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Dollar Rally Shifting from Schadenfreude to Inherent Fundamentals

Dollar Rally Shifting from Schadenfreude to Inherent Fundamentals

2014-09-10 04:01:00
John Kicklighter, Chief Currency Strategist
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Talking Points:

  • Dollar Rally Shifting from Schadenfreude to Inherent Fundamentals
  • British Pound: Will BoE Testimony Do More Than Carney’s ‘Spring Hike’
  • New Zealand Dollar Paid Penance for a Mere Pause in RBNZ Hike Regime?

Dollar Rally Shifting from Schadenfreude to Inherent Fundamentals

Over the past few months, the Dollar’s fundamental landscape has developed unevenly. Yet, you wouldn’t know it from the currency’s performance.Well into its ninth consecutive weekly advance, the greenback seems as if it is has been charged by an exceptional upgrade to its prospects. In reality, the consensus outlook for growth, returns (interest rates) and stability are far from stellar. Then again, strength is not measured on an absolute basis. It’s relative. The spectacular shift in ECB’s policy bearings that has driven the Euro lower, a policy and currency sympathetic retreat in Pound, and even a Yen retreat borne of persistent risk complacency. With the liquid options dropping off one-by-one, there was little alternative aside from the dollar.

As effective as a ‘best of the rest’ view in the FX market is for leveraging gains for the greenback, it doesn’t bode well for stability and is carries momentum so long as its counterparts fall – and in some extent in tandem. Yet, that dependency may be changing. On the interest rate front, a report from the San Francisco Fed this week suggested the market is underestimating the Fed’s return to rate hikes. The Fed Fund futures have reflected that disconnect with a market currently pricing in a 0.76 percent benchmark rate by end of 2015 and 1.78 percent through 2016 – versus the FOMC’s own forecasts of 1.13 and 2.50 percent. Concern of this forced ignorance may be a sign the Fed will attempt to clarify its path with next Wednesday’s meeting (with updated forecasts and press conference).

In the meantime, the Dollar’s liquidity appeal is gaining greater prominence. While the S&P 500 and other traditional measures of investor sentiment (now complacency) have only slipped modestly this past session, the FX volatility readings are showing a quickly building intensity. The short-term (1-week) implied volatility measure for the FX market has jumped by 50 percent since Friday to a six-month high 8.55 percent. The medium-term measure (1-month) has hit an 11-month high 8.85 percent. If this volatility surge spreads beyond the borders of the FX market – the equities VIX is climbing slowly at 13.5 percent – it will likely leverage the dollar’s position as a liquidity haven.

British Pound: Will BoE Testimony Do More Than Carney’s ‘Spring Hike’

There was a range of UK rate fodder this past session, but it didn’t do much to extend the Sterling’s tumble nor feed a belated recovery. Where the industrial productive figures impressed, the trade numbers disappointed and the NIESR GDP estimate fell in line with expectations. While, these data points provided roundabout rate speculation, BoE Governor Carney offered a direct view by saying a rate hike by the Spring of 2015 and gradual pace thereafter was consistent with their goals and the market’s forecasts. That didn’t seem to stir too many Pound bulls though. Perhaps Carney and the other MPC members testimony on the Quarterly report in August in Parliament will add force to speculation.

New Zealand Dollar Paid Penance for a Mere Pause in RBNZ Hike Regime?

Since the Reserve Bank of New Zealand’s (RBNZ) last policy meeting on July 23, the New Zealand dollar has dropped 5.5 percent versus the US Dollar and 0.8 percent against the Japanese Yen – two carry currencies. At that meeting, the central bank hiked rates for a fourth time to 3.50 percent. Why would a currency backed by the only major central bank currently engaged in a hawkish policy regime drop after the announcement of a hike? Because its Governor, Graeme Wheeler, suggested a pause was due at today’s meeting. But how far does a currency drop because of a break in an established rate hike regime? We will soon find out. Keep an eye on risk trends (carry appetite) as well.

Euro Rebound Takes Shape but Bulls are In Short Supply

Universal gains made the Euro the top performer amongst the majors this past session. Between a 1.2 percent rally versus the Aussie Dollar and modest 0.1 percent uptick against the Swiss Franc, the correction was broad. Yet, there are serious doubts of its consistency. Lacking is a solid fundamental foundation for a sustained climb. In fact, European equities dropped, sovereign yields jumped and the three-month Euribor dropped to a fresh record low below 0.10 percent. The docket is light ahead, so look for turbulent winds in speculation.

Australian Dollar Extends Dive as Worst Performing Major

The economic calendar has proven unflattering for the Australian dollar, but the currency seems to be taking it much harder than the data would insinuate. Following yesterday’s miss in home loans growth and ease in business confidence, we found consumer sentiment has also dropped. Though the Tuesday’s open, the currency is now suffering losses ranging between 1.5 (Euro) and 0.9 percent (New Zealand Dollar).

Emerging Markets Gap Lower, Turkey 2Q GDP Due

The MSCI Emerging Market ETF dropped 1.2 percent this past on 86 million shares of volume for the biggest decline and volume jump in a month. It wasn’t just the capital markets segment afflicted with the nascent risk aversion sentiment. The EM currencies were heavily red this past session. Moving forward, volatility measures will be a key measures for this risky group. Meanwhile, keep an eye on Turkey’s 2Q GDP.

Gold Recoveries from Nasty Open, Bulls Still Lacking

Though gold managed to erase its mid-day losses this past session, the bulls didn’t make any great effort to turn the tide of the metal’s decline. The dollar’s stubborn advance is keeping the commodity pinned. If the greenback stalls at the same time financial market volatility readings pick up materially, we could perhaps see the gold bugs return – but a liquidity run would likely reinforce the dollar’s appeal.

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ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

23:50

JPY

Machine Orders (MoM)

4.00%

8.80%

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

23:50

JPY

Machine Orders (YoY)

0.50%

-3.00%

23:50

JPY

Japan's PPI

4.10%

4.30%

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

23:50

JPY

Japan PPI

0.00%

0.40%

CNY

New Yuan Loans

700.0B

385.2B

May be looked upon by the PBOC in steering economic policy. However, both of the indicators are volatile

CNY

Aggregate Financing RMB

1135.B

273.1B

CNY

Money Supply M2 (YoY)

13.50%

13.50%

It could help give us an idea of the future credit growth in the economy.

CNY

Money Supply M0 (YoY)

5.60%

5.40%

CNY

Money Supply M1 (YoY)

6.80%

6.70%

NZD

REINZ House Price Index (MoM)

-0.70%

The general direction of housing prices is important to interest rate

decisions

NZD

REINZ House Price Index (MoM)

-0.70%

0:30

AUD

Westpac Consumer Conf Index

98.5

Consumer confidence can be thought of as a predicator of the consumption in the economy

0:30

AUD

Westpac Consumer Confidence

3.80%

1:30

JPY

BOJ Deputy Governor Iwata Speaks in Kanazawa City

11:00

USD

MBA Mortgage Applications

0.20%

Can be an indicator to how well the housing market is performing

12:30

CAD

Capacity Utilization Rate

82.90%

82.50%

14:00

USD

Wholesale Trade Sales (MoM)

0.60%

0.20%

These two indicators might aid in giving an idea of how strong consumption is in the economy

14:00

USD

Wholesale Inventories

0.50%

0.30%

14:30

USD

DOE U.S. Crude Oil Inventories

-1500k

-905k

14:30

USD

DOE Cushing OK Crude Inventory

-385k

14:30

USD

DOE U.S. Gasoline Inventories

0k

-2322k

14:30

USD

DOE U.S. Distillate Inventory

1000k

605k

21:00

NZD

Reserve Bank of New Zealand Rate Decision

21:00

NZD

See the trading video over the RBNZ interest rate decision Click here

GMT

Currency

Upcoming Events & Speeches

13:45

GBP

BOE's Carney, Shafik, Weale and Miles Testify on August Inflation Report

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.

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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