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Dollar Ends Congestion with Collapse

By , Chief Currency Strategist
07 May 2014 03:32 GMT

Talking Points:

  • Dollar Ends Congestion with Collapse
  • Euro Receives Further Encouragement for QE
  • New Zealand Dollar: RBNZ Says ‘May Intervene’

Dollar Ends Congestion with Collapse

Following one of the quietest trading days in the Dow Jones FXCM Dollar Index’s (ticker = USDollar) history, the currency suffered its biggest single-day selloff in a month and tumbled to lows not seen in six months. Now the question is whether this is the opening move in a new trend or merely a normalization to the extraordinarily tepid trading conditions as of late. First and foremost, it is important to appreciate that this was a dollar-based move. The greenback tumbled against all of its major counterparts – from a 0.4 percent drop versus the Euro to a 0.8 percent slump against the Australian dollar. And, these were not minor price developments for the core majors. EURUSD broke above 1.3900 and revived the market discussion over how committed the ECB is in keeping this pair from contributing to deflation. USDJPY took out 102 and a trendline that has shaped the pair’s bull trend over the past 15 months. Meanwhile, GBPUSD extended its reach to a fresh five year high and has more than a few FX participants wondering whether the BoE may be anxious over its own currency’s strength.

There are clearly two elements to the greenback’s progress: the currency’s own fundamental drive and the consequences it holds for its global counterparts. In this slump, a few convenient catalysts have been targeted. Some believe it was a delayed response to last week’s NFPs while others suggest the OECD’s updated forecasts or the recent trade report undermine Fed rate forecasts. Markets are nowhere near inefficient enough to produce such a delay. Meanwhile, neither Treasury yields nor swaps reflect a material change in trend for rate forecasts. If a major theme was not responsible for this spark, it is difficult to imagine a trend following on its heels. That doesn’t mean momentum can’t development; merely that we need something tangible for traders to unite around – perhaps Fed Chair Yellen will contribute to that today.

However, as we plot out the dollar’s course, it is vital to remember that this is a relative market. If the greenback isn’t proactive in finding its bearings, its counterparts can alter its value. That is a very considerable factor to remember with this currency. We have heard threats or seen action targeting a depreciation of the Euro, Japanese Yen, Chinese Yuan, Australian and New Zealand dollars over the past years.

Do you want to trade an individual currency and/or broader trend developments? Use the Mirror Trader Currency Baskets to place a trade.

Euro Receives Further Encouragement for QE

Over the past weeks, we have heard numerous parties – Eurozone government heads, certain ECB members, foreign governments, and the IMF among others – encourage the ECB (European Central Bank) to adopt a fresh round of stimulus to fight deflation and fend off economic trouble. Add another voice to the din. In the OECD’s updated forecasts, the group called on the bank to act to change the trajectory of low inflation. These concerns are certainly not unfounded – nor are they even surprising against the backdrop of this week’s data. So far, we have seen an easing in investor confidence, a sustained drop in factory prices and downgraded EC inflation outlook. Onto Thursday’s meeting.

New Zealand Dollar: RBNZ Says ‘May Intervene’

Reserve Bank of New Zealand(RBNZ) Governor Graeme Wheeler doesn’t like the level of the currency and he is ready to take steps to arrest its ascent if need be. These were the sentiments the policy head relayed clearly to the market this morning. In his remarks, Wheeler reiterated that the Kiwi dollar was overvalued and its level was unsustainable. His suggestion that should ‘fundamentals worsen’ the central bank could intervene is an explicit threat to bulls – and there is little doubt this has as much to do with the exchange rate as standard indicators. Yet, intervention is not effective for New Zealand. Far more concerning was his warning that the NZD will be a factor in future rate decisions.

Yen Crosses Unnerved by USDJPY’s Slip

The Japanese yen was modestly higher against most of its major counterparts this past session and the S&P 500 – as a benchmark for risk appetite and carry demand in the FX market – has not devolved into a bear trend. However, USDJPY’s drop Tuesday has put yen cross traders on high alert. These pairs are highly correlated, which means stability for the major can anchor errant moves. But traders are certainly aware of the risk that one break can start a landslide. Meanwhile, QE hopefuls noted Japanese PMI data this morning plummeted on the tax hike.

British Pound: Data Jump Leverages Rate Forecasts Higher

There was a variance in performance for the sterling between GBPUSD and the other crosses. The former hit multi-year highs in a clean jump while the others presented a more modest performance. The pound itself, however, had a robust fundamental backdrop to engage bulls – namely through rate expectations. PMI figures release this past session beat expectations and the OECD offered up a hefty upgrade to its UK GDP forecast. Two-year Gilt yields and 1y2y swaps both responded by hitting fresh three-year highs.

Chinese Yuan Posts Biggest Rally in 11 Months

For a currency that moves in a managed band, the Chinese Renminbi posted a hearty rally. USDCNH posted its biggest drop in 11 months Tuesday – a concerning point to do so given the publicity surrounding the pair’s bull trend over the past months. Yet, when we look moves of similar magnitude going back the past few years, they rarely turn into lasting trends. Data and financing health will be important to watch.

Emerging Markets Post Uniform Advance Vs Dollar, Not Much Else

Against the US dollar, virtually all of the Emerging Market currencies posted gains. Yet, when we switch in more stable currencies to benchmark the risky group against; the statistics decay very quickly. From the risk backdrop, equities and high-yield assets were notably struggling. Pricing considerations aside, the standout advance in the group was the Russian Ruble which continues to suffer heavy volatility amid Ukraine tensions.

Gold Weakness Masked by Dollar’s Own Tumble

The commodity sector is another place we need to consider our pricing utensil when analyzing our target asset’s strength. Gold actually fell 0.2 percent on the day which should be considered remarkable. If the dollar was down so significantly across the market, why did the metal end the day lower? Because its own drop was more substantial. Concerns of a stimulus withdrawal and tepid inflation are an unflattering mix.**Bring the economic calendar to your charts with the DailyFX News App.

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

1:30

AUD

Retail Sales s.a. (MoM) (MAR)

0.4%

0.2%

Retail sales are expected to increase from a weak start to the year.

1:30

AUD

Retail Sales ex Inflation(QoQ) (1Q)

1.6%

0.9%

1:45

CNY

HSBC PMI Services (APR)

51.9

The deceleration in China’s GDP growth and 4 months of contracting manufacturing PMI will make these figures closely watched.

1:45

CNY

HSBC PMI Composite (APR)

49.3

5:45

CHF

Unemployment Rate (APR)

3.2%

3.3%

Switzerland has seen a steadily increasing unemployment rate since 2011.

5:45

CHF

Unemployment Rate s.a. (APR)

3.2%

3.2%

6:00

EUR

German Factory Orders s.a. (MoM) (MAR)

0.4%

0.6%

German Factory Orders are expected to continue its two month slowdown after two years of steadily increasing growth.

6:00

EUR

German Factory Orders n.s.a. (YoY) (MAR)

4.4%

6.1%

6:45

EUR

French Industrial Production (MoM) (MAR)

0.2%

0.1%

French industrial production is climbing from previous anemic levels including almost 2 years of contraction in the sector. France continues to have a negative trade balance, which it has had since 2004.

6:45

EUR

French Industrial Production (YoY) (MAR)

0.5%

-0.8%

6:45

EUR

French Manufacturing Production (MoM) (MAR)

0.1%

0.3%

6:45

EUR

French Manufacturing Production (YoY) (MAR)

2.2%

1.2%

6:45

EUR

French Trade Balance (euros) (MAR)

-4000M

-3368M

7:00

CHF

Foreign Currency Reserves (APR)

437.9B

Swiss Foreign currency reserves near all time highs.

7:30

EUR

Markit German PMI Construction (APR)

52.5

German PMI Construction sector has seen expansion in May of last year.

8:00

GBP

New Car Registrations (YoY) (APR)

17.7%

New car registration has shown consistently upward trend since 2010.

8:10

EUR

Markit Italian Purchasing Manager Index Retail (APR)

46.5

After a tough year of contraction in 2012, composite PMI has climbed back steadily in 2013 but the recent weakness threatens to push Italy back into contraction territory.

8:10

EUR

Markit French Purchasing Manager Index Retail (APR)

50.0

8:10

EUR

Markit German Purchasing Manager Index Retail (APR)

50.2

8:10

EUR

Markit Euro-Zone PMI Retail (APR)

49.2

11:00

USD

MBA Mortgage Applications (MAY 2)

-5.9%

US MBA applications are cyclical and often rebound after periods of decline.

12:30

USD

US Nonfarm Productivity (1Q P)

-1.2%

1.8%

Important, qualitative measures to support labor and inflation expectations

12:30

USD

Unit Labor Costs (1Q P)

2.8%

-0.1%

12:30

CAD

Building Permits (MoM) (MAR)

4.0%

-11.6%

Canadian Building permits are expected to increase after a large drop in February

19:00

USD

Consumer Credit (MAR)

$15.00B

$16.49B

US Consumer credit has been fairly stable since the financial crisis.

23:01

GBP

RICS House Price Balance (APR)

55%

57%

Survey has shown strong increases throughout 2013

GMT

Currency

Upcoming Events & Speeches

9:30

GBP

UK to Sell £1.2 Bln in 30-Year Inflation Bonds

14:00

USD

Fed Chair Janet Yellen Testifies to Joint Economic Committee

17:00

USD

US to Sell 10-Year Notes

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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07 May 2014 03:32 GMT