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Dollar Rallies after Fed Talks QE3 Exit, Will EUR/USD Break 1.2800?

By , Chief Currency Strategist
23 May 2013 04:22 GMT
  • Dollar Rallies after Fed Talks QE3 Exit, Will EUR/USD Break 1.2800?
  • Japanese Yen Traders See the Limits, Ill Side Effects of BoJ Stimulus
  • British Pound: A Round of Data and Nothing Went the Sterling’s Way
  • Euro Optimism to be Tested by Recession Warning in PMI Data
  • Australian Dollar Slides Further on Stimulus Concerns, Chinese Data
  • Canadian Dollar Breaks from Multi-Year Range with Help of Retail Stats
  • Gold: Steady Fed and BoJ Stimulus Programs Dollar Bullish, Gold Bearish

Dollar Rallies after Fed Talks QE3 Exit, Will EUR/USD Break 1.2800?

The markets have sought out guidance on the future of the Federal Reserve’s QE3 plans to shape their speculation, and that is exactly what Fed Chairman Ben Bernanke and the FOMC minutes offered. Tentative but tangible commentary about the eventual reduction in the current $85 billion-per-month program spurred the traditional ‘risk aversion’ move from the capital markets. For the S&P 500, an intraday reversal tore the index from fresh record highs to a dangerous shift in momentum that threatens a deeper rollover. Leading the safe havens – and a direct victim of the supply-and-demand elements of the US money supply – the Dow Jones FXCM Dollar (ticker = USDollar) surged above 10,850 to its highest level since July 2010. These are both meaningful developments, but they don’t exactly confirm conviction just yet. Just like a technical breakout does not necessarily guarantee a lasting trend, a fundamental volatility swell does not ensure a systemic shift in capital.

To determine whether the market will finally pitch into a fear-driven deleveraging and risk aversion spiral, we need to see the proper fundamental catalyst to unite investors’ fears about their exposure. The Fed’s commentary does a little more than sow the seeds of doubt. The action began in the New York morning session when central bank head Bernanke testified before Congress’ Joint Economic Committee. Much of what he offered were words of caution. He clearly warned that premature tightening could undermine the US economy’s recovery. Yet, tightening and tempering are two different concepts. For speculators that have accessed record levels of leverage through the NYSE and have driven carry-favored yen crosses far off track of their yield differentials, what really stuck out was his suggestion that “in the next few meetings…(they) could take a step down in (their) pace of purchases.” How much in the way of capital gains can investors hope to squeeze out in just a few more months – because interest / yields / dividends aren’t up to par.

The hand wringing intensified a few hours later when the transcript of the Federal Open Market Committee’s (FOMC) last meeting was released. While the group noted that ‘many’ members thought that further progress was necessary to slow the policy cadence, shift away from certainty was unmistakable. Furthermore, ‘some’ on the Committee believed QE3 could be slowed as early as the June meeting. In the end, it is not confidence of growth, but fear of disastrous side effects (a market bubble) that would ultimately encourage the shift – and such fears were also noted. This is far from confirmation of a change in bearing for the world’s most prolific stimulator, but it offers a clear reason for doubt. And, at record price and exposure (leverage) levels, that may be enough to start the contagion.

Japanese Yen Traders See the Limits, Ill Side Effects of BoJ Stimulus

As expected, the Bank of Japan decided to keep its monetary policy bearing unchanged from the already remarkable objective of increasing the country’s money base by ¥60-70 trillion yen a year. This serious policy move was made little over a month ago, so a period of ‘wait and measure’ is to be expected. Yet, that may be little comfort for FX traders who have driving the yen down between approximately 25 percent in the span of six months – an extreme move for the liquid currency market. While pairs like AUDJPY, EURJPY and USDJPY probe multi-year highs, the carry (yield differential) that they offer are at historical lows. Capital gains through expectations of a constant bid are the only hope of real return. Meanwhile, the BoJ is facing a serious problem. With an aim to end deflation, interest rates will inevitable rise in Japan. However, the 10-year JGB yield surged a fourth day by 4 percent. It is now double its low in April. This is dangerous for a country with so much debt…

British Pound: A Round of Data and Nothing Went the Sterling’s Way

There was plenty of fundamental fodder on the UK docket this past session, and none of it was good for the sterling. Retail sales figures dropped the most in two years (1.4 percent) while the CBI manufacturing activity trends report posted a deeper contraction than expected. What is really troublesome in these times of stimulus, the disappointing figures are unlikely to encourage more BoE support. The BoE minutes showed the same 3 MPC members were outvoted to keep policy unchanged. Coming up, watch the second read of UK 1Q GDP to see critical details.

Euro Optimism to be Tested by Recession Warning in PMI Data

As blatant as the updates on monetary policy for the UK, Japan and UK were this past session; there seems a lack of appreciation for the subtlety of Europe’s policy regime (if few people are speculating on a change, such a move will have greater impact down the line). Worth noting though, ECB member Praet remarked on the group’s exploration of SME (small and medium-size business) loans and quality reviews of asset backed securities. In the upcoming session, we will be reminded of Europe’s biggest problem – recession – with the monthly PMI figures.

Australian Dollar Slides Further on Stimulus Concerns, Chinese Data

If there is a fear of risk, the Australian dollar will certainly take a brunt of the hit. This currency was already suffering while other benchmarks for sentiment – like equities – were still holding steady. A new addition to the currency’s troubles was added this morning when the HSBC Chinese Manufacturing PMI report for May reported a dip back into contractionary territory (49.6). A near-term rebound only works in a risk stable market.

Canadian Dollar Breaks from Multi-Year Range with Help of Retail Stats

Since October 2009, USDCAD has been guided lower by a consistent descending trendline. This past session, the pair finally closed above the high-profile technical level. The unique strength of the US dollar and general risk aversion support the break above 1.0300; and if sentiment really starts moving, that will be the catalyst for a trend. Meanwhile, the Canadian retail sales miss may hint at trouble in economic paradise.

Gold: Steady Fed and BoJ Stimulus Programs Dollar Bullish, Gold Bearish

Gold is first and foremost an alternative store of wealth for traditional fiats nowadays. That being the case, the metal found little support in the developments of the past 24 hours. Fed talk of tapering their balance sheet expansion curbs the unnatural depreciation of the world’s reserve currency. Furthermore, the BoJ has said it would stick to the course for now and the BoE is no closer to watering down their own currency. Selling was met with the highest volume in months, an uptick in the Gold Volatility Index and ETF holdings hit a fresh multi-year low.

**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

1:00

AUD

Consumer Inflation Expectation

2.20%

RBA reduced inflation outlook between 2-3% over the next two years.

1:45

CNY

HSBC Flash Manufacturing PMI

50.4

50.4

Often used as leading indicator for entire economy due to economy’s heavy focus on manufacturing.

7:00

EUR

French Purchasing Manager Index Services

44.5

44.3

Remains contractionary; Manufacturing activities increased for 4 months amid sluggish service activities

7:00

EUR

French Purchasing Manager Index Manufacturing

44.7

44.4

7:30

EUR

German Purchasing Manager Index Manufacturing

48.5

48.1

Manufacturing activates declined for 3 months amid sluggish service activities; Continent’s strongest member remains contractionary.

7:30

EUR

German Purchasing Manager Index Services

50

49.6

8:00

EUR

Euro-Zone Purchasing Manager Index Manufacturing

47

46.7

Ineffective easing tool and social instability (demonstration in Italy) due to austerity hurt unemployment and productivities.

8:00

EUR

Euro-Zone Purchasing Manager Index Services

47.2

47

8:00

EUR

Euro-Zone Purchasing Manager Index Composite

47.2

46.9

8:30

GBP

Gross Domestic Product (QoQ) (1Q F)

0.30%

0.30%

Update providing details on sectors

8:30

GBP

Private Consumption

0.30%

0.40%

Stayed in positive territory for 5 months.

8:30

GBP

Government Spending

0.20%

0.60%

Negative capital expenditure for 2 months indicates weak producers’ expectation for UK economy.

8:30

GBP

Gross Fixed Capital Formation

0.30%

-0.20%

8:30

GBP

Imports

-0.90%

-1.00%

Quarterly report; the avoidance of a triple-dip recession may indicate higher export.

8:30

GBP

Exports

-1.00%

-1.60%

8:30

GBP

Total Business Investment (QoQ)

-0.80%

Quarterly report; Has declined for 4 consecutive quarters.

8:30

GBP

Total Business Investment (YoY)

0.80%

8:30

GBP

Index of Services (MoM)

0.10%

0.80%

Accounted for over 75% of UK’s GDP; MoM data approached 6-month high.

8:30

GBP

Index of Services (3Mo3M)

0.60%

0.10%

12:30

USD

Initial Jobless Claims

345K

360K

Previously jumped to 6-week high; Typically volatile weekly data due to seasonal adjustment.

12:30

USD

Continuing Claims

3000K

3009K

12:58

USD

Markit US PMI Preliminary

51.4

Indicative of strength in manufacturing.

13:00

USD

House Price Purchase Index (QoQ)

1.40%

Steady uptrend for 4 months, most price increases were in cities that got hammered by recession the most.

13:00

USD

House Price Index (MoM)

0.80%

0.70%

14:00

EUR

Euro-Zone Consumer Confidence

-21.8

-22.3

Could be benefited from ECB rate cut.

14:00

USD

New Home Sales

425K

417K

Housing market showed strong growth amid low borrowing cost.

14:00

USD

New Home Sales (MoM)

1.90%

1.50%

15:00

USD

Kansas City Fed Manf. Activity

-4

-5

Remained negative for 7M.

22:45

NZD

Exports (New Zealand dollars)

4.06B

4.42B

Trade surplus rose to the highest level since 05/11.;Strong export and recent performance service index likely to underpin kiwi.

22:45

NZD

Imports (New Zealand dollars)

3.60B

3.70B

22:45

NZD

Trade Balance (New Zealand dollars)

480M

718M

GMT

Currency

Upcoming Events & Speeches

5:00

JPY

Bank of Japan's Monthly Economic Report for May (Table)

7:00

EUR

ECB’s Noyer Speaks

-:-

EUR

Portugal Releases Year-to-Date Budget Report

-:-

EUR

Cyprus President Anastasiades Meets EU’s Barroso

8:30

EUR

Spain to Sell 3, 5, and 13-Year Bonds

10:05

USD

Fed's Bullard to Speak on Monetary Policy in London

17:30

EUR

ECB’s Weidmann Speaks on Integration Risk

19:30

EUR

ECB President Draghi Speakes on Future of Euro Economy

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

15.0000

2.0000

9.8365

7.8165

1.3650

Resist 2

7.5800

5.8950

6.1150

Resist 1

12.9000

1.9000

9.5500

7.8075

1.3250

Resist 1

6.8155

5.8300

5.8620

Spot

12.4494

1.8478

9.5766

7.7630

1.2680

Spot

6.6541

5.8039

5.8346

Support 1

12.0000

1.6500

8.7750

7.7490

1.2000

Support 1

6.0800

5.6075

5.5000

Support 2

11.5200

1.5725

8.5650

7.7450

1.1800

Support 2

5.8085

5.4440

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

1.2958

1.5160

104.28

0.9901

1.0470

0.9740

0.8129

133.95

156.52

Resist. 2

1.2929

1.5128

103.96

0.9875

1.0448

0.9713

0.8103

133.53

156.09

Resist. 1

1.2901

1.5095

103.63

0.9848

1.0427

0.9686

0.8077

133.11

155.66

Spot

1.2843

1.5030

102.99

0.9795

1.0384

0.9632

0.8026

132.27

154.80

Support 1

1.2785

1.4965

102.35

0.9742

1.0341

0.9578

0.7975

131.43

153.94

Support 2

1.2757

1.4932

102.02

0.9715

1.0320

0.9551

0.7949

131.01

153.51

Support 3

1.2728

1.4900

101.70

0.9689

1.0298

0.9524

0.7923

130.59

153.08

v

--- Written by: John Kicklighter, Chief 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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23 May 2013 04:22 GMT