Forex: Dollar Advance but Risk Trends Surge on Hopes for Debt Deal

DailyFX

Talking Points:

  • Dollar Advance but Risk Trends Surge on Hopes for Debt Deal
  • British Pound Firms after Bank of England Holds Policy
  • Canadian Dollar at Risk of Volatility Swell on Jobs Data

Dollar Advance but Risk Trends Surge on Hopes for Debt Deal

Is the US government close to defusing its debt ceiling disaster? The market’s think so. Confidence in a down-to-the-wire agreement between House Republicans and President Obama sent the S&P 500 to its biggest single day rally since January 2 (the last stick save on the budget) while the Dow Jones FXCM Dollar Index advanced for the a second day. A resolution – rather than disaster – has also been the most likely outcome for this event; and that leaves us with an inherent bias that we should account for. If the market has also maintained an expectation for a solution to the debt ceiling standoff, how strong would the recovery effort be for equities and the dollar? Would the alleviation of crisis necessarily trigger the confidence needed for a renewed climb to record highs? This is something to keep in mind, but first we have yet to find a definitively solution to the brinkmanship. A suggested six-week delay on the debt ceiling (to November 22) seemed amenable, but linking a lift on the government shutdown seemed to stall talks. An agreement is likely, but seeing it Friday morning versus night has a different impact.

British Pound Firms after Bank of England Holds Policy

As expected, the Bank of England (BoE) held its monetary policy bearings at its meeting this past session. That means the central bank maintained a benchmark lending rate of 0.50 percent, an asset purchase target of £375 billion in gilts and – most important of all – the forward guidance for interest rates to remain at their current level until late 2016. What some may see as a non-event is in fact a rebuff to rate forecasts that have pushed forward expectations for the first hike to the first half of 2015. That matters in a forward-looking currency market – especially one that has been made hyper-sensitive to expectations due to historically-low yields globally. Despite this unspoken check to bullish sterling speculators, the currency actually advanced against all its counterparts – albeit modestly. There is no key event risk through the final day of trading for the pound; so traders will need to watch gilt yields and risk trends.

Canadian Dollar at Risk of Volatility Swell on Jobs Data

While the focus remains on more open-ended fundamental topics, the greatest potential for data-derived volatility amongst the majors rests with the Canadian dollar. On the docket, we have the September Canadian labor data as well as the 3Q lending conditions and business confidence surveys. Given the market’s NFPs withdrawal last week, there may be greater interest in this particular jobs report – especially if there is substantial deviation from the forecast. Once again, the consensus is rather restrained at a projected 10,000-position increase. Over the past six months, this indicator has averaged a survey-actual deviation of 40,000 jobs – four-times the current expectation.

Japanese Yen Spurred Higher by Yield Appetite, USDJPY Leads Fundamental Move

The Japanese yen was the biggest mover amongst the majors by a wide margin Thursday. We could ascribe the move to simple risk trends, but that would ring false with the otherwise restrained performance from other areas of a risk in the FX market and the steady decline in the asset class’s volatility index throughout the US deficit-bred uncertainties. Adding fuel to the otherwise dim fire though, the expansive Bank of Japan stimulus program and upcoming government stimulus program help gear the market higher. For USDJPY in particular, the headlines of a possible US resolution help alleviate risk aversion concern as well as financing pressure on the region’s markets. That is a natural, fundamental booster which has resulted in a three-day 1.7 percent rally. Looking at Deutsche Bank’s Currency Future Harvest Index (carry trade index), we see greater restraint. That suggests unless risk trends really entrench, the yen crosses’ run may run cool quickly.

Australian Dollar Rally on Positive Risk and Strong Jobs…Weak

This past session was marked by a strong rally during the New York hours for risk trends as well as an impressive employment report from Australia. And yet, the Aussie dollar had barely budged against its major counterparts. There is reason to question the overall vigor of the labor statistics. The 9,100-net increase in payrolls was smaller than expected; and while the jobless rate unexpectedly ticked down two-tenths of a percentage point (to 5.6 from 5.8 percent), it was a mild correction from a more than four-year high. It is the risk connection that is more trouble for FX traders. A carry currency whose yield outlook has marked a notable turn yet is unable to leverage a positive risk day spells trouble. In fact, the AUDUSD’s correlation (20-day) tothe S&P/ASX 200 is actually negative -0.17. This unusual relationship may pass, but the currency is missing out on key fundamental fodder as the 12-month rate forecast has climbed to multi-year highs (now 17 bps).

Euro: When Does Stimulus Speculation Start to Take its Toll?

It isn’t exactly a secret. Monetary policy officials – including ECB President Mario Draghi – have stated their intention to maintain loose policy along with their concerns for any serious rise in market rates that could choke off budding economic recovery. According to a Bloomberg survey of economists, the consensus is that the central bank introduces another large scale asset purchase (LSAP) program before an eventual rate hike (which isn’t seen until 2015). Looking back to the market’s reaction to the two Long-Term Refinancing Operations (LTRO) the central bank introduced to fend off a liquidity crunch in the bank sector, short-term rates plunged…but the euro would also suffer. While following different lines, there is very similar in intention and impact to the Fed’s QE program. So, when does the market start positioning for its concern? Short-term rates are rising, but perhaps when the dust settles in US markets and yields remain wide in Europe; FX traders will begin.

Gold Drops Below $1,300 as Light Seen at the End of Dollar’s Tunnel

We have seen gold lose its opportunistic ambition to rally when traditional stores of wealth – most notably the US dollar – have been forced to retreat. With the market expecting an impending fix to the United States’ debt standoff, there is even more pressure on the precious metal. A rebound in the greenback and Treasuries aligned nicely to a 1.4 percent drop for gold. With the back-to-back, one percent-plus declines for the commodity (the biggest slump in a month); the market is now below the $1,300-mark. While breaking the round figure is a concern for bulls, technical traders would note that the range low at $1,275 over the past three months would represent the more definitive line in the sand. Given our proximity to an important floor, it will be important to watch the headlines through the final 24 hours of this week. While we may have bled off much of the premium behind a ‘debt crisis’ bid on gold, there may still be enough insurance exposure that can send it the next leg lower on confirmation that the US government will offer a viable resolution.

**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

2:00

NZD

Non Resident Bond Holdings (SEP)

68.3%

The reading has not passed 70% since 2009.

6:00

EUR

Germany Wholesale Price Index MoM (SEP)

-0.6%

Disappointing CPI data out of Germany continues to weigh on policymakers as MoM improvements are yet to be seen.

6:00

EUR

Germany Wholesale Price Index YoY (SEP)

-1.7%

6:00

EUR

Germany CPI MoM (SEP F)

0.0%

0.0%

6:00

EUR

Germany CPI YoY (SEP F)

1.4%

1.4%

6:00

EUR

Germany CPI EU Harmonized MoM (SEP F)

0.0%

0.0%

6:00

EUR

Germany CPI EU Harmonized YoY (SEP F)

1.6%

1.6%

6:45

EUR

France Current Account Balance (AUG)

-3.2B

7:00

CHF

Bloomberg Oct. Switzerland Economic Survey

7:30

GBP

Bloomberg Oct. United Kingdom Economic Survey

8:00

EUR

Italy CPI FOI Index Ex Tobacco (SEP)

107.6

YoY CPI has failed to show stabilization since early 2012.

8:00

EUR

Italy CPI EU Harmonized YoY (SEP F)

0.9%

0.9%

8:30

GBP

Construction Output SA MoM (AUG)

0.8%

2.2%

If the reading comes in at 3.9%, it will be the single best print since December of 2011.

8:30

GBP

Construction Output SA YoY (AUG)

3.9%

2.0%

12:30

CAD

Net Change in Employment (SEP)

10.0K

59.2K

Canada’s unemployment rate has been steady above 7%, but hasn’t been below since December of 2008.

12:30

CAD

Unemployment Rate (SEP)

7.1%

7.1%

12:30

CAD

Full Time Employment Change (SEP)

17.40

12:30

CAD

Part Time Employment Change (SEP)

41.80

12:30

CAD

Participation Rate (SEP)

66.6

66.6

13:55

USD

Univ. of Michigan Confidence (OCT P)

76

77.5

With the U.S. government shutdown, this will be the last and only print of the week.

GMT

Currency

Upcoming Events & Speeches

11:00

USD

|| US Earnings - JPMorgan

11:45

EUR

Germany's Weidmann, Schaeuble Hold Breakfast in Washington

12:00

USD

|| US Earnings – Wells Fargo

12:30

EUR

ECB's Praet Speaks in Washington

13:00

GBP

BOE's Haldane Speaks at Conference in Dublin

15:00

USD

Fed's Powell Speaks on Monetary Policy Panel in Washington

16:15

CAD

Bank of Canada Deputy Governor Macklem Speaks on Panel

17:00

USD

Fed's Rosengren Speaks at Council of Foreign Relations in NY

17:30

USD

G-20 Economies Hold Press Conference in Washington

17:45

EUR

ECB's Coeure Speaks in Washington

20:00

CAD

Bank of Canada Deputy Governor Murray Speaks on IMF Panel

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

13.4800

2.0500

10.7250

7.8165

1.3650

Resist 2

7.5800

5.8950

6.5135

Resist 1

12.9700

2.0100

10.5000

7.8075

1.3250

Resist 1

6.8155

5.8475

6.2660

Spot

13.0632

1.9747

9.9087

7.7544

1.2482

Spot

6.4982

5.5093

6.0311

Support 1

12.6000

1.9140

9.3700

7.7490

1.2000

Support 1

6.0800

5.5175

5.7450

Support 2

12.4200

1.9000

8.9500

7.7450

1.1800

Support 2

5.8085

5.4440

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

1.3644

1.6102

99.60

0.9187

1.0460

0.9576

0.8406

134.89

1326.63

Res 2

1.3618

1.6073

99.33

0.9166

1.0444

0.9552

0.8382

134.52

1318.05

Res 1

1.3592

1.6043

99.06

0.9146

1.0427

0.9529

0.8359

134.14

1309.47

Spot

1.3540

1.5984

98.51

0.9105

1.0394

0.9482

0.8312

133.38

1292.32

Supp 1

1.3488

1.5925

97.96

0.9064

1.0361

0.9435

0.8265

132.62

1275.17

Supp 2

1.3462

1.5895

97.69

0.9044

1.0344

0.9412

0.8242

132.24

1318.05

Supp 3

1.3436

1.5866

97.42

0.9023

1.0328

0.9388

0.8218

131.87

1326.63

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

Sign up for John’s email distribution list, here.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.
Learn forex trading with a free practice account and trading charts from FXCM.

Rates

View Comments (0)