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Dollar Strategies for US GDP, Fed Rate Decision Impact

By , Chief Currency Strategist
31 July 2013 05:35 GMT
  • Dollar Strategies for US GDP, Fed Rate Decision Impact
  • Euro Unresponsive for In-Line Spain GDP, ECB Within Sight
  • Australian Dollar Extends Tumble after RBA’s Stevens Ruminates on Further Cuts
  • Japanese Yen Crosses Find Little Lift from Jobs Surge, Earnings on Tap
  • Swiss Franc Advances Despite SNB’s Hearty 2Q Loss
  • Canadian Dollar: Expect More Influence from US Data than Canada’s Own GDP
  • Gold Primed for a Breakout Wednesday on FOMC Statement

Dollar Strategies for US GDP, Fed Rate Decision Impact

The activity level (average true range) for EURUSD has dropped to the lowest level this year while short-term historical volatility for the S&P 500 is dipping to the extremes of lethargy we’ve seen through the past five years. In other words, we are looking at extreme breakout risk with the level of event risk we have ahead of us. In the next 24 hours, we have two high-level pieces of event risk that could individually tap into one of the most enduring fundamental themes to the financial markets: risk appetite trends. The second quarter US gross domestic product (2Q GDP) report is due at 12:30 GMT and Federal Open Market Committee (FOMC) rate decision is set for 18:00 GMT. Both can materially alter the market’s expectations for the ‘Taper’ timeframe, and no other fundamental wind can more effectively set market-wide trends back on course.

Heading into the busy trading day, one important consideration for traders is that there may be two rounds of volatility Wednesday; but trend development will likely be deferred to the latter release. Due before the New York exchanges open, the growth report will act as a benchmark for investors, analysts and economists to assess the need for maintaining the current $85 billion-per-month pace of QE3. That said, given its release time just hours before the central bank meets to deliberate on policy, it is unlikely to redefine policy – whether actual changes to policy or mere alterations to guidance. Nevertheless, there is likely to be a sharp reaction to any material surprises in the data. The consensus is for the annualized GDP reading to slow from a 1.8 percent clip in the opening quarter to 1.0 percent in the three months through June. Meeting that forecast can reaffirm the recent shift in speculation towards a deferred Taper from the fear of a September move that arose following the June meeting. It is a significant divergence from the consensus though that can tempt with breakouts that are quickly rendered inert.

Caution should be exercised should there be definitive breakout from equities or the majors on the release of the growth report. While the GDP number can alter the market’s assessment of the timetable for the Taper, the central bank will determine what is pertinent. For this Fed decision, the central bank will not update forecasts and Chairman Bernanke will not hold a press conference. Those are performed on a quarterly basis – and that is one of the reasons there is a consensus for a September time frame for taming QE. However, we will still have the Fed’s statement to process. ‘Status quo’ in this scenario could be interpreted as hawkish as it can contradict the recent run up in US equities and slump for the dollar over the past few weeks. Should the masses interpret a confirmation for a September time frame, risk position can be undermined and the dollar rally – though the former is far more exposed. Alternatively, if the Fed bends to a troubling forecast and pushes back the Taper, a dollar sell off could be more violent than risk rally. Learn more here.

Euro Unresponsive for In-Line Spain GDP, ECB Within Sight

The health of the periphery Eurozone members is of upmost importance to financial stability in the region, but investors have priced in a lot of pain already (New to EUR/USD trading? Watch this video). That is one reason the euro was little moved by the first read on Spain’s 2Q GDP. Despite Prime Minister Rajoy’s optimism, the country did not return to growth last quarter as it contracted 0.1 percent (as expected) while it sank 1.7 percent on a year-over-year basis. Adding to the mix a mixed view of sentiment numbers, a Spanish budget balance swell and rising German inflation, and the day’s fundamentals were mixed. All the more reason for the market to hold off ahead of Thursday’s ECB.

Australian Dollar Extends Tumble after RBA’s Stevens Ruminates on Further Cuts

It seems every time the Australian dollar is ready to take a breather, something comes in to take the wind out of bulls’ sails. This past session, the blow came from RBA Governor Steven’s remarks on the economy. His suggestion that inflation opened maintained the scope for further cuts and that the Aussie dollar was overvalued is not particularly new –but it was more forceful than what was interpreted from the RBA minutes. As such, the market is now pricing in a near 95 percent probability of a rate cut next week and the Aussie is on its back foot.

Japanese Yen Crosses Find Little Lift from Jobs Surge, Earnings on TapThe data from the Japanese docket Tuesday morning was particularly important from the context of assessing economic health and the Bank of Japan’s success with implementing stimulus. The unemployment rate dropped to its lowest level since October 2008, though household spending and industrial production both dropped. This is a mixed back on both stimulus and growth fronts. However, we may be seeing a more definitive measure of the support of yen depreciation – versus trickledown economics – in the heavy round of Japanese earnings reports.

Swiss Franc Advances Despite SNB’s Hearty 2Q Loss

Individual investors looking for an alternative store of wealth to traditional currencies weren’t the only ones to take a hearty loss in gold’s tumble since October. According to the Swiss National Bank (SNB), the central bank lost a painful 13.2 billion francs on its holdings of the precious metal. That was significantly more than the 5.8 billion unrealized return on their foreign exchange holdings. The composition of their FX holdings didn’t change with the euro still accounting for 48 percent. That said, the credit quality of their holdings did drop.

Canadian Dollar: Expect More Influence from US Data than Canada’s Own GDP

We often have the dual release of US and Canadian employment data, and the two indicators compete for influence over the loonie. Canada’s currency is clearly influenced by its own data, but the health of its largest trade partner can have greater influence over its bearing than local data – particularly with noteworthy surprises. We do see instances where inline US data can open the door to a dramatic USDCAD reaction to Canadian data, but this is not likely one of those times. The focus on the FOMC will likely overwhelm May Canadian GDP figures.

Gold Primed for a Breakout Wednesday on FOMC Statement

Activity levels on gold have once again cooled to suspiciously restrained levels – with charts showing a pattern that suggests the commodity is highly exposed to a breakout. That is appropriate given the level of event risk due. The precious metal is extremely sensitive to the US GDP and Fed decision as stimulus from the US is one of the primary reasons that it made its epic run from 2009 onwards. If there is a clear sign that a September Taper is still in the books, gold will drop back below $1,300. Watch the dollar for a quick guide for the metal.

**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

NZD

NBNZ Business Confidence (JUL)

50.1

Estimates put the Business Confidence print at the highest since 2010.

1:00

NZD

ANZ Activity Outlook (JUL)

45

1:30

JPY

Labor Cash Earnings (YoY) (JUN)

0.2%

-0.1%

The print hit its lowest mark in June of 2009 at -7.10%.

1:30

AUD

Private Sector Credit (MoM) (JUN)

0.3%

0.3%

Month over month growth has remained below .50% since May of last year.

1:30

AUD

Private Sector Credit (YoY) (JUN)

2.9%

3.0%

3:00

NZD

Money Supply M3 (YoY) (JUN)

6.2%

Growth has remained around a 5 to 7 percent range since early 2011.

5:00

JPY

Housing Starts (YoY) (JUN)

16.0%

14.5%

Housing starts in Japan have been on the rise since late 2011 when the print was under .9M

5:00

JPY

Annualized Housing Starts (JUN)

0.982M

1.027M

6:00

EUR

German Retail Sales (MoM) (JUN)

0.2%

0.7%

Year over year prints have typically exaggerated estimates to both the up and downside.

6:00

EUR

German Retail Sales (YoY) (JUN)

0.5%

0.4%

6:00

CHF

UBS Consumption Indicator (JUN)

1.46

The print has been moving higher since November of 2011.

7:00

CHF

KOF Swiss Leading Indicator (JUL)

1.22

1.16

The indicator touched a low of -1.83 in April of 2009.

7:55

EUR

German Unemployment Change (JUL)

0K

-12K

The German unemployment rate has stabilized below 7% since late 2011.

7:55

EUR

German Unemployment Rate s.a. (JUL)

6.8%

6.8%

8:00

EUR

Italian Unemployment Rate (JUN P)

12.3%

12.2%

The unemployment print is up 57% in Italy since May of 2011.

9:00

EUR

Euro-Zone Unemployment Rate (JUN)

12.2%

12.1%

European employment and inflation figures are critical measures for the ECB – particularly comparing region-wide figures to those of the struggling periphery. The central bank meets the following day.

9:00

EUR

Euro-Zone Consumer Price Index (YoY) (JUL A)

1.6%

1.6%

9:00

EUR

Euro-Zone Consumer Price Index - Core (YoY) (JUL A)

1.2%

1.2%

9:00

EUR

Italian CPI (NIC incl. tobacco) (YoY) (JUL P)

1.4%

1.2%

9:00

EUR

Italian CPI - EU Harmonized (YoY) (JUL P)

1.5%

1.4%

10:00

EUR

Italian Producer Price Index (YoY) (JUN)

-1.1%

-1.1%

11:00

USD

MBA Mortgage Applications (JUL 26)

-1.2%

ADP will set the tone for Friday’s NFPs, the Fed will set interest

12:15

USD

ADP Employment Change (JUL)

180K

188K

12:30

CAD

Gross Domestic Product (MoM) (MAY)

0.3%

0.1%

The estimate for MoM GDP is an improvement since the 0.20% contraction in December.

12:30

CAD

Gross Domestic Product (YoY) (MAY)

1.6%

1.4%

12:30

USD

Gross Domestic Product (Annualized) (2Q A)

1.0%

1.8%

The ultimate objective of the Fed’s dual mandate for full employment and steady inflation – a healthy economy. This data’s impact will be defined by how the Fed guides policy later in the day.

12:30

USD

Personal Consumption (2Q A)

1.6%

2.6%

12:30

USD

Gross Domestic Product Price Index (2Q A)

1.1%

1.2%

12:30

USD

Core Personal Consumption Expenditure (QoQ) (2Q A)

1.0%

1.3%

12:30

USD

Employment Cost Index (2Q)

0.4%

0.5%

14:30

USD

DOE U.S. Crude Oil Inventories (JUL 26)

-2450K

-2825K

Net spec futures interest in crude is at record highs.

18:00

USD

Federal Open Market Committee Interest Rate Decision

0.25%

0.25%

Speculation over timing of the ‘Taper’ will dominant speculative interest

23:30

AUD

AiG Performance of Manufacturing Index (JUL)

49.6

A key reading after China’s data

23:50

JPY

Foreign Buying Japan Bonds (Yen) (JUL 26)

790.3B

Foreign buying of Japanese stocks and bonds a total capital flow measure

23:50

JPY

Foreign Buying Japan Stocks (Yen) (JUL 26)

349.8B

GMT

Currency

Upcoming Events & Speeches

EUR

Cyprus Due Diligence Report Due by End of July

ALL

Month End Funds Rebalance Flows

12:30

USD

Bureau of Economic Analysis Release Annual Revisions of GDP

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

13.4800

2.0000

10.7000

7.8165

1.3650

Resist 2

7.5800

5.8950

6.5135

Resist 1

13.2000

1.9500

10.2500

7.8075

1.3250

Resist 1

6.8155

5.8475

6.2660

Spot

12.8248

1.9532

9.9898

7.7565

1.2611

Spot

6.6645

5.7005

6.0533

Support 1

12.6000

1.9100

9.3700

7.7490

1.2000

Support 1

6.0800

5.6075

5.9365

Support 2

12.0000

1.6500

8.9500

7.7450

1.1800

Support 2

5.8085

5.4440

5.7400

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

1.3207

1.5321

100.65

0.9579

1.0466

0.9268

0.7945

131.66

1315.85

Res 2

1.3176

1.5284

100.28

0.9553

1.0444

0.9238

0.7918

131.18

1307.84

Res 1

1.3145

1.5246

99.91

0.9527

1.0422

0.9208

0.7891

130.71

1299.83

Spot

1.3084

1.5172

99.18

0.9475

1.0378

0.9149

0.7838

129.76

1283.80

Supp 1

1.3023

1.5098

98.45

0.9423

1.0334

0.9090

0.7785

128.81

1267.77

Supp 2

1.2992

1.5060

98.08

0.9397

1.0312

0.9060

0.7758

128.34

1307.84

Supp 3

1.2961

1.5023

97.71

0.9371

1.0290

0.9030

0.7731

127.86

1315.85

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

Sign up for John’s email distribution list, here.

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31 July 2013 05:35 GMT