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Euro Heading into the Lion’s Den as Eurozone-Greece Talks Scheduled

Euro Heading into the Lion’s Den as Eurozone-Greece Talks Scheduled

2015-02-11 04:21:00
John Kicklighter, Chief Strategist
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Talking Points:

  • Dollar Holds Fast as Fed Officials Feed Rate Hike Speculation
  • Euro Heading into the Lion’s Den as Eurozone-Greece Talks Scheduled
  • British Pound Feels EU Connections, Awaits BoE Quarterly Report

Dollar Holds Fast as Fed Officials Feed Rate Hike Speculation

The Dollar is holding its ground rather than progressing. While Fed rhetoric continues to actively build interest in rate speculation, the forecast for a ‘mid-2015’ hike may be a saturated theme. In the meantime, there is untapped potential in the troubled situations for the Greenback’s major counterparts. As the Forex market’s primary ‘alternative’ (reserve) currency, downgraded yield forecasts for one region or financial trouble for another will find a majority of capital flowing to the US financial system. At the top of the Dollar trader’s list of fundamental cues to watch moving forward is the situation in the Eurozone (more on this below). While the region’s leaders and central bank may have better prepared it against contagion risk from flare ups like a Greece standoff, it is unlikely that they can avoid capital flight.

Adding to the Dollar’s counterparty strength; the BoJ is maintaining its easing path, swaps are pricing in an RBA and RBNZ rate cuts (37 and 13 bps over 12 months, and the BoE – the Fed’s closest peer – is on pause ahead of its quarterly report due Thursday. For the Fed’s own bearing, the 44 bps worth of hikes being priced in through next February offers leverage in its contrast. This past session, Richmond Fed President Lacker (a voter) repeated a June time frame for the first rate hike was an “attractive option”. Meanwhile, Kansas City Fed President George took a different tack when she remarked that hiking rates earlier rather than later can help head off an asset bubble. From the market’s perspective, Fed Funds futures are not pricing in the first full hike until the October meeting while a recent Reuters poll of Primary Dealer found 10 of 19 believed the first hike would come in June (previously it was 13) and the median expected a 0.75 percent rate at the end of the year. There is room to build or collapse the rate view, but a meaningful shift in ‘risk’ trends remains top potential.

Euro Heading into the Lion’s Den as Eurozone-Greece Talks Scheduled

The sound bites about the Eurozone-Greece debt standoff crossed the wires at lightning speed this past session. And little of it sounded encouraging. Some media reports quoting ‘insiders’ in the two camps suggest both sides are more open to compromise than the leaders’ commentary lets on. However, if it is between Prime Minister Tsipras’ own public statements and an unnamed source’s reassurances, it is more prudent to take the policymaker’s threats and beliefs at face value. This past session, Tsipras put his hardline negotiation terms up to a confidence vote and won strong support. Among the terms, he said he would not ask for a bailout extension, will seek a bridge loan (with no new austerity measures attached) to negotiate through June, and they would not accept Troika auditing. Those would be difficult terms for Eurozone officials to swallow. For the more conservative, they are likely fully unacceptable. German Finance Minister Schaeuble for example said there would be no more time (refuting speculation of the six-month extension), that Greece can’t “negotiate something new” and that it would be “over” if the country doesn’t ask for an extension. Those are diametrically opposing stances. While there is always room for compromise and for yielding concessions, it is worth considering what happens if Greece eventually leaves the Eurozone.

British Pound Feels EU Connections, Awaits BoE Quarterly Report

High profile event risk can prove exceptionally market moving or lack impetus altogether depending on the outcome and the market’s expectations. However, there is a far more consistent market influence when it comes to a fundamental storm: a drop in activity and withdrawal of exposure in the lead up to the event’s dawning. That is what we should consider for Pound pairs in the lead up to Thursday’s Bank of England Quarterly Inflation report – a key insight into speculation surrounding the central bank’s plans for that deferred rate hike. In the meantime, watch for spillover effects from the Eurozone’s more active issues as the EU connection can make for easier transmission.

Canadian Dollar Worst Performer as BoC Feeds Speculation of Further Cuts

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.

Australian Dollar: A 41% Probability of an April Hike Heading into Jobs Data

The RBA cut interest rates at its last meeting, and concerns about the economy as well as the ‘fundamentally expensive’ currency seems to have the market believing there is a good probability of a back-to-back easing at the next meeting on March 3. Swaps arepricing in a 41 percent probability of another 25 bp cut. Given the sensitivity of the market to rates, Thursday’s jobs data can leverage a big shift here.

Emerging Market Currencies Drop Lead by Brazil Real’s Tumble to Decade Low

Both Emerging Market equity and sovereign bond benchmarks have eased the past week, but they are far from freefall. In a risk-adverse world, the higher risk assets in these regions should theoretically be leaders in deleveraging. So is this effective policy, complacency or hope? From the FX ranks, the Ruble is still meandering near record lows, while the Brazilian Real tumbled 2.2 percent to a 10-year low.

Gold Still Drawing Speculative Appetite, Struggling for Systemic Demand

Looking to ETF holdings and the CFTC’s Commitment of Traders report, we find there significant demand building in certain areas for gold. However these are avenues that could reasonably labeled ‘speculative’. Where is the systemic demand for inflation and ‘deteriorating fiat’ hedges? It is still not showing in the face of Greece and new stimulus programs. If complacency is broken, will this change?

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

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

23:30

AUD

Westpac Consumer Confidence Index (FEB)

93.2

This month’s figure had the biggest MoM increase of 8.0%, the highest reading since Sept 2011. Measure is at its highest since Jan 2014.

23:30

AUD

Westpac Consumer Confidence (MoM) (FEB)

2.4%

0:30

AUD

Investment Lending (MoM) (DEC)

-2.2%

Last figure’s contraction was the biggest since January 2014.

0:30

AUD

Value of Loans (MoM) (DEC)

-0.2%

This month’s figure of 3.8% m/m was the highest since Sept 2013.

0:30

AUD

Home Loans (MoM) (DEC)

2.0%

-0.7%

Increase of 2.7% m/m was the highest since Sept 2013.

2:01

NZD

Reinz House Price Index (YoY) (JAN)

6.0%

RBNZ has stated that they will look at the housing market developments when deciding on policy.

2:01

NZD

REINZ House Price Index (MoM) (JAN)

-1.0%

02:01

NZD

REINZ House Sales (YoY) (JAN)

24.2%

12:00

USD

MBA Mortgage Applications (FEB 6)

1.3%

A volatile measure that could indicate future housing demand

19:00

USD

Monthly Budget Statement (JAN)

-$19.0B

-$10.3B

21:30

NZD

Business NZ Performance of Manufacturing Index (JAN)

57.7

Has been showing expansion since October 2012. Might show a fundamentally strong macroeconomic picture.

23:50

JPY

Machine Orders (MoM) (DEC)

2.3%

1.3%

A volatile measure on MoM basis that isn’t likely to change the market’s expectation of future BOJ policy.

23:50

JPY

Machine Orders (YoY) (DEC)

5.6%

-14.6%

23:50

JPY

Domestic Corporate Goods Price Index (MoM) (JAN)

-0.6%

-0.4%

Inflation from the production side can impact the CPI. The BOJ has stated that QQE until CPI is at 2%.

23:50

JPY

Domestic Corporate Goods Price Index (YoY) (JAN)

1.1%

1.9%

GMT

Currency

Upcoming Events & Speeches

07:00

EUR

ECB’s Coeure Speaks at Conference

10:00

EUR

Greece to Sell 3-Month Bills

10:30

GBP

UK to Sell £1.75 bln in 30 Year Bonds

-:-

EUR

ECB Effectively Ends Acceptance of Greek Bonds as Collateral

13:00

USD

Fed's Fisher Speaks to Economists in New York

13:50

GBP

BOE FPC Member Clara Furse Speaks in Birmingham

16:30

EUR

Eurozone Finance Ministers Hold Special Meeting on Greece

22:00

AUD

RBA Assistant Governor Debelle Speaks

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

15.5900

2.5000

12.7000

7.8165

1.3650

Resist 2

8.7400

7.1000

8.4735

Resist 1

15.0000

2.4000

11.8750

7.8075

1.3475

Resist 1

8.4000

6.8500

7.8360

Spot

14.5795

2.3616

11.5729

7.7521

1.3392

Spot

8.1846

6.5466

7.7250

Support 1

14.3800

2.1900

10.2500

7.7490

1.3200

Support 1

7.5200

5.9100

7.2945

Support 2

13.6800

2.0700

9.3700

7.7450

1.2000

Support 2

7.3285

5.7775

6.7280

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

1.1508

1.5343

119.16

0.9161

1.2517

0.8033

0.7563

135.63

1320.77

Res 2

1.1473

1.5307

118.83

0.9126

1.2485

0.8008

0.7537

135.21

1313.98

Res 1

1.1438

1.5272

118.50

0.9090

1.2453

0.7983

0.7512

134.80

1307.20

Spot

1.1369

1.5202

117.84

0.9019

1.2389

0.7932

0.7461

133.96

1293.62

Supp 1

1.1300

1.5132

117.18

0.8948

1.2325

0.7881

0.7410

133.12

1280.04

Supp 2

1.1265

1.5097

116.85

0.8912

1.2293

0.7856

0.7385

132.71

1273.26

Supp 3

1.1230

1.5061

116.52

0.8877

1.2261

0.7831

0.7359

132.29

1266.47

--- 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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