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Dollar Rallies as 10 Year Yield Tumbles

Dollar Rallies as 10 Year Yield Tumbles

2014-05-29 04:14:00
John Kicklighter, Chief Currency Strategist
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Talking Points:

  • Dollar Rallies as 10 Year Yield Tumbles
  • British Pound Tumbles Versus Majors as Rate Outlook Slumps
  • Euro: Does ECB’s Warning of Bubble Risk Extend to EZ Periphery Markets?

Dollar Rallies as 10 Year Yield Tumbles

The Dow Jones FXCM Dollar Index (ticker = USDollar) surged to a seven-week high this past session. Against the traditional risk backdrop, the stalled rally for the S&P 500 and broader equity markets helps, but doesn’t confer an impetus. If the focus was instead on interest rate expectations, the currency’s fundamental performance was equally discordant. In fact, the 10-year US Treasury yield collapsed 2.8 percent this past session – the biggest drop since March 13 at 2.436 percent the lowest level since last June. With neither a safe haven bid nor a competitive yield bearing, where was the greenback sourcing its strength. As the saying goes, ‘in the land of the blind, the one-eyed man is king’. While the dollar’s fundamental stats may have not materially improved, its counterparts have fared materially worse. Between a multi-week bear trend for EURUSD, a key technical break below 1.6750 for GBPUSD, and bearish thrust below 0.8500 for NZDUSD (the largest carry-based major); the dollar is gaining ground through its counterparts’ own abdication.

A ‘best of the worst’ performance is not one likely to last in a market that is frustratingly directionless while also seemingly so close to tipping a more systemic change in activity levels. From yields, we are not likely seeing a genuine delay in the time frame for the first rate hike – much less a break from Taper – but rather a bid for the paper. Volume on Treasury futures have surged around the contract roll, while foreign demand for a floating rate 2-year note (an inflation and rate measure) picked up. We may not receive clarification until next week’s NFPs. Meanwhile, the ‘risk’ element remains, with an FX crowd ready to jump to the dollar and yen should fear take the wheel.

British Pound Tumbles Versus Majors as Rate Outlook Slumps

Though GBPUSD’s 0.6 percent, 99-pip decline was not a single-handed to return to more volatile trading conditions, it was nevertheless a remarkable move for the pound. For the benchmark pair, the drop cleared the technical floor of a bull trend that has guided the market higher for the past 11 months. Furthermore, it was a universal slump for the sterling versus most of its counterparts – the exception being GBPNZD. On the docket, the Debt Management Office sold £1.1 billion in 2052 index-linked bonds. In turn, the 2-year Gilt yield dropped 7.6 percent to 0.644 and the 1-year-2-year forward swap dropped 3.45 percent. The high-flying rate expectations for the BoE may be coming under pressure, but there hasn’t been anything tangible to spark concern of a delayed first hike. And, there is little on the immediate docket.

Euro: Does ECB’s Warning of Bubble Risk Extend to EZ Periphery Markets?

Fundamental euro traders were likely watching the Germany employment statistics this past session. And, the unexpected 24,000-net increase in the jobless ranks was certainly news worthy. Yet, it didn’t stir the EURUSD to the day’s tumble. That falls to a combination of the unfavorable monetary policy expectations ahead for the ECB, further comments from central bankers insinuating a move is unavoidable on June 5 and an ECB report showing bank lending fell for a third month in April. Particularly interesting was a biannual report from the bank which suggested there may be a financial bubble that has developed out of a chase for yields. Does that apply to EZ periphery bonds?

New Zealand Dollar Worst Performer on the Day as Banks Expect Dispersed Hikes

Once again, the New Zealand dollar was the worst performer amongst the major. This retreat is gaining serious ground with NZDUSD dropping below 0.8500 and AUDNZD making a move to push through the 1.0900 resistance that has capped the pair through 2014. The sharp decline in the ANZ’s business sentiment survey certainly adds a bearish weight on the market, but the scope of this move certainly finds its origination in diminished rate expectations. Given the RBNZ is actively engaged in a rate tightening cycle, that may seem a contradiction in terms. However, the market moved to price hikes well in advance – and now the expected pace of consecutive hikes is coming serious doubt.

Japanese Yen: Will BoJ Consider Retail Sales Plunge, Upcoming CPI?

The Japanese economy received a black mark this morning when retail sales figures for April collapsed more aggressively than expected. However, the market was prepared for an adjustment given that was the timing of the nation’s tax hike. Should we expect similar responses from the upcoming round of critical data? Household spending for April is certainly an ‘at-risk’ measure, but the jobless rate, industrial production and CPI figures fall further outside its influence. Would an economic slump and moderation in price pressures encourage a QE upgrade?

Emerging Market Currency Mixed, Sovereign Bond Appetite Soars

Just as the climb in developed world capital market indexes stalled this past session, so too did the Emerging Market’s stumble. The MSCI Emerging Market ETF rose 0.6 percent – hefty enough to curb bearish interests but restrained enough to prevent a meaningful break to new highs. On the FX front, the field was mixed. Gains were marked by the Brazilian Real, Indian Rupee and Turkish Lira; while the Mexican Peso and Russian Rubble slipped. Of particular note amongst the different asset classes, a EM sovereign debt index hit a record high.

Gold Tumble Continues but at a More Controlled Pace

Volatility didn’t snuff out gold’s bearish move. On the back of Tuesday’s hefty 2.2 percent tumble, the precious metal followed up with another 0.5 percent slide this past session. Volume behind the move in the ETF and futures market remains elevated. Meanwhile, the CBOE’s Gold Volatility Index is still up over 15 percent from its 12-month low set earlier this month. This is an impressive move, but just like risk or the dollar; continuation requires more than just a technical drive. A dollar rally could feed bears while a risk aversion wave could roust the bulls.**Bring the economic calendar to your charts with the DailyFX News App.

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

1:00

AUD

HIA New Home Sales (MoM) (APR)

0.2%

Private capital expenditure is expected to decline to the lowest level in over 5-years. The Aussie has been under pressure due re-emerging China risks A miss here may further weigh on AUD.

1:30

AUD

Private Capital Expenditure (1Q)

-1.9%

-5.2%

12:30

CAD

Current Account (BoP) (Canadian dollar) (1Q)

-$12.8B

-$16.0B

Trade and wage growth figures are two key economic measures for the Canadian economy

12:30

CAD

Average Weekly Earnings (YoY) (MAR)

2.3%

12:30

USD

Gross Domestic Product (Annualized) (1Q S)

-0.5%

0.1%

US 1Q GDP it to show the world largest economy contracted 0.5 percent in the first-quarter. With US Dollar technical hinting at a reversal an upbeat outcome may push the US Dollar higher, but a miss in expectations or a downward revision may weigh on the U.S as it weighs on interest rate expectations..

12:30

USD

Personal Consumption (1Q S)

3.1%

3.0%

12:30

USD

Gross Domestic Product Price Index (1Q S)

1.3%

1.3%

12:30

USD

Core Personal Consumption Expenditure (QoQ) (1Q S)

1.3%

1.3%

12:30

USD

Initial Jobless Claims (MAY 24)

315K

326K

Initial claims expected to drop back towards seven-year low set two weeks ago

12:30

USD

Continuing Claims (MAY 17)

2655K

2653K

14:00

USD

Pending Home Sales (MoM) (APR)

1.0%

3.4%

Home sales m/m are expected to decline from the highest level in over 2-years.

14:00

USD

Pending Home Sales (YoY) (APR)

-8.9%

-7.4%

22:45

NZD

Building Permits (MoM) (APR)

-3.5%

8.3%

Building permits may provide insight on future economic activity and financial health, with building permits slowing to the lowest level in 2014 NZD may come under slight pressure.

23:05

GBP

GfK Consumer Confidence Survey (MAY)

-2

-3

Impact may be amplified by recent volatility

23:30

JPY

Jobless Rate (APR)

3.6%

3.6%

The economic health counterpart to policy officials’ inflation update. A price target matters only so far as economic activity remains robust

23:30

JPY

Job-To-Applicant Ratio (APR)

1.07

1.07

23:30

JPY

Household Spending (YoY) (APR)

-3.7%

7.2%

23:30

JPY

National Consumer Price Index (YoY) (APR)

3.3%

1.6%

The BOJ has raised its forecast for business investment and inflation as they feel the April sales-tax hike had limited impact on the Japanese economy. Earlier this month Japan 1Q GDP crushed expectations, fueling an optimistic outlook for the economy. An upbeat outcome may strengthen the Yen as it may dampen bets of seeing the BOJ expand its asset-purchase program.

23:30

JPY

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

3.1%

1.3%

23:30

JPY

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

2.2%

0.7%

23:30

JPY

Tokyo Consumer Price Index (YoY) (MAY)

3.0%

2.9%

23:30

JPY

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

2.9%

2.7%

23:30

JPY

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

2.1%

2.0%

23:50

JPY

Industrial Production (MoM) (APR P)

-2.0%

0.7%

Preliminary figures of Industrial production m/m are to show a marked drop in factory sector-activity. The year-on-year rate is expected to drop to a 5-month low.

23:50

JPY

Industrial Production (YoY) (APR P)

4.6%

7.4%

GMT

Currency

Upcoming Events & Speeches

1:30

JPY

BoJ's Sayuri Shirai Speaks on Japanese Economy

12:30

USD

Fed's Sandra Pianalto Speaks on U.S. 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

13.5800

2.3800

12.7000

7.8165

1.3650

Resist 2

7.5800

5.8950

6.5135

Resist 1

13.1500

2.3000

11.8750

7.8075

1.3250

Resist 1

6.8155

5.8475

6.2660

Spot

12.8709

2.0979

10.4622

7.7529

1.2553

Spot

6.6343

5.4864

5.9596

Support 1

12.8350

2.0700

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

1.3692

1.6818

102.37

0.9040

1.0925

0.9337

0.8558

139.44

1278.00

Res 2

1.3670

1.6794

102.21

0.9024

1.0910

0.9320

0.8541

139.17

1272.81

Res 1

1.3648

1.6770

102.04

0.9008

1.0896

0.9302

0.8523

138.90

1267.61

Spot

1.3604

1.6723

101.71

0.8976

1.0866

0.9267

0.8488

138.36

1257.21

Supp 1

1.3560

1.6676

101.38

0.8944

1.0836

0.9232

0.8453

137.82

1246.81

Supp 2

1.3538

1.6652

101.21

0.8928

1.0822

0.9214

0.8435

137.55

1241.61

Supp 3

1.3516

1.6628

101.05

0.8912

1.0807

0.9197

0.8418

137.28

1236.42

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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