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Dollar Untroubled by Risk Swell, Rises As Peers Weaken

Dollar Untroubled by Risk Swell, Rises As Peers Weaken

John Kicklighter, Chief Strategist

Talking Points:

  • Dollar Untroubled by Risk Swell, Rises As Peers Weaken
  • Euro Drops on Rumor of Further ECB Stimulus
  • British Pound: BoE Minutes Will Help Gauge Whether 1Q Rate Hike Feasible

Dollar Untroubled by Risk Swell, Rises As Peers Weaken

Investor sentiment – in the form of volatility readings and equity indexes – improved markedly this past session while rate forecasts for the Fed posted comparatively little progress. That is an unfavorable fundamental mix for the US Dollar. And yet, the greenback still managed to climb this past session. Rather than reflect a currency that is impervious to detrimental developments, we are seeing how far the market has priced the Greenback’s underlying themes.

The most prominent story this past session was the biggest rally for the S&P 500 in 12 months and further moderation of volatility measures from last week’s extremes. Both would be considered signals for risk appetite and thereby could weigh a safe haven like the Dollar. Yet this swell of optimism didn’t reach far beyond the equities market – FX, fixed income, commodities and other asset types showed little exuberance of their own. Another caveat to the currency’s risk role is its lack of performance through the first half of October. Despite a material sense of fear and concerted risk unwind, the reserve consolidated. Even if the appetite for return was universal, there was little premium to wash for USD.

A similar discount is apparent in the Dollar’s rate forecast. Treasury yields, Fed Fund futures and other assets sensitive to the monetary policy forecasts have collapsed these past weeks; and the currency has seemingly suffered little for it. This should be taken into consideration with the upcoming September CPI release. Whether we realize or miss the consensus forecast for a further downtick in the headline, annual reading to 1.6 percent; the market’s position for rates is already significantly discounted to even the FOMC view. That doesn’t leave much room for downside surprise. Furthermore, the Fed is in its media blackout period ahead of next week’s policy meeting. What does that leave? Weakened counterparts. In particular, the Euro stumbled on news of further ECB stimulus.

Euro Drops on Rumor of Further ECB Stimulus

The Euro was down across the board this past session as financial media reported a second day of ECB stimulus. Once again, the central bank’s actions are unconfirmed for target, size or future intention – which may curb its effectiveness for stabilizing financial markets, much less deflate the local currency. The general consensus was that the bank purchased Italian covered bonds, but there were also reports of possible German purchases. Italian (and broader Eurozone) yields were down on the day, but it is early to attribute their general trend to this stimulus effort. What is more interesting for the money policy-focused market was an exclusive article from Reuters which suggested the ECB was considering corporate bond purchases. That would be a significant increase in scope even if the details are still lost.

British Pound: BoE Minutes Will Help Gauge Whether 1Q Rate Hike Feasible

There are a few noteworthy pieces of event risk scheduled for release from the majors through the upcoming session, but few hold out the market-moving potential of the BoE minutes. Sterling traders have come to expect the actual rate decisions themselves to be nonevents. When the central bank leaves its policies unchanged, it offers no immediate insight to its reasoning or expectations going forward. Details come from the transcript later on. Rate speculation has intensified for the Pound (as it has for the Dollar, Euro and other currencies) as global growth forecasts have cooled and with a softening of local data as with last week’s five-year low UK CPI reading. If the impetus for a rate hike before April 2015 diminished, the sterling will find it has the most to lose from tempered rate speculation.

Australian Dollar Finds Tepid Guidance from Chinese GDP, How About Aussie CPI?

Though it managed to beat expectations, China’s 3Q GDP reading would still reflect the slowest pace of growth for the hemisphere’s behemoth economy in five years. That is a concern for Australia which drew heavily on its trade relationship with China during the Great Recession to avoid an economic stall of its own. Yet, the growth shortfall wouldn’t move AUDUSD from weeks of congestion. Traders were offered another chance this morning with Aussie 3Q CPI. However, a sharp drop in the inflation read to 2.3 percent would result in a similar lack of response.

Canadian Dollar Rallies Before Bank of Canada Policy Meeting

The Loonie was the major’s best performer Tuesday with a rally that measured between 0.6 percent (versus the USD) up to 1.2 percent (against EUR). The docket was empty, local capital markets generated gains in-line with the rest of the globe and energy prices were little changed. Ahead, we have something a little more tangible – the BoC rate decision and policy statement as well as September retail sales.

Emerging Markets Enjoy Little of the DM’s Risk Appetite

The S&P 500 and other developed market equity indexes may have enjoyed hefty rallies this past session, but that same sense of risk appetite didn’t seem to make it to the Emerging Markets. The MSCI EM ETF was higher on the day, but by a modest 0.4 percent and on tepid volume. The FX standings were mixed, but the Ruble edged 0.1 percent higher despite Russia cancelling a second bond auction.

Gold Futures Open Interest Near Levels that Has Seen Metal Top in Past

Though there are many fundamental considerations going into the appetite for gold, participation figures are showing a consistent picture. ETF holdings of the metal are at five-year lows and volume in derivatives continues to fade as the metal advances. Another interesting exposure figure is futures open interest which is currently at 407,000 contracts – at levels that have lined up to short-term spot prices five times in 2014.

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ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

23:00

AUD

Conference Board Leading Index (AUG)

0.50%

Ways of measuring the strength of the Australian economy

23:30

AUD

Westpac Leading Index (MoM) (SEP)

-0.10%

23:50

JPY

Merchandise Trade Balance Total (Yen) (SEP)

-¥780.0B

-¥949.7B

Japan is a trade dependent economy; would help assess the strength of Japan’s economy. Japan has been having a trade deficit this year despite the depreciation of the yen against major currency pairs. The changes in exports and imports have been decreasing this year.

23:50

JPY

Adjusted Merchandise Trade Balance (Yen) (SEP)

-¥918.5B

-¥924.2B

23:50

JPY

Merchandise Trade Exports (YoY) (SEP)

6.5

-1.3

23:50

JPY

Merchandise Trade Imports (YoY) (SEP)

2.7

-1.4

0:00

AUD

Skilled Vacancies MoM (SEP)

1.10%

Has been rising at a positive rate this year

0:30

AUD

Consumer Prices Index (YoY) (3 Q)

2.30%

3.00%

Inflation has been increasing the year. However, the Citi Australia Inflation Surprise Index shows that inflation has performed poorly relative to the market’s expectations. Weakness might make the RBA keep rates low

0:30

AUD

Consumer Prices Index (QoQ) (3 Q)

0.40%

0.50%

11:00

USD

MBA Mortgage Applications (OCT 17)

5.60%

Can help measure strength of housing demand but volatile

12:30

USD

Consumer Price Index (YoY) (SEP)

1.60%

1.70%

Inflation is important to the Fed when deciding on interest rate decisions and monetary policy. Despite the strong improvement of the US economy in 2nd and 3rd quarter, inflation is still below the Fed’s 2 % inflation target.

12:30

USD

Consumer Price Index Ex Food & Energy (YoY) (SEP)

1.70%

1.70%

12:30

USD

Consumer Price Index n.s.a. (SEP)

238.029

237.852

12:30

USD

Consumer Price Index Core Index s.a. (SEP)

238.625

238.345

12:30

CAD

Retail Sales Less Autos (MoM) (AUG)

0.20%

-0.60%

It is a volatile measure and not market moving. It has recently started to show contraction in retail sales.

12:30

CAD

Retail Sales (MoM) (AUG)

0.00%

-0.10%

14:00

CAD

Bank of Canada Rate Decision

1.00%

1.00%

Important for the USDCAD and other CAD pairs. Recent Canadian inflation figures last week showed inflation that met the market’s expectations

21:45

NZD

Consumer Prices Index (QoQ) (3 Q)

0.50%

0.30%

May help the RBNZ decide on monetary policy. Inflation has been increasing at a stable pace.

21:45

NZD

Consumer Prices Index (YoY) (3 Q)

1.20%

1.60%

GMT

Currency

Upcoming Events & Speeches

-

JPY

Cabinet Office Monthly Report for October

8:30

GBP

Bank of England Minutes

13:15

GBP

BOE's Bailey Attends Treasury Committe Hearing

14:00

CAD

Bank Of Canada Monetary Policy Report Published

15:15

CAD

Bank of Canada's Poloz & Wilkings Hold Press Conference

16:15

EUR

ECB’s Linde Speaks in Madrid

19:00

GBP

BOEs Weale Speaks at Event in Cambridge, England

19:30

USD

Fed to Discuss Risk Retention Rule

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

7.2900

Resist 1

13.5800

2.3000

11.8750

7.8075

1.3250

Resist 1

7.3285

5.8475

6.7400

Spot

13.5441

2.2620

11.1073

7.7574

1.2733

Spot

7.1620

5.8173

6.5641

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

1.2902

1.6188

107.33

0.9518

1.1351

0.8865

0.8033

137.37

1263.72

Res 2

1.2877

1.6159

107.09

0.9497

1.1327

0.8842

0.8009

137.06

1257.34

Res 1

1.2851

1.6131

106.85

0.9475

1.1304

0.8818

0.7986

136.76

1250.96

Spot

1.2800

1.6073

106.37

0.9433

1.1258

0.8771

0.7939

136.15

1238.21

Supp 1

1.2749

1.6015

105.89

0.9391

1.1212

0.8724

0.7892

135.54

1225.46

Supp 2

1.2723

1.5987

105.65

0.9369

1.1189

0.8700

0.7869

135.24

1219.08

Supp 3

1.2698

1.5958

105.41

0.9348

1.1165

0.8677

0.7845

134.93

1212.70

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.

The information contained herein is derived from sources we believe to be reliable, but of which we have not independently verified. Forex Capital Markets, L.L.C.® assumes no responsibility for errors, inaccuracies or omissions in these materials, nor shall it be liable for damages arising out of any person’s reliance upon this information. Forex Capital Markets, L.L.C.® does not warrant the accuracy or completeness of the information, text, graphics, links or other items contained within these materials. Forex Capital Markets, L.L.C.® shall not be liable for any special, indirect, incidental, or consequential damages, including without limitation losses, lost revenues, or lost profits that may result from these materials. Opinions and estimates constitute our judgment and are subject to change without notice. Past performance is not indicative of future results.

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