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Dollar Rally as Much a Bull Trend as S&P 500 Retreat a Collapse

By , Chief Currency Strategist
25 June 2014 03:45 GMT

Talking Points:

  • Dollar Rally as Much a Bull Trend as S&P 500 Retreat a Collapse
  • British Pound: So Much for BoE Clarity
  • Yen Crosses Facing Inevitable Technical Breaks

Dollar Rally as Much a Bull Trend as S&P 500 Retreat a Collapse

A bullish jump for the Dow Jones FXCM Dollar Index (ticker = USDollar) reflected notable gains for the greenback among pairs like AUDUSD, GBPUSD and NZDUSD. The gains measured in these majors, however, is rather modest in the bigger picture. Furthermore, these standout performers made moves from their respective and relative highs (dollar lows). In other words, this is not a convincing signal for a more prolific trend development. This mirrors the conditions in the US equity markets –a good proxy for investor sentiment, which caters to another fundamental aspect of the currency’s value. Having grown catatonic between slow daily advances and a steadily deflating volatility backdrop, the 0.6 percent drop from the S&P 500 and 10 percent jump in the VIX volatility index (the biggest in more than two months) seems incredible. Yet, it is important to remember the benchmark stock index is pulling back from a record high and the ‘fear’ index is climbing from a seven-year low. This may prove yet another hiccup in a larger trend unless conviction marks a more sizable shift.

As market participants, it is important to never write off a scenario. And, the impact of an inevitable sentiment shift that will be exaggerated by the mixture of complacency and leverage that has solidified alongside record highs means it is an outcome we should have a plan ready to go for. That said, such a seismic shift to the financial system (sentiment influences all assets and markets) will take time and distance to confirm. In the meantime, we can focus on other active fundamental considerations for the dollar. Interest rate considerations are still an active secondary mover.

This past session, material improvements in the June Conference Board consumer sentiment survey and New Home Sales figures for May add economic tangibility to the still-vague timing of the Fed’s first hike and subsequent pace. This morning, we find the 2-year Treasury yield trading at a 9-month high 0.492 percent. Earlier, an auction of $30 billion of debt with the same duration drew its highest yield since May 2011. This is strong evidence that the speculation for the hawkish regime change is filtering in. No doubt, Philly Fed President Plosser’s suggestion that rate hikes could come as early as next quarter contributed. Ahead, watch the economic docket and auction of a floating rate 2-year note.

British Pound: So Much for BoE Clarity

Central bankers aim to curb volatility and excessive speculation in the exchange rates and broader financial markets. That hasn’t worked out very well for the Bank of England (BoE). Just a few months ago, the policy group was adamant in its stance against early rate hikes and the focus on fostering the UK’s economic recovery. Yet, just these past few weeks, we have heard a very different tune. A remark of surprise from the BoE minutes that a 2014 hike wasn’t more heavily speculated on by the markets seems to directly contradict the previous effort of

Yen Crosses Facing Inevitable Technical Breaks

Following the round of rate cuts, end to sterilization and targeted LTRO announced at the last ECB rate decision; the next move to speculate on for the central bank is whether they will pursue an outright purchasing program. Policy officials themselves have stated openly that this is an option that is being looked into and a few seem confident that it is but a matter of time. When we have data like this past session’s drop in June PMI figures, it only furthers the justification for easing. Will the ECB – and more importantly speculators – see it that way?

Euro Weighed by Market Rates but Periphery Appetite Key

The BoJ keeps pulling back the safety net on the high-flying Japanese yen crosses. In commentary Monday, Governor Kuroda remarked that the central bank will be more tolerant of a mid-term correction in price pressures back from their objective of 2 percent target for core CPI. The central banker said a pullback to 1 percent is possible before a rebound towards target was likely. What does this mean for traders? While it is may not be reason enough alone to encourage deleveraging of the yen crosses, it means a risk-generated retreat won’t hold up on BoJ hopes.

Australian Dollar Under Pressure as 10-Year Yield Gaps Lower

Appetite for the carry trade – and the Aussie dollar as a carry currency – rose Monday. Yet, Aussie yields continue to retreat. The yield on the 10-year Australian Government bond was at its lowest level in 12-months (3.643 percent) having slid 18 percent from its peak seven months ago. A decline in expected return, however, hasn’t put a cap on demand for equities, emerging markets nor other relatively higher-yielding assets. As evidence, this morning the country auctioned off 20-year inflation-adjusted bonds to high demand.

Emerging Markets: Most Currencies Weak, Ruble Soars

The MSCI Emerging Market ETF was little moved on the day – in line with the performance of US equities through Monday’s close. Yet, the EM currency group fared surprisingly well. Looking at the list of liquid fiat, we find the majority were in the green, and stand outs like the Russian Ruble (0.9 percent), South African Rand and Brazilian Rand (0.5 percent) generated more significant gains than other asset classes.

Gold: Will Central Bank Plans to Cut Debt Holdings Lift the Metal?

Traders still have the taste of volatility in their mouths following last week’s incredible breakout and rally from gold. Yet, that one-day still has not drawn the metal into a meaningful trend – whether bullish follow through or speculative retracement. As with most other asset classes gold’s volatility reading is exceptionally low (a 14-month low). Meanwhile, COT figures show futures speculators increased long interest 28 percent. **Bring the economic calendar to your charts with the DailyFX News App.

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

1:00

AUD

Skilled Vacancies (MoM) (MAY)

-1.3%

Figure has shown a slide into negative territory after a rebound early in the year

1:45

CNY

Westpac-MNI Consumer Sentiment (JUN)

121.2

Consumer sentiment fell to its lowest levels in almost a year

6:00

EUR

German GfK Consumer Confidence Survey (JUL)

8.6

8.5

Consumer confidence has risen to its highest levels since prior to the recession

6:00

CHF

UBS Consumption Indicator (MAY)

1.72

Leads official private consumption figures; has increased steadily since 2011

6:45

EUR

French Production Outlook Indicator (JUN)

-13

Figure has largely recovered from a weak 2012-13 showing.

6:45

EUR

French Business Confidence Indicator (JUN)

99

99

8:00

EUR

Italian Retail Sales s.a. (MoM) (APR)

-0.2%

Retail Sales has shown negative growth since 2012 while consumer confidence has just recovered from a weak 2012-13

9:00

EUR

Italian Consumer Confidence Index s.a. (JUN)

107.0

106.3

10:00

GBP

CBI Reported Sales (JUN)

23

16

Tracks business sentiment within certain industries, showing signs of picking up over past year.

11:00

USD

MBA Mortgage Applications (JUN 20)

-9.2%

Large drop in most recent showing may be a seasonal effect.

12:30

USD

Durable Goods Orders (MAY)

-0.2%

0.8%

Durable goods orders are expected to weaken from last month.

12:30

USD

Durables Ex Transportation (MAY)

0.3%

0.1%

12:30

USD

Non-Defense Capital Goods Orders ex Aircrafts (MAY)

0.4%

-1.2%

12:30

USD

Non-Defense Cap Goods Shipments ex Aircrafts (MAY)

1.0%

-0.4%

12:30

USD

Gross Domestic Product (Annualized) (1Q T)

-1.8%

-1.0%

The weak Q1 GDP is expected to continue in Q2, with potential implications for the Fed ‘s rate hike timeline.

12:30

USD

Personal Consumption (1Q T)

2.7%

3.1%

12:30

USD

Gross Domestic Product Price Index (1Q T)

1.3%

1.3%

13:45

USD

Markit Purchasing Manager Index Composite (JUN P)

58.4

US PMI showing a surprisingly strong reading, nearing 2012 peaks, despite negative GDP growth.

13:45

USD

Markit Purchasing Manager Index Services (JUN P)

58.0

58.1

14:30

USD

DOE U.S. Crude Oil Inventories (JUN 20)

-1800K

-579K

Inventories expected to continue falling.

23:50

JPY

Foreign Buying Japan Stocks (Yen) (JUN 20)

¥238.1B

Capital continues to flow out of Japan as investors are buying more foreign stocks and bonds.

23:50

JPY

Foreign Buying Japan Bonds (Yen) (JUN 20)

¥154.7B

23:50

JPY

Japan Buying Foreign Bonds (Yen) (JUN 20)

¥638.2B

23:50

JPY

Japan Buying Foreign Stocks (Yen) (JUN 20)

-¥108.6B

GMT

Currency

Upcoming Events & Speeches

3:00

AUD

RBA’s Lowe Speaks in Melbourne

7:00

EUR

Germany Chancellor Merkel Policy Speech Before EU Summit

8:00

EUR

ECB's Carlos Costa Speaks on Euro Economy

9:10

EUR

ECB Long-Term Refinancing Operation (LTRO) Result

9:15

EUR

ECB Announces Allotment in 3-Month Refinancing Tender

12:00

EUR

ECB's Luis Linde Speaks on Euro Economy

13:00

EUR

ECB's Jens Weidmann Speaks on Euro Economy

15:30

USD

US to Sell $13 Bln in 2-Year Floating Rate Notes

17:00

USD

US to Sell $35 Bln in 5-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

12.9860

2.1262

10.6752

7.7511

1.2493

Spot

6.6449

5.4874

6.0115

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

1.3664

1.7085

102.56

0.9019

1.0883

0.9462

0.8772

139.41

1292.97

Res 2

1.3645

1.7062

102.40

0.9005

1.0870

0.9446

0.8756

139.19

1288.92

Res 1

1.3626

1.7039

102.25

0.8991

1.0856

0.9430

0.8739

138.96

1284.87

Spot

1.3589

1.6992

101.93

0.8963

1.0830

0.9399

0.8707

138.51

1276.78

Supp 1

1.3552

1.6945

101.61

0.8935

1.0804

0.9368

0.8675

138.06

1268.69

Supp 2

1.3533

1.6922

101.46

0.8921

1.0790

0.9352

0.8658

137.83

1264.64

Supp 3

1.3514

1.6899

101.30

0.8907

1.0777

0.9336

0.8642

137.61

1260.59

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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25 June 2014 03:45 GMT