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Dollar Reverses NFP-Inspired Rally

Dollar Reverses NFP-Inspired Rally

2014-10-07 05:10:00
John Kicklighter, Chief Strategist
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Talking Points:

  • Dollar Reverses NFP-Inspired Rally
  • British Pound Faces Wave of Event Risk, But Volatility…
  • Euro Climbs Despite Troubling Fundamental Data

Dollar Reverses NFP-Inspired Rally

That didn’t last long. The most recent leg of the greenback rally – inspired by Friday’s NFPs – was largely washed out by Monday’s close. Yet, a similar move to moderate was cued for the S&P 500. Last week’s labor market report was encouraging. Companies added a net 248,000 new employees to their payrolls in September and the jobless rate dropped to a seven-year low 5.9 percent. Rationally, that offers up further support to the notion that the Fed will pursue rate hikes earlier rather than later. Practically, however, it hasn’t materially upgraded the existing probabilities or time frame for that tightening move. Financial products used to hedge rate forecasts (Fed Funds futures, credit swaps, volatility measures more indirectly) showed little additional concern to what was already being priced in. Yet, where rate speculation seems to be cooling a more pervasive element may be slowly stepping up to take its place. A stalled S&P 500 is an eventful development for a market that has been conditioned by habit and complacency such that a recognizable pattern of buying a pullback and fading a volatility spurt has led to repeated iterations since the beginning of 2013. Should this hesitation prove more caustic to sentiment; the environment of slowly rising volatility, downgraded growth forecasts and de-escalation of leverage offers fertile ground for true risk aversion.

British Pound Faces Wave of Event Risk, But Volatility…

Though the Cable gained on the day, the Pound was generally struggling Monday. With FX traders paying closer attention to efforts by authorities to directly or implicitly intervene on behalf of their currency, UK Business Secretary Vince Cable’s comments made for concerned tape. The politician remarked in a side meeting to the Liberal Democrat party’s annual conference that the currency could be currently “overvalued by 10 to 15 percent”. We’ve heard similar sentiments from central bankers and a few other government officials, but we lack the critical bridge of mere concern to actual monetary policy. In the upcoming session, the docket picks up for rate speculation and thereby may stoke volatility for the sterling. Industrial production, the NIESR’s GDP estimate and BRC’s shop inflation index all speak to rate speculation.

Euro Climbs Despite Troubling Fundamental Data

A Euro advance against all of its major counterparts doesn’t seem to fit the docket. For fundamentals to kick off the week, the economic forecast was faced with a very unflattering 5.7 percent drop in August factory orders in Germany – the biggest drop since 2009. This country’s economic health is particularly important for the broader Eurozone as its largest member. That will also make today’s German industrial production number for the same period an important follow up. Meanwhile, the Eurozone Sentix investor sentiment survey for October collapsed further. This indicator has a particularly strong long-term relationship to the performance of the EZ’s capital markets…a leading relationship.

Australian Dollar: RBA’s Lament Currency ‘Still High’ Not Nearly Enough

If you want to see your currency fall, you may have to do more than that. In the statement that accompanied the RBA’s decision to keep its benchmark lending rate steady, the group noted that the currency was still high against historical standard. This is pretty direct ‘jawboning’ but the game has been elevated far beyond mere talk. The RBNZ has taken steps to actually intervene in the FX market. For the ECB and BoJ, policy decisions have been directly connected to currency movements. In a world of active devaluation, the RBA is falling behind.

Japanese Yen and Capital Markets Little Moved after BoJ Hold

As expected, the Bank of Japan left its monetary policy bearings unadjusted this morning. Aside from keeping its plans for an annual ¥60-70 tillion yen increase in the monetary base (the QQE); the group noted a moderate economic recovery, a weakness in production and an extended period of 1.25 percent CPI (below target). This does not translate into a need to increase its stimulus efforts, and traders recognize as much. However, also absent in the remarks were any notes of the recent rash of concerns that have been voiced about a too-quickly depreciating yen.

Emerging Markets Gap Higher in Sentiment Reprieve

A relief rally leverages the most respitein the most volatile markets. So it comes as little surprise that the MSCI Emerging Market ETF posted an impressive 1.3 percent advance on a gap higher to start the week. The surge closes much of the yawning gap opened in last week’s tumble, but confidence is not exactly innate for this market segment. Meanwhile, the FX ranks show a few noteworthy performances. Amongst strong performances by the more liquid grouping (Turkish Lira up 1.2 percent versus the Dollar, South African Rand 1.18 percent and Mexican Peso 0.7 percent); the Brazilian Real posted a remarkable rally. Having dropped over 12 percent versus the USD in the month leading up to the national election, the correction comes on news that incumbent President Rousseff remains the frontrunner, but falling short of a majority, a runoff with business-friendly Aecio Neves is in store for October 26.

Gold Traders Assess Their Bearings as Market Rests on 4-Year Low

Gold has recovered some of the ground lost to the Dollar and speculative appetite this past Friday. Yet, that doesn’t ease the serious anxiety behind this commodity. A 1.3 percent rally Monday pushes us back above $1,200; but it does not offer much breathing room from the four-year low that is one hard selloff away. With the low set at this week’s open, a third test has been made of the $1,180-level – along with the June 27, 2013 and December 31, 2013 lows. Whether the market finds its appetite for yield or the Dollar continues its explosive rise, the results would not be very encouraging for the metal. From speculators, there is limited confidence. Net speculative interests reflected in the COT futures holdings data offered a modest break with the first net increase in 7 weeks. Meanwhile, ETF holdings are at fresh 5-year lows.

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ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

JPY

Bank of Japan Interest Rate Decision

0.10%

0.10%

BoJ Gov and Prime Minister have grown more vocal on Yen tumble

JPY

Bank of Japan Monetary Base Target

¥270T

¥270T

3:30

AUD

Reserve Bank of Australia Interest Rate Decision

2.50%

2.50%

No change and talk of high A$

5:00

JPY

Leading Index (AUG P)

104.0

105.4

Forecasted 104 reading would be weakest since January 2013

5:00

JPY

Coincident Index (AUG P)

108.6

109.9

6:00

EUR

German Industrial Production s.a. (MoM) (AUG)

-1.5%

1.9%

After factory output tumbled, similar expectations for this report

6:00

EUR

German Industrial Production n.s.a. (YoY) (AUG)

-0.5%

2.5%

6:45

EUR

French Central Government Balance (euros) (AUG)

-84.1B

7:00

CHF

Foreign Currency Reserves (SEP)

457.5B

453.8B

Most Swiss data is being read for its cues that the SNB will be pressured to step up its efforts against the EURCHF exchange rate

7:15

CHF

Consumer Price Index (YoY) (SEP)

0.0%

0.1%

7:15

CHF

Consumer Price Index- EU Harmonized (YoY) (SEP)

-0.1%

0.1%

7:15

CHF

Retail Sales (Real) (YoY) (AUG)

-0.6%

8:30

GBP

Industrial Production (MoM) (AUG)

0.0%

0.5%

This series is a known market-mover, something that will not go unnoticed for BoE rate speculation

8:30

GBP

Industrial Production (YoY) (AUG)

2.6%

1.7%

8:30

GBP

Manufacturing Production (MoM) (AUG)

0.1%

0.3%

8:30

GBP

Manufacturing Production (YoY) (AUG)

3.4%

2.2%

12:30

CAD

Building Permits (MoM) (AUG)

11.8%

A volatile series but key sector

14:00

GBP

NIESR Gross Domestic Product Estimate (SEP)

0.6%

Has moderated past six months

14:00

USD

JOLTS Job Openings (AUG)

4700

4673

Rising faster than jobless falling

14:00

USD

IBD/TIPP Economic Optimism (OCT)

45.2

Much weaker than other surveys

19:00

USD

Consumer Credit (AUG)

$20.5B

$26.0B

July was highest since Dec 2010

23:01

GBP

BRC Shop Price Index (YoY) (SEP)

-1.6%

Negative since April 2013

23:50

JPY

Current Account Total (Yen) (AUG)

203.9B

416.7B

Surplus seen cut in half as physical deficit expected to contract

23:50

JPY

Adjusted Current Account Total (Yen) (AUG)

186.8B

99.3B

23:50

JPY

Trade Balance - BOP Basis (Yen) (AUG)

-770.7B

-828.1B

GMT

Currency

Upcoming Events & Speeches

0:30

USD

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

8:00

EUR

ECB's Klaas Knot Speaks on Euro Economy

8:30

GBP

Bank of England Credit Conditions Survey

12:45

USD

Treasury Secretary John Lew Speaks on Global Economy

13:00

EUR

ECB's Carlos Costa Speaks on Euro Economy

18:30

USD

Fed's Narayana Kocherlakota Speaks on Monetary Policy

19:00

USD

Fed's William Dudley 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

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.

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

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