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Dollar Focused on Taper and Risk, Undeterred by ISM Fiasco

Dollar Focused on Taper and Risk, Undeterred by ISM Fiasco

2014-06-03 03:57:00
John Kicklighter, Chief Strategist
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Talking Points:

  • Dollar Focused on Taper and Risk, Undeterred by ISM Fiasco
  • Euro: German Data Further Builds Case for ECB Easing
  • Yen Crosses Trail Nikkei 225’s Incredible Rally

Dollar Focused on Taper and Risk, Undeterred by ISM Fiasco

The top piece of US event risk to open the week didn’t seem to knock the dollar off its game. A 0.3 percent rally for the Dow Jones FXCM Dollar Index (ticker = USDollar) reflects the benchmark’s best performance since January and a universal climb against all the greenback’s major counterparts. There are both impressive and disarming aspects to this performance however. On the positive, this robust performance was wrought on a ‘risk on’ trading session – not the currency’s preferred fundamental backdrop. That said, despite the performance, the bulls have not cleared meaningful dollar-highs neither via the Index nor critical benchmarks like EURUSD and AUDUSD. This may ultimately prove another bout of volatility without the depth necessary to shape a serious trend. Traders want something more.

For dollar traders, the focus remains on the FX market’s top two theme: risk trends and monetary policy forecasts. On the risk front, the S&P 500 advanced to yet another record high – the 15th this high whereas 2013 saw 45 record high closes – yet volume below 400 million shares was near the lowest non-holiday turnover seen since before the Great Financial Crisis and volatility measures are showing little of risk premia for opportunities to wring from current conditions. In interest rates, both the 2-year and 10-year Treasury yields are rising. How far this reflects building speculation of Fed hikes versus a mere correction of the past month’s slump remains to be seen. The docket modestly reinforces the ‘mid-2015 FOMC hike’ camp. After a two revisions, the ISM Manufacturing survey for May nearly met expectations of an improvement and the its inflation sub-component jumped. Ahead, an economic sentiment measure for June is worth watching.

Euro: German Data Further Builds Case for ECB Easing

The top event risk this week is Thursday’s ECB rate decision. Given the expectations circulating in the market, this meeting will materially alter the outlook for the greenback. Furthermore, the various scenarios and slow depreciation of the Euro mean that it is likely that there is substantial adjustment that will be realized even after the market attempts to price in what is suspected. And, to help along the speculation, we are met with a hefty round of important event risk before we arrive to the central bank’s ultimate decision over 48 hours from now. From Monday’s session, the sharper than expected drop in the German CPI reading suggests there are not simple regional issues that policy makers can ignore in favor of core EZ members. Ahead, the region-wide CPI and jobs figures will offer a last critical milestone for central banker and trader.

Yen Crosses Trail Nikkei 225’s Incredible Rally

Japan’s benchmark Nikkei 225 rallied over 2 percent to open the week. As a regional benchmark for risk trends, yen cross traders were paying close attention to see if that same appetite was spilling over to FX positions. There was certainly a positive lean to the crosses Monday, but it was far less convincing than the equity benchmark itself. Aside from a 0.6 percent advance from USDJPY and GBPJPY, the yen’s performance was generally modest. Indeed, there was limited transfer of the Nikkei 225’s performance to other global equity indexes – suggesting the risk appetite was far more restrained than some may have hoped. Meanwhile, this morning, Finance Minister Aso seemed to be showing a tolerance for – and maybe an expectation of – a yen rise by suggesting there are detriments to a constant currency depreciation.

Australian Dollar Traders Batten Down Hatches for RBA

We have already seen a heavy start to the economic data this week for Australia. A stronger manufacturing survey, halved current account deficit and 1Q corporate operating profit offers bulls something to work with. However, theoretical fundamental improvements are not always as convincing to traders as the books would suggest. So far this week, the Aussie dollar is up against all counterparts, but it has extracted little gain. One facet of the recently released data is worth highlighting: foreign ownership of Australian government debt – carry interest – edged down from 67.5 to 67 percent last quarter. Ahead, we have the RBA rate decision. No change is expected, but tone matters a lot for forecasting.

Chinese Yuan Buoyed by Rise in PMI Figures

The People’s Bank of China (PBoC) set the Yuan’s reference rate to the US dollar at 6.1710 – the lowest since September. That said, USDCNY – or more appropriately its offshore counterpart in USDCNH – is not pushing new highs. Strengthening capital markets and a retreat in credit risk in China compliment improvements in both manufacturing and service sector PMIs released on Monday and Tuesday.

Emerging Markets Tumble Despite ‘Risk On’ Lean, RBI on Deck

On a significant drop in volume, the MSCI Emerging Market ETF rose a modest 0.3 percent Monday. On the FX side, however, the performance was uniform. All of the liquid EM currencies were lower versus the dollar through the same session. The worst performances were tallied by the Brazilian Real (down 1.6 percent), South African Rand (down 1.1 percent) and Indonesian Rupiah (0.8 percent lower). Ahead, we have a Reserve Bank of India (RBI) rate decision. No expected change will be viewed in relation to Friday’s 1Q Indian GDP readings.

Gold Slides for Five Straight Trading Days – Longest Tumble in Seven Months

There are a handful of discouraging performance statistics for gold. The most pressing measure through is that Monday’s 0.5 percent ($5.77) drop marked the fifth consecutive decline for the metal. That is the longest run of losses for the commodity since November 5. Should we win another session in the red, it would match the longest series in 13 months. Meanwhile, COT data from Friday showed net long speculative futures interest dropped a painful 24 percent last week after the $1,275 break. Bulls are losing their foot hold. **Bring the economic calendar to your charts with the DailyFX News App.

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

1:00

CNY

Purchasing Manager Index Non-Manufacturing (MAY)

54.8

An upbeat outcome in the factory-sector report may spark a swell in appetite similar to how the Chinese Manufacturing PMI that reported better-than-expected over the weekend may have caused the Japanese Yen to come under pressure and the benchmark Nikkei advance.

1:30

AUD

Current Account Balance (Australian Dollar) (1Q)

-7.0B

-10.1B

A heavy round of event risk that will lead into the RBA decision and later the Aussie 1Q GDP release. This measures both trade and domestic demand

1:30

AUD

Net Exports of GDP (1Q)

0.8

0.6

1:30

AUD

Retail Sales s.a. (MoM) (APR)

0.3%

0.1%

1:30

JPY

Labor Cash Earnings (YoY) (APR)

0.4%

0.7%

Pay to employees for work done is expected to decline to a one-month low.

1:45

CNY

HSBC PMI Manufacturing (MAY F)

49.7

49.7

This indicator of economic activity is expected to remain at the highest level in 6-months.

4:30

AUD

Reserve Bank of Australia Interest Rate Decision

2.50%

2.50%

RBA’s minutes in May showed the central bank foresees below-trend economic growth in the coming quarters and expects monetary to remain accommodative for some time.

5:30

INR

RBI – India Central Bank Rate Decision (EM)

8.00%

8.00%

6:00

GBP

Nationwide House Prices s.a. (MoM) (MAY)

0.6%

1.2%

BoE Governor Mark Carney said surging house prices pose the biggest risk to the economy. House prices are expected to ease in May, if a trend materializes then risks may subside.

6:00

GBP

Nationwide House Prices n.s.a. (YoY) (MAY)

10.9%

10.9%

7:00

EUR

Spain Unemployment (MAY)

-112.5K

-111.6K

Partly seasonable, but still painful

8:00

EUR

Italian Unemployment Rate (APR P)

12.8%

12.7%

8:00

EUR

Italian Unemployment Rate s.a. (1Q)

12.8%

12.6%

8:30

GBP

Markit PMI Construction (MAY)

61.0

60.8

Each reports matters when interest rates forecasts as elevated as GBP’s

9:00

EUR

Euro-Zone Unemployment Rate (APR)

11.8%

11.8%

Critical economic readings for the ECB to consider for Thursday’s rate decision – expected to end with further accommodation

9:00

EUR

Euro-Zone CPI Estimate (YoY) (MAY)

0.7%

--

9:00

EUR

Euro-Zone CPI - Core (YoY) (MAY A)

0.9%

1.0%

13:45

USD

ISM New York (MAY)

50.6

US news-flow has reported favorably out of the U.S. that further positive outcomes may support the US Dollar as it strengthens the case for interest-rate hikes.

14:00

USD

Factory Orders (APR)

0.50%

1.10%

14:00

USD

IBD/TIPP Economic Optimism (JUN)

46.5

45.8

22:45

NZD

Value of All Buildings s.a. (QoQ) (1Q)

5.5%

-1.0%

23:30

AUD

AiG Performance of Service Index (MAY)

48.6

This service-sector activity gauge is an important indicator of economic activity as it helps measure economic output.

GMT

Currency

Upcoming Events & Speeches

5:15

GBP

BOE’s Victoria Cleland Speaks in London

9:15

EUR

ECB Announces Allotment in 7-Day Main Refinancing Tender

17:50

USD

Fed's Esther George Speaks on U.S. Economy

23:10

RBA

RBA Richards Speaks at Conference in Sydney

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

12.8722

2.0841

10.3517

7.7535

1.2532

Spot

6.6218

5.4699

5.9586

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

1.3733

1.6938

102.62

0.9010

1.0921

0.9313

0.8624

140.19

1312.56

Res 2

1.3711

1.6914

102.45

0.8994

1.0906

0.9295

0.8605

139.91

1307.65

Res 1

1.3690

1.6890

102.28

0.8978

1.0891

0.9277

0.8587

139.64

1302.74

Spot

1.3646

1.6843

101.93

0.8946

1.0860

0.9241

0.8550

139.09

1292.91

Supp 1

1.3602

1.6796

101.58

0.8914

1.0829

0.9205

0.8513

138.54

1283.08

Supp 2

1.3581

1.6772

101.41

0.8898

1.0814

0.9187

0.8495

138.27

1278.17

Supp 3

1.3559

1.6748

101.24

0.8882

1.0799

0.9169

0.8476

137.99

1273.26

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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