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Dollar and Risk Slow to React to Fed Decision but Implication Clear

By , Chief Currency Strategist
21 June 2012 05:29 GMT

  • Dollar and Risk Slow to React to Fed Decision but Implication Clear
  • Euro: As Distractions Clear, Back to Gauging Regional Trouble
  • British Pound will Feel the Effects of BoE Stimulus Shift, Weak Data
  • New Zealand Dollar Rallies After Strong GDP, Faces Risk Blowback
  • Japanese Yen: Has the BoJ Run Out of Options Before New Members Induction?
  • Australian Dollar Finding Amplitude in Level Risk Trends Through Improved Rate Outlook
  • Gold Finds No Bid after Fed’s Announcement of Twist Extension

Dollar and Risk Slow to React to Fed Decision but Implication Clear

All the pieces were there for the Fed rate decision to fully disappoint trumped up risk appetite expectations and thereby open the door to a significant change in June’s prevailing drive. However, while the policy decision helps define our fundamental bearing, it doesn’t seem to be our catalyst for change. This is a similar situation to the market reaction to the Spanish request for a bank rescue and Greece’s election. Both of these events are targeted at avoiding financial disaster but don’t materially improve the backdrop. The Fed decisionwas expected to provide a more aggressive spring board for risk taking amongst the speculative ranks but instead left the market exposed to larger fundamental currents.

My surprise in tame market conditions following the Fed’s rate decision this past session is founded on the climb in risk positioning since the beginning of the month. Throughout this advance, the backdrop for economic and financial health of continued to deteriorate. This would imply that forward looking markets had expected a development that would either promote stability (and thereby passively encourage a natural correction) or actively fuel risk taking. The outcome was far from accommodative of that positive bias. Where the ‘bullish risk’ scenario would entail purchases of new assets (most likely mortgage-backed securities), the Federal Open Market Committee (FOMC) decided to offer only an extension of the Operation Twist effort. In comparison to the first, $400 billion endeavor, the central bank announced a smaller $276 billion program of selling Treasuries with a maturity of less than 3 years and using the proceeds to buy an equal amount of 6-30 year debt. This has a very real-world effect of flattening the yield curve, but it doesn’t give a market that is addicted to front-running short-term liquidity injections anything to work with. Furthermore, the lowered growth forecastscarry more weight than the suggestion that they have ‘options’.

It is easy to read too much into this event and assign the dollar’s reticence to rally and equities to tumble on hope of more support rolled forward by comments that more action can be taken as it is deemed “appropriate”. The door for further stimulus has always been open, but clearly the central bank sees the diminishing return of further expansion of the balance sheet. Instead, this is an event that removes the sentiment stabilizers and now awaits a strong breeze to start sentiment rolling again. It is difficult to say what the particular catalyst will be (Spain and the Euro Zone, second quarter earnings, an unforeseen development), but the market will be more sensitive negative developments than positive.

Euro: As Distractions Clear, Back to Gauging Regional Trouble

The market has given the euro a number of mulligans on its fundamental docket. Over the past few weeks, the euro has kept sustained its buoyancy through Spain’s sloppy rescue plea, swells in key government bond yields, pained bond auctions, appalling data and a short coming for the community effort to ensure financial and economic stability. Initially, the distraction of the Greek election (which really could only disappoint) was enough to sideline action. Then we had the Fed rate decision, which has proven itself to be just as helpful for the Euro Zone as it is for US markets (limited, if at all). There are few milestones for hope moving forward and many more opportunities for the reality of fundamental burden to weigh in. In the upcoming session, we have a series of Spanish bond auctions, growth leading PMI figures and the start of the Euro-area Finance Ministers meeting. Those holding out for the EU Summit may find the market doesn’t have the patience.

British Pound will Feel the Effects of BoE Stimulus Shift, Weak Data

Where the fear of a Euro-area crisis spread has eased off the pressure on the sterling, the currency has found its own fundamental trouble to replace the absence. The employment data from this past session is certainly important for growth expectations (as will be the upcoming CBI factory activity and ONS retail sales figures), but there are bigger concerns for the pound – namely the stimulus effort. The BoE has been relatively restrained in its balance sheet expansion policy…until now. This past session the central bank called for the five 5 billion sterling in six-month its new ECTR liquidity program. More interesting was the 4-5 split in the BoE minutes, suggesting another stimulus move is at hand.

New Zealand Dollar Rallies After Strong GDP, Faces Risk Blowback

Fundamentals treated the New Zealand dollar well this past session. The currency advance on the positive risk balance that followed the Fed rate decision, but the kiwi really made its move with its own economic event risk. The 1Q GDP figurewas set for modest acceleration on the quarter and significant slowing on the year. That said, the 1.1 percent jump from 4Q was the biggest since 1Q 2007 and the 2.4 percent year-over-year performance was the best since 4Q 2007. Rebuilding has proven stimulating. That said, if risk trends collapse, so will the kiwi.

Japanese Yen: Has the BoJ Run Out of Options Before New Members Induction?

Over the past 24 hours we have read the BoJ’s statement that it has pursued “powerful monetary easing” while Governor Shirakawa has warned that an economic backlash from the Euro Zone’s troubles is possible. Add to that the news that the Diet has approved Prime Minister Noda’s two suggestions for the BoJ (both stimulus supporters), and it would seem that the central bank is in a position to further ramp up assets purchases. There is likely still room for them to do so, but the issue is more in its effectiveness. Risk aversion trumps any individual stimulus program.

Australian Dollar Finding Amplitude in Level Risk Trends Through Improved Rate Outlook

Though the Australian dollar hasn’t outperformed its New Zealand counterpart (hard to do given its superior, real market return), it has nevertheless shown a stronger climb than many of its FX and broader asset class counterparts. In addition to the risk positive move of the past weeks, the Aussie dollar has a recovery drive behind it that follows the hammering taken on rate expectations. That forecasts is easing.

Gold Finds No Bid after Fed’s Announcement of Twist Extension

Like the US dollar, Treasury yields, benchmark risk indexes and volatility readings; gold is an excellent measure of stimulus expectations and the market’s assessment of its effectiveness. After having run a difficult, seven-day advance gold is now working on a third decline. Operation Twist doesn’t seem to be the kind of central bank action that encourages people to divert funds from Treasuries and currencies.

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ECONOMIC DATA

Next 24 Hours

GMT

Currency

Release

Survey

Previous

Comments

22:45

NZD

Gross Domestic Product (QoQ) (1Q)

1.1% (A)

0.3%

Largest jump in quarterly growth since March 2007.

22:45

NZD

Gross Domestic Product (YoY) (1Q)

2.4% (A)

1.8%

1:30

AUD

RBA Foreign Exchange Transaction (Australian dollar) (MAY)

366

6:00

CHF

Trade Balance (Swiss franc) (MAY)

1.33B

Declines due to poor economic conditions in Europe are likely.

6:00

CHF

Exports (MoM) (MAY)

-0.9%

6:00

CHF

Imports (MoM) (MAY)

2.6%

7:00

EUR

French Purchasing Manager Index Manufacturing (JUN P)

44.5

44.7

7:00

EUR

French Purchasing Manager Index Services (JUN P)

45.1

45.1

7:00

CHF

Money Supply M3 (YoY) (MAY)

6.3%

7:15

CHF

Industrial Production (QoQ) (1Q)

-7.2%

7.9%

7:30

EUR

German Purchasing Manager Index Manufacturing (JUN A)

45.2

45.2

Considered leading growth readings for Euro Area countries. Vital to rounding out the already-strained 2Q GDP forecasts.

7:30

EUR

German Purchasing Manager Index Services (JUN A)

51.5

51.8

8:00

EUR

Euro-Zone Purchasing Manager Index Composite (JUN A)

45.5

46

8:00

EUR

Euro-Zone Purchasing Manager Index Manufacturing (JUN A)

44.8

45.1

8:00

EUR

Euro-Zone Purchasing Manager Index Services (JUN A)

46.4

46.7

8:00

EUR

Euro-Zone Current Account n.s.a. (euros) (APR)

7.5B

8:00

EUR

Euro-Zone Current Account s.a. (euros) (APR)

9.1B

8:30

GBP

Retail Sales ex Auto Fuel (MoM) (MAY)

0.7%

-1.0%

The print will be informative on the change in consumer sentiment during the onset of Greek contagion.

8:30

GBP

Retail Sales ex Auto Fuel (YoY) (MAY)

2.7%

-0.3%

8:30

GBP

Retail Sales inc Auto Fuel (MoM) (MAY)

1.2%

-2.3%

8:30

GBP

Retail Sales inc Auto Fuel (YoY) (MAY)

2.1%

-1.1%

10:00

GBP

CBI Trends Total Orders (JUN)

-20

-17

Manufacturing expected to further dive this month.

10:00

GBP

CBI Trends Selling Prices (JUN)

12

12:30

CAD

Retail Sales (MoM) (APR)

0.2%

0.4%

Keeping up appearances of strong growth vital.

12:30

CAD

Retail Sales Less Autos (MoM) (APR)

0.3%

0.1%

12:30

USD

Initial Jobless Claims (JUN 16)

385K

386K

Leading jobs figures don’t lead NFPs.

12:30

USD

Continuing Claims (JUN 9)

3278K

12:58

USD

Markit Purchasing Manager Index - Preliminary (JUN)

53.9

Leading ISM read.

14:00

EUR

Euro-Zone Consumer Confidence (JUN A)

-20

-19.3

14:00

USD

Philadelphia Fed. (JUN)

0

-5.8

14:00

USD

Existing Home Sales (MAY)

4.56M

4.62M

NAHB index offers guide with near 2007 levels.

14:00

USD

Existing Home Sales (MoM) (MAY)

-1.30%

3.40%

14:00

USD

House Price Index (MoM) (APR)

0.40%

1.80%

14:00

USD

Leading Indicators (MAY)

0.10%

-0.10%

GMT

Currency

Upcoming Events & Speeches

8:30

EUR

Spain to Sell 2, 3 and 5-Year Notes

15:00

EUR

Euro-Area Fin Mins Meet in Luxembourg

17:30

GBP

BoE’s Weale Speaks on the UK Economy

SUPPORT AND RESISTANCE LEVELS

To see updated SUPPORT AND RESISTANCE LEVELS for the Majors, visitTechnical Analysis Portal

To see updated PIVOT POINT LEVELS for the Majors and Crosses, visit ourPivot Point Table

CLASSIC SUPPORT AND RESISTANCE

EMERGING MARKETS 18:00 GMT

SCANDIES CURRENCIES 18:00 GMT

Currency

USDMXN

USDTRY

USDZAR

USDHKD

USDSGD

Currency

USDSEK

USDDKK

USDNOK

Resist 2

15.5900

2.0000

9.2080

7.8165

1.3650

Resist 2

7.5800

5.6625

6.1150

Resist 1

15.0000

1.9000

8.5800

7.8075

1.3250

Resist 1

6.5175

5.3100

5.7075

Spot

13.7139

1.7934

8.2132

7.7591

1.2713

Spot

6.9714

5.8684

5.9115

Support 1

12.5000

1.6500

6.5575

7.7490

1.2000

Support 1

6.0800

5.1050

5.3040

Support 2

11.5200

1.5725

6.4295

7.7450

1.1800

Support 2

5.8085

4.9115

4.9410

INTRA-DAY PROBABILITY BANDS 18:00 GMT

Currency

EUR/USD

GBP/USD

USD/JPY

USD/CHF

USD/CAD

AUD/USD

NZD/USD

EUR/JPY

GBP/JPY

Resist. 3

1.2811

1.5817

80.33

0.9592

1.0307

1.0273

0.8065

102.27

126.32

Resist. 2

1.2775

1.5782

80.15

0.9564

1.0284

1.0243

0.8040

101.91

125.93

Resist. 1

1.2739

1.5747

79.97

0.9537

1.0262

1.0213

0.8015

101.55

125.54

Spot

1.2668

1.5676

79.60

0.9482

1.0218

1.0152

0.7965

100.83

124.77

Support 1

1.2597

1.5605

79.23

0.9427

1.0174

1.0091

0.7915

100.11

124.00

Support 2

1.2561

1.5570

79.05

0.9400

1.0152

1.0061

0.7890

99.75

123.61

Support 3

1.2525

1.5535

78.87

0.9372

1.0129

1.0031

0.7865

99.39

123.23

v

--- Written by: John Kicklighter, Senior Currency Strategist for DailyFX.com

To contact John, email jkicklighter@dailyfx.com. Follow me on twitter at http://www.twitter.com/JohnKicklighter

To be added to John’s email distribution list, send an email with the subject line “Distribution List” to jkicklighter@dailyfx.com.

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21 June 2012 05:29 GMT