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Dollar – Should We Expect that Same Fed Turn as Post-QE3?

By , Chief Currency Strategist
13 December 2012 06:57 GMT

  • Dollar – Should We Expect that Same Fed Turn as Post-QE3?
  • Euro Faces 1.3100 and a Greek Aid Payment that is Priced In
  • British Pound Mixed Between Big Drop in Jobless, Fears of BoE Stimulus
  • Swiss Franc Traders Tune in to SNB for Follow Up to Negative Bank Rates
  • Australian Dollar: Inflation Expectations Plunge, Currency Exposed to Risk
  • Japanese Yen: Be Careful of Jumping on This Fast-Moving Plunge
  • Gold Drops after the Fed Turns on the Stimulus Spigot?

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Dollar – Should We Expect that Same Fed Turn as Post-QE3?

Equities rose and the dollar dropped against both the Euro and Australian dollar Wednesday after the Fed announced that it was wading deeper into the stimulus pool. Yet, we saw the same reaction after the induction of the QE3 mortgage-backed securities purchases program back on September 13. Looking back to that historical example, though, the equities markets leveled off immediately after the last-gasp advance and the greenback triggered an abrupt reversal not a day later. So, the question going forward is whether the good will for risk was already fully priced in.

First we need to get the lay of the land for this monetary policy outcome from the Federal Reserve. The FOMC announced a monthly purchase of $45 billion in longer-dated Treasuries would replace the expiring Operation Twist extension program at the start of next year. For all intents and purposes, this is as close to meeting expectations as the central bank could have gotten. This will certainly have the benefit of forcibly keeping Treasury yields down - which translates into lower loans for homes, vehicles, small businesses, education, etc; and thereby encourages growth to the best of the Fed’s ability. That said, the market impact depends on how much of this outcome was priced in (for the short-term) and to what degree it can offset larger headwinds like slowing growth, the exit of speculative capital and financial uncertainties (for the long-term). On both accounts, this policy decision will struggle to bolster risk taking and/or drive the dollar down.

There are two threats to the dollar from additional stimulus: the removal of risk drives speculative appetites higher (negating the need for a safe haven like the dollar), and an increase to the money supply can structurally devalue the currency. In the latter function, a monthly increase of $45 billion to the Fed balance sheet and money supply can easily be absorbed. Risk sentiment is the more critical factor. The promise to keep rates low is an invitation to take on more risk (though volatility levels are already at a 5-year low) in order to draw more returns (though yields are so low that capital has to be distributed to far risky assets). Given the four-week rally into this decision, the short-term risk expectations are likely played out. Now, the reality of thin speculative participation (season and structural) and the lingering Fiscal Cliff will really start to weigh in.

Euro Faces 1.3100 and a Greek Aid Payment that is Priced In

The euro has climbed rapidly this week – against safe haven and investment currency alike. That is a critical point to make as it speaks to strength inherent to the shared currency. This may be another key example of expending buying interest between the fundamentals are fully confirmed. For the euro, the fundamental focus is on the Eurozone Finance Ministers’ decision on whether to pay out Greece’s next round of aid. Through the past week, we have the stages of progress to bring the country closer to relief. The bond buyback program was a big stepping stone and arrangements for €11.3 billion in EFSF bonds in exchange for €31.8 billion in Greek debt comes close to meeting requirements. Though, technically, the amount spent was more than was earmarked and the projected debt-to-GDP ratio for 2020 of 128 percent is lower than the IMF’s level of sustainability. Be prepared for a deferment (an immediate selling event). An approval is best case, and may be fully priced.

British Pound Mixed Between Big Drop in Jobless, Fears of BoE Stimulus

The sterling was torn between two very different fundamental developments this past session. On the positive side, jobless claims for November unexpectedly dropped by 3000-positons. The real stats come from the ILO figures though which reported the biggest drop in unemployment since 2001 – though the jobless rate held steady. On the negative side, future BoE Governor Carney hinted that he could take a very dovish tack in the UK. This offset could have been the source of the pound’s drift or the currency may still be disconnected from its own fundamentals.

Swiss Franc Traders Tune in to SNB for Follow Up to Negative Bank Rates

The Swiss franc was the only currency that outpaced the Euro – which was itself exceptionally strong. That speaks to the currency’s performance. Against most counterparts, the franc is a stand in for the euro; so much of that strength is likely borrowed. However, the slip for the EURCHF speaks to lingering safe haven demands for Euro-area funds. The SNB should be concerned. We will see if they are in the upcoming London session as the SNB will deliberate on monetary policy. The central bank has maintained a floor on EURCHF and Swiss banks have started to charge for holding franc-based accounts, yet the currency stubbornly holds on. Further stimulus would help, but it is unlikely.

Australian Dollar: Inflation Expectations Plunge, Currency Exposed to Risk

There are two things that typically define the Australian dollar: risk trends and interest rate expectations. The two are interconnected. This morning, we saw inflation expectations (a factor in policy setting) dropped to the lowest level since 1997 – boosting rate cut potential. That sets the tone for the Aussie and leaves it exposed to selling. Yet, to turn the high-yielder, risk trends needs to collapse.

Japanese Yen: Be Careful of Jumping on This Fast-Moving Plunge

The Japanese yen is on fire. The currency has plummeted against every one of its counterparts this week and finds itself at multi-month (and in some cases, multi-year) lows. We have seen heavy runs like this happen in the past and history shows they can be hearty trends. However, there are two reasons for concern for jumping in now this late in the game. First the threat of risk aversion (detailed above) means carry trade unwinding drives the yen higher. The other issue is the Japanese election this weekend. Stimulus fears may have already played out.

Gold Drops after the Fed Turns on the Stimulus Spigot?

While gold is often quote as a safe haven asset, it’s more consistent role nowadays is as an alternative to currencies – and the US dollar more specifically. As the Fed works to undermine its currency by boosting risk appetite and flooding the money supply, we would normally expect the precious metal to gain ground. That didn’t happen this past session with the new stimulus announcement. Instead, gold dropped off into this morning’s Asian session. This may be a longer-term sign that stimulus efforts have peaked for market influence.

ECONOMIC DATA

Next 24 Hours

GMT

Currency

Release

Survey

Previous

Comments

0:00

NZD

ANZ Consumer Confidence (MoM) (DEC)

-

3.3%

New Zealand consumer confidence continues to rise as economy weathers China, EU

0:00

NZD

ANZ Consumer Confidence Index (DEC)

-

114.1

0:00

AUD

Consumer Inflation Expectation (DEC)

-

2.2%

Inflation continues to be stable

0:30

AUD

New Motor Vehicle Sales (MoM) (NOV)

-

-2.8%

Large purchases continuing to increase, may be due to lower rates and borrowing

0:30

AUD

New Motor Vehicle Sales (YoY) (NOV)

-

8.6%

5:00

JPY

Tokyo Condominium Sales (YoY) (NOV)

-

-14.4%

More stimulus may be needed

8:30

CHF

Swiss National Bank Rate Decision

0.00%

0.00%

No change in floor is expected, though there may be suggestions of diversifications of SNB’s massive reserve holdings away from EUR denominated assets

10:00

EUR

Euro-zone Labor Costs (YoY) (3Q)

-

1.6%

May suggest stable inflation

13:30

CAD

Capacity Utilization Rate (3Q)

80.5%

81.0%

CA industries robust

13:30

CAD

New Housing Price Index (MoM) (OCT)

0.1%

0.2%

New housing prices not yet seeing large demand in overall real estate market

13:30

CAD

New Housing Price Index (YoY) (OCT)

-

2.4%

13:30

USD

Advance Retail Sales (NOV)

0.4%

-0.3%

Retail sales expected to gain on holiday buying, though survey numbers cautious

13:30

USD

Retail Sales Ex Auto & Gas (NOV)

0.2%

-0.3%

13:30

USD

Retail Sales Less Autos (NOV)

0.0%

0.0%

13:30

USD

Retail Sales "Control Group" (NOV)

0.3%

-0.1%

13:30

USD

Continuing Claims (DEC 1)

-

3205K

Weekly jobs report expected see continued improvement

13:30

USD

Initial Jobless Claims (DEC 8)

370K

370K

13:30

USD

PPI Ex Food & Energy (MoM) (NOV)

0.2%

-0.2%

Input prices growing moderately, no reason yet for inflationary fears

13:30

USD

PPI Ex Food & Energy (YoY) (NOV)

2.2%

2.1%

13:30

USD

PPI (MoM) (NOV)

-0.5%

-0.2%

13:30

USD

PPI (YoY) (NOV)

1.8%

2.3%

15:00

USD

Business Inventories (OCT)

0.3%

0.7%

Investment spending still rising

23:50

JPY

Tankan Large Manufacturers Index (4Q)

-

-3

Last Tankan report of 2012 may drive policy, especially towards foreign exchange, for the next year as large manufacturers heavily dependent on foreign demand

23:50

JPY

Tankan Non-Manufacturing Outlook (4Q)

-

5

23:50

JPY

Tankan Non-Manufacturing Index (4Q)

-

8

23:50

JPY

Tankan Large Manufacturers Outlook (4Q)

-

-3

23:50

JPY

Tankan Large All Industry Capex (4Q)

-

6.4%

GMT

Currency

Upcoming Events & Speeches

-:-

EUR

IMF & ECB Conference on Fiscal Governance

9:00

EUR

ECB Publishes Monthly Report

9:00

EUR

Eurozone Finance Ministers Meets on Greece

9:30

EUR

|| Spain to Sell 3, 5 and 28-Year Bonds

6:45

CHF

SECO December 2012 Economic Forecasts

18:00

USD

|| US to Sell 30-Year Bonds

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

1.3186

1.6226

84.41

0.9335

0.9901

Resist 2

7.5800

6.1875

6.1150

Resist 1

1.3160

1.6203

84.20

0.9317

0.9887

Resist 1

6.8155

5.9190

5.8200

Spot

1.3134

1.6181

84.00

0.9299

0.9872

Spot

6.6833

5.7027

5.6227

Support 1

1.3082

1.6135

83.59

0.9264

0.9844

Support 1

6.0800

5.5840

5.6000

Support 2

1.3030

1.6089

83.18

0.9229

0.9816

Support 2

5.8085

5.3350

5.3040

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

1.3186

1.6226

84.41

0.9335

0.9901

1.0629

0.8516

110.62

136.25

Resist. 2

1.3160

1.6203

84.20

0.9317

0.9887

1.0609

0.8498

110.30

135.90

Resist. 1

1.3134

1.6181

84.00

0.9299

0.9872

1.0589

0.8480

109.98

135.56

Spot

1.3082

1.6135

83.59

0.9264

0.9844

1.0550

0.8444

109.35

134.87

Support 1

1.3030

1.6089

83.18

0.9229

0.9816

1.0511

0.8408

108.72

134.18

Support 2

1.3004

1.6067

82.98

0.9211

0.9801

1.0491

0.8390

108.40

133.83

Support 3

1.2978

1.6044

82.77

0.9193

0.9787

1.0471

0.8372

108.08

133.49

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

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13 December 2012 06:57 GMT