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Dollar’s Haven Appeal Slow to Build as Global Headlines Shake Volatility

Dollar’s Haven Appeal Slow to Build as Global Headlines Shake Volatility

2014-07-18 03:14:00
John Kicklighter, Chief Strategist
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Talking Points:

  • Dollar’s Haven Appeal Slow to Build as Global Headlines Shake Volatility
  • Yen Crosses Start to Slip Below Critical Levels as Risk Rises
  • British Pound Rate Expectations Confronting Global Stability, 2Q GDP

Dollar’s Haven Appeal Slow to Build as Global Headlines Shake Volatility

The usually sanguine global markets shuddered this past session as conflicts arose in two particular prominent hotspots. News that a passenger airliner was shot down near the border between Ukraine and Russia sharply escalated the tensions over the disputed region. This was shortly followed by headlines that Israel was launching a ground offensive in the Gaza Strip. The geopolitical, economic and energy market implications of these conflicts readily reverberate across the interconnected global financial system. The question for investors in benchmark assets and currencies though is whether these issues will fade from the collective consciousness like so many other troubles during this extended period of speculative contentedness, or if this could prove the inflection point of a long overdue normalization of risk assessments.

While both of the aforementioned events are serious and unlikely to be resolved without further troubles, their influence on the financial market has just as much to do with backdrop of speculative sentiment as the direct implications of the events themselves. Peak complacency brings with it an obstinacy that calls up short-term speculators to fade most of the swells in risk premium we’ve experienced so far in 2014. That said, the environment of extremely low volatility and exceptional reach for yield cannot last forever. This combination of troubling headlines adds to a general deterioration in growth forecasts, a deliberate shift in global monetary efforts and debate over asset fair values. So far, we have seen a moderate level of ‘risk aversion’ with global equity indexes retreating, volatility measures soaring and Yen crosses pushing support levels (some like EURJPY and NZDJPY breaking). Tapping the dollar’s safe haven status requires a further deterioration.

For the dollar, the haven designation is founded in the currency’s liquidity. Demand for liquidity represents an exceptional aversion to risk – even panic. That is a significant sentiment threshold to breach. In the meantime, key technical moves from one or more of the most heavily traded majors can exact significant influence – for example, if EURUSD breaks below 1.3500.

Yen Crosses Start to Slip Below Critical Levels as Risk Rises

Far less resistant to sentiment tides, the Yen crosses have more readily followed equities into their retreat. This pullback has exacerbated some existing moves and subsequently led to provocative technical breakdowns. EURJPY dropped below 137.50 and has progressed to its lowest level in five months. NZDJPY accelerated a three-day, nearly 2 percent tumble that has tentatively broken a two-year rising trendline. Unlike the dollar where its appeal really kicks in when demand for market depth is tantamount, the Japanese currency finds a bid well before that extreme as the market looks to first unwind risky positions before proactively seeking out the havens. As a funding currency driven down by a BoJ that has capped its stimulus effort and a risk drive that is facing low returns, these crosses are far more exposed.

British Pound Rate Expectations Confronting Global Stability, 2Q GDP

Rate expectations were already receding heading into this past session despite otherwise strong UK data. As global sentiment dimmed, the market was even further drawn from its rate hike focus. Hawkish forecasts are difficult to sustain when financial uncertainty builds – especially when there isn’t a robust backdrop for inflation pressures. Both Gilt yields and swaps showed a further pullback in forecasts of a near-term BoE hike. Moving forward, we will see whether the attitude will change the interpretation of data. Next week, we have BoE minutes and 2Q GDP figures due. A pessimistic lean to this data could significantly change the sterling’s bearings.

Euro Another Currency Exposed to Escalating Fear

In the echelons of risk the Euro is deceivingly exposed. Much of the optimism and low volatility developed over the past months and years was founded on a carefully crafted sense of complacency. For the Eurozone, calm seas are particularly important to maintain the capital inflow as economic conditions are not very encouraging for most members and the discount in local assets has more than been offset over previous years. ECB monetary policy and economic concerns considered, ‘risk trends’ are arguably the Euro’s greatest concern.

US Oil Posts Biggest Rally in 5 Weeks on Middle East Conflict

Following the unexpectedly sharp drop in weekly US crude inventories and record print in implied demand reported with Wednesday’s DoE figures, crude worked to extend a larger reversal of its month-long decline though this week’s open. The commodity rallied 2 percent on the heaviest futures volume (over a million contracts) since March 12. Middle East supply concerns will stand off against a speculative risk take.

Emerging Markets Tumble Led by Collapse in Russian Ruble

Not surprising for one of the market’s riskier asset classes, emerging markets tumbled this past session. The MSCI’s capital market ETF dropped 1.9 percent while JPMorgan’s EM volatility index rose 4.6 percent from its consolidation at record lows. It was not surprising that the Russian Ruble was the worst performer on the session with a 2.1 percent drop versus the dollar and 2.2 percent against the Euro.

Gold Catches Safe Haven Bid but Not as Intense as Risk Unwind

Amid geopolitical tension and concerns over the stability of the financial system, gold naturally gains a luster. The metal rose $20 (1.5 percent) this past session on news of Ukraine and Gaza. Yet, in that move, we have returned to range rather than forged a new bull wave. Derivative volume was notable, but not exceptional. Meanwhile, SSI shows gold interest plunged and ETF holdings continue to pull back. **Bring the economic calendar to your charts with the DailyFX News App.

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

1:30

CNY

Property Prices (JUN)

Indicators than can signal changes in economic trends, significant for currency value of import partners

1:45

CNY

MNI Business Indicator (JUL)

8:00

EUR

Euro-Zone Current Account s.a. (euros) (MAY)

21.5B

Represents balance of payments of a country and has important bearing on its currency value

8:00

EUR

Euro-Zone Current Account n.s.a. (euros) (MAY)

18.7B

12:30

CAD

Wholesale Sales (MoM) (MAY)

0.6%

1.2%

Indirect reflection of consumer demand within an economy

12:30

CAD

Consumer Price Index (MoM) (JUN)

0.1%

0.5%

Inflation rates are an important guide for monetary policy conducted by a country’s central bank

12:30

CAD

Consumer Price Index (YoY) (JUN)

2.4%

2.3%

12:30

CAD

BoC Consumer Price Index Core (MoM) (JUN)

-0.2%

0.5%

12:30

CAD

BoC Consumer Price Index Core (YoY) (JUN)

1.7%

1.7%

13:55

USD

U. of Michigan Confidence (JUL P)

83.0

82.5

Significant economic indicator that is tracked to gauge consumer demand; one of the more important mandates of the Fed currently

14:00

USD

Leading Indicators (JUN)

0.5%

0.5%

Forecasts major trends in the economy; useful as it condenses data from 10 different key indicators into one.

GMT

Currency

Upcoming Events & Speeches

9:00

EUR

Bank of Italy Releases the Quarterly Economic Bulletin

10:00

EUR

ECB Announces 3-Year LTRO Repayment

10:30

EUR

ECB’s Weidmann Speaks in Madrid

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

12.9418

2.1289

10.6645

7.7501

1.2466

Spot

6.6888

5.4511

6.1665

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

1.3750

1.7247

102.19

0.8930

1.0692

0.9524

0.8822

139.83

1345.75

Res 2

1.3732

1.7223

102.04

0.8917

1.0679

0.9508

0.8806

139.61

1340.98

Res 1

1.3714

1.7199

101.89

0.8904

1.0665

0.9492

0.8789

139.40

1336.21

Spot

1.3679

1.7152

101.59

0.8878

1.0639

0.9460

0.8756

138.97

1326.67

Supp 1

1.3644

1.7105

101.29

0.8852

1.0613

0.9428

0.8723

138.54

1317.13

Supp 2

1.3626

1.7081

101.14

0.8839

1.0599

0.9412

0.8706

138.33

1312.36

Supp 3

1.3608

1.7057

100.99

0.8826

1.0586

0.9396

0.8690

138.11

1307.59

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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