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Dollar Charges Higher as Policy Contrast Draws Focus to Fed

Dollar Charges Higher as Policy Contrast Draws Focus to Fed

John Kicklighter, Chief Strategist

Talking Points:

  • Dollar Charges Higher as Policy Contrast Draws Focus to Fed
  • Euro Suffers Biggest Drop in Three Years on Massive ECB QE
  • British Pound: Will 4Q GDP Forecasts Revive BoE Rate Forecasts?

Dollar Charges Higher as Policy Contrast Draws Focus to Fed

While this past session’s top event risk – the ECB’s stimulus announcement – exacted the heaviest impact on the Euro; it was the Dollar that gained the most from the news. The greenback advanced against all of its major counterparts and the Dow Jones FXCM Dollar Index (ticker = USDollar) hit a fresh six-year high after the news was absorbed. Why should another wave of global stimulus support the Greenback? In an environment where capital is still seeking out the most competitive return, the US presents the most hawkish lean for yield and growth expectations. With the world’s largest collective economy signaling its intention to drive returns even lower, the Dollar naturally stands as the primary benefactor. A layer deeper, Europe’s adoption of an open-ended QE-style program shifts the burden for maintaining stability in global financial markets off of the Fed’s shoulders. Given the US central bank is the largest player in the central banking circle, helms the most used reserve currency and took up the mantle as the leader on unconventional policy; the Fed had to walk a tight rope for supporting growth and maintaining stability in global markets. With the BoJ and ECB now sporting active QE programs, Chairwoman Yellen and crew can start to take steps towards normalization (more likely rate hikes than asset purchases) to start acclimatizing the market.

With the capital and FX markets both fully tuned into the course of global monetary policy – the former for ‘risk’ interests and the latter focused on relative return – next week’s FOMC rate decision will be an important fundamental milestone. Given the minutes of the December meeting made it clear that there was no chance a hike could come before April, no imminent changes are expected. Furthermore, the rhetoric in the statement that accompanies this update will offer no clear commitments. However, investors don’t need definitive language. If the group doesn’t materially soften its language in the wake of so much dovish adjustment among the central bank community, the market will interpret it as a hawkish outcome. Another highlight to watch for the coming period is the US 4Q GDP reading. Keeping pace with the relatively robust economic forecasts from the Fed, market and IMF is vital for maintaining such a divergent monetary policy trajectory.

Euro Suffers Biggest Drop in Three Years on Massive ECB QE

Nearly six years after the Fed and Bank of England first introduced the concept and 21 months after the Bank of Japan followed fell in line, the European Central Bank (ECB) has adopted an open-ended quantitative easing (QE) program. For Euro traders, this outcome was expected as it was considered necessary after the range of efforts taken to this point have failed to generate lasting growth and the region has fallen into a state of dis-inflation. On the surface, the program was larger and more comprehensive than the consensus had anticipated. A €60-billion-per-month effort (starting in March and going at least through September 2016) equates to a €1.1 trillion balance sheet increase. Targeting sovereign, Eurozone institution and private-sector debt; the effort generally mirrors that of the Fed. For the Euro, this is a serious bearish weight. However, the rumblings of doubt over this program’s effectiveness for economic objectives is already loud. Equally as troubling, there is serious skepticism that the most recent wave of stimulus can buy another extended period of market quiet against rising global volatility levels.

British Pound: Will 4Q GDP Forecasts Revive BoE Rate Forecasts?

Over the past six months, no other major experienced a bigger swing in the monetary policy expectations than the British Pound. At one point pricing in over 150 bps of rate hikes from the BoE through the end of 2015, there is now debate as to whether the MPC will move even once before the year is out. While the group has certainly softened its rhetoric, the market is far more aggressive in its dovish view. This opens the door to a dramatic response to data or commentary that reinforces a more timely pace. Next week’s UK GDP reading is certainly capable.

New Zealand Dollar Facing Clarity on the Majors’ Most Debated Policy Outlook

While the Fed decision will stand as top event risk for the broader FX market given its outlier status, the greatest market-movement potential for a specific currency likely rests with the RBNZ decision. Not only is the bank’s head Graeme Wheeler prone to blunt statements, but the market has deviated aggressively from his most recent lean (modestly hawkish) due this week’s CPI. If he maintains course, Kiwi could snap back.

Chinese Yuan Responds to PBoC’s Biggest Reference Rate Cut in Nearly 10 Months

The pressure on fixed and managed exchange rate pegs continues in the wake of last week’s SNB destructive monetary policy reversal. The media has focused sharply on both Denmark’s and Hong Kong’s multi-decade policies as their counterparts are far larger and carry significantly more influence. Yet, what happens when the pressure increases on two of the biggest players – the Dollar and the Chinese Yuan?

Emerging Markets Heartened by Stimulus, But Skepticism an Obvious Shadow

Emerging market’s rallied for a second day with the MSCI EM ETF hitting a two month high Thursday on confirmation that another large wave of market-satiating QE would be pumped into the market. The market has had plenty of experience with connecting stimulus with performance in riskier regions and assets. But what if that confidence doesn’t hold out this time? This segment will offer an early cue the ECB’s influence.

Gold: Not Much Alternative Currency Appeal to the ECB’s New Stimulus Ramp

Thursday, the global markets found out about the biggest stimulus injection since April 2013 when the BoJ introduced its QQE program. Yet, what would this natural currency burden do for the one-time favorite ‘alternative store of wealth’? Little. Gold did rallied 2.4 percent on the day versus the Euro, but that is a modest response. What’s more, it doesn’t seem an ‘anti-currency’ view as it was little budged versus the USD.

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ECONOMIC DATA

GMTCurrencyReleaseSurveyPreviousComments
1:35JPYMarkit/JMMA Japan Manufacturing PMI (JAN P)52Has been showing expansion every month in 2014 except when Japan raised the sales tax in April
1:45CNYHSBC China Manufacturing PMI (JAN P)49.549.6Has been showing contraction in 8 months in 2014. Might indicate signs of weakening growth.
8:00EURMarkit France Manufacturing PMI (JAN P)48.047.5The Composite PMI has been showing contraction for most of 2014.
8:00EURMarkit France Composite PMI (JAN P)50.149.7
8:00EURMarkit France Services PMI (JAN P)50.850.6
8:30EURMarkit/BME Germany Manufacturing PMI (JAN P)51.751.2It has been showing expansion in 2014, but the measure has been trending lower.
8:30EURMarkit Germany Services PMI (JAN P)52.552.1
8:30EURMarkit/BME Germany Composite PMI (JAN P)52.452
9:00EURMarkit Eurozone Manufacturing PMI (JAN P)51.050.6It has been showing expansion in 2014, but the measure has been trending lower. This measure isn’t likely to be market moving as the ECB has started a new QE program.
9:00EURMarkit Eurozone Services PMI (JAN P)52.051.6
9:00EURMarkit Eurozone Composite PMI (JAN P)51.751.4
9:30GBPRetail Sales (MoM) (DEC)-0.7%1.7%Has been showing a positive rate of increase on a YoY Basis
9:30GBPRetail Sales (YoY) (DEC)3.4%6.9%
13:30USDChicago Fed Nat Activity Index (DEC)0.480.92Has been showing that America Has been growing at an above average rate for most of 2014.
13:30CADBank Canada CPI (MoM) (DEC)-0.3%-0.2%Inflation has met the BOC’s inflation target of 2%. However, this measure might not be market moving as the BOC has recently cut interest rates.
13:30CADBank Canada CPI Core (YoY) (DEC)2.3%2.1%
13:30CADRetail Sales (MoM) (NOV)-0.2%0.0%Has been positive in 2014 except for two months.
13:30CADRetail Sales Less Autos (MoM) (NOV)0.1%0.2%
14:45USDMarkit US Manufacturing PMI (JAN P)5453.9Has been in expansion in 2014. This measure might indicate a strengthening US economy.
15:00USDExisting Home Sales (MoM) (DEC)2.2%-6.1%Has been rising in 2014. The Fed has voiced concerns over a slowdown in the housing market.
15:00USDExisting Home Sales (DEC)5.04M4.93M
15:00USDLeading Indicators (DEC)0.4%0.6%Indicates that economy is going to continue strong growth
GMTCurrencyUpcoming Events & Speeches
8:00GBPBOE’s Mark Carney Speaks in Davos
11:40GBPBOE’s Gracie Speaks in London

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 GMTSCANDIES CURRENCIES 18:00 GMT
CurrencyUSD/MXNUSD/TRYUSD/ZARUSD/HKDUSD/SGDCurrencyUSD/SEKUSD/DKKUSD/NOK
Resist 215.59002.500012.70007.81651.3650Resist 28.74006.85008.4735
Resist 115.00002.400011.87507.80751.3475Resist 18.13756.33257.8360
Spot14.88202.326811.73087.75451.3372Spot7.93516.26887.7560
Support 114.38002.190010.25007.74901.3200Support 17.52005.91007.2945
Support 213.68002.07009.37007.74501.2000Support 27.32855.77756.7280

INTRA-DAY PROBABILITY BANDS 18:00 GMT

\CCYEUR/USDGBP/USDUSD/JPYUSD/CHFUSD/CADAUD/USDNZD/USDEUR/JPYGold
Res 31.19861.5261120.521.02251.19330.81590.7844143.031243.42
Res 21.19571.5229120.171.01981.19070.81360.7820142.621236.80
Res 11.19281.5198119.831.01721.18810.81130.7796142.221230.19
Spot1.18701.5135119.131.01191.18290.80660.7749141.411216.95
Supp 11.18121.5072118.431.00661.17770.80190.7702140.601203.71
Supp 21.17831.5041118.091.00401.17510.79960.7678140.201197.10
Supp 31.17541.5009117.741.00131.17250.79730.7654139.791190.48

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--- 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

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