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Dollar Rising Too High for Fed’s Liking?

Dollar Rising Too High for Fed’s Liking?

2014-09-26 02:55:00
John Kicklighter, Chief Currency Strategist
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Talking Points:

  • Dollar Rising Too High for Fed’s Liking?
  • Euro Discounts Draghi Talk, Bigger Concerns Looming
  • New Zealand Dollar Suffers Biggest Drop in 15 Months

Dollar Rising Too High for Fed’s Liking?

Earlier this week, New York Fed President William Dudley remarked that the US Dollar’s rapid rise could hinder growth and undermine the central bank’s effort to boost inflation to target levels. FOMC officials don’t often comment on the level of the currency, which made these particular comments stand out. Nevertheless, the concerns could be considered benign enough as they are so infrequent and there were little mention of what recourse can be taken to rectify the situation. However, this past session, a second official echoed similar sentiments that a buoyant currency was posing a potential problem. Atlanta Fed President Dennis Lockhart said the currency could go higher, but its climb was a budget on exports. Will policy officials alter their forecasts because of the greenback’s run? Will the market’s hawkish run on the dollar cool because of these concerns?

On pace for a 10-week consecutive rally, the market will naturally be on edge over the endurance of the USDollar’s climb. Further opening doubt over the path to timely rate hikes, we have also seen a revival of ‘Currency War’ concerns – though they are not so clearly labeled just yet. The RBNZ’s recent efforts have brought FX ‘guidance’ back into view. And, while the Fed will not likely embark on such a blatant move as Governor Wheeler; there is a certain precedence from the central banks of the Eurozone and Japan. The former drew a line in the sand nearly five months ago when it said an expensive currency was a policy burden as EURUSD hovered just below 1.4000. The BoJ was far more explicit with its intentions two years ago with USDJPY coming off a record low.

For now, a policy response to the Dollar’s rally is only a nagging buzz, but it could quickly turn into justification if traders are looking for a reason to bow out. Meanwhile, another fundamental theme seems to be supplementing rate speculation. Traders have grown deeply skeptical of a true risk version from the financial markets after so many false starts, but the slow build in volatility and slip from SPX is unsettling.

Euro Discounts Draghi Talk, Bigger Concerns Looming

ECB President Mario Draghi was on the wires again this past session reiterating a vow to offset an economic slowdown and reverse a disinflation risk by doing whatever is necessary. Once again referring to unconventional policy as a tool, speculators will be looking forward to next Thursday’s rate decision. At the last meeting, the central banker said details of an asset purchase program would come after the October meeting. It is not clear if the press conference is the venue for these particulars though. Yet, as we await more clarity; other concerns are starting to popup. Region-wide lending continues to drop, budget targets are deteriorating and sovereigns are throwing off safety nets.

New Zealand Dollar Suffers Biggest Drop in 15 Months

I was too skeptical of RBNZ Governor Wheeler’s influence. NZDUSD posted its biggest since June 2013 after the central bank chief issued thinly veiled threats against the New Zealand dollar. His suggestion that the currency was ‘unjustifiably’ and ‘unsustainably’ high is modestly more aggressive than past assessments. In the past, the market has shrugged off similar comments because the means for intervention was minimal. Yet, with the Kiwi already reeling from the central bank’s pause in its rate hike regime; this warning was taken seriously.

British Pound: Carney Keeps to Controlled, Hawkish View

Under normal circumstances, the Eurozone and German investor sentiment surveys from ZEW generate limited response from the shared currency and the region’s capital markets. That said, its importance should not be overlooked. While the focus has been on the implications of a loosening of monetary policy on yields and the currency – which is furthered by this week’s first Targeted-LTRO placement – a greater potential risk is what happens should the foreign capital that flooded the region were to reverse course. A drop in sovereign bond yields and disproportionate drop in EZ markets would have a reverberating impact on the currency.

Japanese Yen: Will Abe’s Currency View Translate into BoJ Shift?

Japanese Prime Minister Shinzo Abe was arguably the driving force behind the Bank of Japan’s adoption of its open ended stimulus program (QQE) back in April 2013. So what does it mean that he remarked that the government was watching the impact that the weak yen was having on the local economy? Harmless rhetoric misinterpreted or the first stages of a policy shift? How would officials engineer a Yen correction?

Emerging Markets Drop, Volatility Index Jumps to Four-Month High

The MSCI’s Emerging Market ETF rebound Wednesday didn’t last long. This past session, the measure for this riskier asset class gapped lower to a fresh, four-month low. Confirming the surprise and conviction of the move, the JPMorgan EM Volatility Index has advanced to a four-month high. On the FX side, every one of the major EM currencies lost ground to the Dollar –the Brazilian Real collapsed 1.8 percent.

Gold Consolidating for Breakout Pressure as Currency Wars Flare Up

There is limited talk of a revival of the currency war fears from past years yet, but the influence from central banks is growing a little more consistent and overt. If these efforts persist and lead to overlapping efforts to devalue multiple liquid currencies, the financial market’s concern over manipulated exchange rates and subsequently asset values could guide capital back to one of its few major alternatives to traditional ‘fiat’: gold. For now, the metal continues to suffer the dollar’s strength and the appetite for yield. But keep watch.

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ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

23:01

GBP

Hometrack Housing Survey (MoM)

0.10%

Tracks housing prices which have been increasing this year on a YoY basis and a MoM basis as well; if house price increases turn out to be strong, it may put pressure on the BoE to increase rates.

23:01

GBP

Hometrack Housing Survey (YoY)

5.50%

23:30

JPY

National Consumer Price Index (YoY)

3.30%

3.40%

The CPI for Japan has been increasing this year. It has risen due to the recent sales tax hike. The recent weakness in the Yen is causing talks among the central bankers and Shinzo Abe as they stress that a “too weak” yen may cause more inflation as Japan imports mainly petroleum products. A lower Yen makes it more expensive to import

23:30

JPY

National Consumer Price Index Ex-Fresh Food (YoY)

3.20%

3.30%

23:30

JPY

Tokyo Consumer Price Index (YoY)

2.70%

2.80%

23:30

JPY

Tokyo Consumer Price Index Ex-Fresh Food (YoY)

2.60%

2.70%

23:30

JPY

National Consumer Price Index Ex Food, Energy (YoY)

2.30%

2.30%

23:30

JPY

Tokyo Consumer Price Index Ex Food, Energy (YoY)

2.10%

2.10%

23:50

JPY

Foreign Buying Japan Bonds (Yen)

¥839.0B

These measures are very volatile. However, it may give a picture of the net purchasing of financial assets. This might put pressure on the currency. When foreign investors buy financial assets in Japan, they need Yens to buy those assets.

23:50

JPY

Japan Buying Foreign Bonds (Yen)

-¥401.4B

23:50

JPY

Japan Buying Foreign Stocks (Yen)

¥248.3B

23:50

JPY

Foreign Buying Japan Stocks (Yen)

¥136.8B

02:00

CNY

Conference Board China August Leading Economic ex

06:00

EUR

German Import Price Index (MoM)

0.20%

-0.40%

Import prices can add to the domestic inflation. If import prices are adding further to deflationary pressures in the Eurozone’s largest economy, it would put pressure on the ECB to expand monetary policy further. Import prices (YoY) have been falling this past year.

06:00

EUR

German Import Price Index (YoY)

-2.00%

-1.70%

06:00

EUR

German GfK Consumer Confidence Survey

8.5

8.6

It has been rising this year despite the anemic growth rate of the Euro Zone.

12:30

USD

Gross Domestic Product (Annualized) (2Q F)

4.60%

4.20%

All of these measures have recovered since the drop in the first quarter. If these measures show a strong uptrend, it may put pressure on the Fed to slowly to wind down the QE Policy and to increase the Fed Funds Rate.

12:30

USD

Personal Consumption (2Q F)

2.90%

2.50%

12:30

USD

Gross Domestic Product Price Index (2Q F)

2.10%

2.10%

12:30

USD

Core Personal Consumption Expenditure (QoQ) (2Q F)

2.00%

2.00%

13:55

USD

U. of Michigan Confidence (SEP F)

84.8

84.6

This measure is a revision of the previous measure that came out.

GMT

Currency

Upcoming Events & Speeches

10:00

EUR

ECB Announces 3 year LTRO Repayment

10:00

EUR

ECB's Coene Speaks at Lunch Conference in Brussels

13:30

AUD

RBA's Richards Speech in Chicago

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

14.0100

2.3800

12.7000

7.8165

1.3650

Resist 2

7.5800

5.8950

6.7400

Resist 1

13.5800

2.3000

11.8750

7.8075

1.3250

Resist 1

7.3285

5.8475

6.5135

Spot

13.3930

2.2618

11.2060

7.7538

1.2697

Spot

7.2098

5.8372

6.3980

Support 1

13.0300

2.0700

10.2500

7.7490

1.2000

Support 1

6.7750

5.3350

6.3145

Support 2

12.8350

1.7500

9.3700

7.7450

1.1800

Support 2

6.0800

5.2715

6.1300

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

1.2850

1.6421

109.56

0.9547

1.1181

0.8873

0.8008

139.63

1245.51

Res 2

1.2825

1.6394

109.33

0.9526

1.1159

0.8851

0.7987

139.35

1239.83

Res 1

1.2801

1.6367

109.10

0.9506

1.1137

0.8830

0.7966

139.08

1234.16

Spot

1.2752

1.6314

108.64

0.9466

1.1093

0.8786

0.7925

138.53

1222.81

Supp 1

1.2703

1.6261

108.18

0.9426

1.1049

0.8742

0.7884

137.98

1211.46

Supp 2

1.2679

1.6234

107.95

0.9406

1.1027

0.8721

0.7863

137.71

1205.79

Supp 3

1.2654

1.6207

107.72

0.9385

1.1005

0.8699

0.7842

137.43

1200.11

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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