Dollar Slammed by Risk Rally, Inflation and Capital Measures Ahead

DailyFX

Talking Points:

  • Dollar Slammed by Risk Rally, Inflation and Capital Measures Ahead
  • Euro Unfazed by Inflation Downgrade and Echoing Draghi Concern
  • Yen Crosses Rally with Capital Markets

Dollar Slammed by Risk Rally, Inflation and Capital Measures Ahead

The volatility build up and ominous headlines of global political tensions with the pending Crimea referendum vote heading into the weekend failed to carry through the seismic shift in sentiment they threatened Monday. The standard bearers for sentiment were broadly higher through Monday’s session – though conviction seemed to vary from asset class to asset class. Leading the pack, equity indexes curbed recent aggressive declines with the S&P 500 charging one percent higher to close back above 1,850. The carry-based yen crosses were similarly uniform in their gains, though progress was restrained; but the emerging markets (arguably in the direct line of the weekend event risk) were mixed. Though there are cracks in the façade of this sentiment buoy, the dollar was preoccupied with the bigger picture.

On an individual basis, the Dow Jones FXCM Dollar Index (ticker = USDollar) fell for a fourth consecutive trading session to linger just above the 10,500-mark – on the verge of breaking to a four-month low. The greenback’s circumstances look just as alarming when paired up to major counterparts. EURUSD closes slowly in on the 1.4000-mark, AUDUSD and NZDUSD are closing in bullish breakouts, and GBPUSD looks ready to revive its primary trend after a long period of indecision. Traditional risk trends are certainly playing a part in this lackluster performance for the dollar, but it is more a lack of fear – rather a renewed appetite for risk – that seems to be deflating the currency. With a three-month correlation between the USDollar and medium-term FX Volatility Index at 0.65 (strong), the activity gauge’s proximity to 14-month lows bodes poorly.

A positive push on the sentiment front is a slow-developing burden for the greenback, but we may see an impetus arise from other regions of the fundamental map. In advance of Wednesday’s FOMC rate decision, the February CPI gives us a view of the ‘other side’ of the monetary policy discussion. While the core reading is expected to maintain a 1.6 percent pace, headily inflation is seen slowing to a 1.2 percent clip. Diversification is another concern that will be fed. The delayed TIC figures are due and the previous updates near-five year low along with the report this past week that holdings of Treasuries for foreign accounts at the Fed dropped a record $100 billion will put stoke interest.

Euro Unfazed by Inflation Downgrade and Echoing Draghi Concern

EURUSD is inching ever closer to the 1.4000-level. Through the opening session of the week, the world’s most liquid pair was only able to manage an 8 pip gain - but it nevertheless represents a fresh two-and-a-half year high. Capital diversification from central banks to institutional investors to individual traders continues to funnel capital into Euro-area assets. Though the value of these target assets may be richly priced – periphery sovereign bond yields are at record low – the trend has the same hypnotic qualities as the persistent S&P 500 climb. In other words, it is difficult to reverse the tide. The downward revision to the February Eurozone CPI reading Monday fell short. The0.7 percent reading matches a four-year low and recalls ECB President Draghi’s warning last week that the strong currency is weighing price pressures and becoming increasingly important to monetary policy. Ahead, we have another noteworthy round of event risk in a Eurozone investor sentiment survey, region wide trade number and another Portugal bond buyback. Yet, none of these strikes the right cord of fear.

Yen Crosses Rally with Capital Markets

Following in the wake created by the global equities market, the risk-sensitive yen crosses rose between 1.1 (AUDJPY) and 0.3 percent (CHFJPY) to start the week. With heavier gains skewed in favor of the more carry intensive pairs, there is certainly a ‘risk’ element to the move. However, there may also be a factor ofgrowing optimism of a BoJ stimulus upgrade. BoJ Governor Kuroda remarked early Monday that he could act at any time, but there was little expected drag from next week’s tax hike. Both the yen and JGBs seem to be holding out hope.

British Pound: Carney to Speak on BoE Strategy Ahead of Minutes, Jobs Report

The sterling continues to find itself adrift and at the mercy of stronger counterparts – for GBPUSD, this has translated into a listlessness above 1.6600. The next 48 hours, however, may provide us with some charge from the sterling. In Tuesday’s session, Chancellor Osborne is expected to announce outgoing BoE Deputy Governor Charlie Bean’s replacement at as voter at the central bank and BoE Governor Mark Carney will speak on the group’s long-term strategic plan after a review by McKinsey & Co. Wednesday, we have BoE minutes and jobs data.

Australian Dollar Rebounds as Rate Cut Speculation Eases Further

A universal rally from the Aussie dollar that coincides with the general ‘risk’ bounce may lead some to believe the currency has regained its straightforward carry-yield appeal, but that is a relationship that will take time to repair. Yet, notable changes in monetary policy expectations from high-profile market participants may return the Aussie to its former glory. Westpac’s Chief Economist wrote off a further RBA hike in 2014.

New Zealand Dollar Looks to 4Q Current Account to Validate Rate Hike Regime

Last week, the RBNZ hiked its benchmark lending rate and Governor Wheeler made clear his intention to carry through with further tightening of the monetary policy reins through the coming two years. And yet, NZDUSD is still not above 0.8600. Those that were looking for the FX gains on renewed carry interest are no doubt concerned, and will watch data like the upcoming 4Q current account read for any uneven market impact.

Emerging Markets: Ruble Best Performer after Weekend Crimea Vote

According to exit polls, the Crimea referendum vote this weekend drew over 80 percent of eligible voters and over 95 percent choose to join the Russian Federation. As expected, the succession ballot was met with claims of illegality and threats of sanctions against Russia by the European Union and US. Yet, market showed little concern. The Markit Vectors Russia ETF rallied 3 percent and the Ruble 1 percent.

Gold Bugs Surprised by Lack of Market Fear Around Ukraine

Despite the risk of financial disruption due to the Crimea standoff, the bounce in risk trends has put off gold. The metal dropped 1.2 percent Monday – its biggest drop in two weeks – on the heaviest volume in the derivatives market in three months. This is a marked correction, but not yet a definitive trend change considering COT figures show net speculative long futures holdings rose the 11th time in 12 weeks’ last week.**Bring the economic calendar to your charts with the DailyFX News App.

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

1:30

CNY

China February Property Prices

Any decline or slowing of home prices will add to risk factors coming out of China.

6:00

JPY

Machine Tool Orders YoY (FEB F)

--

26.00%

January was the highest print since 2011

10:00

EUR

German ZEW Survey Current Situation (MAR)

52

50

After ZEW Germany Expectation of Economic Growth hit highs not seen since 2009 in December, the figure has been on the decline since.

10:00

EUR

German ZEW Survey Expectations (MAR)

52

55.7

10:00

EUR

ZEW Survey Expectations (MAR)

--

68.5

10:00

EUR

Trade Balance SA (JAN)

13.9B

13.7B

2013 has been the best year on our 10 year records for overall Euro-Area Trade Balance.

10:00

EUR

Trade Balance NSA (JAN)

--

13.9B

12:30

CAD

Manufacturing Sales MoM (JAN)

0.5%

-0.9%

12:30

USD

CPI MoM (FEB)

0.1%

0.1%

These are the last major data prints ahead of Wednesday’s FOMC Rate Decision. Although market expectations call for an addition $10B reduction in the Fed’s asset purchase program, weak data here may provide for more dovish guidance cautionary tone. Taking into account higher fuel prices in February, a case can be made for a beat of 0.1% despite weak demand on poor weather in the U.S..

12:30

USD

CPI Ex Food and Energy MoM (FEB)

0.1%

0.1%

12:30

USD

CPI YoY (FEB)

1.2%

1.6%

12:30

USD

CPI Ex Food and Energy YoY (FEB)

1.6%

1.6%

12:30

USD

Housing Starts (FEB)

911K

880K

12:30

USD

Housing Starts MoM (FEB)

3.5%

-16.0%

12:30

USD

Building Permits (FEB)

960K

937K

12:30

USD

Building Permits MoM (FEB)

1.6%

-5.4%

21:45

NZD

BoP Current Account Balance (4Q)

-1.309B

-4.780B

Note that impact from this data print may be limited ahead of NZD GDP this week.

21:45

NZD

Current Account GDP Ratio YTD (4Q)

-3.3%

-4.1%

23:30

AUD

Westpac Leading Index MoM (FEB)

-0.2%

23:50

JPY

Trade Balance (FEB)

-¥601B

-¥2790B

Japan continues to hit its worst trade balance deficit on record month after month. A break of this could provide some support for YEN crosses.

23:50

JPY

Trade Balance Adjusted (FEB)

-¥894B

-¥1819B

23:50

JPY

Exports YoY (FEB)

12.4

9.5

23:50

JPY

Imports YoY (FEB)

7.3

25

GMT

Currency

Upcoming Events & Speeches

6:45

CHF

SECO March 2014 Economic Forecasts

20:30

USD

API Weekly Statistical Bulletin

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

14.0200

2.3800

12.7000

7.8165

1.3650

Resist 2

7.5800

5.8950

6.5135

Resist 1

13.5800

2.3000

11.8750

7.8075

1.3250

Resist 1

6.8155

5.8475

6.2660

Spot

13.2934

2.2478

10.8921

7.7616

1.2684

Spot

6.3739

5.3841

5.9554

Support 1

13.0000

2.1000

10.2500

7.7490

1.2000

Support 1

6.0800

5.3350

5.7450

Support 2

12.6000

1.7500

9.3700

7.7450

1.1800

Support 2

5.8085

5.2715

5.5655

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

1.3953

1.6728

103.84

0.8841

1.1192

0.9043

0.8548

144.06

1381.75

Res 2

1.3930

1.6701

103.60

0.8824

1.1172

0.9021

0.8527

143.71

1376.01

Res 1

1.3907

1.6674

103.37

0.8807

1.1152

0.8998

0.8505

143.35

1370.27

Spot

1.3861

1.6620

102.90

0.8773

1.1112

0.8954

0.8462

142.63

1358.79

Supp 1

1.3815

1.6566

102.43

0.8739

1.1072

0.8910

0.8419

141.91

1347.31

Supp 2

1.3792

1.6539

102.20

0.8722

1.1052

0.8887

0.8397

141.55

1341.57

Supp 3

1.3769

1.6512

101.96

0.8705

1.1032

0.8865

0.8376

141.20

1335.83

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

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