Euro Ready for a Short-term Breakout, Trend Revival When Liquidity Returns

DailyFX

Talking Points:

  • Dollar Starting to Regain Some of its Lost Yield Traction
  • Euro Ready for a Short-term Breakout, Trend Revival When Liquidity Returns
  • Japanese Yen: Little Mistaking the Drop in Support for More QE

Dollar Starting to Regain Some of its Lost Yield Traction

A fourth consecutive rally for the S&P 500 was an appropriate way to end the active trading week for North America. Less a concerted risk based than a correction of the near push into the abyss of fear that preceded it, we are left with a sense of balance as a long holiday weekend starts. An appetite for yield or liquidity will continue to be the dollar’s and broader market’s most prominent and potential spark, but there are more active considerations to consider until the headlines splash panic or greed. Interest rate expectations continue to shape benchmark majors like EURUSD, GBPUSD and AUDUSD. For the greenback, 2, 5 and 10-year Treasury yields posted hearty rallies into Thursday’s close to put a firm stop on the rate forecast bleed. We will look to see conviction in this trend when liquidity and speculative appetites return.

Euro Ready for a Short-term Breakout, Trend Revival When Liquidity Returns

Activity levels for EURUSD are extraordinary. Regardless of how we measure the trading conditions behind the market’s most liquid currency pair, we are left with an assessment that reveals extreme levels of inactivity. And, extremes do not last. The level of indecision is reflected in the most prominent chop (measuring persistence of intraday correction) in years, average daily ranges are at more-than six year lowsand expected volatility levels for a month out are at their lowest level since 2007. We put this contrarian activity level against tight trading conditions between 1.3900 and 1.3650, and a breakout looks inevitable. If we further consider that the ECB is starting to take a vocal stand against movement up to and beyond 1.4000, we also see the balance of probability for direction. While yield-seeking capital flows continue to bolster periphery Eurozone bonds and the currency in turn, this theme can be disrupted by market forecasts (volatility and risk aversion) or unnatural causes (an ECB move). FX traders should be very careful with this pair, its conflicts and its hot spots.

See my medium-term outlook for the EURUSD in today's strategy video.

Japanese Yen: Little Mistaking the Drop in Support for More QE

After the April 8 Bank of Japan rate decision – notably the one-year anniversary of the open-ended stimulus program the central bank is still engaged in – the market better appreciated the diminished potential for follow up accommodation in the form of quantitative easing. For FX traders, that would mean that the yen crosses’ broad advance would need to continue via other means or potentially correct. There are still holdouts for another wave of support for yen cross bulls, but they continue to drop off quickly. In the recent Japanese Cabinet update, the economic outlook was downgraded, but the report stated clearly that further BoJ support was not expected nor needed.

New Zealand Dollar Traders Have to Wonder Why Kiwi Isn’t Rallying into RBNZ

Reserve Bank of New Zealand Governor Graeme Wheeler hiked his country’s benchmark lending rate for the first time in nearly four years at his last monetary policy meeting. What’s more, he would repeat his expectation to lift the rate another 200 basis points (bps) over the next two years. This makes the RBNZ the most hawkish major central bank by a wide margin. And yet, since that first move, the currency has put in for a mixed performance against its lower yielding counterparts. How can such a prominent carry candidate underperform its potential? One, risk trends are not leveraging what are still historically-low carry trades. Can the central bank reignite that appetite next week?

Australian Dollar Run Cools with CPI Update Due Next Week

The Australian dollar has regained significant traction over the past few months. With gains against both ‘weak’ and ‘strong’ counterparts over that period, it is clear that there is an innate fundamental bloom behind the currency. Given driver behind the currency’s tumble over the past years was a dovish monetary policy bearing from the RBA, it is reasonable to assume the strength is a correction of that negative premium. Yet, if rate expectations are picking up, the hawkishness is not yet finding broad support. Where the Aussie dollar has gained, there is little rate speculation seen in bond yields or swaps. Perhaps next week’s expected 3.2 percent 1Q CPI release will anchor the outlook.

Chinese Yuan: No Stimulus Could Mean a Weaker Currency or Financial Instability

While the data that was released this past week was close to or slightly better than estimates, the general trend is clear. The world’s second largest economy is cooling. And, while its pace of growth still makes other nations blush; the country can ill afford a clip below ‘robust’. The further expansion cools in China, the more it exposes the sources of that growth – including a lending boom. Whether we view the Yuan or Renminbi’s depreciation (USDCNH gain) as manufactured or fundamentally based, it does offer some relief. The problem is that it could also encourage a capital flight as those intending for carry gains capitulate and repatriate.

Emerging Markets Rebound Lead by Russian Ruble

Fear of another flood of capital out of the Emerging Market has cooled before the market’s liquidity drained. Looking at the region’s health, the MSCI Emerging Market ETF rose 0.9 percent (to 42.01) while the JPMorgan volatility index tracking the risky segment slipped a second day to 8.43 percent. From the currency scales, it was easy to see that there were a few standouts from a much calmer sea. Most of the higher-risk region’s saw their unit rise or fall within a 0.2 percent bound against the US dollar. A few of the more liquid and high-profile regions reported a little more strength – the South African Rand rose 0.8 percent, Turkish Lira 0.5 percent and Brazilian Real 0.3 percent. The biggest mover though was the Russian Ruble with a 1.1 percent climb. The Russian currency and capital markets jumped on news that an accord had been struck with European and US officials over the Ukrainian affair.

Gold Drops Back Below $1,300 as Dollar and Yields Recover

A third consecutive decline from gold was less technical (yesterday’s slip was $0.09) and far more tangible. The precious metal lost another 0.6 percent through Thursday’s close to close below $1,300 for the first time since April 7. The slip was met with a moderate pick up in volume for ETFs and futures, but neither price action nor turnover would insinuate a bigger move is immediately at hand. With much of the tradable market for the metal offline for the long weekend, it would be difficult to generate the necessary momentum to break the recent impasse. Meanwhile, open interest in gold futures is still exceptionally low and ETF holdings are close to setting new multi-year lows. Speculative appetite has significantly faded from view, leaving gold bugs exposed to the rebound in the US dollar and yields as well as a global trend away from QE.**Bring the economic calendar to your charts with the DailyFX News App.

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

-:-

ALL

Market Holiday and Closed Markets for US, UK, Eurozone, Australia

1:30

CNY

Property Prices (MAR)

Tier 3 and 4 cities have recently shown signs of slowing property prices and this spells trouble for the Chinese economy. A further extension of declining property prices to tier 2 is likely to spark more questions in regards to the health of the market and the destabilizing impacts it could bring in the second and third quarter.

8:00

EUR

Italian Industrial Sales s.a. (MoM) (FEB)

1.2%

Industrial Orders is likely to be the most important print here. Although not a big mover in terms of price action, last month’s print was the single best reading since 2011! More of the same could help EUR price action into the weekend.

8:00

EUR

Italian Industrial Sales n.s.a. (YoY) (FEB)

3.0%

8:00

EUR

Italian Industrial Orders s.a. (MoM) (FEB)

4.8%

8:00

EUR

Italian Industrial Orders n.s.a. (YoY) (FEB)

2.6%

9:00

EUR

Italian Hourly Wages (MoM) (MAR)

0.1%

9:00

EUR

Italian Hourly Wages (YoY) (MAR)

1.4%

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

13.5800

2.3800

12.7000

7.8165

1.3650

Resist 2

7.5800

5.8950

6.5135

Resist 1

13.1500

2.3000

11.8750

7.8075

1.3250

Resist 1

6.8155

5.8475

6.2660

Spot

13.0529

2.1179

10.4811

7.7544

1.2491

Spot

6.5332

5.3732

5.9247

Support 1

12.9650

2.0700

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

1.3982

1.6872

102.49

0.8825

1.1002

0.9461

0.8723

142.51

1340.59

Res 2

1.3960

1.6847

102.27

0.8809

1.0985

0.9441

0.8703

142.19

1335.39

Res 1

1.3939

1.6823

102.06

0.8794

1.0967

0.9421

0.8683

141.86

1330.18

Spot

1.3895

1.6774

101.63

0.8763

1.0931

0.9382

0.8643

141.21

1319.78

Supp 1

1.3851

1.6725

101.20

0.8732

1.0895

0.9343

0.8603

140.56

1309.38

Supp 2

1.3830

1.6701

100.99

0.8717

1.0877

0.9323

0.8583

140.23

1304.17

Supp 3

1.3808

1.6676

100.77

0.8701

1.0860

0.9303

0.8563

139.91

1298.97

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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