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Dollar Needs Inflation to Sustain Break from Equities, Yields

Dollar Needs Inflation to Sustain Break from Equities, Yields

2014-08-19 05:06:00
John Kicklighter, Chief Strategist
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Talking Points:

  • Dollar Needs Inflation to Sustain Break from Equities, Yields
  • British Pound Faces Another Wave of Potential Volatility with CPI
  • New Zealand Dollar Drops as Inflation Readings Further Cut Rate Forecast

Dollar Needs Inflation to Sustain Break from Equities, Yields

The Dollar opened the new trading week with a mixed performance. Between modest gains against the Euro (0.3 percent) and losses versus the Pound (0.2 percent), the Dow Jones FXCM Dollar Index (ticker = USDollar) closed out Monday virtually unchanged. This is a familiar performance for the greenback. It has struggled to find bearing and momentum throughout August. The lack of performance is remarkable when we put its fundamentals into context. Considering volatility in the FX market and system-wide has cooled materially from the jump experienced just two weeks ago and Treasury yields continue to bleed rate speculation; the assumption would be that the benchmark should be in full retreat. The currency’s endurance likely has a lot to do with the burgeoning trouble experienced by so many of its counterparts – Euro growth, Pound and New Zealand dollar rates, and Yen risk trends. Yet, that relative and indirect performance offers little hope for momentum.

In need of an intrinsic fundamental driver, the dollar is coming into key event risk today. The July consumer inflation (CPI) data is due at 12:30 GMT. While this data could theoretically spur a shift in broader speculative appetites – by leveraging a global response to the implications of global stimulus programs winding down – its more direct impact will come through reshaping Fed rate expectations. US Treasury yields have been in retreat for weeks and implied yield forecasts derived from Fed Funds futures trade at heavy discounts to the FOMC’s own projections. This suggests we are looking at an asymmetrical response opportunity. A ‘weak’ inflation outcome could weigh the dollar; but already bridled with skepticism, the rate impact would be moderated. Alternatively, if the CPI reading beats (headline forecast is 2.0 percent, core 1.9 percent), closing the market’s discount could translate into a rally.

British Pound Faces Another Wave of Potential Volatility with CPI

If the British Pound’s reaction to last week’s Bank of England Quarterly Inflation Report was any indication, the upcoming UK event risk can elicit a serious move from the currency. Ahead, we have a broad range of inflation updates from for the economy. All due at 8:30 GMT, we expect price gauges for the consumer basket (CPI), factory and production levels (PPI), retailer and distribution level (RPI) and the housing market (ONS). When it comes to gauging the time frame of rate hikes for the BoE or any other major central bank, inflation pressures are key. An improved economy and labor situation reduce the need for extraordinary support through stimulus measures, but actually tightening policy typically requires a price motivation. Yet, despite the market’s aggressive rate forecasting, inflation has not taken root. And, this past month, traders have started to adjust for that realization. The market will make a qualitative assessment on all the data, but most focus on the CPI.

Euro Slides as August Economic Surveys Show Further Drop in Growth

Just last week, we were given a troubling update on the Euro-area economy. Second quarter GDP figures showed a general moderation of growth for the region with particular struggles noted in the important ‘core’ members. Yet, some may have found solace in the figures being dated and not indicative of the new ECB stimulus. Well, the economic health survey’s for key Eurozone economies conducted by Bloomberg shows that optimism is short supply. Particular forecast downgrades were noted for Germany and France. Will yields succumb?

New Zealand Dollar Drops as Inflation Readings Further Cut Rate Forecast

Interest rate expectations for the New Zealand dollar have more than cooled – they are collapsing . This morning, swaps are pricing in only 33 bps of rate hikes from the RBNZover the coming 12 months. A month ago, that forecast was 90 bps and six months ago it was 120 bps. The central bank’s hint at the last meeting that it may pause at its next meeting in September triggered a retreat as excess premium bled from the system. But data like this morning’s 2Q PPI unexpectedly dropping 1.0 percent and the two-year CPI forecast easing add fuel to the fire.

Chinese Yuan Hits Five Month High Vs Dollar Despite Troubling Data

The fundamental picture in China is fading quickly, and it’s difficult to say whether authorities can walk that fine line between managing a steady rate of growth while also avoiding a credit bubble implosion. Starting the week off, data from China showed foreign direct investment dropped a massive 17 percent year-over-year through July – the fastest decline in 7 years. Meanwhile, home prices dropped for the most cities in the country in years. Yet, despite this material trouble, the Chinese Renminbi is trading at 6.365 – the highest level versus the dollar since March.

Emerging Markets: ‘Improvement in Ukraine’ Headlines Turn to Russia Data

The lead financial headlines are becoming irksomely familiar. On up days, the reference is to an improved Ukraine situation. On down days, circumstances are said to have worsened. While there is some measure of influence for this geopolitical hotspot, it’s day-to-day impact is likely diminished and requires far more tangible changes to impact the global capital markets. Yet, for Emerging Markets, both broader appetite for risk and the local issues can carry influence. Ahead, Russia is looking at a key round of data on jobs, wages, investment and sales.

Gold Drops Ahead of Key US and UK Inflation Readings

The 0.5 percent decline from gold to start the week does not set off a new trend. For most intents and purposes, the commodity is still trading in congestion – even if SSI and the Commitment of Traders report show an increase in speculative interest. The metal needs a tangible theme to instigate a lasting trend. The upcoming round of US and UK inflation figures can potentially generate interest in its inflation-hedge properties or even as a safe haven. More likely though, a sharp rise or fall in one of these major currencies will provide a direct price swing.

**Bring the economic calendar to your charts with the DailyFX News App.

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

03:00

NZD

RBNZ 2-Year Inflation Expectation (3Q)

2.36%

NZ Dollar may rally on higher expected inflation on better rate expectations

05:30

JPY

Tokyo Department Store Sales (YoY)

-4.1%

Nation-wide stores have seen a sharp fall in sales after the sales tax rate was raised this year

05:30

JPY

Nationwide Department Store Sales (YoY)

-4.6%

08:00

EUR

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

19.5B

The Eurozone’s current account has significantly risen since 2011

08:00

EUR

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

8.9B

08:30

GBP

Consumer Price Index (MoM)

-0.2%

0.2%

Traders will closely be watching the UK inflation report as the release is likely to play a strong role in interest rate expectations. A higher than expected inflation figure is likely to add bets to a rate hike from the Bank of England, driving the Sterling upward. Lower than expected figures are likely to have the opposite effect.

08:30

GBP

Consumer Price Index (YoY)

1.8%

1.9%

08:30

GBP

Core Consumer Price Index (YoY)

1.9%

2.0%

08:30

GBP

Retail Price Index (YoY)

2.6%

2.6%

08:30

GBP

Retail Price Index Ex Mort Int.Payments (YoY)

2.6%

2.7%

08:30

GBP

Producer Price Index Input n.s.a. (YoY)

-6.4%

-4.4%

08:30

GBP

Producer Price Index Output n.s.a. (YoY)

0.0%

0.2%

08:30

GBP

Producer Price Index Output Core n.s.a. (YoY)

0.9%

1.0%

08:30

GBP

DCLG UK House Prices (YoY)

10.2%

10.5%

12:30

USD

Consumer Price Index (YoY)

2.0%

2.1%

US Inflation figures will be a key point of focus for traders and is likely to drive policy expectations

12:30

USD

Consumer Price Index Ex Food & Energy (YoY)

1.9%

1.9%

12:30

USD

Housing Starts (MoM)

8.6%

-9.3%

The US Housing market has seen a significant improvement in demand over the last three years and if the trend continues, it may add bets to an earlier than expected rate hike from the Fed

12:30

USD

Housing Starts

970K

893K

12:30

USD

Building Permits (MoM)

2.8%

-3.2%

12:30

USD

Building Permits

1000K

973K

23:50

JPY

Merchandise Trade Balance Total (Yen)

-¥714B

-¥823B

Japanese exports have been on a downward trend since mid-2013, and contracted in May and June. Imports have shown a similar pattern, falling from a 3-year high in Oct 2013 to a contraction in May this year

23:50

JPY

Adjusted Merchandise Trade Balance (Yen)

-¥761B

-¥1080B

23:50

JPY

Merchandise Trade Exports (YoY)

3.80

-1.90

23:50

JPY

Merchandise Trade Imports (YoY)

8.40

GMT

Currency

Upcoming Events & Speeches

01:30

AUD

RBA Releases Minutes of August Policy Meeting

23:30

AUD

RBA Governor Stevens Semi-Annual Testimony

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

13.3250

2.3000

11.8750

7.8075

1.3250

Resist 1

7.3285

5.8475

6.3145

Spot

13.0707

2.1529

10.5535

7.7507

1.2463

Spot

6.8573

5.5796

6.1569

Support 1

12.8350

2.0700

10.2500

7.7490

1.2000

Support 1

6.7750

5.3350

5.7450

Support 2

12.6000

1.7500

9.3700

7.7450

1.1800

Support 2

6.0800

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

1.3435

1.6781

103.17

0.9123

1.0969

0.9386

0.8543

137.87

1329.49

Res 2

1.3417

1.6757

103.00

0.9110

1.0953

0.9369

0.8527

137.64

1325.18

Res 1

1.3399

1.6733

102.83

0.9096

1.0936

0.9352

0.8510

137.41

1320.87

Spot

1.3362

1.6684

102.49

0.9069

1.0904

0.9319

0.8476

136.95

1312.25

Supp 1

1.3325

1.6635

102.15

0.9042

1.0872

0.9286

0.8442

136.49

1303.63

Supp 2

1.3307

1.6611

101.98

0.9028

1.0855

0.9269

0.8425

136.26

1299.32

Supp 3

1.3289

1.6587

101.81

0.9015

1.0839

0.9252

0.8409

136.03

1295.01

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.

The information contained herein is derived from sources we believe to be reliable, but of which we have not independently verified. Forex Capital Markets, L.L.C.® assumes no responsibility for errors, inaccuracies or omissions in these materials, nor shall it be liable for damages arising out of any person’s reliance upon this information. Forex Capital Markets, L.L.C.® does not warrant the accuracy or completeness of the information, text, graphics, links or other items contained within these materials. Forex Capital Markets, L.L.C.® shall not be liable for any special, indirect, incidental, or consequential damages, including without limitation losses, lost revenues, or lost profits that may result from these materials. Opinions and estimates constitute our judgment and are subject to change without notice. Past performance is not indicative of future results.

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