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Dollar Risks Tumble if QE3 Taper Talk or Capital Market Don’t Catch

Dollar Risks Tumble if QE3 Taper Talk or Capital Market Don’t Catch

2013-05-30 06:20:00
John Kicklighter, Chief Strategist
Share:
  • Dollar Risks Tumble if QE3 Taper Talk or Capital Market Don’t Catch
  • Euro Suspiciously Aloof About Broad Warning About Future
  • Japanese Yen: Policy Officials Try to Talk Down Stimulus Risks
  • Australian Dollar: Bond Sales Reflect Aussie’s Other Problem
  • Swiss Franc Faces Another Volatility Spark in 1Q GDP
  • Canadian Dollar Offered No Surprises from BoC Rate Decision
  • Gold Activity at Two Month Low, Breakout Barometer High

Dollar Risks Tumble if QE3 Taper Talk or Capital Market Don’t Catch

The US dollar has done its best to run astray of the dogged strength of stimulus-backed risk assets. As of late, the bullish effort carried the currency to near three-year highs; but the market seems increasingly open to taking a breather. This morning, the Dow Jones FXCM Dollar Index (ticker = USDollar) slipped a gradual rising floor of support to trade back to 10,750. This is the edge of deeper retracement. The same risk is palpable for the currency’s major pairings. EURUSD has made a push back towards 1.3000, AUDUSD bounced hard from its multi-year support around 0.9550 and USDJPY is falling back towards 100 once again. After such an extensive move against the rudimentary fundamental backdrop, further climb requires real support. The longer we go without a firm drive, the higher the probability of retracement.

There are two fundamental themes that carry the necessary influence to keep the greenback’s buoyancy in place: risk trends and a building support for the Fed’s downshift in stimulus (now referred to as the ‘taper’). While we have seen some carry unwinding, short-term swells in volatility indexes and sharp moves in debt market (sovereign and high-yield corporate); we have yet to see the market-wide fear that undermines the center of moral hazard – the S&P 500. The dollar’s strength over the past month has ridden the wave of QE3 speculation. This past session, we heard Fed dove Rosengren suggest he could be open to tapering in a few months; but that sets no immediate time table.

Euro Suspiciously Aloof About Broad Warning About Future

The euro didn’t seem to put in for a dedicated move of its own this past session – and EURUSD notably closed Wednesday 0.7 percent higher. That performance belies the fundamentals we were seeing come from the Euro-area. From the OECD’s bi-annual growth forecast update, a hefty downgrade to the region’s 2013 GDP outlook (from a 0.1 percent contraction to 0.6 percent slump) speaks to the root problem for the world’s largest aggregate economy and its financial market. Elsewhere, the EU had to extend its allowance for members to reach their deficit targets while the ECB issued a financial stability report that warned the most stable conditions in two years were at risk of collapse.

Japanese Yen: Policy Officials Try to Talk Down Stimulus Risks

It is now commonplace to hear central bankers proclaim that they are monitoring for bubbles via stimulus and claiming that all the lights are still green. Japanese policy officials are no different. The alternative – to admit monetary policy causes problems and either market or economy may have to be sacrificed short term – is naturally unacceptable for a policy group that is charged with promoting stability through action and guidance. That being said, commentary from BoJ Governor Kuroda, Finance Minister Aso and others that suggests there is no problem in the extremely volatile JGB market and with the Nikkei 225 comes off as a willingness to ignore obvious risks. We have been told that increased bond purchases are possible, but that also bolsters inflation expectations and consequently yields…

Australian Dollar: Bond Sales Reflect Aussie’s Other ProblemThere are a few, plain fundamentals troubles for the Australian dollar: namely interest rate forecasts and risk appetite trends. As an investment currency, we need to know what kind of return the market can expect from the currency and how important that yield is compared to the commensurate risk it represents. Sentiment has trembled over the past few weeks, but it has yet to full breakdown. For the Aussie’s part, the probability of impending RBA rate cuts has backed off. Yet, we should also appreciate a third (constant) factor: who is participating. In the past few years, there has been a considerable ‘diversification’ effort to buy Aussie bonds and assets to provide yield to central bank and institutional portfolios. That said, a A$700 million, 14-year bond auction yesterday shows that is fading. Demand dropped and yields rose.

Swiss Franc Faces Another Volatility Spark in 1Q GDP

We learned earlier this week that Swiss data is not to be simply written off. The trade report released on Tuesday contributed to a steep franc selloff – its biggest daily tumble since December 2011. If that is a gauge of sensitivity and short-term volatility potential from the region’s docket, those trading Swissie pairs should be particularly wary of the upcoming 1Q GDP report. Expectations call for relatively little deviation from the previous reports 0.2 percent quarterly and 1.4 percent annual expansion measures. That means that the masses are poorly positioned for any significant surprises. Meanwhile, systemic change is afoot as the Swiss government has taken steps allowing banks to break the country’s secrecy laws and forfeit US clients’ information to US authorities – a serious change to this currency’s stature in the global market.

Canadian Dollar Offered No Surprises from BoC Rate Decision

There was a broad consensus that the Bank of Canada would hold its monetary policy bearings this past session, and they would not disappoint. This meeting was Mark Carney’s last as the head of the Canadian central bank, and there is rarely a dramatic change made by an outgoing leadership – especially when they have been incredibly consistent as the BoC has been. However, things become interesting from here. There seems an automatic assumption that incoming Governor Stephen Poloz will simply pick up where Carney left off with an eye towards the first rate hike. However, if new head – who did his PhD thesis on currency movement – joins the currency war fray…

Gold Activity at Two Month Low, Breakout Barometer High

Activity levels are cooling for gold. In fact, the rolling five-day daily range for the precious metal is currently just above $16 – a week ago it was $48. Similar measures of lethargy can be seen in the CBOE’s Gold Volatility Index as it eased back to three week lows (22.8 percent) while volume on both futures and ETFs have dried up. Under normal circumstances, this could be construed as a simple return to ‘typical’ trading levels. However, both the technical wedge pattern seen on the chart and the fundamental risk of volatility to the dollar point to the same thing –gold is at high risk a sudden as it breaks free of its boundaries. The more academic fundamental conversation tends to debate the dedicated ‘physical’ buying and short-term ‘paper’ trading, but the breakout we find from this hold is unlikely to hold to such high-minded debate. The metal’s sensitivity to the dollar is the greatest threat to quiet a quiet.

**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

1:30

AUD

Building Approvals (MoM)

-5.5%

Dropped to 09/12 level in a sharpest pace in a year; Recent rate cut may revive the housing market.

1:30

AUD

Building Approvals (YoY)

3.9%

1:30

AUD

Private Capital Expenditure (1Q)

-1.2%

Fell to 06/10 level, indicating companies’ cautious sentiment towards future demand.

5:45

CHF

Gross Domestic Product (QoQ)

0.2%

Stayed below 0.6% for 8 quarters.

5:45

CHF

Gross Domestic Product (YoY)

1.4%

Showed improvement for 3 consecutive quarters.

8:30

GBP

Lloyds Business Barometer

27

Companies’ optimism has improved for 3 consecutive months.

9:00

EUR

Euro-Zone Industrial Confidence

-13.8

European flash PMI showed improvement, though GE and FR disappointed; All euro-zone countries remained contractionary; More stimuli from ECB could improve sentiment, as Praet hinted on more lending and new policies to maintain price stability.

9:00

EUR

Euro-Zone Consumer Confidence

9:00

EUR

Euro-Zone Services Confidence

-11.1

9:00

EUR

Euro-Zone Economic Confidence

88.6

9:00

EUR

Euro-Zone Business Climate Indicator

-0.93

12:30

CAD

Current Account (BoP) (Canadian dollar)

-$17.3B

A significant component to Friday’s1Q GDP figure. Deficit since 4Q 2008

12:30

USD

Gross Domestic Product (Annualized)

2.5%

2.5%

Stronger-than-expected economic growth could lead to risk aversion as investors fear reduction in bond purchases, while it will be USD positive.

12:30

USD

Core Personal Consumption Expenditure (QoQ)

1.2%

1.2%

12:30

USD

Personal Consumption

3.2%

3.2%

12:30

USD

Initial Jobless Claims

340K

Have recently advance from multi-year lows.

12:30

USD

Continuing Claims

2912K

14:00

USD

Pending Home Sales (MoM)

1.7%

1.5%

Lower than 12-month average since 01/2013.

14:00

USD

Pending Home Sales (YoY)

5.8%

22:45

NZD

Terms of Trade Index (QoQ)

-1.3%

Heavily rely on Chinese growth and productivity.

23:01

GBP

GfK Consumer Confidence Survey

-27

Declined slightly after holding steady for 3 months.

23:15

JPY

Nomura/JMMA Manufacturing PMI

51.1

Indicative of the stimulus impacts on manufacturing activities.

23:30

JPY

National Consumer Price Index (YoY)

-0.9%

Deflation shown in national CPI data has worsen, declining for 4 months; The lack of improvement in deflation will cause the BOJ to adjust the timing to achieve its 2% inflation target and may expand its bond purchases program.

23:30

JPY

National CPI Ex-Fresh Food (YoY)

-0.5%

23:30

JPY

National CPI Ex Food, Energy (YoY)

-0.8%

23:30

JPY

Tokyo Consumer Price Index (YoY)

-0.7%

23:30

JPY

Household Spending (YoY)

5.2%

Surged to the highest level since 2004.

23:30

JPY

Jobless Rate

4.1%

Unemployment rate dropped to the lowest level since 11/08; Steady uptrend in job-to-applicant ratio,

23:30

JPY

Job-To-Applicant Ratio

0.86

23:50

JPY

Industrial Production (MoM)

0.9%

Slow growth as demand mainly comes from US, but sluggish demand from Europe and China.

23:50

JPY

Industrial Production (YoY)

-6.7%

GMT

Currency

Upcoming Events & Speeches

3:00

NZD

RBNZ Publishes Assessment of Currency Flows

5:30

JPY

Japan Cabinet Office Conference on Policy

8:15

JPY

BOJ Deputy Governor Nakaso to Speak at Forum in Tokyo

16:30

EUR

ECB’s Costa Speaks on Portugal and EU

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

15.0000

2.0000

10.7000

7.8165

1.3650

Resist 2

7.5800

5.8950

6.1150

Resist 1

12.9000

1.9000

9.8365

7.8075

1.3250

Resist 1

6.8155

5.8300

5.9365

Spot

12.6277

1.8611

9.7835

7.7636

1.2642

Spot

6.6334

5.7508

5.8862

Support 1

12.0000

1.6500

9.3700

7.7490

1.2000

Support 1

6.0800

5.6075

5.7400

Support 2

11.5200

1.5725

8.9500

7.7450

1.1800

Support 2

5.8085

5.4440

5.5000

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

1.3079

1.5266

102.31

0.9711

1.0431

0.9795

0.8210

132.66

154.70

Resist. 2

1.3050

1.5234

101.97

0.9684

1.0410

0.9769

0.8185

132.21

154.24

Resist. 1

1.3021

1.5202

101.63

0.9658

1.0389

0.9742

0.8160

131.76

153.77

Spot

1.2962

1.5138

100.96

0.9604

1.0347

0.9689

0.8110

130.87

152.83

Support 1

1.2903

1.5074

100.29

0.9550

1.0305

0.9636

0.8060

129.98

151.90

Support 2

1.2874

1.5042

99.95

0.9524

1.0284

0.9609

0.8035

129.53

151.43

Support 3

1.2845

1.5010

99.61

0.9497

1.0263

0.9583

0.8010

129.08

150.97

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

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