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Dollar Still Dives Through Stock Market Collapse

By , Chief Currency Strategist
11 April 2014 04:43 GMT

Talking Points:

  • Dollar Still Dives Through Stock Market Collapse
  • Euro: Does Weak Inflation or EURUSD at 1.4000 Move the ECB?
  • Japanese Yen Crosses Slip on Risk but Shy from Equities’ Momentum

Dollar Still Dives Through Stock Market Collapse

If this past session was running on a ‘risk aversion’ theme, someone forgot to tell the dollar to don its safe haven cloak. The S&P 500 led a global equity selloff this past session with a 2.1 percent tumble – its steepest in two-months. It will take a substantial level of ‘fear’ to revive the greenback’s liquidity appeal; but with the US index pressuring a prominent level of support to its most recent bull run to record highs, there was perhaps the opportunity to hit that extreme. Yet, the performance between currency and index couldn’t have been more different. Compared to the severe and negative move in stocks, the dollar was controlled and heading lower. A better driver for the currency seems to be the fifth straight drop in mid-term Treasury yields (easing rate forecasts). Bulls need either a more symbolic risk drop or strong CPI data next week.

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Euro: Does Weak Inflation or EURUSD at 1.4000 Move the ECB?

EURUSD advanced Thursday and is now working on its first five-day run since mid-December. The quick reversal from this benchmark currency pair has driven us back up to 1.3900 and the put us in the same vicinity that provoked ECB President Draghi into making the connection between exchange rates and monetary policy last month. On March 13 – on a day when the pair pressed a multi-year high just 35 pips short of 1.4000 – the central banker commented that a high Euro contributes to weak inflation. Yet, that warning didn’t necessarily send the currency reeling – that was accomplished later by the FOMC when they announced their policy assessment. The market looks intent once again to press European authorities on the point. Capital is flowing into the region seeking higher rates of return and diversification. If the inflation update next week or another Draghi effort aren’t realized, EURUSD may slowly work its way to 1.4000 and a nest of entry/stop orders.

Japanese Yen Crosses Slip on Risk but Shy from Equities’ Momentum

The fire continued for the yen crosses this past session with the pairs falling another 0.1 to 1.0 percent (CHFJPY to CADJPY) this past session. As broad as this move was, though, it is worth noting that it was measurable less severe than the move on Tuesday. That is something of a surprise for those watching risk trends, as these low-yielding but expensive carry pairs maintain an especially strong correlation to benchmark sentiment measures. This morning, the Nikkei 225 is down another 2.0 percent – bringing the week’s plunge to an impressive 7 percent while the index sets a six-month low. In hesitation from USDJPY, EURJPY and GBPJPY; we seem the same reluctance to take the next big step over the cliff that stocks have shown. The difference is that the yen pairs were closer to their break point.

British Pound Unfazed by BoE Hold, Inflation and Jobs Data Next Week

Once again the Bank of England’s (BoE) policy gathering would pace with little fanfare from the FX trading ranks. A hold by the central bank means that there is no statement to be released or nuance from which we can extract expectations for interest rate moves down the line. Having stalled at 1.6800, GBPUSD needs another push from rate hawks to upgrade its advance to the self-propagating momentum. Next week, we will have a far better chance to spark a chance in rate speculation with the March round of inflation figures.

New Zealand Dollar Loses Ground Through Risk Slide, Foreign Demand Update

Why is the New Zealand dollar considered one of the ‘major’ currencies of the world? A top credit rating and high yield mark it as a favorite investment currency for global financiers. An appetite for carry trade is therefore particularly important for keeping capital flowing into New Zealand and thereby the kiwi buoyant. With the RBNZ leading the shift to a tightening regime, the central bank is acting to maintain the currency’s position in the financial system; but appetite for that yield is something authorities have less control over. Despite the hike last month, data shows foreign holdings of New Zealand debt dropped to 62.8 percent – the lowest level since November 2012.

Chinese Yuan Ready for Volatility Next Week with 1Q GDP Release

The Chinese currency (CNH or offshore Renminbi) dropped 0.3 percent against the dollar this past session – its biggest stumble since March 10. This move is even more interesting considering authorities actually lowered the USDCNY reference rate from the previous day. Having returned to the 12-month highest set this past month, there is evidence that the market is particularly cautious about returning to the ‘China carry trade’ as exchange manipulation and liquidity concerns may impede investors ability to unwind should the pullback in speculative markets we’ve seen recently grow more intense. Looking ahead to next week, the market will gauge economic health and financial stability in the world’s second largest economy with the release of the 1Q GDP data alongside other high-level metrics.

Emerging Market Currencies Mixed Despite Equity Plunge

If this past session was a strong ‘risk off’ day, then shouldn’t one of the most sensitive asset classes in the financial markets – emerging markets – suffer equally to equities? While the MSCI Emerging Market ETF fell 1.1 percent through the session, the currency segment for this grouping was generally mixed. The heavy-hitting and more liquid currencies in this group (Brazilian Real, South African Rand, Mexican Peso and Indonesian Rupiah) fell against the safe haven dollar on the day between 0.9 and 0.6 percent. Yet, the Russian Ruble, Taiwanese Dollar and Chilean Peso were a few of the higher risk and less-traded units that saw significant gain. So long as Emerging Markets are not aligning to equities, yields and yen crosses; the reading on ‘risk trends’ is weak.

Gold Climbs Third Straight Day as Dollar and Sentiment Retreat

With the correct combination of fundamental influence – as questionable as they may be for follow through – spot gold managed its first three-day advance since the market topped back on May 14. Absent though in this comparison was the momentum. Thursday’s performance was a 0.5 percent gain to $1,319. Yet, once again, when we price the metal in euros, pounds or Australian dollars; the gains evaporated. The advance gold has made this week has been largely pricing derived – weakness in the unit of currency that is used to value the commodity. While there is certainly validity to gold’s strength in terms of a general selloff in equities and the weakening of the world’s most liquid currency, need for this alternative asset is still not hitting escape velocity. Looking to derivative volume, turnover eased in ETF as well as futures trading and is still below its two-week average. **Bring the economic calendar to your charts with the DailyFX News App.

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

-

NZD

REINZ House Price Index (MoM) (MAR)

2.1%

Any further increase in home values MoM is likely to put more pressure on the RBNZ to raise rates and/or LVR restrictions.

-

NZD

REINZ House Price Index (MAR)

3835.9

-

NZD

REINZ House Sales (YoY) (MAR)

-7.6%

1:30

CNY

Consumer Price Index (YoY) (MAR)

2.4%

2.0%

Higher than expected CPI could add to worries out of China as options for further stimulus could become increasingly more limited.

1:30

CNY

Producer Price Index (YoY) (MAR)

-2.2%

-2.0%

3:00

NZD

Non Resident Bond Holdings (MAR)

63.3%

6:00

EUR

German Consumer Price Index (MoM) (MAR F)

0.3%

0.3%

Read more about what April inflation figures in the EU mean for the Euro.

6:00

EUR

German Consumer Price Index (YoY) (MAR F)

1.0%

1.0%

6:00

EUR

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

0.3%

0.3%

6:00

EUR

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

0.9%

0.9%

6:45

EUR

French Current Account (euros) (FEB)

-4.5B

8:30

GBP

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

-1.5%

1.8%

An indicator to better measure the growth aspect of the housing boom in the UK

8:30

GBP

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

4.2%

5.4%

12:30

USD

Producer Price Index (MoM) (MAR)

0.1%

-0.1%

Upstream inflation pressure and a measure of consumer health – an integral part of economic activity will be good Fed / rate speculation fodder

12:30

USD

Producer Price Index (YoY) (MAR)

1.2%

0.9%

12:30

USD

PPI ex Food and Energy (MoM) (MAR)

0.2%

-0.2%

12:30

USD

PPI ex Food and Energy (YoY) (MAR)

1.1%

1.1%

13:55

USD

University of Michigan Confidence (APR P)

81

80

GMT

Currency

Upcoming Events & Speeches

-:-

ALL

IMF and World Bank Spring Meeting [April 11 to 13]

10:00

EUR

ECB's Publishes 3-Year LTRO Repayment

11:00

USD

US Earnings – JPMorgan Chase

12:00

USD

US Earnings – Wells Fargo

-:-

EUR

Fitch to Publish Portugal Sovereign Rating

(SAT)

16:00

EUR

ECB's Draghi Holds Press Conference

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

13.5800

2.3800

12.7000

7.8165

1.3650

Resist 2

7.5800

5.8950

6.5135

Resist 1

13.1500

2.3000

11.8750

7.8075

1.3250

Resist 1

6.8155

5.8475

6.2660

Spot

13.0529

2.1179

10.4811

7.7544

1.2491

Spot

6.5332

5.3732

5.9247

Support 1

12.9650

2.0700

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

1.3982

1.6872

102.49

0.8825

1.1002

0.9461

0.8723

142.51

1340.59

Res 2

1.3960

1.6847

102.27

0.8809

1.0985

0.9441

0.8703

142.19

1335.39

Res 1

1.3939

1.6823

102.06

0.8794

1.0967

0.9421

0.8683

141.86

1330.18

Spot

1.3895

1.6774

101.63

0.8763

1.0931

0.9382

0.8643

141.21

1319.78

Supp 1

1.3851

1.6725

101.20

0.8732

1.0895

0.9343

0.8603

140.56

1309.38

Supp 2

1.3830

1.6701

100.99

0.8717

1.0877

0.9323

0.8583

140.23

1304.17

Supp 3

1.3808

1.6676

100.77

0.8701

1.0860

0.9303

0.8563

139.91

1298.97

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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The information contained herein is derived from sources we believe to be reliable, but of which we have not independently verified. Forex Capital Markets, L.L.C.® assumes no responsibility for errors, inaccuracies or omissions in these materials, nor shall it be liable for damages arising out of any person’s reliance upon this information. Forex Capital Markets, L.L.C.® does not warrant the accuracy or completeness of the information, text, graphics, links or other items contained within these materials. Forex Capital Markets, L.L.C.® shall not be liable for any special, indirect, incidental, or consequential damages, including without limitation losses, lost revenues, or lost profits that may result from these materials. Opinions and estimates constitute our judgment and are subject to change without notice. Past performance is not indicative of future results.

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11 April 2014 04:43 GMT