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Dollar and Rate Outlook Offered Little Help from CPI

By , Chief Currency Strategist
16 May 2014 05:14 GMT

Talking Points:

  • Dollar and Rate Outlook Offered Little Help from CPI
  • Euro: Expectations for Builds on Weak GDP Release
  • Japanese Yen Crosses Starting to Push Against Risk

Dollar and Rate Outlook Offered Little Help from CPI

A tumble from the S&P 500 marked another abrupt decline in ever-fickle risk trends. However, Dollar traders have grown too familiar with the flippant views of risk trends and were too engrossed with interest rates to try and ride a bullish response from the benchmark currency. Marking the contrast, the benchmark equity index tumbled 1.0 percent while the Dow Jones FXCM Dollar Index (ticker = USDollar) ended an otherwise volatile day unchanged. This is not to mean that the greenback’s position as a safe haven is forever broken. Rather, traders and investors have grown wary of short-lived sentiment shifts that seem manufactured simply for deriving the next quick rebound. With each day that passes, it becomes increasingly clear that the markets will only revive genuine momentum with a cleansing risk aversion move.

In the meantime, the harder fought gain for the dollar through its relative interest rate bearing is losing steam. Treasury yields extended their slump this past session with rate on the benchmark 10-year note dropping below 2.50 percent and returning to levels last seen during the government shutdown. Given the Fed’s optimistic outlook, the rebound in data from the weak 1Q reports and this past session’s upgrade in the CPI reading (the 2.0 percent headline reading is at the Fed’s target), the baseline of a mid-2015 first hike seems well supported. That said, Fed Funds rates confirm the timid outlook. Looking at the broader market, this yield compression seems a universal development; which has maintained a relative buoyancy for the dollar against the more aggressive slump amongst its counterparts.

Euro: Expectations for Builds on Weak GDP Release

Having suffered a painful tumble this past week, the euro looked like it was trying to catch its balance this past session. With its fundamental backdrop, though, a breather is not likely to evolve into a meaningful rebound. Taking the temperature of fundamentals this past session, the support for additional stimulus from the ECB has only grown. The most prominent listings on the docket were the Euro-area GDP figures for 1Q. The region missed forecasts with a 0.2 percent pace of growth through the period that was half of the consensus. Meanwhile, the different country listings showed the two-speed economy was slowly turning into a one-speed moderation with Italy and France growth slowing as Portugal, Greece and Cyprus continue to suffer. Confidence in a stimulus move come June 5 is growing to the point where markets instead argue over the composition of the package. Yields show there is plenty of premium that can be worked off the euro.

Japanese Yen Crosses Starting to Push Against Risk

Conviction eludes risk trends whether it be bullish or bearish. That is a meaningful anchor for those assets that are highly correlated to the underlying theme. USDJPY and the other yen crosses have certainly taken advantage of the situation. If there were a complacency and comfort driving investors for yield wherever it may be, these pairs would have certainly retraced a significant portion of their gains into and after the BoJ introduced its open-ended stimulus program last April. Yet, that faux optimism can’t sustain markets forever. Eventually, real returns will need to compensate for risk. And the risk that yen carry is overvalued may find this group as a first mover in a bigger shift.

British Pound Holds Fast Despite a Sustained Drop in Rate Speculation

Looking at swaps and Gilt yields, interest rates in the UK continue to ease off their inflated heights heading into the BoE Quarterly Inflation report. The 2-year government bond yield dropped a third straight session – now off 20% from the multi-year highs to start the week.Despite this, the sterling was up against all of its counterparts with the exception of Japanese yen. A chase for yield and a global slump in rates is giving the sterling temporary reprieve. If this effort ebbs, the pound will once again be cast in harsh light.

Chinese Yuan Unfazed by Risk Aversion, Important Events Next Week

Another risk measure that was seemingly left out of the ‘risk off’ move this past session was the Chinese currency. The US dollar – Chinese Offshore Renminbi (USDCNH) rose slightly Thursday to break off two days of retreat. This looks more like an ill-fated congestion between a medium-term depreciation effort on the Renminbi’s part and a temporary distraction by traditional risk.

Emerging Market Equities and Bonds Diverge, Russia Economy Cools in 1Q

There seems to be a preference in flavor when it comes to risk. Nowhere was that better illustrated than with the Emerging Markets. While the MSCI EM ETF tumbled 0.9 percent Thursday (the most in three weeks), the groups’ sovereign debt index inched closer to reaching a record high. In a general search for yield amongst the world’s debt offerings, there is both yield and discount in the EM thanks to geopolitical flare-ups. Further interest will be marked by the approach of the Ukrainian elections – and Russia’s interest – and the India election results.

Gold Reverses Sharp Gains, Speculative Interest Close to Flipping

As remarkable as gold’s rally was Wednesday, the metal would promptly reverse the rally the following day to deflate any hopes for a more substantive breakout. The spot metal dropped 0.8 percent through Thursday to close back below $1,300. While the switchback in price was worth a sizable jump behind the market’s specific volatility index – a 6 percent jump to 14.6 vols – complacency is certainly setting in with the familiarity of a wedge that is essentially two months in the making. With $30 worth of range ($20 recently), we find the markets once again coiling up for a definitive catalyst to resolve indecision…even if it is only a temporary solution. Interest rates and their tangible connection to monetary policy expectations are likely to be offer the trend, but a meaningful dollar move would be more effective for a break.**Bring the economic calendar to your charts with the DailyFX News App.

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

03:30

JPY

JPY Industrial Production (YoY)

7.0%

Price action in JPY continues to remain in the context of developments in the US equity and bond market.

03:30

JPY

JPY Industrial Production (MoM)

-2.3%

03:30

JPY

JPY Capacity Utilization (MoM)

-2.6%

05:00

EUR

EUR EU 25 New Car Registrations

10.6%

With the Euro continuing to fall in the month of May, any negative data here provides further fuel to the selling fire.

05:45

EUR

EUR French Non-Farm Payrolls (QoQ)

0.1%

05:45

EUR

EUR French Wages (QoQ)

0.2%

06:00

EUR

Eurozone Economic Survey - Bloomberg (MAY)

09:00

EUR

EUR Euro-Zone Trade Balance (euros)

16.0B

13.6B

09:00

EUR

EUR Euro-Zone Trade Balance s.a. (euros)

15.0B

12:30

CAD

CAD International Securities Transactions (C$)

6.08B

12:30

USD

USD Housing Starts (MoM)

2.80%

With mixed data, concerns are building in regards to the US housing market in the context of the Federal Reserve pulling back. Housing data will remain important this summer as economists judge to what degree the market is pulling off as the Fed seeks to end MBS purchases in 2014.

12:30

USD

USD Housing Starts

1M

0.9M

12:30

USD

USD Building Permits

1M

1M

12:30

USD

USD Building Permits (MoM)

-2.4%

13:55

USD

USD U. of Michigan Confidence

84.50

84.10

GMT

Currency

Upcoming Events & Speeches

-:-

INR

Indian Election Results Expected (Emerging Markets)

-:-

EUR

Moody’s to Publish Ireland Sovereign Debt Rating

10:00

EUR

ECB to Announce 3-Year LTRO Repayment

11:50

USD

Fed's Bullard Speaks on Monetary Policy in Little Rock, Ark.

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

12.8983

2.0713

10.3074

7.7517

1.2503

Spot

6.5569

5.4407

5.9239

Support 1

12.8350

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

1.3806

1.6865

102.54

0.8955

1.0939

0.9439

0.8740

140.84

1323.34

Res 2

1.3784

1.6842

102.36

0.8939

1.0924

0.9421

0.8721

140.55

1318.64

Res 1

1.3763

1.6819

102.18

0.8924

1.0909

0.9403

0.8703

140.27

1313.95

Spot

1.3720

1.6772

101.83

0.8893

1.0879

0.9368

0.8666

139.71

1304.55

Supp 1

1.3677

1.6725

101.48

0.8862

1.0849

0.9333

0.8629

139.15

1295.15

Supp 2

1.3656

1.6702

101.30

0.8847

1.0834

0.9315

0.8611

138.87

1290.46

Supp 3

1.3634

1.6679

101.12

0.8831

1.0819

0.9297

0.8592

138.58

1285.76

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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16 May 2014 05:14 GMT