Dollar Rallies…Sans Traditional Fundamental Support

By DailyFx | Updated August 20, 2014 AAA

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Talking Points:

  • Dollar Rallies…Sans Traditional Fundamental Support
  • British Pound Drops as Tempered Inflation Further Drains Rate Hike Conviction
  • Euro Reflects Little of the Strength Seen in European Capital Markets

Dollar Rallies…SansTraditional Fundamental Support

The US Dollar has soared over the past 24 hours. And yet, this move seems to draw a stark contrast to the fundamental backdrop. This will keep FX traders on guard as they gauge the conviction behind one of the strongest moves we have seen from this benchmark in weeks. From the greenback itself, the Dow Jones FXCM Dollar Index’s (ticker = USDollar) performance paints the picture well enough. The 0.4 percent rally Tuesday – and follow through this morning – lift the Index to a six month high and further reinforces the bullish trend change tentatively marked last month. Beyond the magnitude of the move though, it is the ‘breadth’ that truly impresses. Gains were tallied against high yield, safe haven and interest rate prospects alike. And this performance was generated on a relatively subpar event calendar.

There was a surprise from US fundamentals this past session – but it wasn’t the one that we would expect to carry weight with dollar traders. Housing starts in July jumped 15.7 percent to a 1.09 million unit pace. While this was the biggest jump in 8 months, housing represents relatively little untapped potential for the dollar bulls. Alternatively, the CPI inflation statistics could weigh in on rate forecasts for the Fed, which the market is still significantly discounting versus the estimates offered up by the FOMC and economists. The in-line 2.0 percent reading keeps the mid-2015 time frame on track, but it doesn’t leverage the hawkish view. Meanwhile, the ‘safe haven’ appeal was fully off course with equities charging higher. Ahead, we have the FOMC minutes; but the heavy hitting event risk comes Thursday with PMI data and Jackson Hole.

British Pound Drops as Tempered Inflation Further Drains Rate Hike Conviction

The speculative rate forecast for the Bank of England is furthering its retreat. Mimicking some the exceptional momentum seen last Wednesday after the Quarterly Inflation Report redirected the focus to lackluster wage growth, we saw GBPUSD drop another 0.7 percent on heavy volume. The existing bearish bias set the stage, but the fire was lit by another round of disappointing data. Among a range of inflation indicators, the July CPI report stood out with a 1.6 percent annual reading that anchors the vital rate-deciding statistic to a five-year low.

Euro Reflects Little of the Strength Seen in European Capital Markets

European assets are performing exceptionally well. Demand for sovereign government bonds has returned yields for the likes of Spain and Italy to record lows. Meanwhile, the region’s burdened equity indexes have enjoyed hearty gains – comparable to the losses they suffered during the retreat through July and early August. Yet, despite this tangible appetite from speculators, little of the bullishness seems to be carrying the euro forward. It’s worth noting that foreign demand for Euro ETFs and the like have not recovered from their tumble.

Australian Dollar: RBA and Stevens Exasperatedly Claim Currency Unreasonably High

There is little missing the RBA’s attempt to talk its currency down. However, the success of this effort is still lacking. Tuesday morning, the RBA minutes reiterated a neutral policy stance through the foreseeable future and that the Australian dollar was still ‘high’. Governor Glenn Stevens amplified the bearish view on the currency in his semi-annual monetary policy statement. He specifically remarked that short-term speculators that are long the currency are underestimating the risk that the Aussie dollar will drop. Traders don’t seem too concerned.

Swiss Franc Closes in on SNB’s 1.2000 EURCHF Barrier

Monetary policy over the past three years for the Swiss National Bank (SNB) has revolved around maintaining an unnatural floor on EURCHF to prevent economic fallout from what they deem an unjustified appreciation in their currency. Over the past two years, the clouds seemed to be lifting for the central bank, but the exchange rate never seemed to escape the gravity of that prominent figure. That failure to launch means the ECB’s renewed effort to devalue its own currency through policy easing will put the pressure back on this currency pair. The more effective the European Central Bank is with its own efforts, the heavier the burden its Swiss counterpart will face. What will the latter do? Try to weather a strong storm with constant headwinds at 1.2000 for an undefined time? Or attempt another move to try and loosen the relationship?

Emerging Markets ETF Hits 19-Month High, Currencies Less Robust

Once again, there is a distinct performance contrast between the Emerging Market capital markets and the currency set. The MSCI Emerging Market ETF advanced 0.5 percent this past session to top its highest close since the opening trading day of 2013. A similar sentiment is reflected in the segment’s sovereign debt – the Bloomberg Index rose a fifth consecutive session – as well as the JPMorgan volatility index which continues to retreat. Meanwhile, most EM currencies were lower against the dollar this past session. While the greenback itself was putting up resistance, the speculative appetite clearly fell short on the higher yielding assets. The Brazilian Real was the lone strong performer with a 0.5 percent gain. Meanwhile, the Russian Ruble slipped 0.3 percent and the South African Rand dropped 0.4 percent.

Gold Relative Strength to Silver Wavers at 3-Month Highs

There is a strong relationship between gold and silver – in fact, the current three-month correlation is 0.89 (very high). For an inflation hedge or alternative to traditional currency drive, silver is an acceptable and less expensive speculative substitute. However, for traders, the substitution qualities between the two differ substantially under a ‘risk’ focused market. The imbalance means that when risk aversion kicks in (volatility increases), the ratio of gold-to-silver usually rises. Currently, the ratio is at a 3-month high just above 66.67. However, the VIX run has taken a different tack over the past few weeks. This could prove a weight on gold moving forward – especially relative to its counterpart.

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ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

00:30

AUD

Westpac Leading Index (MoM) (JUL)

0.1%

Has largely remained within the -0.2% and 0.2% range for the last year

01:00

AUD

Skilled Vacancies (MoM) (JUL)

1.6%

No of vacancies have consistently increased since Sep 2013

04:30

JPY

All Industry Activity Index (MoM) (JUN)

-0.4%

0.6%

Contracted by 4.6% in April before the 0.6% expansion in May

06:00

EUR

German Producer Prices (MoM) (JUL)

0.0%

0.0%

The year-on-year producer prices have seen consistent contraction since August of 2013

06:00

EUR

German Producer Prices (YoY) (JUL)

-0.7%

-0.7%

07:00

JPY

Convenience Store Sales (YoY) (JUL)

-1.9%

Have consistently fallen in the last 3 months

09:00

EUR

Euro-Zone Construction Output s.a. (MoM) (JUN)

-1.5%

The MoM construction output had taken a downtrend in January and continues to maintain the general trend.

09:00

EUR

Euro-Zone Construction Output w.d.a. (YoY) (JUN)

3.5%

10:00

GBP

CBI Trends Total Orders (AUG)

4.00

2.00

Selling prices have seen a downtrend since January this year, contracting for the first time in July

10:00

GBP

CBI Trends Selling Prices (AUG)

-4.00

11:00

USD

MBA Mortgage Applications (AUG 15)

-2.7%

United States just reported better than expected housing numbers

12:30

CAD

Wholesale Sales (MoM) (JUN)

0.5%

2.2%

Expected to increase by a smaller amount than prior for 1st time in 4 months

14:30

USD

DOE U.S. Crude Oil Inventories (AUG 15)

1401K

Crude Oil inventories rose for the first time in 7 weeks in last week’s report.

14:30

USD

DOE Cushing OK Crude Inventory (AUG 15)

418K

22:00

NZD

ANZ Job Advertisements (MoM) (JUL)

5.7%

Job Ads saw a pickup in June after falling 4.8% in May

22:45

NZD

Net Migration SA (JUL)

4270.00

NZ has seen a rise in immigrants since December of 2012

23:50

JPY

Japan Buying Foreign Bonds (Yen) (AUG 15)

¥232.6B

Foreigners have continued to purchase Japanese bonds for the last 6 weeks after the crisis in Ukraine, dispute between Israel and Gaza and problems in Iraq.

23:50

JPY

Foreign Buying Japan Stocks (Yen) (AUG 15)

-¥584.9B

23:50

JPY

Foreign Buying Japan Bonds (Yen) (AUG 15)

¥196.8B

23:50

JPY

Japan Buying Foreign Stocks (Yen) (AUG 15)

¥175.7B

GMT

Currency

Upcoming Events & Speeches

09:30

GBP

Bank of England Releases Monetary Policy Meeting Minutes

12:30

EUR

Merkel Speaks at Economists’ Conference in Lindau

18:00

USD

USD Fed Releases Minutes from July 29-30 FOMC 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

13.3250

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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