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Dollar Gains on Euro and Emerging Markets, Conviction Still Soft

By , Chief Currency Strategist
04 March 2014 05:34 GMT

Dollar Gains on Euro and Emerging Markets, Conviction Still Soft

Emerging markets were rumbling and global equities dove to open the new trading week and month…and the dollar would certainly reap the benefits. The building appetite for safety and liquidity lent the greenback notable buoyancy versus most of its counterparts and the Dow Jones FXCM Dollar Index (ticker = USDollar) rose 16 points off its 18-month rising support. Looking more broadly to the ‘risk’ profile of the markets, the FX-based volatility index posted its biggest jump since September 30 (rising 0.5 ‘vols’ to 8.22 percent) while the equity favorite VIX lurched 2 vols higher to 16 percent for the biggest swell in a month. Furthermore, ‘liquidity’ demand was measured in the developed world’s sovereign bonds. For US Treasuries, the 10-year note’s yield gapped lower on the open and is now at 2.61 percent.

As far as uniform ‘risk off’ assessments go, this was a complete one. The trouble – as it has been for some time – is the conviction in the move. Like a bolder on a plateau, it is difficult to build enough momentum behind a deleveraging effort to make the trend self-sustaining. The newest bout of international financial stability concerns originating with the standoff between Russia and the West over Ukraine (more on that below), certainly command the headlines. Yet, volatility sellers have seen too many false dawns in the past few years to be so easily shaken from attempting to reap the short-term gains they have frequently found after jumps like these. We could still tip the scales; but the pressure would have to be sustained, losses would have to stack up or another catalyst would have to kick in to add traction.

This past session’s docket added further data (manufacturing activity rose, personal income and spending grew, and the PCE inflation figure ticked higher) to secure the steady Taper path for the Fed. Yet, that is already market reality. We need something more tangible to leverage the dollar’s relative appeal. Perhaps speculative of the first Fed rate hike may leverage the dollar like it the BoE’s outlook ramped the pound. Meanwhile, the Senate Banking Committee’s confirmation hearings for Fischer, Brainard and Powell have Today have been postponed.

Emerging Markets Slip, Russian Markets Plunge

Rather than cool over the weekend, tensions over Ukraine’s political situation intensified. That in turn generated significant waves for the financial system. With reports that pro-Russia forces have moved in and taken control of the Crimea region of Ukraine, European and US officials among others have threatened sanctions against Russia for intervening with a military presence. For a country that has a high requirement for foreign capital to support its economy, that proposition is more than troubling. The fear of capital flight was felt as the Russian Ruble dropped to a record low, leading the Bank Rossii (the country’s central bank) to dump a reported $10 billion in the market to halt its own currency’s tumble. Russian ETF’s suffered bearish gaps on Monday’s open and the largest – Market Vector – suffered a near 7.0 percent drop on the heaviest volume in the product’s record. The risk is that this situation will evolve and metastasize into a global situation. Yet, to this point, the spread has proven uneven. While Russian markets collapsed, global equities stumbles and a number of Emerging Market currencies fell sharply (Zloty, Forint, Rand, Lira); the MSCI EM ETF itself fell less than 1 percent. Furthermore, neither dollar nor yen have surged.

Australian Dollar Retreats after RBA Refuses Rate Hike Speculation

The Australian dollar has already waded through a dense round of event risk, and there is plenty more moving forward. The top event risk so far was the RBA rate decision this morning. Though the market fully expected no change to the group’s policy bearings, there was nevertheless a negative reaction to the absence of a timeline for a shift to hikes as well as the reiteration that the currency was ‘expensive’ on a historical basis. None of this is particularly new, so follow through implications are limited. Tomorrow, we follow up with 4Q GDP figures.

Euro Market Hit the Worst on Russia Stand Off

Sorting the majors for performance Monday, the Euro offered the worst numbers Monday. The currency closed in the red versus all of its major counterparts; and its capital markets suffered the sharpest declines. Where the euro slide was relatively restrained (ranging between 0.8 percent versus the yen to virtually unchanged against the pound), the benchmark Euro Stoxx equity Index collapsed 3 percent. While there were a few Euro-data based headlines and Draghi warnings into Thursday’s decision, this is likely economic proximity to the Russia standoff.

British Pound A Safe Haven?

With capital seeking more robust moorings than European periphery debt has to offer during these increasingly volatile times, we’ve seen some capital flight to the region’s financial harbor: the UK. The 10-year UK gilt yield slipped below 2.65 percent to its lowest level in four months, the appeal doesn’t seem universal. GBPUSD dropped 0.5 percent Monday as the market continues to process BoE expectations through data.

Yen Crosses Drop, but Where is the Momentum?

If concern over the Russia-West standoff were turning into a global financial risk concern, the fear would spread from the Emerging Market measures directly to the yen crosses and then on up the ‘risk scale’. Yet, these over-priced and under-paying carry currencies offered limited retreat Monday. As we wait for the BoJ’s QE decision next month, volatility and risk correlation are the keys to the yen cross bearings.

New Zealand Dollar: Yields Continue to Slip, A Worry for Kiwi and RBNZ?

How much further can we go? That is the question that kiwi hawks/bulls are asking themselves. We have seen the market already fully price in the RBNZ’s first rate hike next week as well as the total tightening expected over the next two years. Now, further gains on rate speculation have to be found above and beyond. Now, it is easier to disappoint than impress. A dangerous proposition with 10 year NZ rates near 6 month lows.

Gold Jumps to a Four-Month High as Speculative Interest Hits 10-Month High

We are striking the right cord to revive safe haven demandin gold. The metal returned to form on the week’s open with an impressive 1.8 percent run – the biggest since January 23. While the situation with Russia may not be pinching off cash markets, it is still encouraging investors to seek harbor outside fiat. Meanwhile, speculative futures holdings rose to a 10 month high and ETF demand is rebounding.**Bring the economic calendar to your charts with the DailyFX News App.

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

0:00

NZD

ANZ Commodity Price (FEB)

1.2%

Basket of 17 commodities rose 22.4% Y/Y

0:30

AUD

Current Account Balance (Australian Dollar) (4Q)

-10.0B

-12.7B

The retreat of the AUD from 2011 and 2012 highs should help boost exports and reduce the current account deficit.

0:30

AUD

Net Exports of GDP (4Q)

0.7%

0.7%

0:30

AUD

Building Approvals (MoM) (JAN)

0.5%

-2.9%

The rise of building approvals correlates with a strong increase in the Aussie House price index.

0:30

AUD

Building Approvals (YoY) (JAN)

24.0%

21.8%

1:30

JPY

Labor Cash Earnings (YoY) (JAN)

0.3%

0.5%

Labor earnings Y/Y continue steady growth

3:30

AUD

Reserve Bank of Australia Interest Rate Decision

2.50%

2.50%

Last meeting, RBA repeated its outlook of a period of likely stable policy rates. Economists widely expect RBA to maintain rates.

9:30

GBP

Purchasing Manager Index Construction (FEB)

63.2

64.6

PMI continues to strength from 2013 and indicates expectation of robust economic growth this year.

10:00

EUR

Euro-Zone Producer Price Index (MoM) (JAN)

-0.1%

0.2%

The declining PPI, in tandem with the declining CPI increases risk of deflation in Europe.

10:00

EUR

Euro-Zone Producer Price Index (YoY) (JAN)

-1.3%

-0.8%

14:45

USD

ISM New York (FEB)

64.4

This compares to the national ISM manufacturing index of 54.8%

15:00

USD

IBD/TIPP Economic Optimism (MAR)

45.0

44.9

The reading below 50 signals a negative outlook.

21:45

NZD

Value of All Buildings s.a. (QoQ) (4Q)

3.1%

1.4%

Figure is expected to show stronger growth than previous quarter, contributing to the record home prices in New Zealand.

22:30

AUD

AiG Performance of Service Index (FEB)

49.3

Continues to remain weak, has been below 50 since 2012.

23:30

CNY

China Premier Li Keqiang 2014 GDP Growth Target

23:30

CNY

China Fin Min Lou Jiwei Gives 2014 Budget Report

23:30

CNY

China NDRC Chairman Xu Shaoshi Annual Report

GMT

Currency

Upcoming Events & Speeches

15:00

USD

Senate Banking Committee Confirmation Hearing on Fed Nominees

21:15

USD

Fed's Jeffrey Lacker Speaks on U.S. Economy

-:-

CNY

China National People's Congress Begins (Mar 5 - 15)

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

14.0200

2.3800

12.7000

7.8165

1.3650

Resist 2

7.5800

5.8950

6.5135

Resist 1

13.5800

2.3000

11.8750

7.8075

1.3250

Resist 1

6.8155

5.8475

6.2660

Spot

13.2388

2.1785

10.8853

7.7558

1.2627

Spot

6.4839

5.4204

6.0378

Support 1

13.0000

2.1000

10.2500

7.7490

1.2000

Support 1

6.0800

5.3350

5.7450

Support 2

12.6000

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

1.3860

1.6812

103.23

0.8946

1.1024

0.9093

0.8379

142.25

1340.67

Res 2

1.3837

1.6781

102.99

0.8928

1.1005

0.9072

0.8358

141.88

1335.05

Res 1

1.3813

1.6750

102.75

0.8910

1.0986

0.9050

0.8336

141.51

1329.43

Spot

1.3766

1.6688

102.26

0.8873

1.0947

0.9007

0.8294

140.77

1318.20

Supp 1

1.3719

1.6626

101.77

0.8836

1.0908

0.8964

0.8252

140.03

1306.97

Supp 2

1.3695

1.6595

101.53

0.8818

1.0889

0.8942

0.8230

139.66

1301.35

Supp 3

1.3672

1.6564

101.29

0.8800

1.0870

0.8921

0.8209

139.29

1295.73

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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04 March 2014 05:34 GMT