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British Pound Traders Brace for Volatility from BoE Report

British Pound Traders Brace for Volatility from BoE Report

2014-11-12 05:00:00
John Kicklighter, Chief Strategist
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Talking Points:

  • Dollar Drops as FX Volatility, Rate Forecasts Offset
  • British Pound Traders Brace for Volatility from BoE Report
  • Yen Crosses Rally as Market Speculates on Election, Tax Hike Delay

Dollar Drops as FX Volatility, Rate Forecasts Offset

The US Dollar took a modest spill versus most of its major counterparts this past session as moderation in rate speculation offset a jump in FX volatility. Two important themes have traded influence over the Greenback: investor sentiment and the yield advantage held over major counterparts. On the risk front, the standard-bearer S&P 500 tagged a fresh record high but did so on increasingly slower progress while volume showed the lowest turnover in 10 weeks. While this restraint was likely partly attributable to the Veteran’s holiday that closed fixed income exchanges, this projects a trend of moderation that we have seen develop shortly after the rebound began. Meanwhile, on the FX side, the currency market’s short-term (1-week) volatility reading jumped nearly 10 percent, and has made a similarly sized jump this morning. At 9.4 now, a move back towards 11 – the 12-month peaks set in September and opening week of November – could reinvigorate the Dollar.

However, waiting for ‘risk’ has proven a crap shoot for traders; and there is little in the way of definitive event risk that can be expected to generate a shock with enough mass to shift market-wide sentiment. In the meantime, rate speculation seems to be percolating. Both Fed Fund and Eurodollar futures slipped Tuesday, but overnight swaps with a 12-month outlook are hovering hawkishly around 50 bps. On the wires, both Dallas Fed President Fisher and Philly Fed President Plosser kept to their policy colors by both warning of risks associated with keeping rates too low for too long. Yet, the pull their views carry is likely tempered by the fact that bot is set to retire next year – neither would have been a voter in 2015 regardless. Ahead, we have some low-grade event risk, dove Kocherlakota is set to speak and there are a few shorter duration Treasury auctions. Heavier movements in the Pound, Euro and Yen would likely generate more Dollar movement.

British Pound Traders Brace for Volatility from BoE Report

Top event risk for the majors through the upcoming session is the Bank of England’s Quarterly Inflation Report. As important as monetary policy is for establishing the bearings and activity levels of currencies, the Sterling is notoriously short-changed for updates on this theme. The BoE does not offer a meaningful update after meetings that don’t result in policy change – and there hasn’t been an update in a while. Minutes offer more detail, but are still vague and are limited in forecast. The best updates for the policy group’s outlook comes with this periodical report. Compared to the burgeoning optimism and hawkish views in the updates through the second half of 2013 and first half of 2014, the last report took a more dovish tone. Furthermore, we have seen growth forecasts dim and policy officials have individually voiced a more balanced view with interviews. Given the GBPUSD’s trend these past four months and the still-hawkish lean behind market forecasts, a more timid outlook would generate a bigger (bearish) response. And, given its track record for impact, this event risk should be watched closely.

Yen Crosses Rally as Market Speculates on Election, Tax Hike Delay

Through the close of Tuesday’s session, the Yen suffered losses between 0.8 percent (versus the Dollar) and 1.6 percent (against the NZD). The impetus for this drop were rumors that the Japanese Prime Minister Shinzo Abe may soon have to call a snap election and/or that the second sales tax increase could be pushed back due to stagnant growth conditions. A mixture of uncertainty and a push towards implicit stimulus both stokes a tawdry appetite for risk while also undermining long-term confidence in Japan’s financial and fiscal health. Both drive the Yen lower (crosses higher). This morning, the market remains focused on this theme with Advisors speaking more belligerently.

Euro and European Markets Can’t Remain on Divergent Paths For Much Longer

Though its allegiances fluctuate, there is generally a strong relationship between EURUSD and general risk trends as well as the relative confidence in European capital markets. This is demonstrated when we overlay a chart of the exchange rate with the Euro Stoxx 50 equity index. Historically, the correlation tends to be strongly positive. Currently, that relationship (20-day, 1-month rolling correlation) is the most negative it has been since July of last year. The ECB’s efforts are forging this divergence, but global risk appetite will eventually reconcile them.

Australian and New Zealand Dollars Lead Majors Gains

Despite a measured performance in global equities performance, modest gains from the Deutsche Bank Carry Harvest index and a rise in FX volatility; the struggling carry currencies (Australian and New Zealand Dollars) generated the past session’s top performance. Both currencies have struggled against the US and European currencies these past months which may confera rebound through moderation. Because, neither their yield forecasts nor the appetite for carry seems to be providing a strong motivation for gains. In other words, be wary of follow through.

Emerging Markets: Has Russia’s Most Recent Move Stabilized the Ruble?

The MSCI Emerging Market ETF posted a modest decline on low volume this past session. From the FX range, the EM was once again an even split between moderate gains and losses. The biggest mover was once again the Russian Ruble. A 2.3 percent drop developed despite the Russian Central Bank’s recent efforts to try and stem capital outflow. Default swaps and volatility levels show the market is very dubious.

Gold Positioning Grows More Extreme Even as Prices Seem to Form Range

While gold offered up another switch back with its 1.1 percent rally to further firm up its November range, positioning is showing remarkable consistency. Volume in this congestion is drying up – leveraging the risk of a breakout. Meanwhile, open interest in the futures market has climbed to its highest level in 17 months as ETF holdings has hit a five-year low. This looks like positioning for further losses.

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ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

23:30

AUD

Westpac Consumer Confidence (NOV)

0.90%

It has been trending lower this year.

23:30

AUD

Westpac Consumer Conf Index (NOV)

94.8

23:50

JPY

Tertiary Industry Index (MoM) (SEP)

0.80%

-0.10%

A volatile measure

23:50

JPY

Japan Money Stock M2+CD (YoY) (OCT)

3.00%

3.00%

Both measures show expansion. These measures may increase at a higher pace due to the recent additional easing by the BOJ

23:50

JPY

Japan Money Stock M3 (YoY) (OCT)

2.50%

2.50%

0:30

AUD

Wage Cost Index (QoQ) (3 Q)

0.60%

0.60%

Wage cost index is important to see how the non-mining sector part of the economy is performing

0:30

AUD

Wage Cost Index (YoY) (3 Q)

2.60%

2.60%

0:30

AUD

Credit Card Balances (SEP)

$A49.5B

Credit card balances have remained flat this year while credit purchases have showed a slight decline when compared to the beginning of the year

0:30

AUD

Credit Card Purchases (SEP)

$A22.3B

7:00

EUR

German Wholesale Price Index (YoY) (OCT)

-0.90%

Whole price index has been showing contraction this year on a YoY basis. This measure might indicate that Europe’s largest economy might be entering into an anemic economic environment with possible risks of deflation

7:00

EUR

German Wholesale Price Index (MoM) (COT)

0.10%

9:30

GBP

ILO Unemployment Rate (3M) (SEP)

5.90%

6.00%

Unemployment rate and jobless claims have been declining this year. These measures might show a stronger economy. The BOE is likely going to take account of how well the labor market is performing when deciding on monetary policy.

9:30

GBP

Jobless Claims Change (OCT)

-20.0K

-18.6K

9:30

GBP

Claimant Count Rate (OCT)

2.70%

2.80%

9:30

GBP

Average Weekly Earnings (3M/YoY) (SEP)

0.80%

0.70%

9:30

GBP

Weekly Earnings ex Bonus (3M/YoY) (SEP)

1.10%

0.90%

9:30

GBP

Employment Change (3M/3M) (SEP)

125K

46K

10:00

EUR

Euro-Zone Industrial Production s.a. (MoM) (SEP)

0.70%

-1.80%

Industrial Production has entered into contraction since September 2014. This is one of the many indicators that have been showing economic weakness in the Eurozone.

10:00

EUR

Euro-Zone Industrial Production w.d.a. (YoY) (SEP)

-0.20%

-1.90%

12:00

USD

MBA Mortgage Applications (NOV 7)

-2.60%

It is a volatile measure. A strong measure can show a strong demand for housing

13:30

CAD

Teranet/National Bank HPI (MoM) (OCT)

0.40%

Canada’s house prices have been rising this year. The BOC is likely going to monitor housing developments when deciding on monetary policy

13:30

CAD

Teranet/National Bank HPI (YoY) (OCT)

5.40%

13:30

CAD

Teranet/National Bank HP Index (OCT)

167.64

15:00

USD

Wholesale Inventories (SEP)

0.20%

0.70%

Inventories have been growing this year while trade sales have recently started to decline

15:00

USD

Wholesale Trade Sales (MoM) (SEP)

-0.10%

-0.70%

21:30

NZD

Business NZ Performance of Manufacturing Index (OCT)

58.1

Measure is higher than the value from the beginning of the year.

GMT

Currency

Upcoming Events & Speeches

8:00

USD

Fed's Plosser Speaks on the Economy in London

8:30

EUR

ECB's Visco Speaks in Rome

10:30

GBP

Bank of England Inflation Report

14:00

EUR

ECB President Mario Draghi Speaks in Rome

18:30

USD

Fed's Kocherlakota Speaks on Monetary Policy in Wisconsin

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

6.1750

7.2900

Resist 1

13.6800

2.3000

11.8750

7.8075

1.3250

Resist 1

7.5000

6.0900

7.0000

Spot

13.6388

2.2647

11.2617

7.7529

1.2960

Spot

7.4348

6.0094

6.8655

Support 1

13.0300

2.0700

10.2500

7.7490

1.2000

Support 1

6.7750

5.8000

6.3145

Support 2

12.8350

1.7500

9.3700

7.7450

1.1800

Support 2

6.0800

5.7300

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

1.2483

1.5947

116.41

0.9829

1.1519

0.8652

0.7777

143.90

1170.60

Res 2

1.2456

1.5919

116.09

0.9805

1.1496

0.8630

0.7755

143.55

1163.67

Res 1

1.2429

1.5891

115.78

0.9781

1.1474

0.8608

0.7734

143.21

1156.74

Spot

1.2376

1.5835

115.15

0.9733

1.1429

0.8564

0.7690

142.51

1142.87

Supp 1

1.2323

1.5779

114.52

0.9685

1.1384

0.8520

0.7646

141.81

1129.00

Supp 2

1.2296

1.5751

114.21

0.9661

1.1362

0.8498

0.7625

141.47

1122.07

Supp 3

1.2269

1.5723

113.89

0.9637

1.1339

0.8476

0.7603

141.12

1115.14

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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