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Chinese Yuan: A Better 1Q GDP Outcome for Reassurance or Stimulus Motivation?

By , Chief Currency Strategist
16 April 2014 04:03 GMT

Talking Points:

  • Dollar’s Yield Forecast Hemorrhage Staunched by CPI Data
  • Chinese Yuan: A Better 1Q GDP Outcome for Reassurance or Stimulus Motivation?
  • British Pound Loosing Fundamental Traction as Inflation Hits 4 Year Low

Dollar’s Yield Forecast Hemorrhage Staunched by CPI Data

US yields continue to rise alongside FX-based volatility measures. Both developments indulge the dollar’s primary fundamental values, so it comes as little surprise that the Dow Jones FXCM dollar Index (ticker = USDollar) has advanced for three consecutive tradingdays. Yet, consistency does not account for conviction. While the benchmark extends its reversal from a five-month low 10,400, momentum has been held in check. The currency’s safe haven appeal is its weaker source of strength through the remainder of this week. Though the balance of sentiment trends through this past session was mixed (emerging markets up, yen crosses holding ranges), the strong run for US equities into the close lifts the markets off key technical levels and significantly reduces breakdown risks as the Friday liquidity drain looms.

A more practical source of strength for the greenback is yield forecasts. The tumble for the currency over the past two weeks distinctly conformed to the drop in Treasury yields – one of the preferred measures for interest rate expectations. This past session’s CPI data holds significant sway over the time frame for the first Fed hike. The headline reading picked up to a 1.5 percent pace while the core measure picked up from a near three-year low to 1.7 percent. Ahead, data takes a back seat to a dense round of Fed speeches – including Chair Yellen.

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Chinese Yuan: A Better 1Q GDP Outcome for Reassurance or Stimulus Motivation?

An important round of Chinese data came out better-than-expected overall…slightly. Retail sales, industrial production and fixed investment figures for Mach as well as first quarter business sentiment surveys were second tier to the first quarter economic activity (1Q GDP) report. According to the government’s figures, the world’s second largest economy grew 7.4 percent in the year through the first quarter. That matches the slowest rate of expansion since the Great Recession after a 7.7 percent pace previously, but it was still modestly better than the 7.3 percent forecast. The question is whether this is ‘good enough’ to salvage stall fears or ‘bad enough’ to necessitate fresh stimulus. It likely satisfies neither. USDCNH at a fresh 13-month high, but China may soon gain prominence as a catalyst for broader risk concerns.

British Pound Loosing Fundamental Traction as Inflation Hits 4 Year Low

The sterling rose against all of its major counterparts this past session despite a disappointing round of inflation data. Though we would cover all levels of price measures (retail, factory, housing), the reading with monetary policy implications was the CPI round. Both headline and core met expectations and in doing so hit a four-and-a-half and five-year low respectively. Expectations dampened the immediate impact this data would have, but the longer-term implications are significant. Expectations for 1Q 2015 BoE hikes are looking less and less likely.

Euro Traders Wonder if There is Anymore Drive to be Squeezed from CPI Data

EURUSD has fallen for three consecutive sessions, but the euro doesn’t look any closer to tripping into a strong bear trend. That is no doubt a disappointment for European monetary policy officials. The modest 6-pip decline for this benchmark pair reflects an equally tepid performance for the shared currency across the board. The restraint is noteworthy given the surprisingly explicit threat Draghi made about adopting more accommodation to ward off the high level of the currency. We’ll see if upcoming EZ CPI figures can offer further justification for a move.

Japanese Yen: Expected Volatility Levels Lowest in 18 Months

Market expectations for USDJPY volatility for the coming week – derived from implied volatility in options – hit its lowest level since October 2012. Given the potential for a significant change in risk-based bearings through the end of this week is tempered by a holiday-based liquidity drain, expectations for restraint over that period aren’t particularly surprising. Then again, the volatility level for the coming month and three months forward is at similar lows historically speaking. While yen cross trends are not as robust as what they projected a year ago, this looks more like an overshoot in expectations for stability and thereby another aspect that will lead to ‘surprise’ when a serious trend is revived.

Canadian Dollar Traders Shouldn’t Wright Off BoC Decision

Though the Bank of Canada has not changed its benchmark interest rate since 2010, the central bank’s meetings have generated greater swells for the loonie with the past few gatherings. The change began subtly when Governor Stephen Poloz backed off of the hawkish rhetoric that his predecessor – Mark Carney, now at the BoE – championed before him. That neutral stance turned dovish though when he suggested rate cuts were an option if inflation remained soft for too long. Since that warning, USDCAD rose nearly 1000 pips to the March peak. Since the last meeting, CPI has eased but factory activity, trade and jobs figures have all improved.

Emerging Markets Signal Serious Bearish Reversal

Where global equities were mixed and Yen crosses were unyielding at their major trendline support, there was little restraint from Emerging Markets. Perhaps this ‘risk’ measure was more prone at its recent bull wave high while other measures had measurably retreated in recent weeks, but the day’s drop was particularly severe. On heavy volume, the MSCI Emerging Market ETF gapped lower to open the day and lost as much as 2.7 percent on the day. In the FX rankings, the losses ranged from BRIC countries (the Brazilian Real was down 1.1 percent), liquid benchmarks (the South African Rand and Mexican Peso fell 0.5 percent), and political hotspots (Russian Ruble down 0.7 percent). This is less likely a leading risk measure and more likely a catch up to a correction other benchmarks have already made.

Gold Volatility Soars with an Initial 3.4 Percent Plunge

Short-term volatility levels behind gold hit their highest levels of the year this past session. The 1-day historical volatility reading behind the metal surged to 22.8 percent – the highest since December 31 – following an unexpectedly aggressive intraday reversal. A steady decline through the Asia and European sessions exploded just before the release of the US economic data with a near $19 drop in the span of less than a minute. The severity of the move and quick rebound suggests a technical move that tripped stops. Despite the rebound, the day’s peak-to-trough tumble measured a hefty 3.4 percent and has once again cast severe doubt over the metal’s ability to mount a consistent recovery for bulls. If the rebound in inflation pressures steadies US rate forecasts, gold may make a bid for $1,250 rather than $1,350.**Bring the economic calendar to your charts with the DailyFX News App.

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

0:30

AUD

Westpac Leading Index (MoM) (MAR)

-0.1%

Volatility here likely to be light post RBA minutes and ahead of Chinese GDP figures.

2:00

CNY

Gross Domestic Product s.a. (QoQ) (1Q)

1.5%

1.8%

Keep an eye on AUD crosses as volatility is likely to be heavy post RBA minutes with these GDP figures. Although figures rarely deviate from estimates, any figure under 7.3% will not be welcome by Aussi bulls.

2:00

CNY

Gross Domestic Product (YoY) (1Q)

7.3%

7.7%

2:00

CNY

Gross Domestic Product (YTD) (YoY) (1Q)

7.3%

7.7%

2:00

CNY

Retail Sales (YoY) (MAR)

12.2%

13.6%

2:00

CNY

Retail Sales (YTD) (YoY) (MAR)

11.9%

11.8%

2:00

CNY

Industrial Production (YoY) (MAR)

9.0%

9.7.%

2:00

CNY

Industrial Production (YTD) (YoY) (MAR)

8.8%

8.6%

2:00

CNY

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

18.0%

17.9%

4:30

JPY

Japan Industrial Production (YoY) (FEB F)

6.9%

Last month’s MoM -2.3% print was the worst since summer.

8:30

GBP

Jobless Claims Change (MAR)

-30.0K

-34.6K

GBP crosses are likely to be digesting Tuesday’s inflation data, although any weakness here could prompt further GBP selling on speculation of a double top amid a resurgence of USD strength.

8:30

GBP

Claimant Count Rate (MAR)

3.4%

3.5%

8:30

GBP

ILO Unemployment Rate (3M) (FEB)

7.1%

7.2%

8:30

GBP

Average Weekly Earnings in Bonus (3MoY) (FEB)

1.8%

1.4%

8:30

GBP

Average Weekly Earnings ex Bonus (3MoY) (FEB)

1.7%

1.3%

8:30

GBP

Employment Change (3Mo3M) (FEB)

90K

105K

9:00

EUR

Euro-Zone Consumer Price Index (MoM) (MAR)

1.0%

0.3%

As these are final prints, we do not expect volatility unless we see an unexpected deviation from the preliminary figures.

9:00

EUR

Euro-Zone Consumer Price Index (YoY) (MAR F)

0.5%

0.5%

9:00

EUR

Euro-Zone CPI - Core (YoY) (MAR F)

0.8%

0.8%

11:00

USD

MBA Mortgage Applications (APR 11)

-1.6%

Housing and manufacturing – while important to economic health – are not key focuses for monetary policy

13:15

USD

Industrial Production (MAR)

0.5%

0.6%

13:15

USD

Manufacturing Production (SIC) (MAR)

0.6%

0.8%

14:00

CAD

Bank of Canada Interest Rate Decision

1.00%

1.00%

The recent dovish turn from the central bank will amplify this event’s importance

23:50

JPY

Japan Buying Foreign Stocks (Yen) (APR 11)

¥94.7B

Foreign capital flows in Japan cooled the previous week. Last week’s yen cross tumble may indicate sizable flows for this update however

23:50

JPY

Japan Buying Foreign Bonds (Yen) (APR 11)

-¥380.5B

23:50

JPY

Foreign Buying Japan Stocks (Yen) (APR 11)

¥223.6B

23:50

JPY

Foreign Buying Japan Bonds (Yen) (APR 11)

¥23.7B

GMT

Currency

Upcoming Events & Speeches

6:15

JPY

BoJ Governor Haruhiko Kuroda Speaks on Japanese Economy

12:30

USD

Fed's Jeremy Stein to Speak on Quantitative Easing

15:30

USD

Fed's Dennis Lockhart Speaks on Financial Markets

16:25

USD

Fed Chair Janet Yellen Speaks on U.S. Economy

17:25

USD

Fed's Richard Fisher Speaks on U.S. Economy

18:00

USD

Federal Reserve Publishes Beige Book Economic Report

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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16 April 2014 04:03 GMT