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Dollar Gains Increasingly Relative

Dollar Gains Increasingly Relative

John Kicklighter, Chief Strategist

Talking Points:

  • Dollar Gains Increasingly Relative
  • British Pound Faces Top Event Risk on Inflation Data
  • Yen Crosses Shaken But Not Broken on Recession Announcement

Dollar Gains Increasingly Relative

The traditional means for Dollar strength weren’t catering to the currency’s advance Monday, but that didn’t prevent the greenback from closing at a fresh multi-year high through the session’s close. As has been the case for a good portion of the past four-month’s rally for the currency, gains were instead found on the basis of weakening counterparts. Warnings of softer monetary policy stances by Euro-area and UK central bank heads as well as an unexpected recession for Japan (which also inspires speculation of more easing) draw a greater contrast to the United States modest but as-yet persistent move towards normalization. Amongst the potential avenues of fundamental influence, this is proving the most capable driver with plenty of motivation and unencumbered by the complacency inspired in other themes.

As we monitor the Dollar as the springboard for its most liquid counterparts, we should also perspective of its own developments. News of Japan’s economic slip fell short of triggering a global appeal for havens. However, 1-month implied (expected) volatility in the FX market advanced to its highest level in 14 months (9.55 percent). For the Fed’s own policy bearings, rate speculation softened notably. Fed Fund and Eurodollar futures showed a drop in implied rates through 2015 while Treasury yields (which can also reflect risk appetite) slipped. Research from the San Francisco suggested inflation could remain below target rates through 2016, while the Philly Fed’s Survey of Professional Forecasters showed a downgrade of 2015 PCE forecasts from 2.0 to 1.8 percent. Today, the docket prints factory inflation, dated (September) TIC capital flow data and dovish (Kocherlakota) Fed speak. We are bidding time to Wednesday’s FOMC Minutes and Thursday CPI.

British Pound Faces Top Event Risk on Inflation Data

UK interest rate expectations continue to tumble. Following up on the softer policy language in last week’s BoE Quarterly Inflation Report, a few MPC officials reinforced the temperance theme Monday. Governor Mark Carney remarked on “huge deflationary forces” from its trade partners while Chief Economist Haldane said he is watching inflation expectations “like a dove”. According to Short Sterling futures, the market is now pricing in a 0.97 benchmark rate by the end of 2015 – the lowest since last May. Those forecasts can be lowered even further if the inflation statistics due today show that there is little pressure for the UK to act preemptively and possibly undermine growth. Price readings are due for consumer, retail, producer and housing sectors; but it is the first in that list – CPI – which puts the market into motion. No further easing is expected, so a slip would cater to a dovish lean. Then again, a pick up could tip the boat in the other direction.

Yen Crosses Shaken But Not Broken on Recession Announcement

Forecasts for Japan’s 3Q GDP figures were conservative, but apparently not conservative enough. Against a survey of 0.5 percent growth on the quarter and a 2.2 percent annualized pace of expansion, the economy reported a 0.4 and 1.6 percent contraction respectively. That is a technical recession for the world’s third largest individual economy. The monetary policy implications from this unexpected showing are increased speculation of a deferred second sales tax hike, a greater likelihood of a snap election and further upgrade to the BoJ’s stimulus efforts – all three factors that would push Yen crosses higher. And yet, through the volatility, the crosses ended mixed. The data’s contribution to asset-class volatility (risk aversion) seems to generating more deft balance with ‘positive’ implications for the crosses.

Euro Drops after ECB President Draghi Hints at Sovereign Bond Purchases

It starts with hints and vows to do ‘whatever is necessary’, and eventually turns into currency-devaluing policy. The markets have been dubious of the ECB’s commitment and ability to fight dis-inflation as well as economic stagnation through its monetary policy efforts. Vows to increase the balance sheet by €1 trillion have so far seen holdings only level off. Programs to this point have been many but lacking the pull necessary to match the Fed’s previous QE efforts or the BoJ’s own open-ended programs. Traders are looking for the upgrade to outright sovereign purchases, and Draghi hinted at just that Monday. There is still a gap to action though, and it needs to fill to drive EURUSD below 1.2200.

Australian Dollar Losing Ground Despite RBA’s Avoidance of Rate Cut Threats

Calls that the RBA will shift back to an regime of interest rate cuts seem to grow by the week as a controlled cool down in Chinese GDP, a drop in commodity prices and trips in local economic data curb carry calls. Minutes from the group’s last meeting this morning however show the central bank does not believe the situation dire enough to justify this route. That doesn’t seem to have inspired an Aussie bid though…

Emerging Market Currencies Broadly Lower with Russian Ruble, Korean Won the Notable Counterpoints

Emerging Markets took a tumble Monday with the MSCI ETF dropping 1.1 percent on moderate volume. Yet, with this slump, we have yet to establish progress on the previously stalled bear trend. Like US equities – though significantly off its own highs – it seems investors in this asset class are waiting for something more convincing. On the FX side, the performance was heavily in the red versus the Dollar. The notable exceptions were the Korean Won (up 0.6 percent) and the intervention risky Russian Ruble (gaining 0.2 percent).

Gold Unable to Extend its Rally Despite a Recession and Stimulus Warnings

Friday’s rally back above $1,185 inspired little follow through from gold bugs Monday. The precious metal was little moved through the session, dropping 0.2 percent through Monday’s close with limited volume in futures and ETF trade. Meanwhile, the CBOE’s gold volatility index is holding at 13-month highs and COT figures showed a third week of long cuts. Odd given Japan’s recession and fresh stimulus talk.

**Bring the economic calendar to your charts with the DailyFX News App.

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

22:30

AUD

AUD ANZ Roy Morgan Weekly Consumer Confidence Index (NOV 16)

114.8

Consumer confidence is more important as the RBA is trying to encourage growth in the service sector in light of the weakness in the mining sector in Australia.

23:50

JPY

JPY Housing Loans (YoY) (3Q)

2.70%

Has been growing at a positive pace this year.

1:30

CNY

CNY China October Property Prices

7:00

EUR

EUR EU 25 New Car Registrations (OCT)

6.40%

Has been rising at a positive pace this year. However, this measure isn’t likely to be market moving.

9:30

GBP

GBP Consumer Price Index (MoM) (OCT)

0.10%

0.00%

The rate of inflation has been trending lower this year. The Citi inflation surprise index has been in negative territory; thus implying that the UK has not meeting economists’ inflation expectations this year. Inflation has also been below the BOE’s 2% inflation target this year.

9:30

GBP

GBP Core Consumer Price Index (YoY) (OCT)

1.60%

1.50%

9:30

GBP

GBP DCLG UK House Prices (YoY) (OCT)

11.20%

11.70%

It has been rising at a positive rate this year

10:00

EUR

EUR German ZEW Survey (Economic Sentiment) (NOV)

0.5

-3.6

Both of these measures have been falling this year; thus showing weakness in Eurozone’s largest economy.

10:00

EUR

EUR German ZEW Survey (Current Situation) (NOV)

1.7

3.2

10:00

EUR

EUR Euro-Zone ZEW Survey (Economic Sentiment) (NOV)

4.1

Been trending lower; this is one of the many measures that has been showing economic weakness in the Eurozone

13:30

USD

USD PPI Final Demand (MoM) (OCT)

-0.10%

-0.10%

PPI has been expanding at a positive pace but recently the PPI has been expanding at a slower rate. Inflation from producer side can have a strong impact on CPI.

13:30

USD

USD PPI Ex Food and Energy (MoM) (OCT)

0.10%

0.00%

13:30

USD

USD PPI Final Demand (YoY) (OCT)

1.20%

1.60%

13:30

USD

USD PPI Ex Food and Energy (YoY) (OCT)

1.50%

1.60%

15:00

USD

USD NAHB Housing Market Index (NOV)

55

54

Has remained above 50 since July 2014; thus showing that builders are viewing economic conditions in the housing market as good

21:00

USD

USD Net Long-term TIC Flows (SEP)

$52.1B

A delayed measure of capital flows can paint a picture of global Fed forecasts and risk projections

21:00

USD

USD Total Net TIC Flows (SEP)

$74.5B

GMT

Currency

Upcoming Events & Speeches

0:30

AUD

AUD RBA Minutes of Nov. Meeting

8:25

AUD

AUD RBA Stevens Speech at CEDA Annual Dinner

8:30

EUR

EUR ECB's Lautenschlaeger Speaks in Frankfurt

18:00

EUR

EUR ECB's Knot Discusses Deflation Risk in Parliament

18:30

GBP

GBP BOE's Forbes Speaks at Event in London

18:30

USD

USD Fed's Kocherlakota Speaks on Monetary Policy in St. Paul MN

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

13.5823

2.2315

11.1048

7.7548

1.2974

Spot

7.4186

5.9681

6.7772

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

1.2573

1.5766

117.89

0.9723

1.1367

0.8812

0.8030

146.88

1214.79

Res 2

1.2548

1.5738

117.55

0.9700

1.1347

0.8790

0.8008

146.50

1207.54

Res 1

1.2523

1.5709

117.21

0.9677

1.1327

0.8769

0.7986

146.12

1200.28

Spot

1.2473

1.5652

116.54

0.9632

1.1286

0.8726

0.7943

145.36

1185.78

Supp 1

1.2423

1.5595

115.87

0.9587

1.1245

0.8683

0.7900

144.60

1171.28

Supp 2

1.2398

1.5566

115.53

0.9564

1.1225

0.8662

0.7878

144.22

1164.02

Supp 3

1.2373

1.5538

115.19

0.9541

1.1205

0.8640

0.7856

143.84

1156.77

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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