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Dollar Range Sets Another Dangerous Low

By , Chief Currency Strategist
06 May 2014 05:40 GMT

Talking Points:

  • Dollar Range Sets Another Dangerous Low
  • Euro: The Pressure Mounts for the ECB to Ease
  • Australia Dollar Bulls Show Relief in Status Quo RBA

Dollar Range Sets Another Dangerous Low

Extreme volatility readings are easily spotted in all corners of the financial system. Equities in particular have been a big story as activity readings have bounced along multi-year lows recently. However, nowhere are trading conditions as remarkable as the currency market. The FX Volatility Index – a measure of expected movement a month forward – has collapsed to a seven-year low. Realized activity levels have plunged similar depths. Yet, the situation is even more incredible on an individual pairing basis.

ForEURUSD, the 20-day average true range– ameasure of actual price action – has collapsed to a record low since the Euro began trading. Another of the most liquid majors, USDJPY has seen its one-month implied volatility reading hit a record low going back multiple decades. These readings have in turn contributed to the extraordinary circumstances for USDollar. Through Monday’s session, the Index produced a range of a mere 10 points. There are only 6 other instances in the benchmark’s price history where it has covered less than 15 pips in a trading session – and half of those are holidays. These are truly incredible market conditions.

Extremes are not meant to last – that is why they are considered as such. The question is: when do trading conditions attempt the return to ‘normal’ and what will be the circumstances surrounding its rebalance? Excessive use of leverage and a shallow poll of liquidity sow the ground work for a violent deleveraging under adverse conditions – translation: severe risk aversion. That level of speculative interest can revive the greenback’s little-appreciated safe haven status. Yet, the market has shown a resiliency to panic. As we wait for the spark that will ignite risk trends, the dollar’s current will likely be determined by rate expectations. The ISM’s service sector survey this past session helps offset last week’s disappointing 1Q GDP release and gives a nudge on the NFPs debate. Ahead, we have trade data and the Fed’s Stein speaking.

Euro: The Pressure Mounts for the ECB to Ease

The newswires are doing what they can to remind us that there is an ECB rate decision on Thursday. There is already tremendous speculation suggesting the central bank will make another easing move in the near future – though it never seems to be at the next central bank meeting. Recently we have seen ECB President Draghi make the connection between the exchange rate and weak inflation, politicians decry the burden of the high currency and softening of economic data. Monday, these themes were furthered. Attempting to strong-arm monetary policy officials, French Prime Minister Valls remarked that the euro was too high and required further central bank action to ease its strength. On the data front, a slight easing in Eurozone investor sentiment was not as significant as the downgraded growth and inflation forecasts in the EU’s Spring assessment. The latter downgrade from 1.0 to 0.8 percent is particularly important for the central bank’s decision later this week.

Australia Dollar Bulls Show Relief in Status Quo RBA

Concerns that the RBA will slide back into a dovish policy stance were curbed this morning after the central bank maintained policy and tone at its policy decision. Immediately following the suggestion that rates are likely to go through a period of stability and inflation was on track to meet the 2 to 3 percent target, the Australia dollar found a quiet bid. However, that move seemed to be a modest unwinding of dovish risk premia as the move quickly faded. Falling back into the market’s ‘status quo’, the Australian dollar is facing a global drop in yields that is pulling down the 10-year Aussie yield further below 3.90 percent.

British Pound Traders Should Keep Track of Data

A market holiday in London dampened the pound’s already-tepid volatility measures and did its part to disrupt the transmission of risk trends. Back online, sterling traders much keep track of event risk. This is a currency that is not particularly beholden to the traditional risk trends – which are anchoring price action in other pairs and asset classes that are running on that fuel. For the pound, rate forecasts are far more motivating. Already positioned with a hawkish outlook, we have a broad PMI survey and private inflation reading for April due.

New Zealand Dollar: Why Do So Few Expect Gains?

It seems there are is a strong belief that the New Zealand dollar will struggle for traction and NZDUSD will fail to overtake 0.8750 on a bid to new multi-decade highs. Adding to the central bank’s (RBNZ) passive remarks that it judges the exchange rate to be too high, the New Zealand Treasury noted a drop in inflation pressures recently. In the market, a Deloitte survey of CFOs showed only 14 percent expected the benchmark lending rate to exceed 3.50 percent in 12 months time while only 36 percent expected NZDUSD to be above 0.8500.

Chinese Yuan First Back-to-Back Gain in 4 Weeks

There is a bit of a difference between data and performance for the Chinese currency so far this week. USDCNH (Dollar versus the offshore Renminbi) slipped 0.2 percent Monday and is down once again this morning. If we close in the red, this would be the first back-to-back drop for the pair in four weeks. On the data front, the data was mixed. Saturday’s service-sector PMI report for April from the government rose slightly to 54.8 (above 50 reflects growth). That said, the HSBC manufacturing report unexpected slipped in its final reading.

Emerging Markets Volume, Appeal Tumble

The MSCI Emerging Market ETF dropped 0.6 percent to start the week, but the real blow was to volume which was more than halved from Friday – and the lowest overall turnover excluding the year-end holiday season in years. On the FX side, more of the riskier currencies rose; but their gains were modest. Meanwhile, the Brazilian Real dropped 1 percent and South African rand fell 0.6 percent.

Gold Clears $1,305 as Bulls Scramble for Support

Spot gold advanced to start the week, and has closed above $1,305 for the first time since April 14. Yet, FX and other capital markets, the level of volume behind the move was particularly tepid. The Commitment of Traders report from last week showed speculative showed a second week of increase to net longs – to 85,227 contracts. To feed this bullish appetite, a dollar tumble or inflation fear surge would go far.**Bring the economic calendar to your charts with the DailyFX News App.

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

1:30

AUD

Trade Balance (Australian dollar) (MAR)

1000M

1200M

The RBA is not expected to raise interest rates in the near future as unemployment remains on the rise currently holding at 5.97%. Some have gone so far as speculate that interest rates may decline further down to 2.25%, despite the fact that current rates represent historic lows. Economic growth overall in Australia remains slow in the midst of slowing growth in China and the current commodities glut that has accumulated.

4:30

AUD

Reserve Bank of Australia Interest Rate Decision

2.50%

2.50%

7:55

EUR

Markit German PMI Services (APR F)

55.0

55.0

The Euro-Zone Composite PMI has been on the rise since 2012 rising relatively steadily at approximately 5 points per annum. T

7:55

EUR

Markit German PMI Composite (APR F)

56.3

56.3

8:00

EUR

Markit Euro-Zone PMI Services (APR F)

53.1

53.1

8:00

EUR

Markit Euro-Zone PMI Composite (APR F)

54.0

54.0

8:30

GBP

Markit Purchasing Manager Index Services (APR)

57.8

57.6

The UK PMI has been on decline since late in 2013, peaking at approximately 60.

8:30

GBP

Markit Purchasing Manager Index Composite (APR)

57.6

9:00

EUR

Euro-Zone Retail Sales (MoM) (MAR)

-0.3%

0.4%

Euro-Zone Retail Sales (MoM) are expected to have declined through March. Retail Sales (MoM) in the EU remains highly volatile.

9:00

EUR

Euro-Zone Retail Sales (YoY) (MAR)

0.8%

0.8%

12:30

USD

Trade Balance (MAR)

-$40.4B

-$42.3B

The trend of reductions in the U.S. deficit is largely due to exports of domestic U.S. oil and to a degree increased service surpluses.

14:00

CAD

Ivey Purchasing Managers Index s.a. (APR)

55.2

22:45

NZD

Employment Change (QoQ) (1Q)

0.6%

1.1%

Unemployment in New Zealand has been in steady decline since the beginning of 2013. Survey estimates of NZ’s unemployment have been largely pessimistic (higher) relative to actual figures over the past year.

22:45

NZD

Employment Change (YoY) (1Q)

3.4%

3.0%

22:45

NZD

Unemployment Rate (1Q)

5.8%

6.0%

22:45

NZD

Participation Rate (QoQ) (1Q)

68.9%

68.9%

23:15

JPY

Markit Purchasing Manager Index Services (APR)

52.2

The Japanese Purchasing Managers Index rebounded in February following 3 months of slowing growth.

23:15

JPY

Markit Purchasing Manager Index Composite (APR)

52.8

23:30

AUD

AiG Performance of Construction Index (APR)

46.2

GMT

Currency

Upcoming Events & Speeches

6:45

EUR

French Survey of Industrial Investment

9:00

USD

OECD Publishes Global Economic Outlook

23:00

USD

Fed's Jeremy Stein Speaks on U.S. 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

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

13.0904

2.1320

10.6238

7.7533

1.2569

Spot

6.5665

5.3928

5.9928

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

1.3920

1.6900

103.18

0.8876

1.1093

0.9340

0.8641

142.89

1313.81

Res 2

1.3899

1.6877

102.99

0.8862

1.1076

0.9322

0.8623

142.60

1308.44

Res 1

1.3878

1.6854

102.81

0.8847

1.1059

0.9304

0.8604

142.31

1303.08

Spot

1.3837

1.6807

102.43

0.8817

1.1024

0.9268

0.8568

141.72

1292.35

Supp 1

1.3796

1.6760

102.05

0.8787

1.0989

0.9232

0.8532

141.13

1281.62

Supp 2

1.3775

1.6737

101.87

0.8772

1.0972

0.9214

0.8513

140.84

1276.26

Supp 3

1.3754

1.6714

101.68

0.8758

1.0955

0.9196

0.8495

140.55

1270.89

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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06 May 2014 05:40 GMT