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Forex: Dollar Gains On S&P 500, Euro Tumble

By , Chief Currency Strategist
14 March 2014 03:31 GMT

Talking Points:

  • Dollar Gains On S&P 500, Euro Tumble
  • Euro: Has Draghi Marked the ECB’s Tolerance for Gains?
  • Yen Crosses Tumble on the Day as Nikkei 225 Breaks Floor

Dollar Gains On S&P 500, Euro Tumble

A global slump in equities and key reversal from EURUSD before reaching 1.4000 speaks to the exact mix we would expect to jump start a significant dollar recovery. Yet, the greenback’s individual performance this past session lacked the clarity and conviction general risk trend and the FX market’s most liquid pair were displaying. In fact, through Thursday’s session, the dollar finished lower against most of its counterparts and the Dow Jones FXCM Dollar Index (ticker = USDollar) slipped for a second consecutive day. To this point, the benchmark currency has readily responded to favorable changes in sentiment trends and yield forecasts – while simultaneously curbing the ill-effects of detrimental developments. While this may initially reflect doubt over the financial markets’ willingness to commit to systemic deleveraging or perhaps preoccupation with forthcoming event risk (Ukraine’s referendum or next week’s FOMC), it may also be a characteristic change.

If the dollar is to play the role of a safe haven, the market must in fact need a harbor from a perceived threat. Measuring the market’s level of fear this past session, there was more convincing evidence of a significant jolt to investor poise than even the January slump. The anxiety seven weeks ago was wrung from the emerging markets. There is a similar element this go around as the Ukraine standoff with Russia over Crimea continues, but it is not the only exposed nerve. As global powers trade threats of sanctions and the market awaits the planned weekend referendum; the market is also reminded of China’s economic cooling and financial squeeze, a distinct rebuke of stimulus by the major central banks, and the record deployment of leverage in the market. A flare up from any of these individual sources – or any headline that carries global ramifications – will have plenty of dry dynamite to set off.

Looking ahead, the scheduled event risk is light before the end of the week. The University of Michigan consumer confidence report for March may offer some insight into the economy’s resilience as the Taper takes effect, but its entire impact is unlikely to reach beyond a short-term volatility response to any substantial deviations from consensus. Many will be watching the international headlines over the weekend to see what comes of the planned Crimea referendum to join the Russian Federation on Sunday. For EURUSD and the dollar, Wednesday’s FOMC meeting will set the tone for moral hazard and relative rate expectations – a comprehensive event risk.

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Euro: Has Draghi Marked the ECB’s Tolerance for Gains?

Since the ECB announced last week that it would leave its monetary policy course unchanged, we have seen the EURUSD inch closer and closer to 1.4000. Without a substantial piece of event risk or a strong countercurrent from the dollar to turn the tide, it seemed a push to the big figure was inevitable. Policy officials must have feared the same, so they upped the rhetoric this past session and the pair collapsed 120 pips from its two-and-a-half year, overnight high. We have heard numerous ECB officials caution that further policy actions were a possibility if the economy strayed from its goals moving forward, but actions (such as last week’s hold) speak louder than words. The market had all but decided to write off any further verbal cues from the central bank until President Mario Draghi remarks made the currency to policy connection by saying it was sabotaging price pressures. We will see if the market tries to push this still ‘veiled’ verbal intervention.

Yen Crosses Tumble on the Day as Nikkei 225 Breaks Floor

The global tumble in equities led to a number of nasty spills Thursday, but few made the kind of technical splash that the Nikkei 225 saw. The index’s fourth consecutive decline cleared the bullish channel the market had depended on since seeking a bottom at the beginning of February. Given the yen crosses’ correlation to the Japanese equity benchmark, the slide from the crosses doesn’t surprise. The consistency of the move, though, should be noted. This uniform yen retreat is pushing these pairs dangerously close to far more critical breaks.

British Pound Awaits Trade Friday, Event Risk Heavier Next Week

The final trading session of the week brings with it a last rush of UK data. Pound traders will certainly take in the January trade figures as another building block for their interest rate expectations – though there will be far greater impact to data that undermines the inflated yield outlook. Next week, the rate forecasts will be top of the mind for the sterling with BoE minutes, jobs data and the budget announcement due.

Australian Dollar Up Against Most Counterparts…Despite Risk Lean

On a day that we would readily call ‘risk adverse’, we have seen something very unusual – the Australian dollar is up against all its major counterparts with the exception of the yen. We have seen the carry currency steadily break ranks with its traditional investment appeal for some time, but this is particularly remarkable. If the market diversifies away from over-leveraged risk exposure, AUD may actually draw funds…

New Zealand Dollar Withstands Equity Stumble with Help from Rate Forecast

It helps that the day before a market-wide risk tumble that the New Zealand dollar was fortified by an RBNZ rate hike. It is rate of return versus appetite for yield at the moment, and the kiwi is attempting to compensate. Looking at swaps following the first hike in a regime, the market seems almost certain of a follow up hike in April. Meanwhile, next week brings 4Q GDP and current account reports.

Emerging Markets Drop, Currencies Mixed

Despite the exceptional level of conviction measured in global equities, it seemed risk aversion didn’t send the emerging markets into a panic. While the MSCI Emerging Market ETF dropped to a fresh month low, its currency ranks were a mix. Social and political turmoil seems to be an additional component, but not a certainty for resignation. China and Ukraine will continue to dominant headlines through the weekend.

Gold Extends Six Month Highs on Strongest Run in Over Two Years

Spot gold rose for a third consecutive day Thursday – though the pace was noticeably tempered. The ECB’s threat to check rates is a fiat distortion consideration that alternative-store-of-wealth advocates jump on and the Crimea situation offers temporary safety from geopolitical exposure in the world’s fiat-safe havens. This week has pushed us to a six month high and maintained the strongest run since 2011.

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ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

2:00

NZD

Non Resident Bond Holdings (FEB)

63.7%

4:30

JPY

Industrial Production (MoM) (JAN F)

4.0%

Yen price action looks likely to be determined by developments in the equity markets over the next 24 hours.

4:30

JPY

Industrial Production (YoY) (JAN F)

10.6%

4:30

JPY

Capacity Utilization (MoM) (JAN)

2.2%

7:00

EUR

German Consumer Price Index (MoM) (FEB F)

0.5%

0.5%

European, and especially German, inflation figures moving forward become all the more important as the Euro presses fresh highs on the back of the ECB’s inaction. If CPI figures continue to miss, Mr. Draghi may be forced to talk about actual policy possibilities rather than blind optimism at his next meeting.

7:00

EUR

German Consumer Price Index (YoY) (FEB F)

1.2%

1.2%

7:00

EUR

German CPI - EU Harmonised (MoM) (FEB F)

0.5%

0.5%

7:00

EUR

German CPI - EU Harmonised (YoY) (FEB F)

1.0%

1.0%

8:15

CHF

Producer & Import Prices (MoM) (FEB)

0.0%

If we see another negative MoM print, look to next week’s SNB Rate Decision for central bank comments on deflation moving forward.

8:15

CHF

Producer & Import Prices (YoY) (FEB)

-0.3%

9:30

GBP

UK Trade Balance (JAN)

9:30

GBP

Construction Output s.a. (MoM) (JAN)

2.0%

2.0%

With GBP strength over the past few months being derived from strong incoming data, any softening will give fundamental fuel for bears to step in.

9:30

GBP

Construction Output s.a. (YoY) (JAN)

5.3%

6.3%

11:00

EUR

ECB Announces 3-Year LTRO Repayment

12:30

USD

Producer Price Index (MoM) (FEB)

0.2%

0.2%

YoY PPI figures have come off the November lows of 1.00%, but follow through towards the 2% level will be needed to help ease Fed fears of disinflation post-QE3.

12:30

USD

Producer Price Index (YoY) (FEB)

1.2%

1.2%

12:30

USD

Producer Price Index ex Food and Energy (MoM) (FEB)

0.1%

0.2%

12:30

USD

Producer Price Index ex Food and Energy (YoY) (FEB)

1.4%

1.3%

13:55

USD

U. of Michigan Confidence (MAR P)

82.0

81.6

GMT

Currency

Upcoming Events & Speeches

0:05

GBP

Bank of England Quarterly Bulletin

1:05

NZD

New Zealand to Sell NZ$200 Mln in Inflation Bonds

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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14 March 2014 03:31 GMT