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Forex: Dollar Steadies as Market Makes a Tentative Risk Move

Forex: Dollar Steadies as Market Makes a Tentative Risk Move

2013-10-24 02:57:00
John Kicklighter, Chief Currency Strategist
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Talking Points:

  • DollarSteadies as Market Makes a Tentative Risk Move
  • British Pound Checked by BoE Minutes, Carney May Sink Currency
  • Euro Ignores Spain 3Q GDP Forecast, PMI Figures Today

Dollar Steadies as Market Makes a Tentative Risk Move

There was a flutter of risk aversion this past session which temporarily leveled the dollar off. Yet, as broad as the sentiment hiccup seemed, it has yet to show the commitment needed to forge a more meaningful dollar recovery. There are generally two elements that speak to a market-wide sense of risk trends (be it ‘risk on’ or ‘risk off’) - breadth and depth. In assessing the former, equities were down globally, carry trade was fading, high-yield assets were on the block and the dollar edged up from a 10-month low. When the appetite for safety spreads across asset and geographic boundaries, it often carries more weight. Yet, the conviction behind the move is where we find the real momentum for follow through – and the dollar’s salvation – lies. The greenback lacked the drive of the yen, and the stimulus-assured S&P 500 refused to retreat far from its record high. A lack of momentum on the onset is to be expected if the spark was an afterthought of Tuesday’s NFPs or the news that Chinese banks reported hefty loan writeoffs while the PBoC was considering tightening monetary policy to curb inflation. A deleveraging event can be a self-generating cycle, but it typically needs a big push. These aren’t the catalysts we need.

British Pound Checked by BoE Minutes, Carney May Sink Currency

With GBPUSD standing just below 1.6250 (a multi-year trendline resistance) and EURGBP positioned below 0.8500 (seven-week support for the sterling), the market was prepared for the release of the BoE minutes. The transcript of this month’s monetary policy meeting kept much of the cautious language seen in previous updates. However, were a few comments for the rate hawks that had driven the currency aggressively higher over the past few months to bite on. Notably, the statement included a remark that labor market slack was evaporating a little more quickly than expected. If the desire was to find anything that verified a preconceived expectation, that could have played the part. Instead, pound and Gilt yields stumbled. BoE Governor Carney may offer a little more proactive guidance in his 16:45 GMT speaking engagement.

Euro Ignores Spain 3Q GDP Forecast, PMI Figures Today

There were a few mixed headlines for the euro this past session. On the bullish side, the Bank of Spain’s monthly bulletin estimated the local economy grew 0.1 percent through the past quarter. If confirmed by the official data due next Wednesday, it would be the first positive quarterly growth for the country since 1Q 2011. In contrast, the negotiations between austerity and growth may heat up going forward. Greek coalition leaders met to discuss their strategy with the Troika. Doubts over the accuracy of Greece’s 2014 forecasts are well documented, and the bargaining for further debt relief could prove difficult if the government refuses demands for additional spending cuts. Looking ahead, we have bigger event risk on tap. The two-day EU Summit begins today – though expectations are for big items to be reserved for the December meet. The October PMI figures, however, are ripe for speculative influence now. Timely measures of growth, this is good 3Q GDP lead in.

Australian Dollar and New Zealand Dollar Rate Forecasts Fade

Interest rate expectations are a significant aspect to FX pricing – particularly for the traditional carry currencies. As such, the recent drop in yield forecasts for the Australian and New Zealand dollars spells trouble for the currencies. As would be expected, the market’s outlook for interest rates follows the general level of sentiment for the capital markets. The recent check in bullish equity momentum has in turn exacerbated a pullback in 12-month rate forecasts for the two. Despite the better-than-expected 3Q CPI figures, the coming year’s RBA forecast has eased back to 6bps (from as high as 18). The situation is more painful for the kiwi with the RBNZ’s outlook now at 73 bps (from 97 last month).

Canadian Dollar Tumbles as Bank of Canada Voices Unexpected Dovishness

It’s always the quiet ones… Little was expected from the Bank of Canada from its policy meeting this past session. The consensus was for a status quo that was optimistic on growth, caution over the housing sector and a view that the next move would be an eventual rate hike. That last part was conspicuously absent however. While the central bank didn’t shift from hawkish to dovish overnight, they did leave out the explicit rhetoric on a need for future rate hikes. Over the past few years, the Canadian dollar lead the rate forecast segment – though not current rates – due to a persistent vow that a hike was in the horizon. That spectrum has shifted and Canada now finds itself in the same position as the Fed. Meanwhile, the growth forecasts for 2013 (1.6 from 1.8 percent) and 2014 (2.3 from 2.7 percent) were lowered; while the expected return to the 2 percent inflation target was pushed out to the fourth quarter of 2015. This is a painful shift for an already second-tier carry.

US Oil Tumbles a Third Day as US Supply Jumps

There is some heat to oil’s collapse this week. What was originally a move to break $100, the US-based West Texas Intermediate (WTI) oil evolved into a hefty three-day, 3.9 percent decline. The decline through the dollar’s own stumble Tuesday was particularly remarkable as a drop in the value of the pricing instrument typically leads into to a rise in the value of the commodity. Yet, the fundamental backdrop is certainly building a defense for cheaper crude prices. Besides the dollar impact the NFPs offered, it was also confirmation of a moderating growth outlook for the world’s largest economy. The US isn’t the only country limiting energy demand due to uneven economic activity. We will see manufacturing activity readings – a good measure of such needs – for Asia (China), the Eurozone and US over the coming 24 hours. On the supply side, stories are circulating that Iran is contacting Western dealers bolstering expectations that sanctions could be eased in the near future. In the US, DoE inventors for last week jumped 5.246 million barrels – the fifth biggest increase this year.

Gold Rally Stalls as Soon as Dollar Bounces

A dependency on a diminishing dollar appeal helped buoy gold following Tuesday’s NFPs, but that same relationship would translate the currency’s balance into a modest gold retreat. The 0.5 percent dip was the biggest in 8 active trading days, but didn’t necessarily threaten a bigger move at hand. The market is now looking to the 20-day moving average and previous resistance around $1,305 as the rough line in the sand for this current bullish effort. Volume in the futures and ETF markets were shallow befitting the price action. Meanwhile, open interest in the former derivative market continues to build from the four-year low set shortly after the Fed’s policy meeting. The 6.2 percent increase in exposure coincides with the first two-day increase in ETF holdings since September 6. Hardly evidence of a full-scale bull recovery, but supportive should a more significant driver come along – like a need for an alternative to a reserve currency (dollar, euro, yen).

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ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

1:45

CNY

HSBC/Markit PMI- Manufacturing (OCT)

50.4

51.2

Data out of China is back in the spotlight following developments in the Chinese housing market.

7:00

EUR

French PMI Manufacturing (OCT P)

50.1

49.8

Although data has been beating estimates over the past few weeks and contributing to the Euro’s appreciation, recent data has simply met estimates. The Eurozone remains prone to slowing as most ‘recoveries’ have been short lived.

7:00

EUR

French PMI Services (OCT P)

51.3

51.0

7:30

EUR

German PMI Manufacturing (OCT A)

51.4

51.1

7:30

EUR

German PMI Services (OCT A)

53.7

53.7

8:00

EUR

Euro-Zone PMI Manufacturing (OCT A)

51.4

51.1

8:00

EUR

Euro-Zone PMI Services (OCT A)

52.2

52.2

8:00

EUR

Euro-Zone PMI Composite (OCT A)

52.4

52.2

8:00

EUR

Italian Consumer Confidence Index s.a. (OCT)

100.6

101.1

Italy has been one of the relative bright spots in terms of improved data, but estimates point to lower confidence this month.

9:00

EUR

Italian Hourly Wages (MoM) (SEP)

0.0%

9:00

EUR

Italian Hourly Wages (YoY) (SEP)

1.5%

10:00

GBP

CBI Trends Total Orders (OCT)

10

9

With the Pound soaring on some of the most improved data in years, business confidence looks to jump to 18.

10:00

GBP

CBI Trends Selling Prices (OCT)

4

3

10:00

GBP

CBI Business Optimism (OCT)

17

7

12:30

USD

Initial Jobless Claims (OCT 18)

358K

September new home sales will be released after delays due to the government shutdown. Thus far, the delayed September data has not been positive for the U.S. and has raised speculation of a later ‘taper’ date.

12:30

USD

Continuing Claims (OCT 11)

2859K

12:58

USD

Markit PMI (OCT P)

52.8

52.8

14:00

USD

New Home Sales (SEP)

425K

421K

14:00

USD

New Home Sales (MoM) (SEP)

1.0%

7.9%

15:00

USD

Kansas City Fed Manufacturing Activity (OCT)

2

16:00

EUR

French Total Jobseekers Change (SEP)

-50

16:00

EUR

French Total Jobseekers (SEP)

3235.7k

23:30

JPY

National CPI (YoY) (SEP)

0.9%

0.9%

Japanese CPI remains one of the most important data points out of the country. Japan must show improvements in inflation or markets will respond appropriately as the impact of Abenomics looks to be fading. Earlier this week, Japan reported the worst trade deficit in years.

23:30

JPY

National CPI Ex-Fresh Food (YoY) (SEP)

0.7%

0.8%

23:30

JPY

National CPI Ex Food, Energy (YoY) (SEP)

0.0%

-0.1%

23:30

JPY

Tokyo CPI (YoY) (OCT)

0.5%

0.5%

23:30

JPY

Tokyo CPI Ex-Fresh Food (YoY) (OCT)

0.3%

0.2%

23:30

JPY

Tokyo CPI Ex Food, Energy (YoY) (OCT)

-0.3%

-0.3%

23:50

JPY

Corporate Service Price (YoY) (SEP)

0.8%

0.6%

GMT

Currency

Upcoming Events & Speeches

15:00

EUR

European Union Leaders Start Two-Day Summit

16:45

GBP

BoE Governor Mark Carney Speaks on U.K. Economy

17:30

USD

US to Sell $7 Bln in 30-Year TIPS

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

2.0500

10.7250

7.8165

1.3650

Resist 2

7.5800

5.8950

6.5135

Resist 1

13.2400

2.0100

10.5000

7.8075

1.3250

Resist 1

6.8155

5.8475

6.2660

Spot

12.9431

1.9739

9.7806

7.7532

1.2376

Spot

6.3651

5.4113

5.9155

Support 1

12.6000

1.9140

9.3700

7.7490

1.2000

Support 1

6.0800

5.4440

5.7450

Support 2

12.4200

1.9000

8.9500

7.7450

1.1800

Support 2

5.8085

5.3350

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

1.3884

1.6306

98.24

0.8995

1.0438

0.9729

0.8516

135.48

1364.22

Res 2

1.3859

1.6277

98.01

0.8976

1.0423

0.9708

0.8495

135.15

1357.05

Res 1

1.3834

1.6248

97.78

0.8957

1.0408

0.9687

0.8473

134.81

1349.87

Spot

1.3785

1.6190

97.32

0.8919

1.0377

0.9645

0.8430

134.15

1335.53

Supp 1

1.3736

1.6132

96.86

0.8881

1.0346

0.9603

0.8387

133.49

1321.19

Supp 2

1.3711

1.6103

96.63

0.8862

1.0331

0.9582

0.8365

133.15

1357.05

Supp 3

1.3686

1.6074

96.40

0.8843

1.0316

0.9561

0.8344

132.82

1364.22

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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