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Dollar Staves Off Correction as Fed Looks to Lose Hawks

Dollar Staves Off Correction as Fed Looks to Lose Hawks

2014-09-24 04:17:00
John Kicklighter, Chief Currency Strategist
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Talking Points:

  • Dollar Staves Off Correction as Fed Looks to Lose Hawks
  • Euro Reacts to Data but Bigger Troubles Lie Ahead
  • Japanese Yen: Prime Minister Abe Says Keeping an Eye on ‘Weak’ Currency

Dollar Staves Off Correction as Fed Looks to Lose Hawks

Interest rate forecasts and a need for safety – that is what the Dollar feeds off of. Market developments this past session hit on both themes, but the currency wasn’t struck with a meaningful wave of conviction. That is because both channels of fundamental drive – though ultimately supportive of the greenback – were partially blocked by offsetting stipulations. Starting with the most omnipresent and imposing matter, the S&P 500 posted its third consecutive decline to put the benchmark in its deepest correction since the beginning of August. Offering the scope that upgrades this move from detached misstep to a more systemic concern on risk, equities were lower on a global basis and the VIX Volatility Index soared further to 15 – the highest level in six weeks. And yet, fear stopped short of infecting the FX markets.

Looking at the currency market’s own volatility measures, the one-month equivalent to the VIX was little changed on the day (at 7.55) while the short-term one-week slowly tries to reclaim ground lost after last week’s incredible drive (at 7.52). The FX market is certainly sensitive to genuine shifts in financial sentiment, but central banks’ influence on the system smothers all but committed repositioning. And, the Dollar is a unique brand of haven that requires an absolute demand for liquidity – not just a mild swoon in risky positions. That said, both market participants and officials continue to point out the unsteady footing we are trying to maintain. Adding to concerns voiced by Fed officials, other central bankers, the BIS, OECD and IMF; Carolyn Wilkins of the global Financial Stability Board noted concerns with the heavy investment in ETFs and liquidity problems that could arise should the market come under a significant selling pressure.

It is important to keep a constant vigilance moving forward, but the focus will likely keep to the greenback’s more active avenue of fundamental motivation: rate speculation. The docket was packed with Fed speakers this past session, and the ranks maintained their well-known biases. Narayana Kocherlakota reiterated his dovish view with a warning that inflation could be below target for four years, Esther George commented that rates should have already been hiked by now, James Bullard said he expected a 1Q 2015 rate hike and Jerome Powell again refused to give a bias. Today, Charles Evans and Loretta Mester will offer new voices. A consideration for medium-term rate forecasting, the NY Times ran an article about the upcoming retirement of Fisher and Plosser – two well known hawks that don’t vote in 2015.

Euro Reacts to Data but Bigger Troubles Lie Ahead

The Euro was responding to high-level economic event risk this past session. Eurozone PMI figures – a timely proxy for growth – reflected a trend of slowing economic activity that we have seen through GDP figures as well as other indicator series. Yet, where most of the fundamental analysis was spent on the correlation between the PMI figures and official growth measures (high) or the currency (moderate), a more significant headline was given far less attention. After meeting with German Chancellor Merkel, Greece Prime Minister Samaras announced his country’s plan to exit its bailout program early. This is yet another periphery to remove its safety net on the hope that rates stay at record lows.

Japanese Yen: Prime Minister Abe Says Keeping an Eye on ‘Weak’ Currency

Policymakers choose their words carefully. So it is interesting that Japanese Prime Minister Shinzo Abe remarked this morning that he was monitoring the impact of the weak yen on Japan’s economy. Until now, the script was either that the currency was seen as too expensive or on the correct path of depreciation given fundamentals. This is a serious shift for what has been a key driver in the Yen crosses surge this past two years. The government’s pressure on the BoJ was a large part of the motivation of its QQE program that devalued the currency.

British Pound Once Again the Major’s Top Performer

Once again, the British Pound was the best performer amongst the majors. Unburdened by the threat of a large member of the United Kingdom (Scotland) leaving the economy, we are still seeing a risk premium evaporate. That said, there is trend potential to this mild relief move. The focus has turned back to BoE rate forecasts, and BoE Governor Carney’s speech is still ahead.

Australian Dollar: RBA’s Financial Stability Review Warns on Risk, China Outlook Fades

Australia’s economic docket has filed out this morning. A Leading Index and jobs vacancies report today gives limited motivation, but the RBA’s financial stability report draws more attention – especially the warnings of heightened risk both locally and globally. Meanwhile, China’s docket continues to jerk the Aussie dollar around with a slip in the MNI’s consumer sentiment survey and notably drop in Bloomberg’s eco survey.

Emerging Markets Extend Decline, FX Tumble Moderates

Emerging markets continued to slip Tuesday with the MSCI ETF dropping another 0.6 percent to four-month lows. From the multi-year high that we were at on this benchmark just two weeks ago, the ETF has dropped 7.1 percent. In the FX ranks, the tables weren’t as deep red as yesterday, but trends for the likes of Russian Ruble, Brazilian Real and Mexican Peso are clear – bearish.

Gold Makes a Weak Effort at Rebound as Volume Drops, Volatility Swells

An early effort by gold bulls to rally the precious metal fell flat Tuesday before any significant headway could be made. Equally discouraging for those trying to feed the ramp was the lack of volume in futures and ETFs for the move. While support crumbles behind the reversal effort, volatility measures for the precious metal (CBOE Gold Volatility Index) is still dangerously elevated and keeps bears at the door.

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

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

0:00

AUD

Conference Board Leading Index (JUL)

0.4%

Supposed to measure peaks and troughs of the business cycle.

1:00

AUD

Skilled Vacancies (MoM) (AUG)

0.9%

Can show the strength of the labor market. It has been falling during the summer(JUL)

1:35

JPY

Markit/JMMA PMI Manufacturing (SEP P)

52.2

Tracks sentiment among purchasing managers. A higher PMI can signal a stronger economy. Above 50 is expansion and below 50 is contraction.

1:45

CNY

Westpac-MNI Consumer Sentiment (SEP)

113.3

Tracks sentiment among households or consumers. It has been declining this year.

2:00

CNY

China Economic Survey - Bloomberg (SEP)

6:00

CHF

UBS Consumption Indicator (AUG)

1.66

Important to SNB as this measure measures consumption which comprises 60% GDP. The better the indicator, the more likely it would put pressure on tightening monetary policy

8:00

EUR

German IFO - Business Climate (SEP)

105.8

106.3

Can show the strength of the biggest Eurozone zone economy by looking at the expectations of businesses. It has been falling this year

8:00

EUR

German IFO - Current Assessment (SEP)

110.2

111.1

8:00

EUR

German IFO - Expectations (SEP)

101.2

101.7

8:00

EUR

Italian Consumer Confidence Index s.a. (SEP)

101.9

11:00

USD

MBA Mortgage Applications (SEP 19)

7.9%

Measures the performance of the housing market. The MBA Mortgage application data is volatile.

14:00

USD

New Home Sales (MoM) (AUG)

4.4%

-2.4%

14:00

USD

New Home Sales (AUG)

430K

412K

14:30

USD

DOE U.S. Crude Oil Inventories (SEP 19)

3673K

16:00

EUR

French Total Jobseekers (AUG)

3441.0K

3424.4K

Trend expected to extend multi-decade high

16:00

EUR

French Total Jobseekers Change (AUG)

20.8

26.1

23:50

JPY

Corporate Service Price (YoY) (AUG)

3.7%

3.7%

Upstream inflation to precede CPI

GMT

Currency

Upcoming Events & Speeches

1:00

AUD

Australia to Sell A$600 Mln in 13-Year Bonds

1:15

USD

Fed's Esther George Speaks on U.S. Economy

1:30

AUD

Reserve Bank of Australia Financial Stability Review

15:30

USD

US to Sell 2-Year Floating Rate Note Treasury

16:05

USD

Fed's Loretta Mester Speaks on Monetary Policy

17:00

USD

Fed's Charles Evans Speaks on U.S. Economy

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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