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Dollar Slides as Volatility Shrinks, Equities Rise and Yields Struggle

Dollar Slides as Volatility Shrinks, Equities Rise and Yields Struggle

2014-06-20 04:03:00
John Kicklighter, Chief Strategist
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Talking Points:

  • Dollar Slides as Volatility Shrinks, Equities Rise and Yields Struggle
  • British Pound Breaks Critical 1.7000 Level as Rate Hopes Bloom
  • Swiss Franc: SNB Reaffirms 1.2000 Commitment, Offers Nothing More

Dollar Slides as Volatility Shrinks, Equities Rise and Yields Struggle

The Dow Jones FXCM Dollar Index (ticker = USDollar) attempted to recover from early losses this past session, but its effort wouldn’t prevent the currency from closing at six-week lows. There are a number of damning reasons for the world’s most liquid and interrogated currency to be caught in a bearish current. It is therefore somewhat surprising that its slide has not been more intense. When an asset does not retreat or suffers only modestly in the face of negative fundamental pressure, it is often a sign of an inherent strength. However, actual appreciation requires favorable conditions; and the greenback’s most prominent drivers are still working against it.

Without doubt, the most charged theme for the dollar is the speculative appetite that drives investors to higher returns or safer harbors. This theme certainly turned the screws on the benchmark this past session. From the capital market benchmarks, the S&P 500 and MSCI World Index each forged record highs. Closer to home, FX-based volatility readings – considered by many a gauge of fear – slid to record lows. Historically, the correlation between the currency and expected activity measure is strongly positive. It is therefore noteworthy that the USDollar is still above 10,400 – the past 12-months’ support – while one-month implied (expected) volatility for the FX market has collapsed to 4.87 percent. For reference, the three year average is 9.17 percent and the stock-based VIX is currently 10.6 percent.

The other point of contest for FX performance is the interest rate outlook. On that front, short-term Treasury yields and swaps may have eased after the FOMC decision, but they have quickly stabilized this past session. In fact, the two-year Treasury yield is close to a 9-month high and the 1year-2-year swap rate is in striking distance of a three-year high. US rate forecasts still look more than competitive.

British Pound Breaks Critical 1.7000 Level as Rate Hopes Bloom

Whether they mean to support the British Pound or not, the Bank of England (BoE) is doing more than its fair share to lift the currency. On the back of Governor Mark Carney’s suggestion that hikes could come earlier than the market anticipates and the MPC Minute’s surprise that there wasn’t a greater discount for a 2014 hike, BoE member McCafferty added his own musings that tightening shouldn’t be held back too long. In the grander scheme, these comments don’t necessarily add much to the market outlook, but they reinforce the speculative weight of the GBPUSD’s 1.7000 break Thursday morning. Currently retail traders are the most short on the pair in six weeks (5.5 shorts per each long).

Swiss Franc: SNB Reaffirms 1.2000 Commitment, Offers Nothing More

As expected, the Swiss National Bank (SNB) took a wait-and-see approach with its monetary policy. Keeping its benchmark rate at zero and reiterating its commitment to keep the 1.2000-floor on EURCHF in place, its position is certainly accommodative. However, that may not be enough to accomplish what the central bank is most concerned about – deflating the value of its currency. The problem does not necessarily reside in local economic factors or the SNB’s actions. Instead, it is the ECB’s effort to escalate its own stimulus effort that is putting downward pressure on the euro and the key Swiss exchange rate. Outright Eurozone QE could drive the pair back to 1.2000 and anchor it there.

Euro Medium-Term Bearings Still Bearish, Yields May Shock it to Life

The euro is holding up well considering the baseline three-month Euribor rate has collapsed over the past few weeks. This benchmark rate reflects the European Central Bank’s new stimulus tack which will swell its balance sheet and erase one of the pillars of the shared currency’s two year rally. While the Euro may not tumble as quickly as market rates, its gravity will look to pull it down through the medium-term. Meanwhile, the specter of a souring of global sentiment hangs heavy in the air. Any flight from periphery EZ bonds could prove painful.

Canadian Dollar: Is the BoC Attempting to Join in the Silent Currency War?

Through the final trading session this week, Canadian calendar events are top billing. April retail sales and May consumer inflation figures (CPI) will give a good view of fundamental health factoring into monetary policy. It is worth nothing that where the dollar has dropped in the wake of the supposed dovish tone of the FOMC decision, the Canadian 10-year government bond yield is at a 36 bps discount to its US counterpart – close to the biggest gap in 5-years. The BoC has maintained a notably dovish course over the past months, but they may need to do more.

Emerging Markets Mixed Showing a Limitation to Yield Reach?

There is a reach for yield amongst global investors that are looking to take advantage of incredibly low volatility conditions and compensate for extremely low rates of return. Yet, perhaps there is a limit as to how far these traders are willing to go. The MSCI Emerging Market ETF has trailed the S&P 500 for some time, and this past session is no different. While the latter hit a record the former meandered.

Gold Posts Its Biggest Rally in 9 Months in an Explosive Break from Bear Trend

Gold surged nearly $43 or 3.3 percent this past session to close at $1,320. This was the biggest single-day rally for the commodity in nine-months and was a prominent break from a three-month bear trend. Yet, that technical accomplishment may have more to do with the remarkable climb than a deeper fundamental current – and that could spell trouble for those looking for a lasting bull trend. On heavy futures and ETF volume, a break of this magnitude dove into a layer of entry and exit orders that had accumulated in the quiet market conditions. Meanwhile, none of the commodity’s anti-dollar, anti-inflation or anti-risk themes seemed to find a foot hold. See more in the gold video.**Bring the economic calendar to your charts with the DailyFX News App.

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

1:00

NZD

New Zealand Consumer Confidence - ANZ (JUN)

Consumer confidence has slowly slipped back from a seven year high

6:00

EUR

Germany Factory Inflation - PPI (MAY)

An important, upstream inflation reading for the EZ’s largest economy

-:-

EUR

Greece Current Account Balance (APR)

Trade and capital transfers are critical to Greece’s health given austerity

6:45

EUR

France Wages (1Q F)

Both an employment and inflation measure – but a revision

8:00

EUR

Italy Industrial Orders | Sales (APR)

A highly volatile series, this will not likely change Eurozone bearings

8:00

EUR

Eurozone Current Account Balance (APR)

A broad measure of capital flow, this will gauge both economic health as well as financial appeal of Eurozone assets

8:30

GBP

UK Public Finances | Net Borrowing (MAY)

Net borrowing is expected to rise to its highest level in 8 months

12:00

RUB

Russia Wages | Retail Sales | Unemployment (MAY)

This broad range of data is expected to show broad improvement despite the Crimea-related sanctions

12:30

CAD

Canada Retail Sales (MAY)

Canadian 10-year yields are just above a 12-month low. This data will play an important role in mon pol expectations

12:30

CAD

Canada Inflation - CPI (MAY)

14:00

EUR

Eurozone Consumer Confidence (JUN A)

How are consumers viewing the ECB easing efforts, this survey will show

GMT

Currency

Upcoming Events & Speeches

1:00

AUD

Australia to Sell $700 Mln in 5-year Bonds

6:30

BoJ

BoJ Governor Kuroda to Speak

7:00

EUR

EU Finance Ministers Meet to Discuss 2015 Budget Draft

8:15

EUR

ECB's Mersch to Speak

10:00

EUR

Portugal Releases Monthly Economic Survey

10:00

EUR

ECB Announces 3-Year LTRO Repayment

-:-

EUR

Moody's May Publish Spain Sovereign Debt Rating

-:-

ALL

Markets Triple Witching Expirations

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

12.9860

2.1262

10.6752

7.7511

1.2493

Spot

6.6449

5.4874

6.0115

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

1.3664

1.7085

102.56

0.9019

1.0883

0.9462

0.8772

139.41

1292.97

Res 2

1.3645

1.7062

102.40

0.9005

1.0870

0.9446

0.8756

139.19

1288.92

Res 1

1.3626

1.7039

102.25

0.8991

1.0856

0.9430

0.8739

138.96

1284.87

Spot

1.3589

1.6992

101.93

0.8963

1.0830

0.9399

0.8707

138.51

1276.78

Supp 1

1.3552

1.6945

101.61

0.8935

1.0804

0.9368

0.8675

138.06

1268.69

Supp 2

1.3533

1.6922

101.46

0.8921

1.0790

0.9352

0.8658

137.83

1264.64

Supp 3

1.3514

1.6899

101.30

0.8907

1.0777

0.9336

0.8642

137.61

1260.59

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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