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Forex: Dollar Frozen on S&P 500’s Longest Tumble in 16 Months

By , Chief Currency Strategist
26 September 2013 05:44 GMT

Talking Points:

  • Dollar Frozen on S&P 500’s Longest Tumble in 16 Months
  • British Pound Advances Despite BoE’s Yield Reassurance, Yield Drop
  • US Oil at Risk of Major Bear Shift Should $102 Break

Dollar Frozen on S&P 500’s Longest Tumble in 16 Months

Activity for the Dow Jones FXCM Dollar Index – measured by the Average True Range – has dropped sharply from last week’s post-FOMC volatility swell. In fact, the benchmark currency is just off its lowest levels of activity in five months. This lack of performance may strike some as unusual given the S&P 500 has extended a five-day drop – its most consistent tumble since May of last year. Yet, as persistent as the slide for the benchmark of risk appetite has been, there is little conviction behind the move. We can measure that in both implied and realized volatility measures. The VIX Index (often referred to as the ‘fear’ gauge) has trended towards six year lows for some time. Yet the measure of actual or realized volatility has itself collapsed to similar lows this week. While a trend in a market index like the S&P 500 can run astray of fundamentals for an extended period due to stimulus and other factors, risk conditions can only remain submerged for only so long.

Japanese Yen Drops Sharply on Confirmation of Impending Stimulus

In the early Tokyo hours, the Japanese was flat-lining when the Nikkei 225 opened to a sharp 1.4 percent tumble below 14,500 – a closely watched, even figure. This break leveraged the potential for an Asia-session risk shift that could generate momentum in an otherwise aimless market and in turn spark a sell off on the carry-backed yen crosses along the way. Yet, that drive was reversed abruptly a few hours into active trade as news roused speculators to optimism. A few headlines hit the newswires, but two stood out. According to the chief of the LDP tax panel, Prime Minister Abe will produce his stimulus plans with his tax policies on October 1. Add to this, a Kyodo report suggested the stimulus announcement would include plans to explore lower effective corporate tax rates to encourage growth. Both are encouraging, however, they are not particularly original. We have heard similar conjecture before. As such, yen crosses will struggle to rise on this news alone.

Euro Unconvinced of Greece’s Assurances No Third Bailout Necessary

According to Greece’s Deputy Prime Minister (and Foreign Minister) Evangelos Venizelos, Greece will not need a third bailout. This has been a point of considerable speculation – though not active positioning – in the FX market as EU officials, Germany Finance Minister Scheauble and others have speculated such an outcome was essentially inevitable. Yet, in an interview with Reuters, Venizelos said the country could avoid asking for a third round of aid with better terms for its existing program and a return to the capital markets. This is exceptionally optimistic for a country that has proven consistently over-reaching with its forecasts. As it happens, another report made the wires quoting Troika sources that suggested officials were skeptical of Greece’s ability to hit a primary surplus – a prerequisite to altering terms on its bailout.

British Pound Advances Despite BoE’s Yield Reassurance, Yield Drop

An improved yield forecast has been a key catalyst in the sterling’s recover over recent weeks and months. However, policy officials have done everything they can to curb speculation that an improved growth forecast and distaste for QE expansion would translate into earlier rate hikes. The Bank of England (BoE) has reiterated its vow to keep rates at their exceptionally low level until 2016. It seemed the central bank did the same with the Financial Policy Committee meeting minutes that were released this past session – even though that deviates somewhat from its focus. The report attempted to play down higher rates as a reaction to growth and Fed Taper fears. Nevertheless, yield forecasts are still seeing a hike in 2015 with a probability of 2014. That said, a lot of hawkishness has been priced into the sterling. Where the BoE may not be able to shake the market’s convictions, disappointing data could. The 10-year Gilt yield has recently dropped to its lowest level (2.75 percent) in a month. Further retracement may evolve into a serious selling point for a yield-hopeful currency.

New Zealand Dollar Closes First Two-Day Drop this Month

It is more testament to the currency’s strength rather than a sign of serious concern. NZDUSD posted its first two-day drop this month with Wednesday’s 0.5 percent slip. The build up that preceded this correction drove the pair 9.3 percent or 715 pips in the span of around three weeks. That is an incredible performance when we compare to more stoic pairs like EURUSD or USDJPY. What does this pair have that others don’t? Interest rates forecasts. The New Zealand dollar is unique in that its rate forecast is substantial enough that traders are speculating on rate hikes at the turn of the year. That is a serious benefit to a high-yield currency and effective fill-in for directionless risk appetite. That said, the 12-month rate forecast is now down 24 bps from its peak two weeks ago and the 10-year government bond yield is 20 bps lower.

US Oil at Risk of Major Bear Shift Should $102 Break

With Wednesday’s close, US oil has fallen for five consecutive trading days. That matches the longest series of losses for the commodity since May 2012. Unlike many other assets with a risk sensitivity, oil has made a concerted drive that can press for further trend development. Standing in the way of a full-scale bear trend is $102. This level is technically-heavy with a confluence of a multi-month range floor, 100-day moving average and other cues. If the fundamental backdrop were allowing a simple focus on the balanced risk backdrop, a ‘normalizing’ bounce would be in order. However, there is another line of premium that can still be worked off through supply-and-demand. In the past week, we have seen the Syrian crisis deflate and US-Iranian relations warm – easing Middle East supply disruption concerns. Meanwhile, DoE oil inventories reported the second biggest jump (2.635 million barrels) in three months while implied demand set an equivalent low (15.33 million barrels).

Gold Flatlines, Fed Looks into Front-Run No Taper Activity

Gold advanced 0.8 percent ($11) Wednesday for the biggest climb in a week. Yet despite the ambition, the precious metal is far from establishing a meaning trend with this push. Participation measures corroborate this restraint. From the SPDR Gold ETF, volume held below its two-week average for the third straight day on 7.5 million shares in turnover. In the futures market, open interest (open positions) is at its lowest level in three months. Given this tepid backdrop, it is difficult to maintain direction – much less momentum. In the meantime, it has surfaced that the Federal Reserve is looking into suspicious trading activity behind gold immediately before the FOMC rate decision last week. A rally in the precious metal would be expected from the ‘No Taper’ call, but charts show the move happened well before. Statements and data are released to news agencies ahead of time on an embargo so that the information can be disseminated more effectively. Pre-event moves are important to watch for; but more importantly, the focus on gold suggests it is perhaps more of a preferred speculative asset nowadays.

**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

1:30

AUD

Job Vacancies (SEP)

-7.3%

February’s print was the lowest on the past decade of records.

6:45

EUR

French Consumer Confidence (SEP)

85

84

M3 money supply annual growth has been on the decline since for almost all of 2013. Italian data will in focus as rumors of a debt downgrade swirl, although this is more due to political uncertainties.

8:00

EUR

Italian Retail Sales s.a. (MoM) (JUL)

-0.2%

8:00

EUR

Italian Retail Sales (YoY) (JUL)

-2.8%

-3.0%

8:00

EUR

Euro-Zone M3 s.a. (3M) (AUG)

2.3%

2.5%

8:00

EUR

Euro-Zone M3 s.a. (YoY) (AUG)

2.3%

2.2%

8:30

GBP

Gross Domestic Product (QoQ) (2Q F)

0.7%

0.7%

Last month’s YoY GDP print was the highest since March of 2011 as prospects look brighter in the U.K.. Meanwhile, Total Business Investment YoY has not been positive since September.

8:30

GBP

Gross Domestic Product (YoY) (2Q F)

1.5%

1.5%

8:30

GBP

Total Business Investment (QoQ) (2Q F)

0.9%

0.9%

8:30

GBP

Total Business Investment (YoY) (2Q F)

-3.5%

-3.5%

8:30

GBP

Current Account (Pounds) (2Q)

-11.0B

-14.5B

12:30

USD

Initial Jobless Claims (SEP 21)

325K

309K

Last week’s Initial Jobless Claims was the lowest print in about 6.5 years. Combined with a higher annualized GDP possibility and the debt ceiling approaching in a matter of 3 weeks, the mix of uncertainties and positive U.S. data may be bullish for the greenback.

12:30

USD

Continuing Claims (SEP 14)

2787K

12:30

USD

Gross Domestic Product (Annualized) (2Q T)

2.6%

2.5%

12:30

USD

Personal Consumption (2Q T)

1.8%

1.8%

12:30

USD

Gross Domestic Product Price Index (2Q T)

0.8%

0.8%

12:30

USD

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

0.8%

14:00

USD

Pending Home Sales (MoM) (AUG)

-1.0%

-1.3%

14:00

USD

Pending Home Sales (YoY) (AUG)

8.6%

15:00

USD

Kansas City Fed Manufacturing Activity (SEP)

8

23:05

GBP

GfK Consumer Confidence Survey (SEP)

-11

-13

The last print was the highest since late 2009.

23:30

JPY

National CPI (YoY) (AUG)

0.8%

0.7%

Japanese CPI data prints continue to be some of the most important readings out of the nation. With the BoJ embarking on a massive easing program that is 2/3rd the size of the Fed’s for an economy 1/3rd the size, the consequences of inflation levels not rising in the near term are deadly. Japan will need to show that CPI levels are rising or market sentiment will turn on JGBs and Japan quickly.

23:30

JPY

National CPI Ex-Fresh Food (YoY) (AUG)

0.7%

0.7%

23:30

JPY

National CPI Ex Food, Energy (YoY) (AUG)

-0.1%

-0.1%

23:30

JPY

Tokyo CPI (YoY) (SEP)

0.5%

0.5%

23:30

JPY

Tokyo CPI Ex-Fresh Food (YoY) (SEP)

0.3%

0.4%

23:30

JPY

Tokyo CPI Ex Food, Energy (YoY) (SEP)

-0.3%

-0.4%

23:50

JPY

Japan Buying Foreign Bonds (Yen) (SEP 20)

921.6B

23:50

JPY

Japan Buying Foreign Stocks (Yen) (SEP 20)

-50.2B

23:50

JPY

Foreign Buying Japan Bonds (Yen) (SEP 20)

112.8B

23:50

JPY

Foreign Buying Japan Stocks (Yen) (SEP 20)

153.5B

GMT

Currency

Upcoming Events & Speeches

8:00

EUR

European Central Bank Publishes M3, Private Sector Loan Report

8:30

EUR

ECB's Joerg Asmussen Speaks on Euro Economy

9:00

EUR

ECB's Erkki Liikanen Speaks on Financial Stability

13:00

CHF

Swiss National Bank Quarterly Bulletin

13:20

EUR

ECB's Yves Mersch Speaks on Euro Economy

14:10

USD

Fed's Jeremy Stein Speaks on Monetary Policy

14:10

EUR

ECB's Victor Constancio Speaks on Monetary Policy

16:15

USD

Fed's Narayana Kocherlakota Speaks on U.S. Economy

22:15

EUR

ECB's Benoit Coeure Speaks on Monetary Policy

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

2.0500

10.7250

7.8165

1.3650

Resist 2

13.4800

2.0500

10.7250

Resist 1

12.9700

2.0100

10.5000

7.8075

1.3250

Resist 1

12.9700

2.0100

10.5000

Spot

12.9631

2.0025

9.8661

7.7534

1.2554

Spot

12.9631

2.0025

9.8661

Support 1

12.6000

1.9140

9.3700

7.7490

1.2000

Support 1

12.6000

1.9140

9.3700

Support 2

12.4200

1.9000

8.9500

7.7450

1.1800

Support 2

12.4200

1.9000

8.9500

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

1.3585

1.6127

99.96

0.9217

1.0373

0.9492

0.8333

134.46

1356.47

Res 2

1.3559

1.6097

99.68

0.9196

1.0356

0.9466

0.8309

134.07

1348.55

Res 1

1.3532

1.6067

99.39

0.9175

1.0339

0.9441

0.8284

133.68

1340.63

Spot

1.3479

1.6008

98.81

0.9134

1.0305

0.9391

0.8234

132.90

1324.79

Supp 1

1.3426

1.5949

98.23

0.9093

1.0271

0.9341

0.8184

132.12

1308.95

Supp 2

1.3399

1.5919

97.94

0.9072

1.0254

0.9316

0.8159

131.73

1348.55

Supp 3

1.3373

1.5889

97.66

0.9051

1.0237

0.9290

0.8135

131.34

1356.47

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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26 September 2013 05:44 GMT