Trade FOREX with FXCM

  • Award-Winning Platform
  • 24/7 Customer Support
  • Trade Directly on Charts
  • Free $50K Practice Account

Resources

Dollar’s Short-Term Volatility Outlook Picking Up

By , Chief Currency Strategist
22 April 2014 04:04 GMT

Talking Points:

  • Dollar’s Short-Term Volatility Outlook Picking Up
  • Yen Crosses Run Questioned on Deficit Swell, GPIF Diversification
  • Euro: A Weekend without an Exchange Rate Threat

Dollar’s Short-Term Volatility Outlook Picking Up

A quiet start to the week was to be expected given the extended holiday weekend for much of the world. While US markets were online Monday, the absence of European liquidity took its toll on conviction. The S&P 500 managed its fifth consecutive advance though progress was tepid and volume was the weakest seen since March 18 – notably the day before the FOMC rate decision. With the trading ranks expected to fill out through the next 24 hours, we are starting to see signs of life in expected volatility readings. Short-term (one-week) implied volatility measures for the dollar-based majors are rounding up from last week’s lows. Of course, marking progress from multi-year lows draws a very different picture than just reviving after a short-lived lull. Immediately important this week is whether risk and/or rate speculation regain traction.

Where is the dollar positioned in the scale of interest rate to stimulus speculation? John discusses in today's Strategy Video.

Yen Crosses Run Questioned on Deficit Swell, GPIF Diversification

Two prominent fundamental catalysts strong-armed the yen crosses higher over the past 18 months: a general appetite for yield / return and heavy stimulus vows by Japanese policy authorities. However, now we find that risk appetite is struggling to press new highs and the BoJ has made it clear that there is little desire to upgrade its sizable open-ended stimulus program. Considering that some of these crosses have risen more than 40 percent over that period and yield differentials have hardly budged to balance their traditional fundamental valuations, the situation is looking more and more like a Wile E. Coyote scenario where the market has already run off the cliff and just waiting for gravity to kick in. Repression and complacency, however, are strong factors in today’s markets. Yet, news that Japan suffered a record April trade deficit and the GPIF pension fund plans to diversify away from local government bonds is trying hard to reengage financial physics.

Euro: A Weekend without an Exchange Rate Threat

It was no doubt refreshing to Euro traders to open the new week Monday without a sharp move lower. Recalling the jump lower on the open last week following the weekend commentary made by the ECB President, we were met with remarkably quiet newswires this past break. Perhaps the lack of liquidity stayed policy officials’ hands or maybe they plan on reserving their open warnings of policy changes to fight a rising exchange rate for when the EURUSD is pressuring 1.3900. The market may put this latter tolerance level to the test if the US dollar doesn’t make its own bid at a meaningful rally in the near future. For scheduled event risk, the Eurozone’s docket is one of the few with noteworthy event risk – the region’s consumer confidence survey – but traders may wait for Wednesday PMI or Thursday’s Draghi speech to weigh in.

British Pound: Will Inflation and Rate Expectations Pick Up Last Week’s Rally?

The Dollar wasn’t the only currency to benefit from a rebound in rate expectations this past week. Two-year Gilt yields surged through Thursday back towards the multi-year (0.743 percent) set at the end of March while Breakeven rates – a measure of inflation expectations – moved into position for an important test of a 12-month range of 3.0 percent. The question is whether this swell was a side effective of unusual liquidity conditions or a genuine rebound in speculative appetite. Sterling traders will watch the official open of London trade after the extended holiday weekend to test conviction. For scheduled event risk, the docket is light until Wednesday’s BoE minutes.

Australian Dollar Traders Shouldn’t Expect New Trends Before CPI

Most traders worry about how the market response to major event risk. Fewer appreciate the consistency in the lead up to such catalysts’ release. Tomorrow morning, the first quarter consumer inflation (1Q CPI) report is due in Australia; and a substantial rebound for the Aussie dollar has leveraged traders’ interest. With swaps close to fully pricing in the possibility of the first 25bp rate hike in three years, a lot is riding on this piece of event risk. Should the core reading meet the 3.2 percent forecast, it could reinforce early calls of emerging pressure for removing accommodation. Miss, and two months of gains can fall apart. Yet, uniformly in the lead up, traders opt for ‘wait and see’.

Chinese Yuan Presses to Fresh 14-Month Lows as Polls Show Regional Worry

What is the greatest risk to global growth and financial market health moving forward? A significantly slowdown in China. That was the conclusion of a Reuters poll released recently, but it is the same call seen across many different economist, trader, analyst-based surveys conducted recently. China was one of the standout sources of growth amongst the world’s largest economies – not just the ‘developing’ group – through the Great Recession, and is still considered a key source of expansion moving forward. And yet, the pressure is building. Though foreign reserves grew through March (considered a measure of capital inflow) and financing pressure is being kept in check (CDS are below 90 bps and the 7-day Repo rate is at 3 percent, the specter of economic malaise is growing more corporeal in data.

Emerging Markets Ease on Weeks Open but Volume Plays Down Conviction

The absence of a strong ‘risk’ current meant the emerging market benchmarks would pass a sedate session Monday. We had to look no further than the MSCI Emerging Market ETF to see the type of conditions we were dealing with through the opening session. The product posted a 0.6 percent dip, but volume (29.3 million shares) was the lowest since the Christmas period –and before that not since February of last year. Within the FX ranks, most of the moves were modest. The stand out was the Columbian Peso (COP) which rallied 0.6 percent versus the dollar. On the short side, the Indian Rupee fell 0.5 percent, Russian Ruble 0.3 percent and Turkish Lira 0.2 percent against the greenback.

Gold Makes Another Threat of a Deeper Tumble as Rate Speculation Eyed

One of the few benchmark assets posting close-to-normal activity levels, gold’s opening move proved an unflattering one. Spot gold closed down 0.4 percent Monday after a feigned attempt to retake $1,300. Though this commodity may not depend on the same level of fundamentals that the standard financial outlets do; the absence of speculative interests along with the preoccupation with stimulus and inflation forecast were working against an errant trend on the metals behalf. As we look ahead to the round of global monetary policy updates for fundamental influence, we should keep in mind speculative appetites as a primary driver. The COT report from the CFTC reported not long speculative futures holdings tumbled a fourth consecutive week through the April 15 period. Cumulative, that is a 42 percent drop in long interest from the one-year high set just this past month.**Bring the economic calendar to your charts with the DailyFX News App.

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

0:00

AUD

Conference Board Leading Index (FEB)

0.2%

Utilizes eight indicators to forecast future growth (positive figures) or contraction (negative figures) in the short to medium terms.

5:00

JPY

Leading Index (FEB F)

108.5

Likewise the Japanese Leading Indicator serves as a benchmark against which to anticipate future economic conditions.

5:00

JPY

Coincident Index (FEB F)

113.4

7:00

CHF

Money Supply M3 (YoY) (MAR)

8.8%

9:00

EUR

Euro-Zone Construction Output s.a. (MoM) (FEB)

1.5%

Euro-Zone Construction Output indicators (YoY) have historically fallen sharply after rising in December.

9:00

EUR

Euro-Zone Construction Output w.d.a. (YoY) (FEB)

8.8%

12:30

CAD

Wholesale Sales (MoM) (FEB)

0.7%

0.8%

Falling Wholesale Sales forebodes negatively for retail sales and by extension inflationary pressures in February.

13:00

USD

House Price Index (MoM) (FEB)

0.5%

0.5%

Existing home sales have contracted significantly since June of 2013. This type of fall in demand may be interpreted as a reduction in inflationary pressures as the economy becomes more self-sustaining.

14:00

USD

Richmond Fed Manufacturing Index (APR)

0

-7

14:00

USD

Existing Home Sales (MAR)

4.55M

4.60M

14:00

USD

Existing Home Sales (MoM) (MAR)

-1.1%

-0.4%

14:00

EUR

Euro-Zone Consumer Confidence (APR A)

-9.3

-9.3

Consumer Confidence has steadily increased since early 2013 by 17.43%

22:45

NZD

Net Migration s.a. (MAR)

3470

GMT

Currency

Upcoming Events & Speeches

0:45

USD

Former Fed Chairman Ben Bernanke Speaks on U.S. Economy

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

Sign up for John’s email distribution list, here.

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.

provides forex news and technical analysis on the trends that influence the global currency markets.
Learn forex trading with a free practice account and trading charts from

22 April 2014 04:04 GMT