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Dollar Launched Higher to Start the Week

Dollar Launched Higher to Start the Week

2014-09-09 05:22:00
John Kicklighter, Chief Currency Strategist
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Talking Points:

  • Dollar Launched Higher to Start the Week
  • British Pound Faces Unexpected Risk in Scottish Referendum
  • Euro Investor Confidence Drops the Most in Three Years

Dollar Launched Higher to Start the Week

While a particularly sharp move for GBPUSD contributed heavily to the Dollar’s general performance Monday, the currency posted gains against all of its major counterparts. Once again, the breadth and intensity of the move seemed to outpace the fundamentals that would have been expected to fuel it. The economic docket was notably light for US releases – and we are not far removed from the hangover of Friday’s substantial NFPs miss. Alternatively, the steady rise in FX-based volatility readings reflects a growing appreciation for market depth at exactly the same time European currencies (the Euro and British Pound) are being slammed by their own fundamental troubles. As long as there is growing distrust among the most liquid currencies, the greenback will benefit.

GBPUSD’s 1.37 percent drop Monday was the pair’s biggest in three years, but it wasn’t the only major showing significant dollar progress. AUDUSD fell 1.03 percent while USDJPY and USDCAD rose 0.9 percent. That is a more inspired performance for the greenback than would be garnered from just the cable and an encouraging foundation to the Dow Jones FXCM Dollar’s (ticker = USDollar) advance to 13-month highs. However, unless the currency can generate more innate fundamental strength, its performance will remain tethered to the fortunes of its counterparts. A more robust vein of strength comes from the FX volatility readings. Having surpassed the 7.0 ‘vol’ level, the medium-term currency based volatility index is at its highest level in five months. On the interest rate front, both two-year Treasury yields and Fed Funds futures have firmed to start the week. And yet, there is still a broad disparity between USD standing and the value this backdrop confers.

British Pound Faces Unexpected Risk in Scottish Referendum

The Sterling plunged to start the week. Already under pressure due to the easing rate forecasts amongst speculators, the currency was sent reeling by an opinion poll that implied a previously disregarded fundamental event for the UK was suddenly a substantial risk. The Scottish Referendum scheduled for September 18 was considered by many in the market a nonevent. A month ago, early surveys suggested the ‘Yes’ vote for Scotland’s independence vote from the United Kingdom was significantly behind the ‘No’ camp – some polls showing a differential of more than 20 percentage points. Hence the biggest GBPUSD bearish gap in 7 years when YouGov showed a 51 percent ‘Yes’ support.

While only a single opinion poll, this particular headline hit the right frequency to tap rising volatility and unsettle already fragile complacency. Moving forward, the full scope and fall out of a scenario where Scotland leaves the UK (losing 10 percent of GDP is not a small thing) will cast a deep shadow as long as volatility remains. Then again, much of the ‘shock’ element of the event may have been exercised. Ahead, we turn back to the rate forecast aspect of the sterling’s trouble with a loaded docket including trade, factory activity and the NIESR’s GDP estimate.

Euro Investor Confidence Drops the Most in Three Years

While much of the FX market’s attention was focused on the British currency Monday, the Euro posted an impressive performance itself. It managed to advance against all its major counterparts with the distinct exception of the US Dollar. EURUSD dove further into its 14-month lows with the dollar riding on momentum. As far as Eurozone fundamentals go, there was little to rebound on. The region’s Sentix investor sentiment survey suffered its sharpest drop in sentiment in over three years. Following suit, the three-month Euribor dropped further to a record low 0.104 percent and the Vanguard FTSE Europe ETF dropped 1.4 percent. If sovereign yields turn, a systemic capital outflow may develop.

Yen Crosses: USDJPY Surpasses 106, Volume Fading

USDJPY is trading at fresh 6-year highs this morning. But what share of this performance owes to the dollar’s strength and what part to the Yen’s weakness? The crosses were split to start the week – which is appropriate when we see the mixed performance of global equity indexes as a gauge of investor sentiment. However, we still have a material imbalance for progress for USDJPY versus the other Yen pairs. As long as risk trends are dormant, stronger (or weaker) counterparts can exert influence. However, should risk trends start to run…

Australian Dollar Drops Despite Upgraded Rate Forecasts, Yields

The Australian dollar was one of the weakest majors to start the week. There wasn’t much data to stoke this broad selling pressure at the onset of the week, but this morning’s weak business sentiment report and indexed bond sale give something to work with. It is worth noting that the 10-year Aussie sovereign bond yield is trading at two-month highs – then again AUDUSD 1-month expected volatility is at three-month highs.

Emerging Market Currencies Slip as Global Yields Rise

A global rise in yields is troubling investors that have sought out higher returns amongst the riskiest assets – including Emerging Markets. Over time, the flood of capital fed by low volatility conditions has pulled down expected returns. The balance between ‘risk’ and ‘return’ is dangerously tilted. As yields in the developed world are projected to rise, the thin margins and troubling exposure become more apparent.

Gold Sets Three-Month Low as Long Speculative Positioning Drops Further

The Commitment of Traders report from the CFTC reported last week that futures traders cut their long gold positions for a third straight week. Another 14 percent drop in net exposure fits the metal’s the decline over the past two months along with the staid level of volatility – it will take considerable momentum to reignite the bulls’ fires now. ETF gold holdings are close to setting a new five-year low (at 54.912 million ounces).

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ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

22:45

NZD

New Zealand total Card Spending (MoM)

-0.2%

Though a volatile series, this will help shape rate expectations with the RBNZ decision due Wed.

22:45

NZD

New Zealand Card Spending Retail (MoM)

0.6%

0.1%

23:01

GBP

BRC Sales Like-For-Like (YoY)

0.3%

-0.3%

The lowest rated UK release

23:50

JPY

Tertiary Industry Index (MoM)

0.2%

0.0%

A service sector report, this series will further tax hike assessment

23:50

JPY

Japan Money Stock M2+CD (YoY)

2.9%

3.0%

Money supply growth has slowed since the beginning of the year despite the ongoing BoJ QQE

23:50

JPY

Japan Money Stock M3 (YoY)

2.4%

2.5%

1:30

AUD

NAB Business Conditions

8

An important gauge for China trade expectations / fears

1:30

AUD

Investment Lending

0.1%

All this data might give the RBA a monthly view on how the economy is doing when updating its policy lean at the next meeting

1:30

AUD

Value of Loans (MoM)

1.7%

1:30

AUD

NAB Business Confidence

10

1:30

AUD

Home Loans

1.0%

0.1%

5:00

JPY

Consumer Confidence Index

42.3

41.5

Officials hope a three-month rebound continues to show tolerance following April’s tax hikes

6:00

JPY

Machine Tool Orders (YoY)

37.7%

An important indicator for setting the 3Q BSI sentiment and spending forecasts

8:30

GBP

Visible Trade Balance (Pounds)

-£9100

-£9413

A disappointment in trade or factory activity for the UK can further a diminished forecast for BoE rate forecasts.

8:30

GBP

Total Trade Balance (Pounds)

-£2300

-£2459

8:30

GBP

Trade Balance Non EU (Pounds)

-£3600

-£3841

8:30

GBP

Industrial Production (MoM)

0.2%

0.3%

8:30

GBP

Industrial Production (YoY)

1.3%

1.2%

8:30

GBP

Manufacturing Production (YoY)

2.2%

1.9%

8:30

GBP

Manufacturing Production (MoM)

0.3%

0.3%

11:30

USD

NFIB Small Business Optimism

96

95.7

Expected improvement would still fall short of 7=year high set in May

12:15

CAD

Housing Starts

195.0K

200.1K

Fears of a ‘housing bubble’ in Canada intensifies the focus here

14:00

GBP

NIESR Gross Domestic Product Estimate

0.6%

A comprehensive and timely update for rate speculators

16:00

USD

DOE Short-Term Crude Outlook

96.08

23:50

JPY

Machine Orders (MoM)

4.0%

8.8%

July orders figures improved at a modest clip – setting expectations for overall orders

23:50

JPY

Machine Orders (YoY)

0.5%

-3.0%

23:50

JPY

Japan's PPI

4.1%

4.3%

Factory-level inflation will be just as important as the CPI in establishing a lasting return of price pressures

23:50

JPY

Japan PPI

0.0%

0.3%

GMT

Currency

Upcoming Events & Speeches

23:50

JPY

Bank of Japan Aug. 7-8 meeting minutes

10:45

GBP

BOE Governor Carney Speaks in Liverpool

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

13.1524

2.1625

10.7255

7.7502

1.2554

Spot

7.0676

5.7562

6.2669

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

1.3026

1.6421

106.13

0.9394

1.0948

0.9406

0.8352

137.23

173.13

Res 2

1.3003

1.6393

105.94

0.9376

1.0932

0.9390

0.8335

136.99

172.81

Res 1

1.2980

1.6365

105.75

0.9359

1.0915

0.9374

0.8319

136.75

172.48

Spot

1.2934

1.6309

105.36

0.9324

1.0882

0.9341

0.8285

136.28

171.83

Supp 1

1.2888

1.6253

104.97

0.9289

1.0849

0.9308

0.8251

135.81

171.19

Supp 2

1.2865

1.6225

104.78

0.9272

1.0832

0.9292

0.8235

135.57

170.86

Supp 3

1.2842

1.6197

104.59

0.9254

1.0816

0.9276

0.8218

135.33

170.54

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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