Dollar Hits New 12-Month High, Forecasts for Early Fed Hike Building

By DailyFx | August 25, 2014 AAA

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Talking Points:

  • Dollar Hits New 12-Month High, Forecasts for Early Fed Hike Buildings
  • Euro Dives to Start the Week Following Draghi’s Jackson Hole Warning
  • Yen Crosses: USDJPY Deviates Further from the Pack

Dollar Hits New 12-Month High, Forecasts for Early Fed Hike Buildings

The Dollar is looking more and more robust. Despite a hearty appetite for risk assets to start the week (working against the greenback’s safe haven status) and little sign that the market was re-pricing its Fed forecasts, the greenback gapped up to open the week. This bullish thrust sent the Dow Jones FXCM Dollar Index (ticker = USDollar) to a six-month high. Amongst the majors, EURUSD dropped to its lowest level in a year while USDJPY notched a modicum of progress on its crawl to seven-month highs. From the two aforementioned majors, we may be looking at a temporary market element at play: gains founded in counterparty weakness. For the dollar itself, there is little demand for liquidity to push the market to seek out haven. As for the currency’s more pressing theme of late – rate expectations – neither Treasury yields nor Fed Funds futures have taken traction. That said, the number of non-market surveys (economists and hedge funds) suggesting a growing call for an earlier first Fed hike are making for more dramatic headlines. Will traders adopt this outlook?

Euro Dives to Start the Week Following Draghi’s Jackson Hole Warning

Among the central bank speakers at the Kansas City Fed-sponsored Jackson Hole Symposium held through this past weekend, ECB President Draghi was the most dovish. In fact, he was arguably the most decisive one way or the other. In the central banker’s remarks, the market divined a concern that inflation would not return to target under the current programs in place and therefore the hope / fear of a Eurozone asset purchase program was fed. Therise in equities, record low government bond yields and slide in the Euro all fit this stimulus puzzle. Yet, what happens if risk trends falter in the middle of an ECB stimulus upgrade? Can the hold back the tide? Either way the Euro will hurt.

Yen Crosses: USDJPY Deviates Further from the Pack

Most of the market’s attention for the Yen crosses Monday went to USDJPY. And why wouldn’t it? The pair gapped on the open and pushed to multi-month highs stoking speculation that the beginning of the next long-term bull leg was taking shape. However, taking stock of the broader Yen crosses would note that most other pairings are straying far from USDJPY’s performance. There is a fundamental imbalance in this comparison where the dollar‘s performance is handling the bulk of this major’s move. Meanwhile, the other Yen crosses are showing a struggle for carry appetite that looks much more like the performance for global equities.

British Pound: UK Markets Have Some Catching Up to Do After the Holiday

London was closed Monday for the Summer Bank Holiday and investors subsequently missed one of the best days for the broader European equity markets in months. As long as sentiment doesn’t take a dramatic turn before the UK markets come online, there will be a significant ‘catch up’ that will be realized in the opening move of the market. However, the demand in the capital markets is unlikely to filter through to the British pound. Not only was the sterling active through the Monday session, but the currency has moved further and further away from its ‘carry’ currency designation. For event risk, the upcoming session holds the BBA home loans figures for July. Given the quick retreat in speculation for BoE rate hikes, the market will likely react more dramatically to a ‘miss’.

New Zealand Dollar Extends Tumble as Speculative Efforts Trump Data

The New Zealand dollar was easily the worst performer amongst the majors Monday – losing between 0.4 percent and 0.8 percent (versus the Euro and Pound respectively). Fundamentally, the stumble didn’t come with much of a market shove. The docket was light until this morning’s July trade balance figures – and the impact of the sharper-than-expected NZ$475 billion deficit is moderated when we consider there is a strong seasonal effect. The bearish drive behind the kiwi carries over far more from speculative interests rather than renewed fundamental concern. That said, the collapse in rate speculation may have tipped the scales towards the other extreme. With this most recent drop for the currency, neither 10-year bond yields nor swaps are showing further loss in rate forecasts.

Emerging Markets Capital Benchmarks Advance but Currencies Fold to USD

Following the lead of most other equity indexes around the world, the MSCI Emerging Market ETF jumped 0.8 percent this past session – enough to wipe out last week’s losses but not to forge a new bull trend beyond the three-year highs that reside immediately above the market. A rising tide lifts all boats, but the capital market climb didn’t’ seem to extend to the FX market. Virtually all of the EM currencies – major powerhouses to small speculative crosses – lost ground to the dollar Monday. Of note, despite the bombastic headlines suggesting tensions between Russia and the West were flaring up; the Ruble was only 0.2 percent lower to start the week. Ahead, Russian and Ukrainian leaders are scheduled to meet. Elsehwere, South Africa will release its 2Q GDP figures at 9:30 GMT.

Gold Breakout Approaching with Market in a Technically Volatile Position

Activity levels in the gold market (measured through the Average True Range) are fading quickly. This drain in trading mirrors other participation and conviction measures. Volume for futures and ETFs has floundered once again. The swell in net long futures speculative interest from the COT was checked back before reaching a 20-month high once again this past week. Meanwhile, the aggregate open interest in gold futures is close to sinking below the five year low set earlier this month. Some measures of market involvement reflect the longer term views of the market, but the short-term volatility levels is where metals traders should be focusing. An extreme in activity is far more quickly reconciled than an extreme in price trend. That is a particularly taxing position given gold is at the floor of its 2014 rising trendline support.

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ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

02:00

CNY

Conference Board China July Leading Economic Index (JUL)

Index has shown strong growth in 2Q this year

9:30

ZAR

South Africa GDP (2Q)

0.9%

-0.6%

A recovery is against the slowdown amongst developed trade partners increasingly difficult

12:30

USD

Durable Goods Orders (JUL)

8.0%

1.7%

Largest increase since Mar 2011 expected, will indicate strong economic recovery if expectations are met

12:30

USD

Durables Ex Transportation (JUL)

0.5%

1.9%

12:30

USD

Cap Goods Ship Nondef Ex Air (JUL)

0.5%

-0.3%

Orders rose in June after contracting during April and May this year

12:30

USD

Cap Goods Orders Nondef Ex Air (JUL)

0.2%

3.3%

13:00

USD

House Price Index (MoM) (JUN)

0.3%

0.4%

Housing Prices have seen a large jump in the last two years, indicative of the improving US Housing market. Housing Data this week will be in focus after improving US economic data and slightly more hawkish comments from the Fed. A higher than expected rise in housing prices might add bets to an earlier rate hike from the Fed

13:00

USD

House Price Purchase Index (QoQ) (2Q)

5.0%

1.3%

13:00

USD

S&P/CS 20 City (MoM) s.a. (JUN)

0.0%

-0.31%

13:00

USD

S&P/Case-Shiller Composite-20 (YoY) (JUN)

8.3%

9.34%

13:00

USD

S&P/Case-Shiller Home Price Index (JUN)

172.84

170.64

13:00

USD

S&P/Case-Shiller US Home Price Index (2Q)

150.76

13:00

USD

S&P/Case-Shiller US Home Price Index (YoY) (2Q)

10.35%

14:00

USD

Richmond Fed Manufacturing Index (AUG)

6.0

7.0

Manufacturing in the region has expanded in 2Q after experiencing contraction due the harsh winter in 1Q

14:00

USD

Consumer Confidence (AUG)

89.0

90.9

A key release that is likely to influence Fed monetary policy if the data reflects a strong and improving consumer sentiment

22:45

NZD

Food Prices (MoM) (JUL)

1.4%

Food prices have been on an uptrend since Feb 2014

GMT

Currency

Upcoming Events & Speeches

-:-

JPY

Cabinet Office Monthly Economic Report for August

3:45

JPY

Japan to Sell 40-Year Government Bonds

-:-

RUS

Russia President Putin Visit Minsk with EU Officials (EM)

-:-

EUR

EU’s Ashton, Oettinger, De Gucht at Summit in Minsk

9:00

EUR

Italy to Sell €3 Bln in 2-Year Zero Coupon Bonds

17:00

USD

US to Sell $29 Bln in 2-Year Notes

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

13.0707

2.1529

10.5535

7.7507

1.2463

Spot

6.8573

5.5796

6.1569

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

1.3435

1.6781

103.17

0.9123

1.0969

0.9386

0.8543

137.87

1329.49

Res 2

1.3417

1.6757

103.00

0.9110

1.0953

0.9369

0.8527

137.64

1325.18

Res 1

1.3399

1.6733

102.83

0.9096

1.0936

0.9352

0.8510

137.41

1320.87

Spot

1.3362

1.6684

102.49

0.9069

1.0904

0.9319

0.8476

136.95

1312.25

Supp 1

1.3325

1.6635

102.15

0.9042

1.0872

0.9286

0.8442

136.49

1303.63

Supp 2

1.3307

1.6611

101.98

0.9028

1.0855

0.9269

0.8425

136.26

1299.32

Supp 3

1.3289

1.6587

101.81

0.9015

1.0839

0.9252

0.8409

136.03

1295.01

v

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