Dollar Rallies, But What Was the Source of Strength?

By DailyFx | July 30, 2014 AAA

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Talking Points:

  • Dollar Rallies, But What Was the Source of Strength?
  • Euro Advances as Spanish GDP Outperforms, Yields Rise
  • Yen Crosses the Best Performing ‘Risk’ Assets

Dollar Rallies, But What Was the Source of Strength?

In a storm of fundamentals, the dollar did not escape a swell of volatility this past session. However, the currency’s remarkable rally didn’t exactly fit the expected interpretation of the event risk. Then again, neither did the general sentiment mix within the financial system look like the cookie cutter response. And, that clear dollar move amid the tumult is important to appreciate as we project its heading moving forward. Assessing performance first, the Dow Jones FXCM Dollar Index (ticker = USDollar) surged beyond 10,500 on one of the biggest advances in four months. Furthermore, the greenback’s performance was broad and uniform with gains versus all of its major counterparts.

The dollar’s performance isn’t remarkable because of the event risk itself, but the lack of consistency in the market’s response. From the 2Q US GDP release, the disparity became clear. A robust 4.0 percent pace of annualized growth through the quarter soundly beat the 3.0 percent consensus and quieted fears of stalled economy following the unexpected first quarter slump (which was itself revised to a smaller contraction). A notable addition to this report was the core PCE inflation measure which jumped to 2.0 percent – the Fed’s target. From a risk appetite perspective, this could have sent investors clamoring for higher risk / higher return assets. Yet, the S&P 500 and Dow edged down and high-yield corporate bonds dropped. Then there was the rally in yen crosses – the FX-version of the ‘long risk trade’. But perhaps the most marked response was the jump in FX Volatility.

In the wake of the economic data, an upgraded interest rate forecasts was more consistent. Treasury yields in area of the curve that aligns to the likely time frame for central bank rate hikes surged and Fed Fund futures priced in an advance in hawkish speculation. With the hawks in dollar bulls in charge, the FOMC decision could have proved low-hanging fruit. However, the central bank deftly avoided providing speculators something to work with. Aside from the $10 billion Taper to QE3 (fully priced in), the Fed’s statement hedged its bets by saying that the chance of inflation persistently below its target 2 percent was diminishing while also noting that there was significant underutilization of labor resources. This noncommittal view will leverage the emphasis on Friday’s combination of July NFPs and June PCE inflation – the primary indicators for the central bank’s dual mandate. In the meantime, traders should keep a wary eye on risk trends as well.

Euro Advances as Spanish GDP Outperforms, Yields Rise

While the focus was on the US docket, the Euro-area newswires were offering up noteworthy headlines. On the data side, Spain’s own 2Q GDP reading beat expectations with a 0.6 percent increase through the period and the Eurozone economic sentiment index ticked higher. From more fundamental concerns, a notable jump in Italian and Spanish yields is too early to be called a sovereign bond risk. Ahead, we may see a refocus on monetary policy and the possibility of the ECB promoting further accommodation with the EZ employment and inflation data on deck.

Yen Crosses the Best Performing ‘Risk’ Assets

In a mixed view of speculative appetites this past session, the Yen crosses stand out as the most unusual. While equities were evasive and volatility readings rose, these carry trade proponents charged higher. Beyond the lack of drive for the appetite for income trades like these crosses (the DB carry harvest index dropped is just off a two-month low), this is a currency that has shown a remarkable disconnect from positive speculative moves through much of 2014. If a universal appetite for income / dividend / yield doesn’t arise, these pairs are at risk.

Canadian Dollar Traders Weigh in on GDP Data

Year-to-date, the Canadian dollar is down against most of its major counterparts (the exception is the Euro). The dovish turn from the Bank of Canada has put material pressure on this once prominent carry currency. A neutral stance is the more likely bearing moving forward, but will the policy authority be driven to a more proactive effort moving forward? Data like today’s May GDP reading and wage growth figures will play a considerable role in shaping that decision for the BoC and expectations for the market.

Swiss Franc: SNB Tells Us How Expensive its Policy Efforts Are

How expensive is it to maintain the Swiss franc’s floor? We will find out in this morning’s report from the Swiss National Bank. The policy authority is scheduled to report is 2Q earnings on the assets that it has purchased to facilitate its position as well as its currency allocation. The exposure to the Euro keeping EURCHF above 1.2000 is to be expected, but details can illuminate what further steps they could take.

Emerging Market: Ukraine GDP Plunges, Russia Meets Fresh Sanctions

Just a day after the US and European Union announced new sanctions on Russia, the G7 released a common statement voicing a willingness to take further steps should the country not change its stance on Ukraine. The Ruble continues its slide lower versus the US dollar, but the news wasn’t amplifying momentum. Meanwhile, the Ukraine reported that its economy dropped 4.7 percent in the year through 2Q.

Gold Looks for Intensified Fed Bias, Doesn’t Find It

While the dollar rallied, the Yen tumbled and interest rate expectations boomed; gold was virtually unchanged. Despite the headlines, the metal would see none of its major roles – safe haven, currency alternative, inflation hedge – generate significant response from traders. Meanwhile, volume was tepid in derivatives and open interest in gold futures is seeing an exacerbated collapse.**Bring the economic calendar to your charts with the DailyFX News App.

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

01:30

AUD

Export Price Index (QoQ)

-4.0%

3.6%

A rise in export prices typically has a bullish impact on the Australian Dollar

01:30

AUD

Import Price Index (QoQ)

-1.5%

3.2%

01:30

AUD

Building Approvals (MoM)

0.0%

9.9%

Can be an indicator of change in Australia’s housing market

01:30

AUD

Building Approvals (YoY)

23.3%

14.3%

01:30

AUD

Private Sector Credit (MoM)

0.4%

0.4%

A rise in loans shows the willingness of companies to take out loans to invest in growth

01:30

AUD

Private Sector Credit (YoY)

4.6%

4.7%

01:30

JPY

Labor Cash Earnings (YoY)

0.8%

0.6%

Measure of wage inflation, an important metric that BoJ’s easing policy is trying to increase

05:00

JPY

Annualized Housing Starts

0.857M

0.872M

A strong rise in these figures from the Japan housing market is likely to indicate a positive consumer sentiment in the island nation

05:00

JPY

Construction Orders (YoY)

13.7%

05:00

JPY

Housing Starts (YoY)

-11.5%

-15.0%

06:00

GBP

Nationwide House Prices n.s.a. (YoY)

11.3%

11.8%

The Bank of England is currently try to curb a rise in housing prices to prevent a bubble

06:00

GBP

Nationwide House Prices s.a. (MoM)

0.5%

1.0%

07:55

EUR

German Unemployment Change

-5K

9K

Employment change and consumer sentiment are two important agendas for the ECB currently as it is trying to battle deflation and prevent the Eurozone from entering into recession through monetary policy

07:55

EUR

German Unemployment Rate s.a.

6.7%

6.7%

08:00

EUR

Italian Unemployment Rate

12.6%

12.6%

09:00

EUR

Euro-Zone Unemployment Rate

11.6%

11.6%

09:00

EUR

Euro-Zone Consumer Price Index Estimate (YoY)

0.5%

0.5%

09:00

EUR

Euro-Zone Consumer Price Index - Core (YoY)

0.8%

0.8%

11:30

USD

Challenger Job Cuts (YoY)

-20.2%

One of the last employment figure indicators before all-important NFPs

11:30

USD

RBC Consumer Outlook Index

50.5

Consumer attitudes on the current and future economic outlook are usually strong indicators of consumer sentiment

12:30

USD

Employment Cost Index

0.5%

0.3%

Provides a picture of changing trends in the labor industry by detailing changes in labor costs for businesses in the US

12:30

CAD

Average Weekly Earnings (YoY)

3.3%

The Bank of Canada is currently focused on tackling downside inflation risk and GDP is lower on its agenda

12:30

CAD

Gross Domestic Product (MoM)

0.3%

0.1%

12:30

CAD

Gross Domestic Product (YoY)

2.3%

2.1%

12:30

USD

Initial Jobless Claims

300K

284K

Employment numbers are an important release tracked by the Fed to determine it monetary policy

12:30

USD

Continuing Claims

2492K

2500K

23:30

AUD

AiG Performance of Manufacturing Index

48.9

Has held below 50 for eight months

23:50

JPY

Loans & Discounts Corp (YoY)

2.2%

Loan growth has slowed from its persistent recovery the past 3 years

GMT

Currency

Upcoming Events & Speeches

7:00

CHF

Swiss National Bank Releases 2Q 2014 Currency Allocation

11:45

EUR

Italy’s and France Finance Minister Padoan, Sapin Meet in Rome

--:--

JPY

BoJ Policy Board Member Kiuchi Speaks with Business Leaders

--:--

USD

U.S. Treasury FSOC Meeting

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

13.1500

2.3000

11.8750

7.8075

1.3250

Resist 1

6.8650

5.8475

6.2660

Spot

12.9579

2.0936

10.5388

7.7502

1.2410

Spot

6.8266

5.5372

6.2021

Support 1

12.8350

2.0700

10.2500

7.7490

1.2000

Support 1

6.0800

5.3350

5.7450

Support 2

12.6000

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

1.3542

1.7091

102.35

0.9077

1.0799

0.9475

0.8640

137.92

1310.87

Res 2

1.3523

1.7067

102.20

0.9064

1.0784

0.9459

0.8623

137.70

1306.03

Res 1

1.3505

1.7042

102.05

0.9050

1.0770

0.9443

0.8607

137.49

1301.19

Spot

1.3468

1.6993

101.76

0.9023

1.0741

0.9411

0.8574

137.05

1291.50

Supp 1

1.3431

1.6944

101.47

0.8996

1.0712

0.9379

0.8541

136.61

1281.81

Supp 2

1.3413

1.6919

101.32

0.8982

1.0698

0.9363

0.8525

136.40

1276.97

Supp 3

1.3394

1.6895

101.17

0.8969

1.0683

0.9347

0.8508

136.18

1272.13

v

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