Dollar Recovery Grows More Difficult with Fed Speakers on Deck

By DailyFx | July 07, 2014 AAA

DailyFX.com -

Talking Points:

  • Dollar Recovery Grows More Difficult with Fed Speakers on Deck
  • Euro Dependency on Volatility Intensifying
  • British Pound and Rate Forecast Strength the Burden of Data to Maintain

Dollar Recovery Grows More Difficult with Fed Speakers on Deck

The rebound the US Dollar mounted through the second half of this past week was an opportunistic move derived as much from market conditions as fundamentals. To keep its favorable trajectory, the greenback needs to find more tangible endorsement. With this new trading week, there is potential that the passing of the seasonal low in volatility associated with the Independence Day holiday – within the ‘summer doldrums’ – can in turn shake loose the contentedness seen with the historical drop in activity measures over the past months and years. Yet, neither the world’s most liquid currency nor its other speculative benchmarks are immediately offering up a change in participation and the revival of risk premia that fuels trading. For the Dow Jones FXCM Dollar Index (ticker = USDollar), a slight decline further disarms the 0.8 percent rally from last weeklows. Elsewhere, volatility measures are only slightly higher and volume behind S&P 500 was still under 400 million shares – collectively reflecting a slow return to speculative form.

Through more active fundamental channels, the dollar will see interest rate interests stoked through the coming session. Two Fed officials are scheduled to speak in the upcoming session. Richmond Fed President Jeffrey Lacker will weigh in on the economic outlook at 17:00 GMT. A known hawk, Lacker is not a FOMC voter this year, but he will be in 2015 – the crucial period in which the central bank is expected to begin its foray into policy tightening. Meanwhile, current voter Minneapolis Fed President Narayana Kocherlakota would generate the most interest if he were to stray from his aggressively dovish bearings when he speaks on monetary policy at 17:45 GMT. Despite a recent rally in Treasury yields at the shorter end of the curve (particularly 2-year), the market’s forecast for US rates is still trading at a meaningful discount to the Fed’s own projections. Fed Funds futures show a 33 bps discount to the central bank’s 1.13 percent forecast for rates at the end of 2015, and 68 bps below the 2.50 percent FOMC projection for 2016.

Euro Dependency on Volatility Intensifying

Currently, the 60-day (3 trading month) correlation between EURUSD and the FX-based volatility index is positive. That would insinuate that a rise in activity and ‘fear’ would benefit this pair. However, the comparison between the two is distorted by the exceptional level of complacency. A more meaningful connection between market activity and the Euro is the volatility index’s correlation to the periphery government bond yields. Over the same period, the two-year Spanish yield’s correlation to the same pair is currently 0.7 (strongly positive) and has been in positive territory for most of the past five years. What does this mean? The speculative capital flowing into the riskier areas and assets in the region are following the same channels of complacency that equity indexes are climbing. Therefore, a record-breaking appetite in Eurozone government bonds (as a proxy for the broader markets) is just as prone to deleveraging as the S&P 500.

British Pound and Rate Forecast Strength the Burden of Data to Maintain

A proprietary consumer index from Llodys released this past session reported a softening sense of optimism in the labour market with a June reading of 1 percent – following the previous update’s net 4 percent projecting improved conditions. Yet, what is more interesting in this report was the increase in those expecting a rate hike from the BoE over the next 12 months – 68 percent versus May’s 59 percent. Citizens are preparing for what the market has already worked into the sterling. Yet, from the market’s perspective, that first move is virtually priced in and set very far forward in the curve. In essence the pound bulls are ‘pricing in perfection’. Their burden is to maintain optimism to keep the currency buoyant, much less rising. With a round of data ahead, this difficulty should not be underappreciated.

Canadian Dollar Worst Performer on the Day On Weak Data

The Canadian Dollar was the worst performing major through Monday’s session – dropping between 0.3 to 0.8 percent versus the Pound and Yen respectively. This weakness was heavily sourced in the poor data that the currency absorbed. While building permits in May surged, a June manufacturing survey posted one of its worst readings in five years, while 2Q business and lending surveys both slid.

Chinese Yuan: Discussion about Exchange Rates and Monetary Policy Ahead

With the Chinese Renminbi attempting to regain its footing against the US Dollar over the past few months, FX traders are looking for distinct catalysts for this future FX liquidity yardstick. A long-term consideration, the upcoming annual Strategic and Economic dialogue between the US and China will be point of interest for investors as they read on topics like the Yuan’s exchange rate and Fed’s global monetary policy impact.

Emerging Market Currencies off to a Weak Start

While the Emerging Market ETF – reflecting capital markets – was little changed from its perch at 12-month highs, the segment’s currencies were not doing well. Aside from an impressive 1.8 percent rally from the Indonesian Rupiah, the high risk – high yield currencies were broadly lower against the US Dollar. Once again, the Brazilian Real, Mexican Peso and Russian Ruble were leading the slide.

Gold Threatens Bearish Turn Despite a Surge in Speculative Futures Interest

Technical traders would not hesitate to point out the head-and-shoulders pattern forming on gold. Fundamental traders wouldn’t would see the same lack of progress after last month’s climb and the absence of an imminent key driver – financial catastrophe, dollar plunge, stimulus swell. This hesitation comes despite a 147 percent, four-week rally in net long gold futures holdings though this past week**Bring the economic calendar to your charts with the DailyFX News App.

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

1:30

AUD

NAB Business Confidence (JUN)

7

Recent PMI figures have not offered favorable activity readings for June

1:30

AUD

NAB Business Conditions (JUN)

-1

5:00

JPY

Eco Watchers Survey: Outlook (JUN)

54.5

53.8

Forecasts project an extended recovery from the post-Tax hike plunge in sentiment

5:00

JPY

Eco Watchers Survey: Current (JUN)

48.9

45.1

6:00

JPY

Bankruptcies (YoY) (JUN)

-20.19%

Last reading lowest since July 2010

6:00

EUR

German Trade Balance (euros) (MAY)

16.2B

17.4B

Germany is finding itself coming under the economic and financial burdens of its Eurozone neighbors. Trade with its neighbors and non-EU counterparts will be critical to maintaining its outperformance

6:00

EUR

German Current Account (euros) (MAY)

14.5B

18.4B

6:00

EUR

German Exports s.a. (MoM) (MAY)

-0.4%

3.0%

6:00

EUR

German Imports s.a. (MoM) (MAY)

0.5%

0.2%

6:30

EUR

Bank of France Business Sentiment (JUN)

97

In contrast to Germany, France is once again taking on the title of the Eurozone’s weakest ‘core’ economy. This data will offer a general update

6:45

EUR

French Central Government Balance (euros) (MAY)

-64.2B

6:45

EUR

French Trade Balance (euros) (MAY)

-3933M

7:15

CHF

Consumer Price Index (MoM) (JUN)

0.1%

0.3%

Exceptionally low inflation pressures reinforces the SNB’s stance on monetary policy, but it further contrasts the nation’s housing sector troubles

7:15

CHF

Consumer Price Index (YoY) (JUN)

0.2%

0.2%

7:15

CHF

Consumer Price Index- EU Harmonized (YoY) (JUN)

0.0%

0.2%

7:15

CHF

Retail Sales (Real) (YoY) (MAY)

0.4%

8:30

GBP

Industrial Production (MoM) (MAY)

0.3%

0.4%

These economic indicators are increasingly important as rate expectations for the UK rise to new heights

8:30

GBP

Industrial Production (YoY) (MAY)

3.2%

3.0%

8:30

GBP

Manufacturing Production (MoM) (MAY)

0.4%

0.4%

8:30

GBP

Manufacturing Production (YoY) (MAY)

5.6%

4.4%

11:30

USD

NFIB Small Business Optimism (JUN)

97

96.6

This group is the largest employer in US

14:00

GBP

NIESR Gross Domestic Product Estimate (JUN)

0.9%

A good proxy to slow quarterly numbers

19:00

USD

Consumer Credit (MAY)

$19.05B

$26.847B

Another view of the student debt bubble

22:45

NZD

Card Spending (MoM) (JUN)

1.7%

An upstream domestic growth measure for New Zealand

22:45

NZD

Card Spending Retail (MoM) (JUN)

1.3%

23:01

GBP

BRC Shop Price Index (YoY) (JUN)

-1.4%

Though proprietary, another inflation measure to work with

23:50

JPY

Japan Money Stock M3 (YoY) (JUN)

2.5%

2.6%

Tracking inflation towards BoJ’s target

GMT

Currency

Upcoming Events & Speeches

3:45

JPY

BoJ's Nakaso Speaks on Japanese Economy

6:30

EUR

ECB’s Noyer Speaks in Paris

7:00

EUR

ECB’s Line Speaks in Madrid

9:30

GBP

UK to Sell 36-Year Bonds

17:00

USD

Fed's Jeffrey Lacker Speaks on U.S. Economy

17:45

USD

Fed's Narayana Kocherlakota Speaks on Monetary Policy

19:00

NZD

RBNZ Governor Wheeler Speaks

-:-

USD

US Earnings – Alcoa 2Q Results

22:00

NZD

RBNZ Assistant Governor McDermott Speaks

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

6.8155

5.8475

6.2660

Spot

12.9418

2.1289

10.6645

7.7501

1.2466

Spot

6.6888

5.4511

6.1665

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

1.3750

1.7247

102.19

0.8930

1.0692

0.9524

0.8822

139.83

1345.75

Res 2

1.3732

1.7223

102.04

0.8917

1.0679

0.9508

0.8806

139.61

1340.98

Res 1

1.3714

1.7199

101.89

0.8904

1.0665

0.9492

0.8789

139.40

1336.21

Spot

1.3679

1.7152

101.59

0.8878

1.0639

0.9460

0.8756

138.97

1326.67

Supp 1

1.3644

1.7105

101.29

0.8852

1.0613

0.9428

0.8723

138.54

1317.13

Supp 2

1.3626

1.7081

101.14

0.8839

1.0599

0.9412

0.8706

138.33

1312.36

Supp 3

1.3608

1.7057

100.99

0.8826

1.0586

0.9396

0.8690

138.11

1307.59

v

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