Dollar Threatening Serious Reversal as Dow Index Hits Record High

DailyFX

  • Dollar Threatening Serious Reversal as Dow Index Hits Record High
  • Australian Dollar Rallies Across the Board on Carry Interest, GDP, RBA
  • Canadian Dollar: Why the BoC Rate Decision Could Spark Volatility
  • Japanese Yen Has Flatlined Since Income BoJ Officials Issued Warnings
  • Euro Looks Primed for Breakout but Beware the ECB
  • British Pound Unresponsive to Strong Services, Retail Sales Data
  • Gold Volatility Drops Despite Japanese Stimulus Vows, What Next?

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Dollar Threatening Serious Reversal as Dow Index Hits Record High

Though momentum has yet to build, there is a uniform selling pressure setting up behind the US dollar. We see this in the Dow Jones FXCM Dollar Index (ticker = USDollar) pullback that threatens to reverse the month-long bull run to 10,500 as well as the EURUSD stabilizing just above 1.3000. A slip from the greenback should not be surprising considering the favored benchmark for investor sentiment – US equity indexes – made a serious thrust higher this past session. The Dow Jones Industrial Average rocketed to a new record high as investors casted a vote in stimulus (not actual growth). And, while the push lacks for a serious foundation of fundamentals as well as volume, we have learned not to underestimate the power of stimulus. Itis follow through that matters, not the breakout; so watch Wednesday risk trends closely.

Australian Dollar Rallies Across the Board on Carry Interest, GDP, RBA

We have absorbed two major pieces of event risk for the Australian dollar this week, and the currency has used the fundamental to drive a meaningful rebound. Though AUDUSD made a turn before the heaviest flow began, the Reserve Bank of Australia (RBA) rate decision and 4Q GDP figures certainly pulled their weight with keeping the currency buoyant. Where the central bank rate decision maintained the threat that there was scope for further easing, there was a notable lack of language to suggest that such a move would be made in the immediate future. The growth report this morning was similarly disarming. While the quarterly GDP report met expectations of 0.6 percent expansion (the previous quarter was revised upwards to 0.7 percent), it nevertheless spoke to more than two decades of expansion without a technical recession. This is data that supports a more dominant theme. Positive risk trends currently takes that mantle, but will it last?

Canadian Dollar: Why the BoC Rate Decision Could Spark VolatilityMost FX traders have become conditioned to expect the Bank of Canada (BoC) monetary policy meetings to be completely overlooked as the authority has not deviated from its path. However, at the past meeting, the steady path towards the prized, eventual rate hike started to flag. We have seen the Canadian dollar drop in the past weeks against its safe haven counterpart (the US dollar) while risk trends have firmed. Overnight swaps are not reflecting an easing policy heading forward, but the sharp drop in the Canadian 10-year government bond yield these past few weeks suggests something is amiss. There is speculation that BoC Governor Carney and crew will drop their commitment to the elusive first rate cut for the majors. If this is indeed realized, it will likely spur further losses for the loonie. Otherwise, shorts have made a misstep.

Japanese Yen Has Flatlined Since Income BoJ Officials Issued Warnings

The ramp for stimulus expectations can’t be driven any higher. Over the past few days, we have heard testimony from Bank of Japan (BoJ) Governor-nominee Kuroda and Deputy Governor-nominees Nakaso and Iwata that was uniformly aggressive in stimulus warnings. With vows to move up the 2014 stimulus program, become more ‘creative’ with stimulus and keeping foreign bond purchases as an option; the outlook for the BoJ effort rivals the biggest player in the mix – the Fed. That said, the yen has gone nowhere through these obvious warnings. Given the positive bearing on risk trends (favorable for short-yen, carry positions), the lack of engagement for the yen crosses is remarkable. This goes a little beyond a simple assumption that the market’s are awaiting action on vowed policy effort. And, Thursday’s BoJ rate decision isn’t the play for it considering the new regime starts with the April 4 meet. Those already short yen will have to bide their time and hope risk doesn’t cave.

Euro Looks Primed for Breakout but Beware the ECB

Both EURUSD and EURJPY have leveled off from the tentative but volatile bearish trends sparked last week. There are two catalysts at play for the Euro – expectations for European Central Bank (ECB) monetary policy and the revival of Euro-area financial risk – and the latter seems to have run short on fuel. Last Monday’s market-wide Euro selloff was driven by news that Italy’s election had ended in a political gridlock. It doesn’t look like a coalition is in the cards with Bersani refusing to deal with Berlusconi and Grillo unwilling to work with either party. Italian President Napolitano reportedly favors a technocrat led government (the same that Mario Monti led), but once again Grillo has vowed not to support such an option. It these avenues fail, the remaining option is a reelection which will take time. This is a mess for Italy and the region, but it is not itself an immediate threat to stability. If we want something kinetic, we likely have to turn monetary policy. Speculation of a dovish turn (discussion of new stimulus or rate cut) from the ECB is building, but it hasn’t shown through in swaps. It may be a wait until Thursday.

British Pound Unresponsive to Strong Services, Retail Sales Data

There was a round of encouraging data to hit the UK docket over the past 25 hours, but it did nothing to help out the sterling. As the GBPUSD’s more-than-1300-pip drop these past two months demonstrates, the market’s heavy primary concern for the pound is that the Bank of England will join the competitive devaluation game and seriously debase the currency moving forward. That is the kind of concern can render indicators showing the biggest jump in retail sales in three years and continued growth in the service sector inert. There is little event risk of note on the docket between now and Thursday’s Bank of England (BoE) rate decision and too much speculation has gone into the assumptions of policy for the market to be sidetracked now. Only a true shift in risk trends can establish a new trend outside of monetary policy’s influence.

Gold Volatility Drops Despite Japanese Stimulus Vows, What Next?

Gold has found itself without a definable trend for the past three trading days. This is a familiar pattern for the precious metal which has transitioned between active trending and tense congestion for months. The metal is now approximately $50 off the $1,525 range low established for the metal since July of 2011, and it awaits a decisive fundamental driver. Time and again, the most effective spark for momentum behind this commodity is a definitive change in the global stimulus regimes. With the BoJ Governor and Deputy Governors’ testimony this week, it would seem that another big wave of fiat devaluation is ahead – driving more capital from under the Japanese yen and into anti-currency metal. And yet, gold hasn’t seen a daily range over $20 so far this week. Do gold bugs need to see that actual capital inflow from Japanese interests? Is there an offsetting concern in early speculation of the early Fed stimulus wind down? Or perhaps gold is just waiting for the dollar to tumble…

**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

GBP

New Car Registrations (YoY)

11.50%

JPY

Bankruptcies (YoY)

-5.20%

0:01

GBP

BRC Shop Price Index (YoY)

0.60%

1.5Y downtrend; Declining inflationary pressure in retail price.

0:30

AUD

Gross Domestic Product (QoQ)

0.60%

0.50%

Boosted by rate cuts in 2012. Low figures would encourage RBA will cut rate further and ease policies.

0:30

AUD

Gross Domestic Product (YoY)

3.00%

3.10%

10:00

EUR

Euro-Zone Gross Domestic Product s.a. (QoQ)

-0.60%

-0.60%

Contraction is expected according to IMF and EU forecast. More easing may be expected.

10:00

EUR

Euro-Zone Gross Domestic Product s.a. (YoY)

-0.90%

-0.90%

10:00

EUR

Euro-Zone Household Consumption (QoQ)

-0.10%

Remained negative since 09/11.

10:00

EUR

Euro-Zone Gross Fixed Capital (QoQ)

-0.60%

A rebound from 06/12’s low reflects positive business confidence

10:00

EUR

Euro-Zone Government Expenditure (QoQ)

-0.10%

Remained negative amid austerity

12:00

USD

MBA Mortgage Applications

-3.80%

Subject to seasonal changes.

13:15

USD

ADP Employment Change

170K

192K

Steadily on the rise for 6 months.

15:00

CAD

Bank of Canada Rate Decision

1.00%

1.00%

Expected to remain unchanged until Mark Carney leaves in June.

15:00

USD

Factory Orders

-2.20%

1.80%

Volatile data; 1Y avg. 0.2; high 4.5; low -5.1.

15:00

CAD

Ivey Purchasing Managers Index SA

56

58.9

3M upturn; 1Y avg. 52.17; high 63.5; low 47.5.

15:30

USD

DOE U.S. Crude Oil Inventories

1000K

1130K

Companies scaled back inventories 2 weeks before sequester budget cuts began.

22:30

AUD

AiG Performance of Construction Index

36.2

Typically peak at the year end.

23:00

NZD

QV House Prices (YoY)

6.20%

Steadily increasing since 2011.

23:50

JPY

Official Reserve Assets

$1267.3B

Steadily declining since 2011, used for foreign asset purchases.

23:50

JPY

Japan Buying Foreign Bonds (Yen)

-¥665.4B

Demand for foreign stock surged in the past week. Purchases on JGBs increased slightly.

23:50

JPY

Japan Buying Foreign Stocks (Yen)

-¥106.4B

23:50

JPY

Foreign Buying Japan Bonds (Yen)

-¥82.6B

23:50

JPY

Foreign Buying Japan Stocks (Yen)

¥190.4B

GMT

Currency

Upcoming Events & Speeches

13:15

USD

Fed's Plosser Speaks on Economic Outlook in Lancaster, PA

19:00

USD

U.S. Federal Reserve Releases Beige Book

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

2.0000

9.2080

7.8165

1.3650

Resist 2

7.5800

5.8300

6.1150

Resist 1

15.0000

1.9000

9.1900

7.8075

1.3250

Resist 1

6.8155

5.7350

5.8200

Spot

12.7532

1.7974

9.0234

7.7550

1.2374

Spot

6.4532

5.7038

5.7257

Support 1

12.5000

1.6500

8.5650

7.7490

1.2000

Support 1

6.0800

5.4440

5.5000

Support 2

11.5200

1.5725

6.5575

7.7450

1.1800

Support 2

5.8085

5.3350

5.3040

INTRA-DAY PROBABILITY BANDS 18:00 GMT

Currency

EUR/USD

GBP/USD

USD/JPY

USD/CHF

USD/CAD

AUD/USD

NZD/USD

EUR/JPY

GBP/JPY

Resist. 3

1.3195

1.5304

93.82

0.9445

1.0373

1.0317

0.8353

123.09

142.39

Resist. 2

1.3165

1.5270

93.53

0.9425

1.0354

1.0296

0.8332

122.61

141.94

Resist. 1

1.3135

1.5237

93.25

0.9404

1.0335

1.0275

0.8310

122.12

141.48

Spot

1.3075

1.5169

92.67

0.9363

1.0297

1.0232

0.8268

121.16

140.57

Support 1

1.3015

1.5101

92.09

0.9322

1.0259

1.0189

0.8226

120.20

139.66

Support 2

1.2985

1.5068

91.81

0.9301

1.0240

1.0168

0.8204

119.71

139.20

Support 3

1.2955

1.5034

91.52

0.9281

1.0221

1.0147

0.8183

119.23

138.74

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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