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Forex: Dollar Ends Longest Bull Run in 14 Months

Forex: Dollar Ends Longest Bull Run in 14 Months

John Kicklighter, Chief Strategist

Talking Points:

  • Dollar Ends Longest Bull Run in 14 Months
  • Euro May Find Rebound in Pre-Event Risk Unwind
  • Australian Dollar Rallies Ahead of RBA Decision

Dollar Ends Longest Bull Run in 14 Months

The USDollar broke stride on its strongest bull-run in 14 months. Monday’s 0.3 percent slip from the Dow Jones FXCM Dollar Index brought to a close a six-day consecutive rally. Historically speaking, the end of such moves does not necessarily translate into impending trend reversals. This situation is likely to prove consistent with this aversion to a technical fate. Fundamentals are critical to the benchmark’s next move. The most significant cues for what truly matter to the dollar – risk trends and stimulus schedules – aren’t due until the end of the week. The US 3Q GDP (due Thursday at 13:30 GMT) and October NFPs (Friday at 13:30 GMT) reports are beacons for FX traders, and there will be considerable hesitation to building into trends (bullish or bearish, risk on or risk off, Taper earlier or later) until the data clarifies probabilities for the crowd. Meanwhile, the event risk from this opening session offered a mixed picture. Data (factory orders and New York manufacturing activity) was lower tier, but the Treasury’s upgraded quarterly borrowing estimate ($266 billion) reminds us we likely have another debt stand off early near year. More immediate, multiple Fed officials spoke; and it seems they are trying to desensitize the market to a Taper.

Euro May Find Rebound in Pre-Event Risk Unwind

Last week’s 2.3 percent EURUSD slump was the largest since the July 6, 2012 tumble. That is a good historical comparison. Looking back to the 3 percent drop 16 months ago, that was a plunge that preceded the ECB’s (European Central Bank) introduction of its open-ended vow to backstop the sovereign debt market should another financial crisis arise. That move was intended to suck the oxygen out of a seemingly relentless cycle of bailout requests and catastrophe for the region. This time around, we have seen a drop not on instability, but rather on diminished expectations for ‘return’. With the drop in the region’s inflation reading last week, there is now room for the ECB to further ease to support countries struggling with recession and a return to the market. With the ECB decision Thursday, there is reason to deleverage exposure.

Australian Dollar Rallies Ahead of RBA Decision

Shortly before the RBA (Reserve Bank of Australia) meets, overnight index swaps projected the 12 month forecast for Australia have swelled to 22 bps. While that is still short of certainty of a quarter-percent rate hike over the coming year, it is nevertheless the most hawkish forecast from this forward looking market since June of 2011. This optimism found its way through to the currency as the Aussie dollar advanced against all of its major counterparts through Monday’s trading session – with a surprisingly uniform 0.5 percent (versus the Swiss franc) to 0.8 percent (against the Canadian dollar) performance. As consistent as the performance was though, it is still a correction for a prevailing bear theme from the past few weeks. In these fluid yield expectations, we see the market can indeed be influenced by the central bank’s policy guidance. Should the statement note any foreseeable pressure for a rate hike, there is a lot of room for yield forecasts and the AUD to rally.

British Pound Advances as Growth Forecasts Upgraded, Construction Report Beats

There was a material improvement in traditional event risk this past week, but does it truly tap into the sterling’s primary fundamental interests? Stealing the headlines was Markit’s construction activity survey for October which printed its best reading (59.4) since series data is available back to 2008. Adding to the sense of optimism on the day, the CBI (Confederation of British Industry) upgraded its UK growth forecasts with an outlook of 1.4 percent 2013 performance and 2.4 percent next year (previous forecasts were 1.2 and 2.3 percent respectively). Today’s service sector report may carry a little bit more influence, but the focus is still on the outlook for monetary policy clues from the Bank of England. Unfortunately, the central bank is unlikely to offer anything material after its policy gathering Thursday.

New Zealand Dollar Firming as Yield Outlook Improves, Jobs Data Ahead

Similar to the revival in rate expectations for the Australian benchmark, we have seen a marked rebound in New Zealand’s yield forecast. From the slump below 60bps last week, the 12-month yield forecast for the region’s benchmark interest rate is back up to 81 bps. That represents a sizable premium over all of the kiwi’s counterparts. We can see this optimism bolstering the yield gap between the New Zealand currency and its more prominent carry counterparts (dollar, yen, pound); but its advantage is proving relatively restrained versus fellow high-yield peers. In the coming trading day, we have a range of 3Q labor statistics due for release. Of particular interest will be the employment change and unemployment rate for the period. There is plenty of room for surprise on both accounts with a 6.2 percent jobless rate forecasted.

US Oil Now Down Nearly 16 Percent from Late August High

US oil – specifically the active futures contract for West Texas Intermediate – closed higher for the first time in five trading days Monday. Yet, the 1 cent increase to $94.62hardly puts the bulls in the driver’s seat. The commodity is tracing out a remarkably durable bear trend against a market backdrop where risk-sensitive assets are finding at worst chop and best sustained buoyancy. In fact, from its August 28 peak (itself a two year high), the crude benchmark has dropped over 16 percent through its Monday low. Given regulators’ efforts to curb speculative activity in the popular commodity – they are far from locking traders out – we are perhaps seeing a systemic shift towards more traditional supply-and-demand factors. Ignoring the stimulus (and thereby risk) implications of weaker economic data, there is fundamentally a reduction in demand for oil. Meanwhile, the 4 week average for the DoE’s US inventories has hit its highest level since April 13, 2013 (5.035 million barrels).

Gold Matches Longest Bear Wave in 5 Months

Despite the dollar’s break from pace, gold extended its stumble. With Monday’s 0.1 percent drop to $1,314, the precious metal won the unflattering distinction of a five-day consecutive decline – the longest series of losses for the commodity since May 15. Yet, there is a material difference between the move that followed the failed recovery from April’s collapse (over 15 percent in two-days) and the current 4.1 percent peak-to-trough move. There isn’t nearly as much one-sided speculative exposure for the market to deleverage on a technical break or volatility swell. Nowadays, we need a more concerted fundamental motivation to drive the market to a lasting trend. With two key monetarypolicy events (Thursday’s ECB and Friday’s Fed decision) due later in the week, there is a fundamental dampener on this metal. That being said, there doesn’t seem to be too much concern ahead of the event. The CBOE’s Gold volatility index is currently at 20.3 percent – at the lower bound of the past 7 months’ range. Meanwhile, ETF volume was the second lowest in three months.

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ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

00:01

GBP

BRC Sales Like-For-Like (YoY)

1.1%

0.7%

01:45

CNY

HSBC/Markit Services PMI

52.4

03:30

AUD

Reserve Bank of Australia Rate Decision

2.50%

2.50%

This will be key event risk for AUD pairs. Gov. Stevens may attempt to talk down the currency after his failure last meeting contributed to Aussie strength.

08:15

CHF

CPI EU Harmonized (YoY)

0.2%

CPI YoY has not been positive since September of 2011.

08:15

CHF

Consumer Price Index (MoM)

0.1%

0.3%

08:15

CHF

Consumer Price Index (YoY)

-0.1%

-0.1%

08:15

CHF

CPI EU Harmonized (MoM)

0.5%

09:30

GBP

Purchasing Manager Index Services

60.0

60.3

The August print PMI print was the highest since 2007.

09:30

GBP

Official Reserves (Changes)

-$188M

10:00

EUR

Euro-Zone Producer Price Index (MoM)

0.2%

0.0%

Producer Price Index has been on the decline since mid-2011 and negative since August.

10:00

EUR

Euro-Zone Producer Price Index (YoY)

-0.8%

-0.8%

15:00

USD

ISM Non-Manufacutring Composite

54.00

54.40

Market participants will be looking towards the ISM print to determine the immediate impact of the US government shutdown in October.

15:00

USD

IBD/TIPP Economic Optimism

42.00

38.40

21:45

NZD

Private Wages ex Overtime (QoQ)

0.5%

0.4%

The Kiwi has pared gains after hitting 6 month highs two weeks ago. The RBNZ continues to be faced with interest rate dilemmas as a housing bubble warrants higher rates, but fears of NZD appreciation delay any rate changes.

21:45

NZD

Labor Cost Private Sector (QoQ)

0.5%

0.5%

21:45

NZD

Unemployment Rate

6.1%

6.4%

21:45

NZD

Employment Change (QoQ)

0.5%

0.4%

21:45

NZD

Employment Change (YoY)

1.6%

0.7%

21:45

NZD

Participation Rate (QoQ)

68.0%

68.0%

21:45

NZD

Average Hourly Earnings (QoQ)

1.4%

0.4%

GMT

Currency

Upcoming Events & Speeches

05:30

JPY

BOJ Governor Kuroda Speaks to Business Leaders in Osaka

07:45

JPY

BOJ Governor Kuroda Holds Press Conference in Osaka

10:00

EUR

European Commission Releases Economic Growth Forecasts

18:15

USD

Fed's Lacker Speaks on Labor Market in North Carolina

22:00

USD

Fed's Williams to Speak to Reporters in San Francisco

23:50

JPY

Bank of Japan October 3-4 meeting minutes

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

12.9582

1.9970

9.9419

7.7531

1.2385

Spot

6.4016

5.4372

5.9072

Support 1

12.6000

1.9140

9.3700

7.7490

1.2000

Support 1

6.0800

5.3350

5.7450

Support 2

12.4200

1.9000

8.9500

7.7450

1.1800

Support 2

5.8085

5.2715

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

1.3817

1.6138

99.41

0.9087

1.0543

0.9587

0.8346

136.42

1367.50

Res 2

1.3792

1.6109

99.18

0.9068

1.0527

0.9565

0.8323

136.09

1360.21

Res 1

1.3767

1.6081

98.95

0.9048

1.0511

0.9543

0.8301

135.76

1352.92

Spot

1.3717

1.6023

98.49

0.9010

1.0479

0.9499

0.8256

135.10

1338.34

Supp 1

1.3667

1.5965

98.03

0.8972

1.0447

0.9455

0.8211

134.44

1323.76

Supp 2

1.3642

1.5937

97.80

0.8952

1.0431

0.9433

0.8189

134.11

1360.21

Supp 3

1.3617

1.5908

97.57

0.8933

1.0415

0.9411

0.8166

133.78

1367.50

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.

The information contained herein is derived from sources we believe to be reliable, but of which we have not independently verified. Forex Capital Markets, L.L.C.® assumes no responsibility for errors, inaccuracies or omissions in these materials, nor shall it be liable for damages arising out of any person’s reliance upon this information. Forex Capital Markets, L.L.C.® does not warrant the accuracy or completeness of the information, text, graphics, links or other items contained within these materials. Forex Capital Markets, L.L.C.® shall not be liable for any special, indirect, incidental, or consequential damages, including without limitation losses, lost revenues, or lost profits that may result from these materials. Opinions and estimates constitute our judgment and are subject to change without notice. Past performance is not indicative of future results.

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