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Dollar Eases Off Multi-Year High as S&P 500 Marches Higher

Dollar Eases Off Multi-Year High as S&P 500 Marches Higher

John Kicklighter, Chief Strategist
  • Dollar Eases Off Multi-Year High as S&P 500 Marches Higher
  • Euro Steady After Italy Downgrade, Talk of German Voter Discontent
  • Japanese Yen Decline Restrained Despite Intensified Stimulus Expectations
  • British Pound to Find Guidance in Data, Real Interest in BoE’s Plans
  • Australian Dollar Rallies as Yields Hit 10-Month High, Rate Outlook Improves
  • New Zealand Dollar Outpaces All Counterparts, Bond Auction Shows Demand
  • Gold’s Tight Congestion Awaits Either a Dollar Drop or Stimulus’ Spark

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Dollar Eases Off Multi-Year High as S&P 500 Marches Higher

The dollar opened with some pep Monday – enough to post a fresh, intraday two-and-a-half year high – but the threshold for bullish momentum is significantly more difficult to achieve. For the Dow Jones FXCM Dollar Index (ticker = USDollar), the 520 pip or 5.2 percent advance since the beginning of the year has contradicted a very prominent fundamental theme – a rise in risk appetite trends. The sustenance of this unusual correlation has been made possible by a questionable level of conviction behind the sentiment push as well as well-timed troubles for the benchmark’s most liquid counterparts. That fortunate combination of factors can only last for so long however. The glow from the four-year low unemployment rate – specifically its marginal implication for an early withdrawal of stimulus in the second half of the year – from this past Friday has no doubt worn off. So, we move on the next round of event risk. On the docket, the House Budget Committee’s2014 budget proposal is due in the upcoming session; but its supposed 10 year return to a balanced budget seems ambitious. Meanwhile always keep an eye on risk trends.

Euro Steady After Italy Downgrade, Talk of German Voter Discontent

Expectations were set high for the euro heading into the open of the new trading week. Credit rating agency Fitch’s downgrade of Italy crossed the wires after most European traders were offline Friday, meaning this was the first opportunity for the new round of regional financial pressure to play through speculators’ assessments. Yet, the euro’s reaction to the Italian downgrade (to BBB+ with a ‘Negative’ outlook) was much like the pound’s reaction to Moody’s downgrade of the United Kingdom just two weeks before – absent. EURUSD and EURJPY (the two most liquid pairings for the yen) were both higher through the opening session. Furthermore, a survey released in a German magazine that reported 29 percent of respondents said they would vote for a party that was anti-Euro in the September election was similar rendered impotent. In the absence of these fears, we could always fall back on the fact that the ECB is actually reducing its balance sheet – a serious euro booster – but EURUSD instead remains range bound between 1.3125 and 1.2965. Perhaps risk trends or the EU meeting later this week can tip the scales.

Japanese Yen Decline Restrained Despite Intensified Stimulus ExpectationsThe Japanese yen dropped across the board Monday, and continues to do so this morning. However, the pace with which the selling pressure was expressed was far more reserved than we would imagine given the intensity of speculation surrounding yen traders’ favorite topic: stimulus. We have been moving from rumor to rumor, first sustaining the yen crosses’ climb and then simply trying to hold back a reversal. The game now is to upgrade the threats – as actual policy cannot be taken until key members of a content Bank of Japan regime retires (March 19). BoJ Governor nominee Kuroda tried his best to intone a vow of action when he said derivatives, longer-dated debt and more risk asset purchases were all possible under his watch. But none of this is particularly new. What was novel was speculation emanating from a Nikkei report that suggested Kuroda may hold a meeting before the official April 4 meeting to implement a stimulus upgrade. Time and belief are running thin.

British Pound to Find Guidance in Data, Real Interest in BoE’s Plans

A new week opens to a familiar trend: the sterling under pressure across the board. The only major pairing that the pound was able to gain traction with Monday was in GBPJPY – hardly a pair for fundamental inspection of anything but the yen. Once again, the market’s open fears of a Bank of England that is prepared to leverage its stimulus efforts through the proximate future seems to be the culprit for speculative interests. Of course, unless the Monetary Policy Committee (MPC) under Governor King’s guidance moves to adopt something more than a 25 billion pound increase in stimulus in the near future, it will be a long wait until July to see what income Mark Carney will adopt. Our interest should turn to the immediate future. On the economic docket, we have scheduled updates on factory activity, external trade and a general GDP estimate. This is a good round of data to keep us occupied until Thursday’s BoE Q1 Bulletin.

Australian Dollar Rallies as Yields Hit 10-Month High, Rate Outlook Improves

There was standard, Aussie-based event in the morning hours of the Tuesday trading session; but it seemed to carry limited weight in terms of trend development. That said, AUDUSD managed to hold and retreat after a tentative push above 1.0300, suggesting there was at least some influence to the event risk. On tap, we were watching the NAB business sentiment survey for February which slipped both on current and forecast measures. Coupled with the weekend release of the Chinese manufacturing, retail sales and funding data; this seems a credible concern for regional investors. That said, this is limited risk against a rising potential for return. The most hawkish outlook for the RBA (pricing in only 18 bp of easing) since August 2011 and a 10-month high 3.62 percent 10-year bond yield pair nicely for a ‘cheap’ carry currency.

New Zealand Dollar Outpaces All Counterparts, Bond Auction Shows Demand

Top billing through Monday’s session goes to the New Zealand dollar with an advance of 0.3 (versus the Swiss franc) to 1.0 percent (against the Japanese yen). The collective strength certainly found support in stable speculative appetite trends – measured by steady equity performance through the three sessions – but there was hardly the even distribution of influence across the FX markets. In other words, there was something more than basic carry trade going on for the kiwi. Additional support for the currency would come through the impressive 8 bp jump in the 10-year bond yield on the session. Further, a short-term debt auction showed exceptional demand – 5.17 times the offer on one-year paper.

Gold’s Tight Congestion Awaits Either a Dollar Drop or Stimulus’ Spark

‘Complacency’ is an overused word in today’s market – conditions may be extremely quiet, but there is always room for them to grow even more extreme. However, gold has put itself in a position that a short-term breakout is almost inevitable within the span of this week. From a market conditions stand point, the metal has resolved itself to an exceptionally tight range between $1,585 and $1,565. Furthermore the effort to insure against sudden, adverse moves in the price of the commodity (measured through implied volatility in the CBOE’s Gold Volatility Index) has plummeted by nearly a third over the past three weeks. Fundamentally, we await to key catalysts to splash the headlines: see the BoJ, BoE, ECB feed a stimulus upgrade; or have the dollar rally topple and work the pricing angle.

**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

0:01

GBP

RICS House Price Balance

-1%

-4%

2Y uptrend; 1Y avg. of -1.0; high of -1; low of -23

0:30

AUD

NAB Business Confidence

3

Past rate cuts have little effect on lending activities and business conditions; Banking sector faces downgrade risk.

0:30

AUD

NAB Business Conditions

-2

0:30

AUD

RBA Credit Card Purchases

$A22.4B

0:30

AUD

RBA Credit Card Balances

$A49.9B

5:00

JPY

Consumer Confidence

43.3

Depends on Kuroda’s effort on expanding asset purchase program

7:00

EUR

German Wholesale Price Index (MoM)

0.30%

At 2Y low, came in below expectation for 2 months; Stronger fundamentals supported by better PMIs likely to lift price levels.

7:00

EUR

German Wholesale Price Index (YoY)

2.30%

7:00

EUR

German CPI - EU Harmonised (YoY)

1.80%

1.80%

7:00

EUR

German Consumer Price Index (YoY)

1.50%

1.50%

9:00

EUR

Italian Consumer Price Index - EU Harmonized (YoY)

0.10%

Austerity continues to weigh on inflationary pressure.

9:30

GBP

Industrial Production (MoM)

0.10%

1.10%

Expected to remain in contraction, thereby Increasing expectations on more asset purchases in next meeting on April 4.

9:30

GBP

Industrial Production (YoY)

-1.10%

-1.70%

9:30

GBP

Manufacturing Production (MoM)

0.00%

1.60%

9:30

GBP

Manufacturing Production (YoY)

-1.00%

-1.50%

9:30

GBP

Visible Trade Balance (Pounds)

-£8950

-£8897

Trading activities in Eurozone remain soft, Outside of Eurozone, bilateral trades have increased (i.e. Ghana).

9:30

GBP

Trade Balance Non EU (Pounds)

-£3200

-£3201

9:30

GBP

Total Trade Balance (Pounds)

-£4500

-£4239

11:30

USD

NFIB Small Business Optimism

90

88.9

Budget cuts from sequester may cut a substantial number of government jobs; possibly slowing the downward momentum.

15:00

GBP

NIESR Gross Domestic Product Estimate

0.00%

Timely growth forecast for 1Q will give guidance on ‘Triple Dip’ recession and BoE prospects

18:00

USD

Monthly Budget Statement

Large swings in data set.

21:45

NZD

Food Prices (MoM)

1.90%

Price levels update before the RBNZ decision.

23:30

AUD

Westpac Consumer Confidence

7.70%

Higher inflation in China could weaken demand for Australian goods, thereby suppressing consumer confidence.

23:30

AUD

Westpac Consumer Confidence Index

108.3

GMT

Currency

Upcoming Events & Speeches

-:-

JPN

Japan Deputy Governor Nominees – Upper House Testimony

-:-

EUR

Bank of Portugal Releases Banking Sector Data

15:30

EUR

ECB’s Liikanen Speaks on ECB and Banking Union

-:-

USD

US House Budget Committee 2014 Budget Proposal Expected

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

15.5900

2.0000

9.2080

7.8165

1.3650

Resist 2

7.5800

5.8300

6.1150

Resist 1

15.0000

1.9000

9.1900

7.8075

1.3250

Resist 1

6.8155

5.7350

5.8200

Spot

12.6279

1.8065

9.0896

7.7569

1.2477

Spot

6.4032

5.7345

5.7258

Support 1

12.5000

1.6500

8.5650

7.7490

1.2000

Support 1

6.0800

5.4440

5.5000

Support 2

11.5200

1.5725

6.5575

7.7450

1.1800

Support 2

5.8085

5.3350

5.3040

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

1.3115

1.5056

97.22

0.9593

1.0359

1.0316

0.8302

126.68

145.00

Resist. 2

1.3087

1.5023

96.92

0.9573

1.0341

1.0296

0.8282

126.22

144.58

Resist. 1

1.3060

1.4990

96.61

0.9553

1.0323

1.0276

0.8262

125.77

144.16

Spot

1.3005

1.4925

96.00

0.9514

1.0287

1.0236

0.8222

124.86

143.32

Support 1

1.2950

1.4860

95.39

0.9475

1.0251

1.0196

0.8182

123.95

142.47

Support 2

1.2923

1.4827

95.08

0.9455

1.0233

1.0176

0.8162

123.50

142.05

Support 3

1.2895

1.4794

94.78

0.9435

1.0215

1.0156

0.8142

123.04

141.63

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

Sign up for John’s email distribution list, here.

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