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Dollar Trading Rate Forecasts for Haven Demand to Maintain Climb

Dollar Trading Rate Forecasts for Haven Demand to Maintain Climb

2014-10-10 04:32:00
John Kicklighter, Chief Strategist
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Talking Points:

  • Dollar Trading Rate Forecasts for Haven Demand to Maintain Climb
  • Yen Crosses Position For Correction Should Markets Crack
  • British Pound: BoE Decision Doesn’t Stem Retreat in Yield Forecasts

Dollar Trading Rate Forecasts for Haven Demand to Maintain Climb

Market participants are growing nervous. Their faith in complacency and the market’s seemingly undying appetite for yield is crumbling. And, should this previously uncontested conviction give way, investors know they have a lot of risky exposure to tend to in a likely disorderly unwind. For the US Dollar, there are few scenarios more encouraging. The more pervasive and disruptive a flight from risk is, the more essential liquidity becomes. The greenback represents the most heavily used reserve currency as well as a key funding instrument for riskier investments (such as European periphery bonds and Chinese real estate assets) and commodities alike. A mild aversion to riskier assets can turn the tides on these relationships and produce a bid for the Dollar. However, it’s the panicked clamor for safety of funds that can truly flip the switch for the currency.

Even after a 12-week consecutive rally, a stretch of full scale risk aversion can carry the greenback much further and for much longer. The hitch is that changing the tide of conviction is extraordinarily difficult after so many months and years of status quo. What fundamental cue – if any – this past session has further pushed us towards existential doubt? The IMF issued yet another warning that the global markets face the risk of disorderly corrections that could derail recoveries. Director Lagarde also advised emerging markets to prepare for the fallout from the Fed’s stimulus withdrawal (a warning to all really). A broad range of Fed officials would further this challenge as the speakers of the more hawkish ilk seemed to maintain their time frames for hikes – some around mid-2015, others earlier – despite the seeming moderation of the FOMC minutes. With warnings and forecasts considered, the spark this past session was volatility. Realizing losses – even small ones – carries far more weight in shaking complacency. A persistent rise in volatility is the true threat to the half decade of risk proliferation.

Yen Crosses Position For Correction Should Markets Crack

This past session, the Japanese Yen rallied between 0.22 percent (versus fellow safe haven USD) and 0.9 percent (against the Canadian dollar). Next to US equities, this carry trade medium was the most sensitive ‘risk off’ advocates in the financial markets. However, in this correction, most of these liquid crosses have not cleared their respective, high-profile support levels. It is easy to cater to a drop in speculative appetite as long as it falls within comfortable boundaries. Making the systemic shift that unwinds tremendous build up in speculative positioning – which these expensive carry trades have certainly done this past year-and-a-half – is a far more difficult task. Volatility measures and other benchmarks of fear and conviction should be watched closely. Jawboning from Abe and Kuroda will take a back seat for now.

British Pound: BoE Decision Doesn’t Stem Retreat in Yield Forecasts

As expected, the Bank of England would remain mum after holding steady on its monetary policy after this past sessions MPC meeting. Yet, speculators still have plenty to shape their forecasts around. This is more than evident in the rates markets. Rate swaps spiked to their lowest levels in 8 months and the two-year Gilt yield is following suit with its nearly 25 percent drop in the past month (now at 0.726 percent). Data has softened, but pound has adjusted for more moderate forecasts. Key data is therefore increasingly important for shaping rate forecasts as much as it is for driving volatility. Next week, key sparks will come from the September inflation and August jobs data.

Euro Traders Should Shift Focus from ECB to DAX

There is little doubt that the ECB has taken the mantleof the most accommodative major central bank. Yet, this isn’t the most prominent driver for the Euro through the immediate future. Having seen a more-than 1,500-pip drop from EURUSD in the wake of the central bank’s warnings and policy slackening, the markets have substantially discounted this fundamental factor. That said, we have seen little adjustment to the massive foreign capital inflows after the ECB averted its crisis. If risk unwinds, there will be a heavy outflow from the Euro-area.

Canadian Dollar Faces Frequent Volatility Catalyst in Jobs Data

The Canadian Dollar’s most market-moving, local release is the monthly labor release. As it happens, September payrolls are due for release this morning. Heading its release, the consensus forecast is for a 20,000-net increase in employment and a hold in the jobless rate at 7.0 percent. This sets expectations high when risk aversion is weighing carry currencies. In other words, volatility is most threatening on a miss.

Emerging Markets: Should We Expect More Intervention Like Russia’s?

IMF Managing Director Christine Lagarde warned Emerging Markets to brace for volatility as the Fed shifts away from its unprecedented stimulus regime – a capital cheap funding that sent investors to these higher-yielding regions. Despite this caution and the drop in global equities this past session though, these markets were surprisingly staid. A 1.6 percent drop from the MSCI ETF was intense but did not send us to new lows. Meanwhile, the FX rankings were mixed. But, when the funding shift does take wind, will more EM countries have to manage the fallout?

Gold Holdings By ETFs Drop the Most in 17 Months Despite Rebound

The rebound for the dollar didn’t put gold off. The precious metal still managed a 0.3 percent climb to $1,224 despite a solid advance from its pricing instrument. A leveraged move when its counterpart dollar slips (1.0 percent Wednesday) and weathering the reversal is indication of a bullish market. Yet, that optimism doesn’t seem to be full instilled in the market’s positioning. In addition to the steady drop in futures positioning we have seen from week to week (COT); this past session, ETF holdings of gold dropped 0.76 percent to a fresh five-year low.

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ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

23:50

JPY

Bank Lending Banks ex-Trust (YOY) (SEP)

2.30%

Has been rising on a YOY basis. A strong increase might make the BOJ reassess current monetary policy

23:50

JPY

Bank Lending incl Trusts (YoY) (SEP)

2.20%

23:50

JPY

Tertiary Industry Index (MoM) (AUG)

0.10%

0.00%

A volatile measure

0:30

AUD

Home Loans (AUG)

0.20%

0.30%

RBA’s Edey discusses that he sees more risk taking in the economy. Loan growth is usually associated with risk taking. If loan growth is strong, pressure would be placed on the RBA to tighten policy

0:30

AUD

Investment Lending (AUG)

6.80%

0:30

AUD

Value of Loans (MoM) (AUG)

0.00%

5:00

JPY

Consumer Confidence Index (SEP)

41.9

41.2

Has been below 50 this past year which indicates that the majority of households think conditions are worsening

8:30

GBP

Visible Trade Balance (Pounds) (AUG)

-£9600

-£10186

Trade balance has been worsening this year. A lower trade balance would subtract more from GDP which might pressure the BOE to maintain low interest rates

8:30

GBP

Trade Balance Non EU (Pounds) (AUG)

-£4000

-£4345

8:30

GBP

Total Trade Balance (Pounds) (AUG)

-£3000

-£3348

8:30

GBP

Construction Output s.a. (MoM) (AUG)

0.50%

0.00%

Construction output has been growing at positive rates this year. If it continues to expand, pressure would be placed on the BOE to tighten policy

8:30

GBP

Construction Output s.a. (YoY) (AUG)

2.90%

2.60%

12:30

CAD

Net Change in Employment (SEP)

20.0K

-11.0K

Unemployment has declined this year. A stronger unemployment market would put pressure on the BOC to raise interest rates.

12:30

CAD

Unemployment Rate (SEP)

7.00%

7.00%

12:30

CAD

Participation Rate (SEP)

66

66

12:30

USD

Import Price Index (MoM)

-0.70%

-0.90%

It has been decreasing on YOY basis.

12:30

USD

Import Price Index (YoY)

-1.30%

-0.40%

14:30

CAD

Business Outlook Future Sales (3Q)

28.00

24.00

Measures the tightness of loan market. The BOC is trying to make sure the housing market doesn’t get too heated; trying to make getting mortgages to be more difficult as the Debt/ GDP ratio is at a record level

14:30

CAD

BoC Senior Loan Office Surprise

-12.8

GMT

Currency

Upcoming Events & Speeches

10:00

EUR

ECB Announces 3 year LTRO Repayment

13:00

GBP

BOE's Andrew Bailey Speaks in Washington

13:00

USD

Fed's Plosser Speaks on Monetary Policy in New York

14:00

GBP

BOE's Andrew Gracie Speaks in Washington

17:00

USD

Fed's George Speaks on Economy in McCook, Nebraska

18:00

EUR

ECB Praet Speaks in Washington

18:08

USD

Fed's Fisher Speaks on the Economy in Dallas

19:00

USD

Fed's Lacker Speaks on Financial Firm Bankruptcy in Chicago

19:00

GBP

BOE Policy Maker Kristin Speaks in Washington

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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