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FOREX: Dollar and Risk See Volatility with In-Line FOMC Decision, True Trends Likely Soon to Follow

FOREX: Dollar and Risk See Volatility with In-Line FOMC Decision, True Trends Likely Soon to Follow

2010-11-04 02:36:00
John Kicklighter, Chief Currency Strategist
Share:
  • Dollar and Risk See Volatility with In-Line FOMC Decision, True Trends Likely Soon to Follow
  • British Pound will Leverage its BoE Reaction after the Fed Lowers the Bar for Stimulus
  • Euro: Little Chance of an ECB Policy Shift Means Regional Financial Troubles Pushed to the Background
  • Japanese Yen Tumbles Across the Board Wednesday as the BoJ Starts its Two-Day Meeting
  • Australian Dollar Hits a New Record against the Dollar as the Fed’s Policy Draws Stark Contrast to RBA
  • New Zealand Dollar Offers a Standout Rally in an otherwise Volatile Day as Employment Jumps

Dollar and Risk See Volatility with In-Line FOMC Decision, True Trends Likely Soon to Follow

Every trader, investor, CEO and American was holding their breath as the countdown to the Federal Open Market Committee’s (FOMC) rate decision dwindled. In the past two months, speculation surrounding the probable outcome of this event has led to a dramatic shift in the pricing of the US dollar and the underlying sense of risk appetite – which essentially impacts all capital markets. Putting in a substantial effort to price in the most likely outcome from the central bank, the masses were essentially taking a gamble (or so it seemed until the Fed itself polled primary dealers to see what they were expecting the central bank to actually come up with). For those that rode the wave of dollar selling and risky asset leveraging, the risk paid off as the Fed essentially vindicated the positioning of the past two months. An expanded stimulus effort that was essentially in-line with expectations required some adjustment as those that were straying from the consensus had to adjust while others would jump in / take profit in equal measures. For price action, this would lead to a dramatic increase in volatility for the dollar. In fact, shortly after the release, EURUSD was jumping back and forth at a clip 75 pips tick-for-tick. Yet, despite this high level of activity, an immediate level of trend has so far escaped dollar and risk traders. This indecision, however, will not likely last for long.

For short-term traders, the biggest draw for this event was the opportunity for a sharp increase in volatility which would generate a major breakout and perhaps a new trend. Yet, the central bank’s effort to establish a consensus of expectations for the policy authority’s actions proved a consequential move. Of the three basic scenarios that could develop from this event (outpace, fall short of or meet expectations), the group opted for the option that would cause the least damage in terms of immediate volatility. Heading into the event, the popular consensus was calling for a second stimulus program that would offer $100 billion-per-month injections for five or six months. What is commonly referred to QE2 (quantitative easing plan 2) would actually come out to $75 billion per month over the next eight months – for a grand total of $600 billion. That said, the policy authority was sly in its efforts to passively leverage optimism a little higher by projecting $250 to $300 billion of Treasury purchases through the reinvestment of the first QE program’s capital. This is not a further contribution; rather, it just puts a value on an effort that has been in place for a few months now. The flexibility of this program is further enhanced by their suggestion that the Fed will adjust the pace and size of the effort as needed.

With the short-term impact of this big-ticket event now past us; it is important to determine what kind of medium and long-term impact it will have on the dollar. Flooding the market with more dollars has a very obvious effect on the value of the currency: it diminishes it. That said, money supply has been inflated and contracted many times and for many currencies over the years with little overall effect on the trend and pace of the underlying. That may not be the case for the greenback given the attention being paid this particular concern recently; but there is a far greater threat to direction in the form of the outlook for risk appetite trends. If the investor optimism collapsed tomorrow, the US dollar would surge as an over-sold safe haven. What we need to determine going forward is whether this new stimulus injection will actually improve growth and market stability, thereby keeping capital markets on a bullish track. Fed member Hoenig suggests it won’t; and the facts for growth support him. If and when the market comes to the same conclusion is the only thing that matters to traders though; because where the market goes, so does price.

Related: Discuss the Dollar in the DailyFX Forum, John’s Analyst Picks: Keeping a Close eye on the Dow for Dollar Breakout, Trend Potential

British Pound will Leverage its BoE Reaction after the Fed Lowers the Bar for Stimulus

The pound looks good in the aftermath of the Fed’s rate decision. With the US central bank following a track of exceptionally loose monetary policy (which lowers rates and naturally devalues the currency through increasing the money supply), other currencies are consequently boosted. For the sterling to really gain traction, we look ahead to the BoE’s decision tomorrow. The record cuts in government spending leveraged expectations of a stimulus hike from the MPC; but 3Q GDP along with factory and service sector activity have tempered that outcome.

Euro: Little Chance of an ECB Policy Shift Means Regional Financial Troubles Pushed to the Background

Like the pound, the euro can find a self-fulfilling sentiment boost as its central bank defers from a loosening of monetary policy after the Fed took its big step. However, in contrast to the BoE; there is essentially no speculation of a stimulus hike for the ECB. That means EURUSD is more secure in its current level. Rate decision aside, when long-term issues are in vogue; traders may start paying attention to record Irish yields.

Japanese Yen Tumbles Across the Board Wednesday as the BoJ Starts its Two-Day Meeting

The Japanese yen was one of the biggest moves in the FX market Wednesday. This is a remarkable feat considering the broader markets were frozen in the lead up to the FOMC rate decision – given its potential influence over risk appetite trends. Perhaps this is in reference to the BoJ’s policy efforts come Friday morning. The two-day meeting has started. There is a reason for their moving up the meeting; so traders are antsy.

Australian Dollar Hits a New Record against the Dollar as the Fed’s Policy Draws Stark Contrast to RBA

With the Fed’s stimulus expansion, the Australian dollar has essentially received a big boost in value. In comparison to a global market that is generally dovish and overly supportive, Australian policy makers continue to tighten their rates and offer higher returns on its investments. As such, the RBA’s decision to hike rates just a few days looks even more encouraging to high-yield seekers. Will the BoE and ECB further this?

New Zealand Dollar Offers a Standout Rally in an otherwise Volatile Day as Employment Jumps

Post-FOMC, the greenback slowly lost ground against its many counterparts. Naturally NZDUSD would advance on this cross-currency depreciation; but beyond this indirect move there was a clear surge from the kiwi itself later in the day. This boost would come via a sharp drop in the 3Q jobless rate to 6.4 percent. And, putting it into perspective; this raises speculation of a timelier RBNZ rate hike.

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ECONOMIC DATA

Next 24 Hours

Currency

GMT

Release

Survey

Previous

Comments

NZD

21:45

Employment Change (QoQ) (3Q)

0.5%

-0.3%

New Zealand's unemployment rate likely declined to 6.7% in the third quarter, after rising from 6.0% to 6.8% in the quarter prior.

NZD

21:45

Employment Change (YoY) (3Q)

1.2%

-0.1%

NZD

21:45

Unemployment Rate (3Q)

6.7%

6.8%

NZD

21:45

Participation Rate (QoQ) (3Q)

68.0%

68.0%

GBP

New Car Registrations (YoY) (OCT)

-8.9%

Declined annually in last 3 months.

AUD

0:30

Trade Balance (Australian dollar) (SEP)

2000M

2346M

Posted fifth straight surplus on coal.

AUD

0:30

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

0.5%

0.3%

Australian retail sales increased in August for a sixth straight month.

AUD

1:30

Retail Sales Ex Inflation (QoQ) (3Q)

1.1%

0.8%

EUR

8:00

Euro-Zone PMI Services (OCT F)

53.2

53.2

PMI composite index fell to 53.4 in October, the lowest in 12 months.

EUR

8:00

Euro-Zone PMI Composite (OCT F)

53.4

53.4

CHF

8:00

Foreign Currency Reserves (OCT)

215.3B

Currency holdings declined in Sept.

CHF

8:15

Consumer Price Index (MoM) (OCT)

0.6%

0.0%

Swiss inflation held at the lowest in nearly a year in September.

CHF

8:15

Consumer Price Index (YoY) (OCT)

0.3%

0.3%

EUR

8:45

Italian PMI Services (OCT)

51.1

51.3

Italian services likely fell in October, while French and German final readings should show no change.

EUR

8:50

French PMI Services (OCT F)

55.3

55.3

EUR

8:55

German PMI Services (OCT F)

56.6

56.6

EUR

10:00

Euro-Zone Producer Price Index (MoM) (SEP)

0.3%

0.1%

Euro-Zone producer prices increased in the past 11 months.

EUR

10:00

Euro-Zone Producer Price Index (YoY) (SEP)

4.2%

3.6%

GBP

12:00

BoE Interest Rate Decision

0.50%

0.50%

Market swaps imply a 1.0% chance of a 25bp rate hike at BoE meeting.

GBP

12:00

BoE Asset Purchase Target

200B

200B

USD

12:30

Non-Farm Productivity (3Q P)

1.0%

-1.8%

2Q decline was first since 2008.

USD

12:30

Unit Labor Costs (3Q P)

0.7%

1.1%

Likely rose for second quarter in 3Q.

USD

12:30

Initial Jobless Claims (OCT 30)

442K

434K

U.S. initial jobless claims fell last week to lowest level since July.

USD

12:30

Continuing Claims (OCT 23)

4378K

4356K

EUR

12:45

ECB Interest Rate Decision

1.00%

1.00%

Market implies no chance in rates.

CAD

14:00

Ivey Purchasing Managers Index (OCT)

65

70.3

Rose to 4-year high in September.

USD

14:30

ICSC Chain Store Sales (YoY) (OCT)

2.6%

Rose annually in last 10 months.

Currency

GMT

Upcoming Events & Speeches

JPY

--:--

BoJ Two-Day Meeting Begins

JPY

2:30

BoJ Governor Masaaki Shirakawa to Speak on Economy

SUPPORT AND RESISTANCE LEVELS

CLASSIC SUPPORT AND RESISTANCE - 18:00 GMT

Currency

EUR/USD

GBP/USD

USD/JPY

USD/CHF

USD/CAD

AUD/USD

NZD/USD

EUR/JPY

GBP/JPY

Resist 2

1.4500

1.6375

89.00

1.0460

1.0922

1.0200

0.8230

127.60

146.05

Resist 1

1.4175

1.6100

86.00

0.9950

1.0750

1.0100

0.7925

120.00

140.00

Spot

1.4134

1.6102

81.12

0.9704

1.0068

1.0039

0.7795

114.66

130.63

Support 1

1.3685

1.5500

80.00

0.9500

0.9950

0.9100

0.6850

103.80

125.00

Support 2

1.3500

1.5300

75.00

0.9000

0.9700

0.8100

0.6585

100.00

119.00

CLASSIC SUPPORT AND RESISTANCE EMERGING MARKETS 18:00 GMTSCANDIES CURRENCIES 18:00 GMT

Currency

USD/MXN

USD/TRY

USD/ZAR

USD/HKD

USD/SGD

Currency

USD/SEK

USD/DKK

USD/NOK

Resist 2

14.4500

1.6755

8.7915

7.8165

1.4945

Resist 2

7.7500

5.7800

6.2750

Resist 1

13.8500

1.4865

8.3675

7.8075

1.4655

Resist 1

7.5800

5.5400

6.1150

Spot

12.2522

1.4026

6.8679

7.7512

1.2855

Spot

6.5824

5.2744

5.7847

Support 1

12.0500

1.3665

6.6950

7.7490

1.2750

Support 1

6.4500

5.2625

5.7030

Support 2

11.7200

1.3475

6.4300

7.7450

1.2500

Support 2

6.1250

5.1000

5.5200

INTRA-DAY PIVOT POINTS 18:00 GMT

Currency

EUR/USD

GBP/USD

USD/JPY

USD/CHF

USD/CAD

AUD/USD

NZD/USD

EUR/JPY

GBP/JPY

Resist 2

1.4289

1.6256

82.08

0.9865

1.0198

1.0138

0.7873

116.09

132.54

Resist 1

1.4211

1.6179

81.60

0.9785

1.0133

1.0088

0.7834

115.38

131.59

Pivot

1.4102

1.6093

81.10

0.9743

1.0091

0.9992

0.7768

114.10

130.31

Support 1

1.4024

1.6016

80.62

0.9663

1.0026

0.9942

0.7729

113.39

129.36

Support 2

1.3915

1.5930

80.12

0.9621

0.9984

0.9846

0.7663

112.11

128.08

INTRA-DAY PROBABILITY BANDS 18:00 GMT

\

Currency

EUR/USD

GBP/USD

USD/JPY

USD/CHF

USD/CAD

AUD/USD

NZD/USD

EUR/JPY

GBP/JPY

Resist. 3

1.4328

1.6291

82.11

0.9830

1.0193

1.0193

0.7914

116.30

132.54

Resist. 2

1.4279

1.6244

81.87

0.9798

1.0162

1.0154

0.7884

115.89

132.06

Resist. 1

1.4231

1.6197

81.62

0.9767

1.0131

1.0116

0.7854

115.48

131.59

Spot

1.4134

1.6102

81.12

0.9704

1.0068

1.0039

0.7795

114.66

130.63

Support 1

1.4037

1.6007

80.62

0.9641

1.0005

0.9962

0.7736

113.84

129.67

Support 2

1.3989

1.5960

80.37

0.9610

0.9974

0.9924

0.7706

113.43

129.20

Support 3

1.3940

1.5913

80.13

0.9578

0.9943

0.9885

0.7676

113.02

128.72

v

Written by: John Kicklighter, Currency Strategist for DailyFX.com

To receive John’s reports via email or to submit Questions or Comments about an article; email jkicklighter@dailyfx.com

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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