support 2

5.8085

5.4440

5.7400

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

1.3386

1.5909

101.00

0.9415

1.0403

0.9353

0.8210

134.12

1362.79

Res 2

1.3359

1.5880

100.68

0.9392

1.0385

0.9328

0.8186

133.70

1354.07

Res 1

1.3333

1.5851

100.36

0.9370

1.0366

0.9302

0.8161

133.28

1345.35

Spot

1.3280

1.5792

99.73

0.9326

1.0330

0.9251

0.8113

132.45

1327.91

Supp 1

1.3227

1.5733

99.10

0.9282

1.0294

0.9200

0.8065

131.62

1310.47

Supp 2

1.3201

1.5704

98.78

0.9260

1.0275

0.9174

0.8040

131.20

1354.07

Supp 3

1.3174

1.5675

98.46

0.9237

1.0257

0.9149

0.8016

130.78

1362.79

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

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