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Dollar’s Current Bull Leg Strongest since Rally Through Crisis

Dollar’s Current Bull Leg Strongest since Rally Through Crisis

John Kicklighter, Chief Strategist

Talking Points:

  • Dollar’s Current Bull Leg Strongest since Rally Through Crisis
  • Euro Stumbles as Inflation Data Raises the Stakes for ECB Thursday
  • Japanese Yen: Japan Inc Says Concerned Over Low Currency

Dollar’s Current Bull Leg Strongest since Rally Through Crisis

With Tuesday’s close, the Dow Jones FXCM Dollar Index (ticker = USDollar) matched its run two weeks ago. If we close the upcoming session green, it will be the longest string of gains for the benchmark currency since September 2008 – the height of the financial crisis. The comparison doesn’t just stop with this particular leg of its incredible climb. Over the past three months, the greenback has surged on a 700 pip run that now finds us at four-year highs. Is demand for the currency now truly as strong as it was during the height of the worst global economic and financial crunch in modern history? Unlikely.

The epic climb from the Dollar through 2008 was far grander in scale even though it was driven by a singular appetite: liquidity. When the interest is something as elemental as access to the market, nothing else matters. In its current state, the currency is certainly finding traction; but it does so through a number of complementary venues. And, none of them are particularly robust enough to ensure a climb through the foreseeable future. As a safe haven, we are still in a controlled burn with some areas coming under more serious pressure (High Yield and Emerging Market) while complacency still rules benchmarks like global equities.

Rate expectations are the primary source of this current run, but that well is not particularly deep. A contrast to an increasingly accommodative Europe, China and Japan can only supply so much indirect strength for the Dollar. Its own rate forecasts needs to climb to bolster its carry returns – while appetite for historically-thin yield throughout the broader markets keeps buoyant. From two-year Treasury yields and Fed Funds futures; there has been little progress in pricing an aggressive, hawkish policy. Furthermore, Monday’s PCE inflation indicator and a consistent drop in breakeven rates offer limited potential for a build in the near future. It is against this disparate rate forecast that we head into today’s top event risk. The ISM Manufacturing survey for September is an important measure of economic growth, but it’s the ADP employment change that will speak to primary concerns. A weak showing here will set unfavorable expectations for Friday’s NFPs.

Euro Stumbles as Inflation Data Raises the Stakes for ECB Thursday

We were reminded why the Euro has been on the chopping block this past session with event risk that speaks directly to the European Central Bank’s (ECB) accommodative monetary policy stance. While the Germany employment statistics this past session were headline worthy, it was the Eurozone’s unemployment rate and inflation figures that waded into the deeper currents. An 11.5 percent unemployment rate (not far from record highs) and a 0.7 percent core CPI (matching record lows) is added justification for the central bank to push forward with the asset purchase program it announced at its last meeting. The market is certainly positioning itself in anticipation of the details for this effort to be released Thursday after the rate decision. That presents a considerable scenario risk should the ECB not deliver…

Japanese Yen: Japan Inc Says Concerned Over Low Currency

Three years ago, Japanese officials decried the record high level of the Japanese yen, saying that it was an undue burden on their country. Eventually, the effort to devalue the currency took root and we find ourselves today with USDJPY trading above 110. A weaker currency is generally considered an advantage – particularly for an export heavy economy. However, there are detriments to it as well. And, those disadvantages are starting to show through. Nikkei quoted a survey from the Japanese Chamber of Commerce and Industry that reported 80 percent of companies polled said the current exchange rate is undesirable. Will the government up its game to reverse its own effort?

British Pound Starting to See the Strong Economic Signs Again

In the months leading up to the fear inherent in the Scottish Referendum, the British Pound was already in retreat. A moderation in the market’s position on rate forecasts showed bulls overshot the bounds of a reasonable pace for the BoE. Yet, how much excess premium was there to work through. Data will help define market balance. Recently, we have a final 2Q GDP reading that upgraded its initial print and a Deloitte poll showing businesses’ risk appetite was building. Today, we will see if the manufacturing PMI will offer a clear proxy to 3Q GDP forecasts.

Canadian Dollar Drops after GDP Data Shows Economy Stagnated

The Canadian Dollar dropped against most of its major counterparts this past session after Stats Canada reported July GDP unexpectedly stagnated. This slowed the year-over-year pace more sharply than expected (2.5 percent) and further downgrades the currency’s position as a carry candidate. Today, we have a September manufacturing report from the RBC to offer another push.

Emerging Market Suffer Worst Month Since January, Russia Contemplates Capital Controls

September saw a 7.8 percent drop from the MSCI Emerging Market ETF – the first and biggest decline since January. While broader risk aversion has yet to sink in, this group is far more sensitive to speculation on policy changes – particularly those of the Fed. These groups aren’t likely to just sit through the tumult though. The Ruble has dropped below a level officials previously said would trigger capital controls.

Gold Sold into the Quarter End

It was an unfavorable ending to the quarter for metals. Gold slipped further to end the day at its lowest point in 2014 on the worst monthly decline (6.2 percent) since the incredible June 2013 plunge. Meanwhile, the final day of the trading month and quarter was a little more dramatic for Copper (down 1.6 percent) and Silver (tumbling 3.0 percent to a fresh four-and-a-half year low).

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ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

23:30

AUD

AiG Performance of Manufacturing Index (3Q)

47.3

Has been declining this summer

23:50

JPY

Tankan Large All Industry Capex (3Q)

7.00%

7.40%

All of these measures have been rising. The strength of the economy will be watched by Japan’s government as further potential sales tax hikes are discussed. It will be watched by the BOJ when deciding on monetary policy

23:50

JPY

Tankan Small Non-Manufacturing Index (3Q)

-1

2

23:50

JPY

Tankan Large Manufacturers Index (3Q)

10

12

23:50

JPY

Tankan Non-Manufacturing Index (3Q)

17

19

23:50

JPY

Tankan Large Manufacturers Outlook (3Q)

13

15

23:50

JPY

Tankan Non-Manufacturing Outlook (3Q)

18

19

00:00

AUD

RPData/Rismark House Px (MoM) (SEP)

1.1%

A Volatile measure

1:00

CNY

Manufacturing PMI (SEP)

51

51.1

Manufacturing has been in expansion so far this year.

1:30

AUD

Retail Sales s.a. (MoM) (AUG)

0.4%

0.4%

Volatile measure

1:35

JPY

Markit/JMMA Japan Manufacturing PMI (SEP F)

51.7

This is a revision of the PMI data that came out earlier this month

5:00

JPY

Vehicle Sales (YoY) (SEP)

-5.0%

It has been contracting this year.

6:30

AUD

Commodity Index (SEP)

91.7

Prices have been trending lower this year. The lower trend might put pressure on the RBA to continue to keep lower interest rates

6:30

AUD

RBA Commodity Index SDR (YoY)(SEP)

-11.5%

7:30

CHF

Purchasing Managers Index (SEP)

52

52.9

Has been above fifty this whole year

7:45

EUR

Markit/ADACI Italy Manufacturing PMI (SEP)

49.5

49.8

PMI has been declining this year.

7:50

EUR

Markit France Manufacturing PMI (SEP F)

48.8

48.8

All of these measures are revisions of the previous PMI figures.

7:55

EUR

Markit/BME Germany Manufacturing PMI (SEP F)

50.3

50.3

8:00

EUR

Markit Eurozone Manufacturing PMI (SEP F)

50.5

50.5

8:30

GBP

Markit UK PMI Manufacturing s.a. (SEP)

52.7

52.5

The PMI has been rising this year. GDP has been strong expanding at 3.2% Y/Y in 2Q. A Strong PMI might add to pressures to the BOE to tighten monetary policy.

11:00

USD

MBA Mortgage Applications (SEP 26)

-4.1%

A volatile measure

12:15

USD

ADP Employment Change (SEP)

207K

204K

Monetary policy is hinged upon on the performance of the labor market. If the ADP report shows a strong labor market, more pressure would be on the Fed to tighten monetary policy

13:30

CAD

RBC Canadian Manufacturing PMI (SEP)

54.8

Has been rising this year. A strong PMI might put pressure on the BOC to tighten policy.

13:45

USD

Markit US Manufacturing PMI (SEP F)

57.9

57.9

Revision of the last PMI

14:00

USD

ISM Manufacturing (SEP)

58.5

59

The PMI has shown that manufacturing has been expanding this year.

14:00

USD

ISM Prices Paid (SEP)

57

58

14:00

USD

Construction Spending (MoM) (AUG)

0.5%

1.8%

Has been declining since June

GMT

Currency

Upcoming Events & Speeches

11:00

GBP

BOE’s Financial Policy Committee Published Statement

17:00

GBP

BOE’s Forbes Speaks at Even In London

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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