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Forex: Dollar Finds Little Impetus from Fed Taper, 4Q GDP Ahead

By , Chief Currency Strategist
30 January 2014 05:22 GMT

Talking Points:

  • Dollar Finds Little Impetus from Fed Taper, 4Q GDP Ahead
  • Euro Heads into Event Risk: Spain GDP, German Employment
  • New Zealand Dollar Drops after Expected RBNZ Hold

Dollar Finds Little Impetus from Fed Taper, 4Q GDP Ahead

As expected, the Federal Open Market Committee (FOMC) decided to cut its immense QE3 stimulus program by another $10 billion. Yet, as sensitive as risk trends have been this past week, the news didn’t spark a broader unwind of exposure. The S&P 500 – as a measure of investor appetite – retreated in the wake of the news, but key levels of implicit support (like the confluence at 1,775) remained standing through the media wave. In turn, the greenback would fail to gain the safe haven bid that could have complimented the building appeal related to the United States’ improved position in the ‘stimulus wars’. What does this mean for the financial markets and the dollar?

From the central bank decision this past session, we learned that the open-ended stimulus program was reduced a second time to $65 billion in purchases of Treasuries and MBS per month. As this was heavily expected amongst economists and market participants, its ‘surprise quotient’ wasn’t very high. In other words, there were few investors that would be caught off guard and thereby have to adjust after the update. Yet, the move certainly carries serious implications for the investment landscape moving forward. A unanimous vote by the group indicates that there is a strong belief in the pace of a steady unwinding moving forward and under the new leadership of Janet Yellen. This sets a rather clear view for timing the end of QE (December if the bank continues at its $10 billion pace) and further shapes speculation for the eventual shift to interest rates as a tool (first half 2015). For the FX market, that kind of clarity is a boon for rate expectations – a key valuation element for currencies. The untapped potential though is the implications that the Fed’s absence holds for moral hazard that has fueled leverage, risk exposure and the S&P 500 to record highs. When will the complacency break down?

In summation, the FOMC decision has failed to live up to the requirements of a catalyst, but still shifts the sentiment balance nonetheless. Perhaps upcoming event risk will carry more influence. The first reading of 4Q US GDP is due at 13:30 GMT, and the consensus is for a softer 3.2 percent annualized pace. At this point, a disappointment would likely revert to a capital market drop. Taper faith has been set.

Euro Heads into Event Risk: Spain GDP, German Employment

For those traders keeping tabs, the Euro-area docket offered yet another overlooked but disconcerting fundamental update. The Eurozone money supply growth through December cooled to 1.0 percent – the slowest pace since September 2010.This is further fuel to add to the deflation risk argument that is gaining traction amongst doves. And, with the three-month Euribor showing steady funding pressure for the region’s financial sector, the case for a preemptive ECB move to fortify the market with stimulus is growing. In the meantime, definable fundamental catalysts are still the best source of volatility. With the upcoming session, we have two particularly important pieces of data to watch out for. Germany’s January labor statistics are known for generating volatility with notable ‘surprises’. As for Spain’s 4Q GDP reading, there is greater scope for regional stability questions - but that is only significant if the market is focused on EZ stability fears.

New Zealand Dollar Drops after Expected RBNZ Hold

A hold by the RBNZ this morning was expected by 12 of the 15 economists that submitted their forecasts to Bloomberg and 65 percent of the market (according to swaps before the release). Therefore, when the central bank did hold its 2.50 percent benchmark, there was a segment of the market that was unprepared for the outcome. The bullish rate speculators eased back their positions and pulled the kiwi down against its benchmark counterparts. Yet, the start of a new hawkish regime is nearly at hand. Governor Wheeler remarked in the statement that the first hike will be “soon”. And, once that first move is realized, his forecast for 225 bps of hikes through 1Q 2016 will be taken more seriously.

Yen Crosses: BoJ Versus Market Uncertainty

Though we have yet to jump start a longer-term trend (bullish or bearish) for the yen crosses, the volatility readings on these pairs is still vibrating. In fact, the one-week realized (historical) volatility measure for USDJPY is 11.6 percent – the highest since August 12. Escalation risk is exceptionally high for this currency as it is particularly sensitive to risk trends. And while the market is still weighing the eventual probability of a BoJ upgrade to its open-ended stimulus program, that distant bullish driver for the crosses would do little against carry unwind…

British Pound Bulls Disregard BoE Gov Carney’s Reassurances

Bank of England (BoE) Governor Mark Carney is using every speaking engagement he attends to reiterate the policy group’s commitment to keep rates exceptional low. He did so again this past session. The market recognizes either rates or his credibility in forward guidance have to give. And, the market is still betting on the former. Without a data collapse, this situation won’t be resolved until the Quarterly Inflation report.

Australian Dollar Selling Pressure Returns as Yields Sink to Three-Month Lows

The Australian dollar’s rebound wasn’t very long lived. The currency has stumbled this morning in wake of the disappointing Chinese Manufacturing activity report from Markit. Beyond the stodgy trade relationships, yield potential is also dropping quickly. Two-year Australian sovereign bond yields have dropped back to 2.65 percent while the 10-year has dropped to a near three-year low 4.00 percent.

Emerging Markets: South Africa Surprise Rate Hike Quickly Reversed

Emerging market policy officials have put in an incredible and somewhat coordinated effort to curb outflows from the categorically risky economies that fit the designation. Volatility has certainly steadied, but the outflows have not been staunched. This past session, a surprise South African central bank rate hike (50 bps) rallied the Rand for mere minutes before it went on to drop 3.2 percent.

Gold Unsettled between Taper and Emerging Market Trouble

On the one hand, we have the Fed Tapering its incredible stimulus program that in turn diminishes gold’s appeal as a fiat-alternative. On the other, Emerging Market outflows generate the kind of panicked interest that drive capital to a safe haven like gold. The problem is that both themes have steadied. This past session gold volume jumped to its highest level since year-end liquidation.

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ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

0:00

AUD

HIA New Home Sales MoM (DEC)

7.5%

The gauge came in at -0.4%

0:30

AUD

Export price index QoQ (4Q)

-0.2%

4.2%

The expectation of Import Price Index had been on the rise since 3Q 2012

0:30

AUD

Import price index QoQ (4Q)

2.0%

6.1%

1:45

CNY

HSBC/Markit Manufacturing PMI (JAN)

49.6

50.5

The PMI came in at 49.5 below expectation of 49.6

8:00

CHF

KOF Leading Indicator (JAN)

2

1.95

The prior print was the best since Sept 2011

8:00

EUR

Span GDP (YoY) (4Q P)

-0.1%

-1.1%

A forecasted 0.3% quarterly print would be a 1Q’08 high

8:55

EUR

Germany Unemployment Change (000's) (JAN)

-5K

-15K

Germany Unemployment Rate has been on the decline Sept 2009

8:55

EUR

Germany Unemployment Rate (JAN)

6.90%

9:30

GBP

Net Consumer Credit (DEC)

0.7B

0.6B

The Net Lending Sec. on Dwellings Print has not been negative since Nov 2012

9:30

GBP

Net Lending Sec. on Dwellings (DEC)

1.2B

0.9B

9:30

GBP

Mortgage Approvals (DEC)

72.9K

70.8K

Print has been continuously rising since Feb 2013

10:00

EUR

EC Business Climate Indicator (JAN)

0.35

0.27

We’re at the highest levels since the June of 2011.

10:00

EUR

EC Economic Confidence (JAN)

101

100

10:00

EUR

EC Consumer Confidence (JAN F)

-11.7

-11.7

13:00

EUR

Germany CPI MoM (JAN P)

-0.4%

0.4%

The recent print of Germany YoY CPI has been fairly close to expectations

13:00

EUR

Germany CPI YoY (JAN P)

1.5%

1.4%

13:00

EUR

Germany CPI EU Harmonized YoY (JAN P)

1.3%

1.2%

13:30

USD

GDP Annualized QoQ (4Q A)

3.2%

4.1%

The Expectation of Personal Consumption Print is at the highest since Dec 2010

13:30

USD

Personal Consumption (4Q A)

3.7%

2.0%

13:30

USD

GDP Price Index (4Q A)

1.2%

2.0%

13:30

USD

Core PCE QoQ (4Q A)

1.1%

1.4%

13:30

USD

Initial Jobless Claims (Jan 25)

330K

326K

The Prior Print of Continuing Claim has been highest since Sept 2013

13:30

USD

Continuing Claims (Jan 18)

3010K

3056K

15:00

USD

Pending Home Sales MoM (DEC)

-0.3%

0.2%

The MoM Print has not been positive since May 2013

15:00

USD

Pending Home Sales YoY (DEC)

-0.3%

-4.0%

21:45

NZD

Trade Balance (DEC)

500M

183M

The NOV Trade Balance is the first positive print since June 2013

21:45

NZD

Trade Balance 12 Mth YTD (DEC)

-383M

-248M

23:15

JPN

Markit/JMMA Manufacturing PMI (JAN)

55.2

The DEC Print was a record high since July 2006

23:30

JPN

Overall Household Spending YoY (DEC)

1.1%

0.2%

Has been on the positive side for 3 Month

23:30

JPN

Jobless Rate (DEC)

3.9%

4.0%

Jobless Rate has been on the decline since July 2009

23:30

JPN

Job-To-Applicant Ratio (DEC)

1.01

1.00

23:30

JPN

Natl CPI YoY (DEC)

1.5%

1.5%

The NOV CPI YoY was another record high since Oct 2008

23:30

JPN

Natl CPI Ex Fresh Food YoY (DEC)

1.2%

1.2%

23:30

JPN

Natl CPI Ex Food, Energy YoY (DEC)

0.7%

0.6%

23:30

JPN

Tokyo CPI YoY (JAN)

0.8%

0.9%

Another record high since NOV 2008 last month.

23:30

JPN

Tokyo CPI Ex Food, Energy YoY (JAN)

0.4%

0.3%

23:50

JPN

Industrial Production MoM (DEC P)

1.3%

-0.1%

The NOV YoY Print was the highest in 18 months

23:50

JPN

Industrial Production YoY (DEC P)

7.3%

4.8%

GMT

Currency

Upcoming Events & Speeches

2:00

NZD

RBNZ Publishes Monthly Assessment of Currency Flows

12:00

EUR

EU's Rehn Speaks in Helsinki on Sustainable Economic Policies

23:00

NZD

RBNZ Governor Wheeler Speaks in Christchurch

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

2.3800

11.8750

7.8165

1.3650

Resist 2

7.5800

5.8950

6.5135

Resist 1

13.3300

2.3000

11.0000

7.8075

1.3250

Resist 1

6.8155

5.8475

6.2660

Spot

13.2758

2.2520

10.8441

7.7572

1.2783

Spot

6.4818

5.4997

6.1694

Support 1

12.6000

2.1000

10.2500

7.7490

1.2000

Support 1

6.0800

5.3350

5.7450

Support 2

12.4200

1.7500

9.3700

7.7450

1.1800

Support 2

5.8085

5.2715

5.5655

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

1.3665

1.6594

105.36

0.9179

1.1059

0.8941

0.8396

143.12

1262.71

Res 2

1.3641

1.6565

105.11

0.9160

1.1037

0.8919

0.8374

142.75

1257.52

Res 1

1.3617

1.6535

104.87

0.9140

1.1016

0.8897

0.8352

142.39

1252.33

Spot

1.3569

1.6477

104.39

0.9101

1.0973

0.8853

0.8308

141.65

1241.95

Supp 1

1.3521

1.6419

103.91

0.9062

1.0930

0.8809

0.8264

140.91

1231.57

Supp 2

1.3497

1.6389

103.67

0.9042

1.0909

0.8787

0.8242

140.55

1226.38

Supp 3

1.3473

1.6360

103.42

0.9023

1.0887

0.8765

0.8220

140.18

1221.19

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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30 January 2014 05:22 GMT