Dollar: ‘Twas the Day before the Fed and Not a Trader Was Stirring

DailyFX

  • Dollar: ‘Twas the Day before the Fed and Not a Trader Was Stirring
  • Japanese Yen Volatility Eases, Still Trending Higher
  • Euro Gains Traction Despite Weak Trade Data, Greek Rumblings
  • Australian Dollar Traders Should Keep an Eye on Bond Auctions
  • British Pound: May CPI Data Sets Up Carney’s First BoE Move
  • Swiss Franc Faces SNB Pressure and Loss of Banking Sector Appeal
  • Gold: Should We Expect a Pre-Fed Breakout?

Dollar: ‘Twas the Day before the Fed and Not a Trader Was Stirring

Small victories. The Dow Jones FXCM Dollar Index (ticker = USDollar) closed higher for the first time in five trading days, but by a tepid 0.1 percent on a particularly small range of 49 points. The markets are on edge ahead of Wednesday’s Fed rate decision. Against the backdrop of a very real chance that the world’s largest monetary policy supporter announces plans for a near-term ‘Tapering’ of its monthly QE3 injections – possibly even an immediately effective reduction – there is a serious curb on investors’ positioning until the heavy weather passes. In the meantime, there are tight technical patterns that present short-term breakout risks on various dollar-based pairs such as EURUSD, GBPUSD and USDJPY. Under these conditions, breakouts are likely; but follow through is very unlikely. Trade appropriately.

Japanese Yen Volatility Eases, Still Trending Higher

According to Japanese Finance Minister Aso and Chief Cabinet Secretary Suga, ‘Abenomics’ was received with overwhelming support by the G-8. The confidence this one-sided assessment inspires is rather limited, however, as the market is quick to recall similar statements made before the G-7 and G-20 meetings whereby both groups released statements that demanded / reassured that major economies would not purposefully manipulate their exchange rates for a competitive advantage. There is unlikely to be additional pressure laid upon the world’s third largest economy at this meeting given the recent volatility in the nation’s markets. Volatility measures for the Nikkei, Japanese Government Bond (JGB) and Japanese yen have all eased through this past session. Yet, with the Nikkei 225’s VIX still at 38 percent (the US S&P 500’s is 17 percent) and USDJPY expected volatility one week forward twice that of EURUSD at 17 percent; it is easy to set this market alight.

Euro Gains Traction Despite Weak Trade Data, Greek Rumblings

The Euro gained ground against all of its counterparts through the opening session of the week – though there was relatively little progress on the drive. When we have market-wide moves – bullish or bearish – it is sound sign that the particular currency itself was responsible for the move rather than the influence of ‘fundamental crosswinds’. The docket for the shared currency was relatively light for traditional indicators. Eurozone trade figures for April top the list with a €14.9 billion surplus that materially curbed the record €22.5 billion surplus from the previous month. Attempting to scratch the surface of the market’s indifference to returning regional financial troubles, we had a number of policy officials/groups deliver statements. Greece’s Prime Minister Samaras said national broadcaster ERT could be reopened, while Reuters noted that a cabinet reshuffle could come at the end of the month – attempts to quell growing backlash to austerity. Meanwhile ECB’s Weidmann and Mersch both spoke to the limitations to stimulus. On a positive note the Bundesbank upgraded its Germany 2Q GDP forecast, saying it likely ‘improved markedly’. In the upcoming session, a Eurozone ZEW (investor sentiment) and ECB President Draghi speech top the docket.

Australian Dollar Traders Should Keep an Eye on Bond AuctionsAdding to Monday’s slide, the Australian dollar is slowly extending its decline this morning. Through the opening session, risk trends were in control of the carry currency. Yet, this morning, the fundamental drive is closer to home. Both the RBA minutes’ comments and the results of a bond auction crossed the newswires this morning. The Treasury sold A$200 million in 2025 inflation-linkedbonds with a 1.16 percent yield and to 3.28 times demand. For comparison, a 2030 bond that was inflation linked drew a lower yield of 0.93 percent – suggesting fading appetite. As for the RBA minutes, scope for further cuts takes a backseat to a big increase in mentions of the Aussie dollar. Currency war participant?

British Pound: May CPI Data Sets Up Carney’s First BoE Move

We are in a transitional period for UK monetary policy. The probability of a change to policy and stimulus for the coming weeks is extremely small as Governor Mervyn King is bowing out and incoming Governor Mark Carney must get up to speed. Carney takes the reins officially on July 1 which means his first policy meeting at the helm will be the July 4 meeting – well timed for thin markets given the US holiday. That policy meeting will use the inflation statistics that are due in the upcoming London session. The year-over-year consumer (CPI) figure is expected to rebound from its second lowest read in three years (to 2.6 percent), but not enough to materially offset growth concerns. Anything that comes within reasonable bounds (within 2.8 to 2.2 percent) will likely be put on ice as the pressure will not be great enough to force a new Governor’s hand. Meanwhile, an eye should be kept on G-8 commentary from the UK’s side to establish trade, tax, foreign relations plans.

Swiss Franc Faces SNB Pressure and Loss of Banking Sector Appeal

The Swiss franc is a safe haven in the FX world for a multitude of reasons. However, both the government and central bank officials are threatening the long-term appeal of opening a legendary ‘Swiss bank account’. This week, both sides will weigh in on their effort to dissuade the inflow of international capital seeking harbor from financial instability and taxes. The Swiss National Bank (SNB) is scheduled for Thursday, but the threat of negative rates on excess reserves deposited on behalf of the nation’s banks still hangs heavy in the air – even if it is unlikely to be genuinely entertained by the group. More imminent and permanent to the franc is the wave of support to open Swiss banks’ books on foreign clients to foreign tax collectors. Swiss Finance Minister voiced support on an international effort to prevent tax evasion. In the upcoming session, the Lower House of Parliament is set to vote on this topic. The Upper House has already passed the bill.

Gold: Should We Expect a Pre-Fed Breakout?

Activity levels continue to diminish for gold in the lead up to the important Fed rate decision. Through the opening trading day this week, the precious metal covered a sparse $11.35 range – the smallest breadth since April 1. Compared to a rolling two-week average of daily trading ranges, this is an exceptionally quiet. That is the level of activity we usually expect before the release of a significant piece of event risk – like the Fed rate decision. It is perhaps more of a tail risk going forward that the central bank will actually expand its support of the financial markets through larger, monthly stimulus purchases. And, we are currently 23 percent off last year’s highs despite the introduction of the sizable $85 billion-per-month purchases in QE3. In other words, status quo can potentially encourage a recovery rally after April’s tumble; but it will do little to revive the long-term bull run as investors worry about the inevitably withdrawal of currency-devaluing stimulus.

**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

01:30

CNY

China May Property Prices

Policy makers are concerned about price inflation and introduced measures in March to calm the housing market.

02:00

CNY

Conference Board China May Leading Economic Index

The index will help paint a better picture as recent data points to a slowing Chinese economy.

04:30

JPY

Industrial Production (MoM) (APR F)

1.7%

With the BoJ outlining no new measures in the latest minutes, any data points that do not show improvements will nudge the BoJ to make moves.

04:30

JPY

JPY Industrial Production (YoY) (APR F)

-2.3%

06:00

JPY

Machine Tool Orders (YoY) (MAY F)

-7.4%

06:00

EUR

Euro-Zone 25 New Car Registrations (MAY)

1.7%

April data left the index positive for the first time since October, 2011.

08:30

GBP

PPI Input n.s.a. (MoM) (MAY)

0.0%

-2.3%

Last week’s inflation data pushed the pound higher as more monetary stimulus looks increasingly unlikely. If that data is any indication, we can see this data bode positive for the sterling.

08:30

GBP

PPI Input n.s.a. (YoY) (MAY)

2.5%

-0.1%

08:30

GBP

PPI Output n.s.a. (YoY) (MAY)

1.4%

1.1%

08:30

GBP

PPI Output Core n.s.a. (YoY) (MAY)

0.9%

0.8%

08:30

GBP

DCLG UK House Prices (YoY) (APR)

2.5%

2.7%

08:30

GBP

CPI (MoM) (MAY)

0.1%

0.2%

08:30

GBP

CPI (YoY) (MAY)

2.6%

2.4%

08:30

GBP

Core CPI (YoY) (MAY)

2.1%

2.0%

08:30

GBP

Retail Price Index (YoY) (MAY)

3.1%

2.9%

08:30

GBP

Retail Price Index Ex Mort Int.Payments (YoY) (MAY)

3.1%

2.9%

09:00

EUR

Euro-Zone ZEW Survey (Eco Sentiment) (JUN)

27.6

Germany continues to be a bright spot in an otherwise weak Euro-Zone. Survey estimates continue to point to a strong German economy.

09:00

EUR

German ZEW Survey (Current Situation) (JUN)

9.5

8.9

09:00

EUR

German ZEW Survey (Economic Sentiment) (JUN)

38.1

36.4

12:30

USD

CPI (MoM) (MAY)

0.2%

-0.4%

Weak inflation data has led some to question the merit of tapering anytime soon, although indications of consumer price index’s moving closer to 2% will damper those criticisms.

12:30

USD

CPI Ex Food & Energy (MoM) (MAY)

0..2%

0.1%

12:30

USD

CPI (YoY) (MAY)

1.4%

1.1%

12:30

USD

CPI Ex Food & Energy (YoY) (MAY)

1.7%

1.7%

12:30

USD

Housing Starts (MAY)

950K

853K

Housing starts are forecast to make a strong improvement in the month of May while data to the upside will continue to point to a strengthening U.S. economy.

12:30

USD

Housing Starts (MoM) (MAY)

11.4%

-16.5%

12:30

USD

Building Permits (MAY)

977K

1005K

12:30

USD

Building Permits (MoM) (MAY)

-2.8%

12.9%

23:50

JPY

Merchandise Trade Balance Total (Yen) (MAY)

-¥1202.8B

-¥881.9B

Exports will be a major factor in the growth of the Japanese economy. With the Yen paring some of its gains as of late, market participants will take note of any forecasts missed.

23:50

JPY

Adjusted Merchandise Trade Balance (Yen) (MAY)

-¥892.8B

-¥764.4B

23:50

JPY

Merchandise Trade Exports (YoY) (MAY)

6.4

3.8

23:50

JPY

Merchandise Trade Imports (YoY) (MAY)

11

9.5

GMT

Currency

Upcoming Events & Speeches

-:-

USD

G8 Summit

01:00

AUD

Australia to Sell 2025 Inflation Bonds

01:30

AUD

AUD RBA Policy Meeting - June Minutes

3:45

JPY

Japan to Sell 20-Year Bonds

-:-

CHF

Swiss Lower House Parliament to Vote on Tax Evasion Dispute

-:-

USD

US President Bush and German Chancellor Merkel Meet

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

15.0000

2.0000

10.7000

7.8165

1.3650

Resist 2

7.5800

5.8950

6.1150

Resist 1

12.9000

1.9000

10.2500

7.8075

1.3250

Resist 1

6.8155

5.8300

5.9365

Spot

12.8276

1.8733

9.9667

7.7598

1.2551

Spot

6.4615

5.5820

5.7290

Support 1

12.0000

1.6500

9.3700

7.7490

1.2000

Support 1

6.0800

5.6075

5.7400

Support 2

11.5200

1.5725

8.9500

7.7450

1.1800

Support 2

5.8085

5.4440

5.5000

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

1.3476

1.5846

96.07

0.9324

1.0263

0.9668

0.8106

128.38

150.81

Resist. 2

1.3448

1.5814

95.72

0.9299

1.0244

0.9638

0.8079

127.91

150.31

Resist. 1

1.3420

1.5783

95.37

0.9275

1.0225

0.9609

0.8053

127.44

149.81

Spot

1.3363

1.5719

94.67

0.9225

1.0187

0.9551

0.8000

126.50

148.81

Support 1

1.3306

1.5655

93.97

0.9175

1.0149

0.9493

0.7947

125.56

147.80

Support 2

1.3278

1.5624

93.62

0.9151

1.0130

0.9464

0.7921

125.09

147.30

Support 3

1.3250

1.5592

93.27

0.9126

1.0111

0.9434

0.7894

124.62

146.80

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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