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Dollar Retreats as Rate Outlook Outguns Risk Aversion

Dollar Retreats as Rate Outlook Outguns Risk Aversion

2014-03-27 03:57:00
John Kicklighter, Chief Strategist
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Talking Points:

  • Dollar Retreats as Rate Outlook Outguns Risk Aversion
  • Yen Crosses Face Inflation Data Tomorrow, Tax Hike Next Week
  • Euro: Officials Making a More Obvious Bid to Talk Down Currency

Dollar Retreats as Rate Outlook Outguns Risk Aversion

The Dow Jones FXCM Dollar Index (ticker = USDollar) has dropped for four consecutive days and is now working on its fifth – matching its lowest stumble in six months. For some, this performance is a surprise given the retreat in equity markets – as a proxy for ‘risk’ – this past session. In general, the frequency with which reports of legitimate financial market outbreaks are showing up in global headlines (China shadow banking, China economic slowdown, forecasts of a deep Russian recession, suspiciously low Eurozone lending rates, Fed Taper implications, et) should serve as a warning that the market’s ability to view these as discrete occurrences is winding down. Yet, until the shift from speculative build up – other’s call it ‘yield chase’ – to deleveraging is marked, dollar traders can afford to be complacent on this front. That leaves the active change in yield forecasts as a more proactive driver. While the 2-year Treasury yield continues to push higher as rate watchers price in the early influences of the Fed’s first moves, the subsequent hawkish trend is slow to develop.

Yen Crosses Face Inflation Data Tomorrow, Tax Hike Next Week

Comparing the USDJPY and other yen crosses now to where we were a year ago, we can see the dramatic difference in market bearing. In the lead up to last April’s BoJ meetings, the Japanese currency was pitched into an aggressive and consistent decline. If we were to assign an descriptor to the markets now, it would have to be ‘directionless’. The market’s expectations / hopes that the central bank was due to upgrade its open-ended stimulus program that it introduced nearly a year ago has certainly faded. And, in the absence more manipulation, risk appetite is not offering a motivated alternative. Stimulus expectations will be shaped tomorrow by CPI data, next week by a planned tax hike.

Expect breakouts? Use the DailyFX Breakout 2 strategy to signal or confirm setups!

Euro: Officials Making a More Obvious Bid to Talk Down Currency

It is difficult to miss. The ECB is making a concerted effort to verbally talk the euro down. Following up on President Draghi’s link between a high exchange rate and deflation, we have heard related comments from the likes of Weidmann, Makuch, LInde and others. However, as many policy officials have found out the hard way, the market cares about action – not musings. And, the global search for yield is keeping European assets and the currency bid. Record or multi-year lows in Spanish, Italian, and Greek yields reflects a shift from returning capital to speculative inflow.

British Pound: Rate Forecasts Refuse to Retreat, So Does Sterling

GBPUSD advanced for a third consecutive day through Wednesday’s close. While the sterling has gained against most of its counterparts over the past session, this particular pair stands out for its focus on the relative monetary policy outlook. Where the Fed is engaging in Taper and the market is working on its consensus for the timetable of the first rate hike, the pound maintains its buoyancy against the benchmark. Though a rough and certainly imperfect measure, we can use the cable’s stubborn hold above 1.6500 as evidence that the projected timing of the Bank of England’s return to a rate hike regime is nearer than its US counterpart. A more quantitative assessment would be the relative level of the UK-US two-year yield spread which is still hovering near two-and-a-half year highs. When rate hike hopes fall, the pound bears will step in.

New Zealand Dollar’s Next Bull Leg Held Up By Market Rates

The New Zealand dollar has certainly gained ground since the RBNZ hiked rates for the first time in what is expected to be a hawkish regime. Yet, the progress is not what most would expect from a currency that stands to dominate the yield curve for some time to come. The difficulty for establishing how much ground the kiwi ‘should’ gain from this change in fundamental standing depends on how much was priced in before the official move. When we look at market-based rates, we can generally see that markets had priced in at least the first hike well in advance. Looking at the 10-year New Zealand government bond yield, we have been unable to overtake 4.65; and it is currently retreating.

Australian Dollar Building Strength as RBA’s Concern Overlooked

A universal advance for the Australian dollar this past session speaks to concentrated strength. The often unloved currency has gained enough traction to win substantial technical breakouts and progress from AUDUSD, EURAUD and even AUDNZD. In the absence of a strong risk-based run and given the gains versus its higher-yielding counterpart (the kiwi dollar), this is more likely a factor of improved rate forecasts for the Aussie. Indeed, we have seen expectations of another RBA rate cut (or cuts) this year dissipate substantially over the past few months. The shift from a dovish to neutral position can have more bullish influence and longer pull for a currency than an actual rate cut itself. That is proving a problem for the central bank which has regularly lamented an ‘overvalued’ currency. Markets respond to returns rather than ruminations.

Emerging Markets: A Ukraine Economic Evaluation and Aid Thursday?

Emerging markets offered up a mixed performance this past session. There was a clear split in performance for the list of currencies (the Lira, Peso and Real up while the Peso, Forint and Rupiah dropped) that further detracts from a clear ‘risk’ bearing for the broader financial markets. Meanwhile, the MSCI’s Emerging Market ETF offered up another bullish gap to two-month highs on Wednesday’s open before retreating into the close. For standout developments, the Ukraine-Russia situation still crowds out the headlines. The World Bank released a projection that Russia could suffer a 1.8 percent economic contraction in 2014 due to sanctions imposed in response to the Crimea adoption. Given the $70 billion capital outflow that may be realized in 1Q according to Russian officials, this could prove a catalyst for the broader EM group. Ahead, we have a Ukraine economic survey from Bloomberg and South Africa’s central bank rate decision.

Gold Closes in on $1,300, 200-Day Moving Average and Bearish Confirmation

Though momentum has been trimmed, gold is still tracing out a bearish trend. The magnitude of the 0.5 percent slip this past session isn’t nearly important to traders as the relative position we now find the metal in. At $1,305, gold is at the door step of a round number it took months to overtake and the widely watched 200-day moving average. The impetus for gold tumble seems innate. Despite unsteady risk considerations and the stumble from the dollar, themetal’s retreat persists against all the major currencies and even the emerging market set. Looking at the 10-day average volume behind the SPDR Gold ETF, we are seeing the heaviest turnover since December 20 (before the turn). Furthermore, COMEX futures open interest – a timely aspect of the COT speculative build up – is dropping quickly from last week’s 8-month high.**Bring the economic calendar to your charts with the DailyFX News App.

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

0:00

AUD

CBAHIA House Affordability (4Q)

75.1

1:30

CNY

Industrial Profits (YTD) (YoY) (FEB)

12.2%

Following a sharp decline in late 2011, Industrial Profits have increased by 17.4%

7:45

EUR

French Consumer Confidence (MAR)

85.0

85.0

French Consumer Confidence has grown by approximately 10% over the past year and Consumer Confidence in Italy is currently holding at peak levels.

9:00

EUR

Italian Business Confidence (MAR)

99.5

99.1

9:00

EUR

Italian Economic Sentiment (MAR)

87.9

9:00

EUR

Euro-Zone M3 s.a. (YoY) (FEB)

1.3%

1.2%

9:00

EUR

Euro-Zone M3 s.a. (3M) (FEB)

1.2%

1.2%

12:30

USD

Gross Domestic Product (Annualized) (4Q T)

2.7%

2.4%

US GDP has oscillated between -2% and 4% since the 2008 crisis averaging at 1.8%

12:30

USD

Gross Domestic Product Price Index (4Q T)

1.6%

1.6%

12:30

USD

Personal Consumption (4Q T)

2.6%

US Personal Consumption has remained relatively steady over the past 3 years. It is currently expected to fall slightly above the 15 year average of 2.5%.

12:30

USD

Core PCE (QoQ) (4Q T)

--

1.3%

12:30

USD

Initial Jobless Claims (MAR 22)

325K

320K

12:30

USD

Continuing Claims (MAR 14)

2889K

14:00

USD

Pending Home Sales (MoM) (FEB)

0.2%

0.1%

Home Sales, a popular leading indicator of economic health, is holding steady, approaching the 6-year average of 0.22%.

14:00

USD

Pending Home Sales (YoY) (FEB)

-8.5%

-9.1%

15:00

USD

Kansas City Fed Manufacturing Activity Index (MAR)

5

4

23:30

JPY

National Consumer Price Index (YoY) (FEB)

1.5%

1.4%

The Bank of Japan (BoJ) has issued statements that it intends to continue doing whatever is necessary to reach and maintain its inflationary target of 2.0% per year. Should the Japanese CPI continue to fall below the BoJ’s inflationary target, expect further depreciation of the Yen.

23:30

JPY

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

1.3%

1.3%

23:30

JPY

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

0.8%

0.7%

23:30

JPY

Tokyo Consumer Price Index (YoY) (MAR)

1.2%

1.1%

23:30

JPY

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

0.9%

0.9%

23:30

JPY

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

0.5%

0.5%

23:30

JPY

Household Spending (YoY) (FEB)

0.1%

1.1%

Household spending growth has been holding quite low over the past decade. It is expected to have declined in February and such declines are likely to continue as a sales tax hike of 3% is set to take effect in the coming month.

23:30

JPY

Jobless Rate (FEB)

3.7%

3.7%

23:30

JPY

Job-To-Applicant Ratio (FEB)

1.05

1.04

GMT

Currency

Upcoming Events & Speeches

0:20

USD

Fed's James Bullard Speaks on U.S. Monetary Policy in Hong Kong

8:15

EM

Ukraine Economic Survey - Bloomberg (MAR) (Emerging Mkts)

-:-

EM

South Africa Reserve Bank Rate Decision (Emerging Market)

9:30

GBP

BoE Publishes Financial Policy Committee Meeting Minutes

12:30

USD

Fed's Sandra Pianalto Speaks on U.S. Economy

15:30

EUR

ECB's Erkki Liikanen Speaks on Euro Economy

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

14.0200

2.3800

12.7000

7.8165

1.3650

Resist 2

7.5800

5.8950

6.5135

Resist 1

13.5800

2.3000

11.8750

7.8075

1.3250

Resist 1

6.8155

5.8475

6.2660

Spot

13.2934

2.2478

10.8921

7.7616

1.2684

Spot

6.3739

5.3841

5.9554

Support 1

13.0000

2.1000

10.2500

7.7490

1.2000

Support 1

6.0800

5.3350

5.7450

Support 2

12.6000

1.7500

9.3700

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

1.3953

1.6728

103.84

0.8841

1.1192

0.9043

0.8548

144.06

1381.75

Res 2

1.3930

1.6701

103.60

0.8824

1.1172

0.9021

0.8527

143.71

1376.01

Res 1

1.3907

1.6674

103.37

0.8807

1.1152

0.8998

0.8505

143.35

1370.27

Spot

1.3861

1.6620

102.90

0.8773

1.1112

0.8954

0.8462

142.63

1358.79

Supp 1

1.3815

1.6566

102.43

0.8739

1.1072

0.8910

0.8419

141.91

1347.31

Supp 2

1.3792

1.6539

102.20

0.8722

1.1052

0.8887

0.8397

141.55

1341.57

Supp 3

1.3769

1.6512

101.96

0.8705

1.1032

0.8865

0.8376

141.20

1335.83

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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