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British Pound: Scottish Vote is Close and FX Traders are Nervous

British Pound: Scottish Vote is Close and FX Traders are Nervous

2014-09-18 04:53:00
John Kicklighter, Chief Currency Strategist
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Talking Points:

  • Dollar Rallies to 14 Month Highs, S&P 500 Steady After FOMC
  • British Pound: Scottish Vote is Close and FX Traders are Nervous
  • Euro’s Medium-Term Outlook Bearish Regardless of TLTRO Uptake

Dollar Rallies to 14 Month Highs, S&P 500 Steady After FOMC

The FOMC delivered a more hawkish view of the future…but it did so begrudgingly. Nevertheless, the US Dollar took the cue and advanced against all of its major counterparts this past session. From the Dow Jones FXCM Dollar Index (ticker = USDollar), bullish sentiment translated into a 14-month high. Furthermore, when we look across the majors; the progression of the central bank’s commitment to the slow but steady return to a hawkish regime was plain to see. On one extreme, EURUSD – which sees the ECB actively engaged in a dovish policy to expand its balance sheet – dropped 0.7 percent on the day. On the other, even carry currencies with materially higher interest rates like the New Zealand (down 1.3 percent) and Australian dollars (off 1.5 percent) would also lose ground to the US unit.

Where did this bullish / hawkish sentiment originate? The headline – and fully expected – move by the market was the $10 billion ‘Taper’ to the central bank’s QE3 program. Fed Chairwoman Yellen later remarked that the group expects to close out the stimulus program when they next meet on October 29. This particular event’s celebrity was brought on by the unique elements of the quarterly meeting: updated forecasts and the Chair’s press conference. The economic projections – growth, employment and inflation – were little changed. Yet, the central bank didn’t leave traders without cannon fodder. Their interest rate forecasts were materially more hawkish. Of the 17 FOMC members, 14 now expected the first hike in 2015 (in June it was 12). More remarkable, the Fed upgraded its outlook for the rate at the end of 2015 to 1.375 percent (previously 1.13) and the end of 2016 to 2.875 percent (previously 2.50). Substantial.

So, if the Fed is moving steadfastly towards a moderation of its accommodation, why didn’t capital markets respond? With a low rate and high stimulus environment; assumed risk by individuals (volatility) collapsed, investors ventured into riskier assets and used higher leverage. An uptick in the risk profile could unnerve a market that has been extremely complacent. Yet, it didn’t. In part, this is due to Ms. Yellen’s evading a clear view of the Fed’s path and perceptions. That maysave the S&P 500 now, but it only further raises the burden for the inevitable shift.

British Pound: Scottish Vote is Close and FX Traders are Nervous

Market participants are clearly concerned about what a possible Scottish secession from the United Kingdom could mean for the British Pound. Looking at short-term (one-week) implied volatility, the expectations for a shock to exchange rates is at the highest level in four years – currently 15 percent, where it was below 3 before the fateful YouGov poll released on September 7. Meanwhile, risk-reversals (used to measure hedging costs for a big market move) of the same duration were the most bearish on record – substantially more bearish than the height of the 2008 crisis. The risk in this event is the lack of definable consequence. Scotland voting ‘Yes’ can significantly disrupt the UK’s economic stability. Though the opinion polls are close, the market still seems leaning towards ‘No’. The polls close at 21:00 GMT.

Euro’s Medium-Term Outlook Bearish Regardless of TLTRO Uptake

The ECB is preparing to inject its first large scale stimulus into the market since the Euro-area regained its financial footing two years ago. On the calendar since it was announced back in June, the Targeted-LTRO is similar to the programs of 2011 and 2012 which provided European banks much needed liquidity during the height of the crisis. Conditions are very different now and there are contingencies on these loans, so the uptake is likely to be significantly smaller. As such, a small or large demand for these loans is unlikely to mark a major change in the ECB’s efforts. President Draghi said they plan to increase their balance sheet to early 2012 levels. If it isn’t via TLTRO, they will find other means.

Swiss Franc Eyes 1.2000 EURCHF Fight as SNB Meets Amid ECB Push

In the excitement of the ECB liquidity action and the Scotland Independence vote, traders should not lose sight of other key event risk. Perhaps one of the most important – yet underappreciated – events today is the SNB rate decision. The ECB has committed to expanding its balance sheet and thereby driving its currency lower. That creates a conflict for the Swiss as their job is to keep EURCHF north of 1.2000

New Zealand Dollar: Economy Hits Fastest Stride of Growth in 10-Years

New Zealand reported impressive growth figures this morning. The 2Q GDP figures offered a 0.7 percent quarterly figure and a 3.9 percent annual clip that was the headiest in a decade. And yet, interest rate expectations behind the Kiwi showed little benefit from the upgrade. The 12-month rate forecast through swaps is still scrapping by at 35 basis points and sovereign yields are little moved around 4.26 percent.

Emerging Market Investors Confused by Fed’s Policy Direction

The Fed’s hawkish rate forecast and ambiguous communications may have done the S&P 500 a favor by blending confusion with complacency, but it does little benefit to Emerging Markets. Leaders of this segment have decried the US central bank’s influence over their financial systems through excessive stimulus and its eventual removal. One of the first places investors are likely to unwind risk is Emerging Markets.

Gold Yields to Dollar’s Strength and Fed’s Rate Forecast, At 8-Month Low

With the dollar on the rise as the specter of rate hikes draws nearer, one of the market’s favored anti-currencies would feel the pain. Gold putting some pace on its bearish intentions with a drop to lows not seen since January. Should more speculative-friendly financial channels price in impending rate hikes – and not just the dollar – the precious metal will feel real pressure below $1,200.

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ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

1:30

CNY

Property Prices (AUG)

6:00

CHF

Trade Balance (Swiss franc) (AUG)

3.98B

7:30

CHF

Swiss National Bank Interest Rate Decision

0.0%

0.0%

8:30

GBP

Retail Sales ex Auto (MoM) (AUG)

0.3%

0.5%

8:30

GBP

Retail Sales ex Auto (YoY) (AUG)

4.8%

3.4%

8:30

GBP

Retail Sales inc Auto (MoM) (AUG)

0.4%

0.1%

9:00

EUR

Italian Current Account (euros) (JUL)

3050M

10:00

EUR

Ireland GDP (2Q)

2.70%

10:00

GBP

CBI Trends Total Orders (SEP)

9

11

10:00

GBP

CBI Trends Selling Prices (SEP)

-1

12:30

CAD

International Securities Transactions (C$) (JUL)

-1.07B

12:30

USD

Initial Jobless Claims (SEP 13)

315K

12:30

USD

Continuing Claims (SEP 6)

2487K

12:30

USD

Housing Starts (AUG)

1035K

1093K

12:30

USD

Housing Starts (MoM) (AUG)

-5.3%

15.7%

12:30

USD

Building Permits (MoM) (AUG)

-2.1%

8.1%

13:45

USD

US Economic Expectations - Bloomberg (SEP)

16:00

USD

Household Change in Net Worth (2Q)

$1490B

22:00

NZD

ANZ Job Advertisements (MoM) (AUG)

-2.7%

23:50

JPY

Foreign Buying Japan Stocks (Yen) (SEP 12)

¥187.9B

23:50

JPY

Japan Buying Foreign Bonds (Yen) (SEP 12)

¥763.6B

23:50

JPY

Japan Buying Foreign Stocks (Yen) (SEP 12)

¥110.0B

23:50

JPY

Foreign Buying Japan Bonds (Yen) (SEP 12)

¥249.4B

GMT

Currency

Upcoming Events & Speeches

-:-

ALL

G20 Finance and Central Bank Deputies Meeting [Sep 18-20]

-:-

ZAR

South Africa Reserve Bank Rate Decision (Emerging Markets)

6:35

JPY

BoJ Governor Kuroda to Speak

8:30

EUR

Spain to Sell Bonds

8:50

EUR

France to Sell 2 and 5-Year Bonds

9:10

EUR

ECB Announces Allotment of First TLTRO

9:50

EUR

France to Sell 4, 7 and 10-Year Inflation Bonds

12:45

USD

Fed Chair Yellen to Speak on Consumer Finance

17:00

USD

US to Sell $13 Bln in 10-Year TIPS Reopening

21:00

USD

Fed's Fisher to Speak on International Crises

21:00

EUR

Polls Close for Scotland Referendum Vote

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.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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