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Talking Points:

  • Dollar Close to Full Blown Run on Risk, Rate Shift
  • Euro Traders Eye Volatility, Harden to Stimulus Concerns
  • Yen Crosses Dramatically Diverge from Equities

Dollar Close to Full Blown Run on Risk, Rate Shift

The S&P 500 dropped 2 percent and the VIX Volatility Index surged 27 percent this past session. Given the quiet nature of the financial markets lately, this drama raised investors’ anxiety that the quiet advance in capital markets may be coming to a destructive end. For the US Dollar – which represents a safe haven with particular clout when liquidity is prized above all else – the deeper the concern, the better the performance. Yet, in Thursday’s commotion, the greenback didn’t display the same degree of impact that the US equity benchmarks offered. Though the Dow Jones FXCM Dollar Index (ticker = USDollar) advanced for the 12th time in 15 trading days and the currency gained against most counterparts, the progress was modest. Even more unusual, the FX market’s most sensitive risk barometer – the richly priced Yen-based carry trade – barely moved on the day.

Market-wide downdrafts in speculative position over the past three years have been few and far between. In fact, the S&P 500 has not experienced a 10 percent correction in 660 trading days. That said, bouts of ‘volatility’ have occurred with some level of regularity. Usually following some event risk and/or isolated to one or a few asset classes, these spikes in fear have repeatedly acted as a staging ground for traders to jump in on a mature trend and sop up short-term risk premium. Tipping the scales on complacency fueled by low rates of return and historically low volatility (both owing heavily to stimulus efforts) is difficult. And yet, it is inevitable. In this particular groundswell, we are seeing a gradual and consistent rise volatility measures and spreads rather than a quickly deflated surge. Consistency in this disquiet is the bane of contentedness. Friday’s scheduled event risk could extend the disruption and move it closer to permanence.

Though there are a number of calendar items ahead, dollar traders and speculators amongst all asset classes will be focusing on the combination of the July labor figures and June PCE inflation data. From a volatility perspective, the jobs figures can be interpreted as an economic activity measure (disappointment unnerving the long-only crowd) or a monetary policy cue (Fed moves closer to removing the same stimulus that helped foster the five-year rally). For the dollar, a true tack on ‘risk aversion’ would offer the greatest overall influence. That said, the rate impact is the more consistent and thereby capable theme. Steady job growth and price pressures reinforce a mid-2015 FOMC hike.

Euro Traders Eye Volatility, Harden to Stimulus Concerns

The Euro’s three avenues of fundamental concern have faced troubling developments recently, but their lack of imminence has tempered the urgency in selling pressure. A drop in yields predicated on the ECB’s stimulus upgrade has stalled as the market awaits the Targeted LTRO programs to be adopted – first one is in September. Meanwhile, developments like the Banco Espirito Santo crisis are not making the sovereign contagion jump. Hesitation may hinge on the girth of the capital inflow in the Eurozone. And thereby, ‘risk’ is central…until September.

Yen Crosses Dramatically Diverge from Equities

As mentioned above, the most pronounced absence in the market-wide shift in sentiment this past session was a drop in Yen crosses. These low-yielding carry traders were driven between 25 and 45 percent higher in a 14-month period to through the end of 2013 on the combination of a rapid stimulus influx and the backdrop for yield appetite. Yet, throughout 2014 – as more traditional assets were still rising – these pairs consolidated. Showing this bias, these pairs should be particularly sensitive to risk aversion. Their nonconformity can disarm the bear call.

Australian Dollar Thursday’s Worst Performer as Data Drops

Is the Australian dollar stepping back into its ‘carry currency’ role? As other high-return assets fell this past session, the Aussie dollar stood out as the worst performer of the majors. Yet, as wide as the decline was, its intensity was tame. From sovereign yields, there was little fade in its carry appeal, but there was activity on the economic docket that may speak to curbed hopes for the timing of the eventual RBA hike. Import and factory-level inflation figures for 2Q both cooled. Alternatively, manufacturing activity in Australia and China did reportedly pick up.

British Pound Traders Have Not Forgotten Rate Speculation

GBPUSD has dropped 11 out of the past 12 trading days. This is in part a dollar performance, but the sterling is doing more than its part in the steady retreat. The balance of rate speculation is clearly shifting. That said, the swaps, Libor rates and 2-year Gilt yields are all maintaining their buoyancy. While not pricing in hawkish perfection, there is still an advantage. Yet any further hits like in today’s PMI could carve it away.

Emerging Markets Suffer Second Worst Stumble in 4 Months

The MSCI Emerging Market ETF gapped lower Thursday on the heaviest volume since April. It looks like bears are launching into a new trend. However, this initial move draws looks similar to same kind of formation on April 15 or even July 17 – where a sharp decline quickly stalled and led the market eventually higher. Conviction matters here. Meanwhile, most EM currencies dropped, but the Ruble only slipped 0.2 percent.

Gold Plays the Anti-Dollar Role Over Safe Haven

With the sharp rise in volatility this past session, gold bugs had the opportunity to leverage the metal’s on-again-off-again position as a safe haven. Yet, that didn’t seem to take. The precious metal instead dropped the most in two weeks (1.1 percent) on elevated volume. It seems the US dollar’s strength and the stability of the broader FX market acted as a cantilever to the bulls’ hopes.**Bring the economic calendar to your charts with the DailyFX News App.

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

00:00

AUD

RPData/Rismark House Px (MoM)

1.4%

Property prices in Australia have recently seen fluctuating trends with alternating increases and decreases

01:00

CNY

Manufacturing PMI

51.40

51.00

China has been reported an improvement in its manufacturing sentiment in its last two announcements

01:30

AUD

Producer Price Index (YoY)

2.50%

Last month’s YoY increase was the highest since December 2011

01:30

AUD

Producer Price Index (QoQ)

0.90%

01:35

JPY

Markit/JMMA Japan Manufacturing PMI

50.80

The Japanese economy is facing fears of recession and disappointing PMI numbers will increase speculation of greater stimulus from the BoJ

01:45

CNY

HSBC China Manufacturing PMI

52.00

52.00

Higher than expected manufacturing PMI has bullish effects on the Australian Dollar as China is Australia’s largest export partner

07:45

EUR

Markit/ADACI Italy Manufacturing PMI (JUL)

52.5

52.6

Improvement in manufacturing sentiment in Europe will bring relief to the ECB which is trying to battle deflation and prevent the Eurozone from falling into recession. Poor numbers will increase speculation of added stimulus from the central bank.

07:50

EUR

Markit France Manufacturing PMI (JUL F)

47.6

47.6

07:55

EUR

Markit/BME Germany Manufacturing PMI (JUL F)

52.9

52.9

08:00

EUR

Markit Eurozone Manufacturing PMI (JUL F)

51.9

51.9

08:30

GBP

Markit UK PMI Manufacturing s.a.

57.2

57.5

Better than expected manufacturing sentiment might stir stimulus reduction measures from the Bank of England

12:30

USD

Change in Non-farm Payrolls

230K

288K

Employment data is an important report closely tracked by the US Fed and plays a big role in the monetary policy implemented by the Fed. Change in Non-farm Payrolls and Unemployment Rates are the key headline releases in this report and typically have an impact on the US Dollar.

12:30

USD

Unemployment Rate

6.1%

6.1%

12:30

USD

Labor Force Participation Rate

62.8%

12:30

USD

Average Hourly Earnings (YoY)

2.2%

2.0%

12:30

USD

Average Weekly Hours All Employees

34.5

34.5

12:30

USD

Personal Consumption Expenditure Deflator (YoY)

1.7%

1.8%

The Personal Consumption Expenditure Deflator is another important release closely watched by the Fed as consumer sentiment is an important agenda on the Fed’s list,

12:30

USD

Personal Consumption Expenditure Core (YoY)

1.4%

1.5%

12:30

USD

Personal Income

0.4%

0.4%

12:30

USD

Personal Spending

0.4%

0.2%

13:30

CAD

RBC Canadian Manufacturing PMI

53.5

The PMI has seen mixed trends over the last 6 months with the 53.5 for June the highest since December 2013.

13:45

USD

Markit US Manufacturing PMI (JUL)

56.5

56.3

A strong expansion in manufacturing will be a reflection of improvement in the economy and introduce more rate hike speculation

13:55

USD

U. of Michigan Confidence (JUL F)

81.8

81.3

Final reading likely to carry limited impact

14:00

USD

ISM Manufacturing (JUL)

56

55.3

Manufacturing is the smaller business grouping to services

14:00

USD

ISM Prices Paid

58

58

GMT

Currency

Upcoming Events & Speeches

03:30

JPY

BOJ Governor Kuroda Speaks at Research Institute of Japan

10:00

EUR

ECB Announces 3-Year LTRO Repayment

--:--

EUR

Moody’s to Publish Greece Sovereign Debt Rating

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

13.5800

2.3800

12.7000

7.8165

1.3650

Resist 2

7.5800

5.8950

6.5135

Resist 1

13.3250

2.3000

11.8750

7.8075

1.3250

Resist 1

7.3285

5.8475

6.3145

Spot

13.2247

2.1418

10.7169

7.7500

1.2479

Spot

6.8969

5.5678

6.2834

Support 1

12.8350

2.0700

10.2500

7.7490

1.2000

Support 1

6.7750

5.3350

5.7450

Support 2

12.6000

1.7500

9.3700

7.7450

1.1800

Support 2

6.0800

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

1.3468

1.6986

103.53

0.9144

1.0977

0.9377

0.8580

138.62

1304.30

Res 2

1.3449

1.6960

103.35

0.9130

1.0960

0.9359

0.8562

138.38

1299.11

Res 1

1.3429

1.6935

103.18

0.9116

1.0944

0.9342

0.8544

138.15

1293.92

Spot

1.3391

1.6884

102.82

0.9088

1.0911

0.9306

0.8507

137.68

1283.53

Supp 1

1.3353

1.6833

102.46

0.9060

1.0878

0.9270

0.8470

137.21

1273.14

Supp 2

1.3333

1.6808

102.29

0.9046

1.0862

0.9253

0.8452

136.98

1267.95

Supp 3

1.3314

1.6782

102.11

0.9032

1.0845

0.9235

0.8434

136.74

1262.76

v

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