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Forex: Dollar Rebound Stalls as Equities Bounce, Yields Slip

By , Chief Currency Strategist
13 March 2014 03:26 GMT

Talking Points:

  • Dollar Rebound Stalls as Equities Bounce, Yields Slip
  • New Zealand Dollar: RBNZ Hikes and Douses Volatility
  • Euro Keeps the Pressure EURUSD as Market Rates Rise

Dollar Rebound Stalls as Equities Bounce, Yields Slip

The Dollar’s three-day advance was brought to close before the market had to really question its intentions for developing a new, lasting trend. As it happens, the tumble in equities (a proxy for investor sentiment) leveled off just before investors would start claiming a major break had been made. These are fluctuations within low-restraint technical boundaries – exercising the market of its natural volatility without making the jump in conviction necessary to establish lasting trends. Risk bulls frustrated by pace and bears who await their cue for a turn are asking the same thing: when does the dithering end and commitment begin?

There are few themes that can inspire a uniform awakening to a common fear/hope from global investors, but risk trend and monetary policy are the stalwarts. The trouble is the catalysts. A uniform slip in ‘higher return’ assets from equities to yen crosses to emerging markets this week has stalled before it has turned into a self-feeding cycle of deleveraging. The most pressing threat this week remains the geopolitical and leverage feedback loop from the emerging markets through the Ukraine standoff with Russia over Crimea. Yet, even though the confrontation remains, developed world risk has smoothed over the threat quickly. This is a significant contrast to last August where capital flight from India inspired a market-wide stumble and near-5 percent correction from the S&P 500.

Aside from a ‘trip and fall’ start to a sentiment-based move, the best potential for fundamental encouragement comes through monetary policy expectations. This past session, we have seen the first developed economy central bank (the RBNZ) switch to a tightening regime. While we are a long way off from the global shift to higher yields, the contrast to the Fed’s position is nevertheless clear. Next week, we have the next FOMC meeting with new forecasts and new Chair Janet Yellen’s first press conference. Before we hit that high profile event, the upcoming session will offer up the Senate confirmation hearing for three Fed board candidates in Fischer, Brainard and Powell. Will these three accelerate the first rate hike or stymie it? Meanwhile, import inflation and retail sales are top data listing.

New Zealand Dollar: RBNZ Hikes and Douses Volatility

Have we seen the turning point for global interest rates? The first of the major central banks lifted its benchmark lending rate this morning – and the RBNZ has made it clear that this was a regime rather than a one-off. Since the Great Financial Crisis (GFC) through the opening months of 2009; monetary policy authorities have stuck to exceptionally accommodative policy to support financial stability, growth and inflation. Yet, five-years on, there is heavy debate over the need and efficacy of maintaining the ample stimulus. This is just the beginning of a larger fundamental discussion that will unfold over months. In the meantime, the first mover on such a systemic shift typically leads the tremendous shift in capital. Yet, there was a tangible lack of progress found from the kiwi to the confirmed 25bp hike to 2.75 percent. Why? The market had fully priced in this hike – and had further priced in 135 bps worth of easing over 12 months. RBNZ Governor Wheeler said he suspected rates could rise 200bps through 1Q 2016 (a repeat) but an extreme would be 125bps in hikes through 2014. He endeavored to ‘meet expectations’.

Euro Keeps the Pressure EURUSD as Market Rates Rise

Since the March 6th ECB rate decision – in which the central bank caught at least a quarter of the market off guard by holding monetary policy – we have the Euro advance against most counterparts (1.2 percent for EURUSD). A hold in policy is a bullish outcome from the euro as the passive status sees the central balance sheet continue to shrink – and for traders, market rates rise. Since that move, the three-month Euribor has risen to an 18-month high. Ahead, we have the ECB report, EZ economy survey and Ireland 4Q GDP to take a swing at rate forecasts.

Yen Correlation to Nikkei Keeps Attention Away from Data Cries for QE Upgrade

Not two days following the Bank of Japan decision to stay the course on policy and further deflate speculation of a QE upgrade, we have seen a February consumer confidence report for Japan drop to its lowest level since September 2011. Japanese and investors are preparing for a tax hike come next month, but confidence in a stimulus move to offset it continues to drop off. We may not need a risk drop to unwind this carry.

Australian Dollar Rallies after Jobs Data Hits, China Numbers Due

There is a range of event risk that poses a volatility risk to the Australian dollar. The first release out of the gate – the consumer inflation expectation report for March – was overlooked in spite ofa disappointing 2.1 percent print. Far more engaging was the February jobs data which compensated for the unemployment rate holding at a 10-year high 6.0 percent with payrolls beat (47,300 jobs added) three times larger than the consensus. This drive moved us to the precipice of an Aussie rally. Perhaps upcoming Chinese retail and factory data can push us over.

Emerging Markets Disengage from Hot Spots to Focus on Traditional Risk Trends

The emerging market currency list was an even split this past session. The South African Rand and Brazilian Real – known ‘risk’ currencies in the EM hierarchy – posted gains on the day. The Asia-area EM currencies, however, did not cope as well. Preoccupation with traditional risk trends has returned, but don’t write off an issue like a devolving situation in the Ukraine. That is still a smoldering volcano.

US Oil Drops Further as US Announces Strategy Reserves Release

‘Supply’ assumptions jumped for the US energy market Wednesday. Not only did the US Department of Energy report a sharp 6.2 million barrel increase in weekly inventories – the third biggest jump in 18 months – the US government announced its first test sale from its strategic reserves since 1990 (though only 5 million barrels). The US to UK – WTI to Brent – spread has widened nearly $4 from last week to $10.

Gold Working on Closing its First Six-Week Advance Since 2011 Record Highs

A 1.3 percent advance from gold this past session closed out a key break above $1,350. This is a move originating from speculative appetite in contrast to the market’s demand for a non-fiat safe haven in the 2008-2011 bull wave. While this represents questionable long-term potential, it is still driving the metal to its sixth weekly advance. We haven’t see such a consistent run since August 2011…when we set record highs.

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ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

0:00

AUD

Consumer Inflation Expectation (MAR)

2.3%

A lower print here gives the RBA flexibility on rate cuts moving forward.

0:01

GBP

RICS House Price Balance (FEB)

52%

53%

November was the highest print on our 10yr records.

0:30

AUD

Employment Change (FEB)

15.0K

-3.7K

The Aussi has been under pressure as of late due to a number of fundamental factors. If the print meets estimates, we could very well see a slight correction.

0:30

AUD

Unemployment Rate (FEB)

6.0%

6.0%

0:30

AUD

Full Time Employment Change (FEB)

-7.1K

0:30

AUD

Part Time Employment Change (FEB)

3.4K

0:30

AUD

Participation Rate (FEB)

64.5%

64.5%

5:30

CNY

Fixed Assets ex Rural (YTD) (YoY) (FEB)

19.4%

19.6%

Any pressure on property prices in China spells trouble for overleveraged and overextended developers and wealth management products.

5:30

CNY

Retail Sales (YTD) (YoY) (FEB)

13.5%

13.1%

5:30

CNY

Industrial Production (YTD) (YoY) (FEB)

9.5%

9.7%

7:45

EUR

French Consumer Price Index (MoM) (FEB)

0.4%

-0.6%

Despite what seems to be a breakout on a multi-year trendline, any serious signs of further disinflation may prompt the ECB to take action. Those actions would likely impact EURUSD to the downside, but of course these developments all depend on CPI figures coming out of France and Germany over the next few months.

7:45

EUR

French Consumer Price Index (YoY) (FEB)

0.8%

0.7%

7:45

EUR

French CPI - EU Harmonised (MoM) (FEB)

0.4%

-0.6%

7:45

EUR

French CPI - EU Harmonised (YoY) (FEB)

0.9%

0.8%

7:45

EUR

French CPI ex Tobacco Index (FEB)

125.04

9:00

EUR

Italian CPI FOI Index ex Tobacco (FEB)

107.3

9:00

EUR

Italian CPI - EU Harmonized (YoY) (FEB F)

0.5%

0.5%

12:30

CAD

Capacity Utilization Rate (4Q)

82.0%

81.7%

Any beat here combined with weak US Retail Sales may provide an opportunity for a good entry lower in USD/CAD longs if one is playing the breakout.

12:30

CAD

New Housing Price Index (YoY) (JAN)

1.3%

12:30

CAD

New Housing Price Index (MoM) (JAN)

0.1%

12:30

USD

Advance Retail Sales (FEB)

0.2%

-0.4%

We may see pressure on the ex-Auto figures as multiple car companies have come out with figures that note a slight decline in sales after a strong 2013. This may be one of the last prints that analysts can blame on ‘the weather’ before analysts starting viewing data weakness in a broader context of softening growth prospects.

12:30

USD

Advance Retail Sales ex Autos (FEB)

0.2%

0.0%

12:30

USD

Advance Retail Sales ex Auto and Gas (FEB)

0.3%

-0.2%

12:30

USD

Advance Retail Sales Control Group (FEB)

0.3%

-0.3%

12:30

USD

Initial Jobless Claims (MAR 8)

330K

323K

12:30

USD

Continuing Claims (MAR 1)

2907K

12:30

USD

Import Price Index (MoM) (FEB)

0.7%

0.1%

12:30

USD

Import Price Index (YoY) (FEB)

-1.5%

14:00

USD

Business Inventories (JAN)

0.4%

0.5%

21:30

NZD

Business NZ Manufacturing PMI (FEB)

56.2

Price action from here is likely to have been determined by the RBNZ on Wednesday.

GMT

Currency

Upcoming Events & Speeches

0:10

NZD

RBNZ Governor Graeme Wheeler Testifies at Parliament Committee

8:15

EUR

ECB's Benoit Coeure Speaks on Euro Economy

9:00

EUR

European Central Bank Monthly Report

10:00

EUR

Bundesbank Holds Annual Press Conference

14:00

USD

Senate Holds Hearing for Fischer, Brainard,Powell

17:00

EUR

ECB President Mario Draghi Speaks on Euro Economy

23:50

JPY

Bank of Japan Meeting Minutes

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

13.2934

2.2478

10.8921

7.7616

1.2684

Spot

6.3739

5.3841

5.9554

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

1.3953

1.6728

103.84

0.8841

1.1192

0.9043

0.8548

144.06

1381.75

Res 2

1.3930

1.6701

103.60

0.8824

1.1172

0.9021

0.8527

143.71

1376.01

Res 1

1.3907

1.6674

103.37

0.8807

1.1152

0.8998

0.8505

143.35

1370.27

Spot

1.3861

1.6620

102.90

0.8773

1.1112

0.8954

0.8462

142.63

1358.79

Supp 1

1.3815

1.6566

102.43

0.8739

1.1072

0.8910

0.8419

141.91

1347.31

Supp 2

1.3792

1.6539

102.20

0.8722

1.1052

0.8887

0.8397

141.55

1341.57

Supp 3

1.3769

1.6512

101.96

0.8705

1.1032

0.8865

0.8376

141.20

1335.83

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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13 March 2014 03:26 GMT