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Forex: Dollar Struggles to Green as US Stocks Edge Closer to Collapse

By , Chief Currency Strategist
20 August 2013 00:12 GMT
  • Dollar Struggles to Green as US Stocks Edge Closer to Collapse
  • Euro Strength Limited to Bundesbank’s Mention of ECB Hikes
  • Japanese Yen: Trade Deficit Balloons Despite Stimulus, A Jackson Hole Topic?
  • British Pound Unable to Leverage GBPUSD Breakout
  • Australian Dollar Worst Performer Monday ahead of RBA Minutes
  • New Zealand Dollar Traders Look for Confirmation of Rate Forecasts
  • Gold Quickly Drops Back Below 100-Day Moving Average

Dollar Struggles to Green as US Stocks Edge Closer to Collapse

The dollar was given another last-minute stay of technical execution Monday as the Dow Jones FXCM Dollar Index advanced for the first time in four trading days and in doing so held up 2013’s trend of higher swing lows. This technical boundary may not hold up for much longer though. The uneven and tepid performance by the greenback through the opening session seemed to find little inspiration from the risk aversion slide in US equities. The Dow Jones Industrial Average and S&P 500 extended their bearish corrections with the former sliding below its 100-day moving average and the latter chalking up its first 4-day decline since October. These disappointing feats certainly raise red flags, but it does not yet mark the scale of fear that usually triggers the demand for absolute safety that is exuded by the reserve currency. At this point, it could be argued we are seeing measured ‘Taper’ adjustment already experienced by carry interest, high yield exposure and other assets.

Euro Strength Limited to Bundesbank’s Mention of ECB Hikes

There was some interest in the speculative community Monday related to remarks in the Bundesbank’s monthly report. In additional to forecasts for the German economy to continue its economic recovery, the regional central bank stated that the newly adopted forward guidance from the European Central Bank (ECB) was not “unconditional commitment”. The group suggested that the policy authority could potentially hike interest rates should inflation reemerge despite July’s reassurance that rates could remain at record lows for an “extended period”. There was a mild 40-pip rally for EURUSD and more substantive 80-pip swell from EURJPY after the comments were digested, but the euro didn’t hold onto those gains. Keeping options on the table does not translate into a change of presumed policy behind the euro and European financial markets. Just as the vague threat that financial troubles could reemerge fails to drive immediate euro fear, a loose hope for hikes won’t rally the currency.

Japanese Yen: Trade Deficit Balloons Despite Stimulus, A Jackson Hole Topic?

Of the few economic listings on the docket Monday, a top billing was Japan’s July trade report. According to the Ministry of Finance’s figures, the nation’s deficit ballooned more than expected to ¥1.024 trillion. Aside from representing the third largest trade short-fall for this global exporter, the data is particularly concerning for those that believed the yen’s nearly one-third depreciation in value over the past year would help strengthen the economic and financial position. This piece of data adds yet another element to policy watcher speculation that BoJ Governor Kuroda will step up verbal intervention at this week’s Jackson Hole gathering. That is unlikely, though, as the central bank has already implemented an unprecedented program and it is showing progress. Further warning would likely be seen as attempted currency manipulation.

British Pound Unable to Leverage GBPUSD BreakoutHaving overtaken 1.5600, the benchmark GBPUSD marked two milestones: climbing over the mid-point of 2013’s historical range and breaking a descending trend of peaks that began with January 2nd's peak high. This move is a technical spark that could theoretically ignite a combustible fundamental backdrop. Given the meaningful reversal in economic performance for the UK and the Bank of England’s (BoE) rejection of a stimulus program to compete with the Fed or BoJ, there is plenty of recovery the sterling could still do. And yet, the cable has been slow to extend its retracement – as have been most pound-based crosses. Perhaps the sterling’s advance will be curbed until the UK 10-year government bond yield can overtake counterparts like the US equivalent - it has traded at a discount for three months.

Australian Dollar Worst Performer Monday ahead of RBA Minutes

The Australian dollar fell against all of its major counterparts in the opening session of the week – between a 0.4 percent slip against the kiwi and 1.1 percent tumble versus the Swiss franc. In a clear fundamental thematic shift, there has been a significant deviation between the Australian currency’s performance and the outlook for its yield. As a ‘carry currency’, the yield the Aussie dollar provides is vital to bearings. Persistent fears of rate cuts from the Reserve Bank of Australia (RBA) have weighed since the dovish regime began. Now, however, the outlook has leveled out according to swaps with virtually no speculation of further easing. If that were the only factor, the AUDUSD would likely retake 0.9300 and extend a recovery. Yet, there is another aspect required: an appetite for yield. Currently, the carry differentials are just off record lows and the Aussie dollar has retraced only a fraction of its gains. Perhaps the RBA Minutes will compensate with further confidence of no cuts.

New Zealand Dollar Traders Look for Confirmation of Rate Forecasts

Though the Reserve Bank of New Zealand’s (RBNZ) first rate hike won’t likely come at least until the opening of 2014 – as warned by Governor Graeme Wheeler – the market is nevertheless clear on the outlook for the country’s benchmark rate…and its significant contrast to the rest of the majors. Overnight index swaps from Credit Suisse are pricing in approximately 86 basis points worth of hikes (near certainty of three quarter-percent hikes to bring us to 3.75 percent and debate as to whether we reach 4.00 percent) within 12 months. This is the most hawkish consensus from rate traders we’ve seen since in 24 months. In turn, the markets have taken heed. The kiwi dollar is up against all its major counterparts in the past two weeks while the 10-year government bond yield has extended its rally to a near, two-year high of 4.67 percent. Coming up, we have the two-year inflation outlook for the third quarter. A turn from 2Q’s 13-year low would be welcome by bulls.

Gold Quickly Drops Back Below 100-Day Moving Average

Spot gold won a remarkable milestone Friday – the metal’s price closed above its 100-day moving average for the first time in 177 trading days. What does this mean for investors, the metal’s aggressive tumble starting this past October was finally putting up a meaningful enough correction to cool its heavy selling momentum. Yet, just as quickly at this turn of fortune seems to have been made, we find the bulls are struggling to turn the correction into a lasting bull trend. Monday, the metal closed lower for the first time in four trading days while the CBOE’s gold volatility index advanced to 24.3 percent. Meanwhile, ETF holdings of the precious metal have leveled off to set the stage for the most convincing turn since the 25 percent divesture began in February. Yet, the COT figures also reflect the hesitation for reviving the bid with net speculative futures exposure growing only 2,291 contracts through last Tuesday. If the dollar doesn’t drop off, the drive will be difficult.

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

ECONOMIC DATA

GMT

Ccy

Release

Survey

Previous

Comments

3:00

NZD

RBNZ 2-Year Inflation Expectation (3Q)

2.10%

Investors will likely be weighing their expectations for RBNZ monetary policy on the central bank’s inflation outlook as market expectations for a rate increase has been building since late July.

4:30

JPY

All Industry Activity Index (MoM) (JUN)

-0.70%

1.10%

These indicators will help gauge the growth of the economy as Japan battles deflationary pressures.

5:30

JPY

Nationwide Department Store Sales (YoY) (JUL)

7.20%

5:30

JPY

Tokyo Department Store Sales (YoY) (JUL)

9.40%

6:00

EUR

German Producer Prices (MoM) (JUL)

0.20%

0.00%

Positive figures could signal a pickup in the Euro-zone’s largest economy. Year-over-year PPI figures have remained positive since April 2010.

6:00

EUR

German Producer Prices (YoY) (JUL)

0.70%

0.60%

7:00

JPY

Convenience Store Sales (YoY) (JUL)

0.10%

This is another measure of domestic Japanese consumption. In June, the index turned positive for the first time since May 2012.

9:00

EUR

Euro-Zone Construction Output S.A. (MoM) (JUN)

-0.30%

Construction has been sluggish in recent months. A pickup could indicate growing optimism towards the Euro-zone recovery.

9:00

EUR

Euro-Zone Construction Output W.D.A (YoY) (JUN)

-5.10%

12:30

CAD

Wholesale Sales (MoM) (JUN)

-0.5%

2.30%

After beating expectations for May, economists are expecting sales to have declined in June.

12:30

USD

Chicago Fed Nat Activity Index (JUL)

-0.10

-0.13

This Fed release comes ahead of the August FOMC minutes and the Jackson Hole Economic Symposium scheduled for later this week.

22:45

NZD

Net Migration S.A. (JUL)

2330

Net migrations have been positive and increasing since the beginning of the year.

GMT

Currency

Upcoming Events & Speeches

1:00

AUD

Australia to Sell 2030 Inflation Bonds

1:30

AUD

Reserve Bank of Australia August Meeting Minutes

3:45

JPY

Japan Sells 40-Year Bonds

9:30

GBP

UK to Sell £1.75 Bln in 0.125%

10:00

EUR

ESM to Sell €1.5 Bln in 6-Month Blls

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

1.9750

10.2500

7.8075

1.3250

Resist 1

6.8155

5.8475

6.2660

Spot

13.0817

1.9552

10.2072

7.7546

1.2772

Spot

6.5053

5.5918

5.9158

Support 1

12.6000

1.9075

9.3700

7.7490

1.2000

Support 1

6.0800

5.5720

5.8700

Support 2

12.0000

1.8515

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

1.3448

1.5777

98.85

0.9335

1.0421

0.9223

0.8171

131.70

1400.90

Res 2

1.3420

1.5745

98.54

0.9311

1.0401

0.9196

0.8147

131.32

1392.23

Res 1

1.3393

1.5714

98.23

0.9287

1.0382

0.9169

0.8122

130.94

1383.56

Spot

1.3338

1.5652

97.61

0.9240

1.0342

0.9116

0.8074

130.18

1366.22

Supp 1

1.3283

1.5590

96.99

0.9193

1.0302

0.9063

0.8026

129.42

1348.88

Supp 2

1.3256

1.5559

96.68

0.9169

1.0283

0.9036

0.8001

129.04

1392.23

Supp 3

1.3228

1.5527

96.37

0.9145

1.0263

0.9009

0.7977

128.66

1400.90

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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20 August 2013 00:12 GMT