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Forex: Why is the US Dollar Quiet on a Huge S&P 500 Break?

Forex: Why is the US Dollar Quiet on a Huge S&P 500 Break?

2013-08-16 03:12:00
John Kicklighter, Chief Strategist
  • Dollar: Why is the Greenback Quiet on a Huge S&P 500 Break?
  • Japanese Yen Sensitive to Carry as Growth Outlook Reaffirms Stimulus Hold
  • British Pound: In Confusion, Improving Growth and Stimulus Outlook Prevails
  • Australian Dollar Looking for a Spark as Market Sees no Cuts First Time in 2 Years
  • New Zealand Dollar Eyes 0.8100 as Rate Expectations Build
  • Canadian Dollar Faces Data-Driven Volatility Threat
  • Gold Posts Biggest Rally in Three Weeks, At Pre-June FOMC Level

Dollar: Why is the Greenback Quiet on a Huge S&P 500 Break?

This past session was incredible for both the US dollar and broader financial markets. Indisputably, the most remarkable development was the critical technical breakdown of the S&P 500 and other benchmark US equity indexes. Having muscled its way to record highs through a tumultuous economic recovery, fading revenue growth and record low market yields; the US stock market has found itself in an extremely exposed position. Having put our faith in the ongoing support of the Federal Reserve’s stimulus programs, we have achieved record highs on 15-year lows in participation, a buildup based on record amounts of leverage while investors have significantly bolstered their risk profile in the pursuit of higher returns. Though not the sole factor in the capital market’s rise, the US central bank is essential to maintaining the façade of strong and stable conditions. And, that is why there is so much concern surrounding the Taper and its time frame.

Through the past three months, there have been a number of developments to undermine optimism and positioning founded on boundless support from stimulus including: data to support a steady economic backdrop; growing concerns surrounding the costs of an eventual exit and most importantly the Fed’s own warnings. As belief has grown that the first moderation in quantitative easing (QE) is at hand, we have seen various markets topple. US Treasuries were the first to tumble in early may as they are arguably the most direct exposure for those investors that were looking to ‘front run the Fed’. As global capital flows took the signal of yield volatility, the carry trade dove later the same month – breaking off a long-running relationship to the S&P 500. The USDollar made a move around the same time Treasuries, but commitment was truly established after Fed Chairman Bernanke’s comments following the June 19 rate meeting. These markets all started to adjust to this inevitable conclusion, but the standard for conviction remained with a benchmark that had yet to turn: US equities.

With the heavy drop from US stocks this past session – the biggest since the June FOMC gathering – there is a new sense of certainty to the inescapable moderation of stimulus. That is why so many were caught off guard when the dollar didn’t surge higher while other markets played out their own Taper fears. In reality, the greenback and other key asset measures were already the process of this adjustment. Is that to mean that we won’t see a further rally from the dollar as this belief becomes mainstream? Absolutely not. While the reserve currency has reversed some of its anti-stimulus discount, there is still a safe haven role. If the equity selloff builds and/or is disorderly, the dollar can rally.

Japanese Yen Sensitive to Carry as Growth Outlook Reaffirms Stimulus Hold

On a day when US equities are tumbling, we would expect risk aversion to transmit easily into carry trade. The yen-denominated crosses are still richly priced given the historically low yield differentials the group currently sport. That said, the yen itself has a lasting stain of a forcibly-devalued currency thanks to the Bank of Japan’s devoted efforts over the past five months. We may have already seen the limitations to how much the central bank can manipulate its currency in the name of inflation, but traders will remain cautious. To override this concern, we need to see a wholesale deleveraging effort that abandons all yield-bearing assets that flout their corresponding risk.

British Pound: In Confusion, Improving Growth and Stimulus Outlook Prevails

There is little doubt that the outlook for the UK economy and its currency have improved materially from the opening months of the year. From fear of an unending recession and denaturing stimulus ramp, we now find a broad recovery alongside a central bank that wants to adopt forward guidance without the QE. And yet, the sterling has yet to retrace more than half the losses suffered through the beginning of the year from the alternative scenario. So, when the market debates the Fed’s Taper and balance of risk, the pound draws capital in the clamor.

Australian Dollar Looking for a Spark as Market Sees no Cuts First Time in 2 YearsThere are two aspects to the Australian dollar’s fundamental role as a high-yield currency that determine direction and momentum: the appetite for yield and the level of return for the currency itself. On the second facet, the Aussie dollar has made incredible strides. Since last week’s RBA rate cut, we now find the 12-month rate forecast – essentially the establishment of the current policy regime – sees no change. This is the first time we have seen a ‘neutral’ reading in the rates market since July 2011. What is still absent though is a swell of carry demand.

New Zealand Dollar Eyes 0.8100 as Rate Expectations Build

We have seen the interest rate outlook for New Zealand turn to forecasts for hikes some time ago. However, now the outlook seems far more robust than a ‘one-and-done’ test rate hike that does little to truly support a high-yield currency that has been ravaged over the past few years. According to overnight index swaps, the rates market is projecting 84 bps of rate hikes through the coming 12 months – certainty of three 25bp hikes and debate of a fourth. That is the most hawkish rate watchers have been since August 2, 2011. When carry appetite returns…

Canadian Dollar Faces Data-Driven Volatility Threat

As an ‘investment currency’, a simple academic expectation for the Canadian dollar would be for a drop alongside equities. In fact, the benchmark US 10-year government bond yield is higher than its Canadian counterpart. Nevertheless, the loonie was down against most of its counterparts this past session. A tepid existing home sales report for July contributed to easing trend, but moreso after the move was instigated. For tomorrow’s session, the data may act as the catalyst. Capital flows and factory output figures for June are core to the economy.

Gold Posts Biggest Rally in Three Weeks, At Pre-June FOMC Level

The 2.3 percent rally from gold Thursday was the strongest since July 22 and drew the highest volume reading (17.2 million shares on the SPDR Gold ETF) since June 28. However, the single day advance through immediate resistance at $1,350 isn’t as remarkable as the broader context. The metal is now trading at its highest level since the day the Fed implicitly confirmed the forthcoming Taper (June 19). Furthermore, we are less than $10 from the 100-day moving average. We are now 177 days below this average – the second longest jaunt on record.

**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

8:00

EUR

Euro-Zone Current Account s.a. (euros) (JUN)

19.6B

After 6 straight quarters of negative GDP, the Euro-Zone showed on Wednesday that it finally had begun to grow. Surprisingly, Portugal came in with better than expected growth and helped lead the print higher. Although surveys indicate a flat CPI YoY, market participants judging Euro-Zone strength will be looking for an improvement in the MoM deflation issue.

8:00

EUR

Euro-Zone Current Account n.s.a. (euros) (JUN)

9.5B

9:00

EUR

Italian Current Account (euros) (JUN)

852M

9:00

EUR

Euro-Zone Consumer Price Index (MoM) (JUL)

-0.5%

0.1%

9:00

EUR

Euro-Zone Consumer Price Index (YoY) (JUL F)

1.6%

1.6%

9:00

EUR

Euro-Zone Consumer Price Index - Core (YoY) (JUL F)

1.1%

1.1%

9:00

EUR

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

14.6B

9:00

EUR

Euro-Zone Trade Balance (euros) (JUN)

15.2B

12:30

CAD

International Securities Transactions (C$) (JUN)

7.25B

6.74B

April’s -2.121 was the worst print since the summer of 2009.

12:30

CAD

Manufacturing Shipments (MoM) (JUN)

0.3%

0.7%

12:30

USD

Non-Farm Productivity (2Q P)

0.6%

0.5%

With the Federal Reserve concerned about a reduction in asset purchases upsetting the housing recovery, housing starts remains an indicator that can stir markets. Strengthening numbers will continue to feed speculation of a taper sooner rather than later.

12:30

USD

Unit Labor Costs (2Q P)

1.2%

-4.3%

12:30

USD

Housing Starts (JUL)

900K

836K

12:30

USD

Housing Starts (MoM) (JUL)

7.7%

-9.9%

12:30

USD

Building Permits (JUL)

945K

918K

12:30

USD

Building Permits (MoM) (JUL)

2.9%

-6.8%

13:55

USD

U. of Michigan Confidence (AUG P)

85.2

85.1

GMT

Currency

Upcoming Events & Speeches

10:00

EUR

ECB Announces 3-Year LTRO Repayments

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

13.4800

2.0000

10.7000

7.8165

1.3650

Resist 2

7.5800

5.8950

6.5135

Resist 1

13.2000

1.9500

10.2500

7.8075

1.3250

Resist 1

6.8155

5.8475

6.2660

Spot

12.8205

1.9325

9.9744

7.7544

1.2698

Spot

6.5040

5.5875

5.9122

Support 1

12.6000

1.9100

9.3700

7.7490

1.2000

Support 1

6.0800

5.6000

5.8700

Support 2

12.0000

1.6500

8.9500

7.7450

1.1800

Support 2

5.8085

5.4440

5.7400

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

1.3456

1.5758

98.79

0.9362

1.0381

0.9275

0.8176

131.72

1397.95

Res 2

1.3429

1.5727

98.48

0.9339

1.0362

0.9248

0.8152

131.34

1389.92

Res 1

1.3401

1.5696

98.17

0.9316

1.0342

0.9222

0.8128

130.96

1381.90

Spot

1.3347

1.5634

97.55

0.9270

1.0304

0.9169

0.8080

130.20

1365.85

Supp 1

1.3293

1.5572

96.93

0.9224

1.0266

0.9116

0.8032

129.44

1349.80

Supp 2

1.3265

1.5541

96.62

0.9201

1.0246

0.9090

0.8008

129.06

1389.92

Supp 3

1.3238

1.5510

96.31

0.9178

1.0227

0.9063

0.7984

128.68

1397.95

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.

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

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