Forex: Dollar Doesn’t Have Same US Debt Ceiling Optimism as S&P 500

DailyFX

Talking Points:

  • Dollar Doesn’t Have Same US Debt Ceiling Optimism as S&P 500
  • British Pound Rate Hawks Look to Inflation Data to Fortify BoE Fight
  • Euro Steady, Bonds Gain as Eurogroup Discusses Future for Rescues

Dollar Doesn’t Have Same US Debt Ceiling Optimism as S&P 500

US politicians are proving more stubborn than optimists have accounted for. The dollar’s mild bounce and the biggest two-day S&P 500 rally since the beginning of the year into this past weekend was founded on confidence that a weekend deal would be struck to end the debt ceiling standoff. Yet, the faceoff lasted the weekend, and traders’ surprise was clear with a morning tumble from both the benchmark currency and broad equity market measure. Despite that early correction, though, confidence in a deal seems unflappable. Whether faith that officials wouldn’t jeopardize a full-scale crisis or simple opportunism to front-run a ‘relief’ rally; the market lean is clear.

Looking to the October 17 (Thursday) debt ceiling date established by Treasury Secretary Jack Lew and taking into the implications of even a brief sortie into default territory – it is important we weigh the risks of trading against this ‘fat tail’ (low probability scenario). Tuesday, the Senate will take back up the debate to hammer out a bill that it can hand back to the House to weigh in on. The majority of politicians voicing optimism is growing, so forcing through a three month delay may be possible. Yet, does the S&P 500 rally on that news after its recent run up?

British Pound Rate Hawks Look to Inflation Data to Fortify BoE Fight

Some of the sterling’s impressive gains over the past three months have been bled off; however, this mild retracement far from rebalances the currency’s bearings. At the center of this fundamental pricing consideration are the market’s expectations for higher rates. According to the Bank of England’s (BoE) forward guidance, the central bank plans on holding the benchmark rate at its extremely low level until 2016. Yet, the swaps curve is still pricing in the first hike well before that time frame. This is a discrepancy that presents serious contention for the pound. If there is too much optimism, the currency has considerable room to retrace. The upcoming round of inflation data will help to shape expectations. There would likely be a greater reaction to a tame price reading as speculators are more compliant to data shifts.

Euro Steady, Bonds Gain as Eurogroup Discusses Future for Rescues

Eurozone Finance Ministers met to discuss the economy, banking union and rescue programs Monday. In the upcoming session, officials from the broader European Union will convene on the same. The comments to come out the first round offered an interesting assessment of the region’s health. According to Eurogroup President Joroen Dijsselbloem, Ireland and Spain are on pace to exit from their respective support programs. That is ambitious considering the financial liabilities both countries’ economies and banking sectors float. A less overtly optimistic tone surrounded Greece’s evaluation. Dijsselbloem remarked that there was no support for a further haircut for the long-troubled country and further suggested the country’s future support system will be revisited at the December meeting.

Australia Dollar Rallies after RBA Minutes Reiterate Neutral Tone

The Australia dollar’s performance Monday was uneven, but the currency seems to be making up for it with a strong start to today’s session. Through early Asia session trade, the currency is up against all of its counterparts. The drive has been hearty enough to usher AUDUSD 0.5 percent higher to overtake the closely watched 0.9500-figure. The source of this strength seems to be the RBA’s minutes. If we were measuring change from minutes to minutes – or event policy decision to minutes – there would be relatively little to report. Yet, sometimes, no change can carry a bullish or bearish connotation for the markets. In this case, the central bank’s decision to hold the probability of future rate cuts at arm’s length suggests the next move is looking increasingly like a hike rather than further easing – a boon for a carry currency. In fact, the 10-year government bond yield jumped above 4.20 percent – a 19-month high – and rate forecasts hit a 28-month high 17 bps.

New Zealand Dollar May Find Boost or Blow from 3Q CPI Data

The first place fundamental traders look when assessing their kiwi trades are benchmarks for risk trends. With US equities making a dramatic turn Monday to close well into the green, there is an inherent appetite for higher yielding / investment currencies. Following the sentiment lead, the New Zealand currency posted a bullish close against all of its major benchmarks. That performance would cover pairs like NZDUSD and NZDJPY, but others like AUDNZD show the kiwi generate more gravity than mere risk trends can explain. Looking at the yield (the rate of return) the currency offers, we find the government 10-year bond yield just below 4.80 percent - a more than 65 bp premium to its Aussie counterpart. Furthermore, the 12-month interest rate forecast (measured by overnight swaps) is rising again with a cumulative 80 bps worth of rate hikes priced in – far more hawkish/bullish than any other major. Is this ambitious outlook justified? We will find some evidence to refute or confirm those forecasts in the upcoming session with the release of 3Q CPI (21:45 GMT). Estimates already project a sizable increase.

Japanese Yen Crosses Look for Carry Boost on Temporary Risk Rally for US Markets

According to Japanese Finance Minister Taro Aso, the policy officials that met at the G-20 meeting late last week were encouraged by his country’s decision to go forward with the increase in the consumption tax (from 5 to 8 percent) in April. Yet, China’s Deputy Finance Minister Zhu Guangyao seemed to read a different sentiment from the crowd saying the tax hike in conjunction with the stimulus program was met by “widespread skepticism.” Japan’s monetary and financial policy efforts present a tightrope to walk towards growth. For FX traders though, the issue rests with the fact that the near-term stimulus drive (the active yen devaluing effort) has been spent. If risk aversion kicks in – due to a US debt situation or anything else – the BoJ will take time to react with more support.

Gold Fails to Retake $1,300 as Investors Avoid US Default Insurance

While Credit Default Swaps are the most appropriate insurance to the possibility of a technical default by the US government due to its debt ceiling standoff, there are many other measures of market uncertainty. We find most measures say the same thing: ‘a messy financial implosion will not occur’. Gold certainly falls into that same category. A fallen-from-grace alternative to the traditional reserve currency US dollar, the precious metal ended Monday virtually unchanged after a morning attempt to return to $1,300. Looking gold’s suitability for the role as a safe haven and/or alternative store of wealth: the commodity’s volatility reading is at a 3-month high 26.5 percent (not good), volume on the SPDR Gold ETF hit a one-month low 6.12 million shares and ETF holdings of the metal dropped to the lowest level since April 2010.

**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

4:30

JPY

Industrial Production (MoM) (AUG F)

-0.7%

4:30

JPY

Capacity Utilization (MoM) (AUG)

3.7%

6:00

EUR

German Import Price Index (YoY) (AUG)

-3.9%

-2.6%

Estimate of -3.9% reading would be fastest pace of deflation since November 2009

6:45

EUR

French Consumer Price Index (YoY) (SEP)

0.9%

0.9%

Inflation pressure in France leveraging little regional stress

6:45

EUR

French CPI - EU Harmonised (YoY) (SEP)

1.0%

1.0%

8:30

EUR

Italian General Government Debt (AUG)

2072.9B

July’s slip was a modest decline from previous record reading

8:30

GBP

Producer Price Index Input n.s.a. (YoY) (SEP)

2.6%

2.8%

Swaps curves still show the market pricing in a BoE rate hike sometime in 2015. That contradicts the central bank’s adamant stance that rates will be held at their record lows until late 2016. The inflation data could reinvigorate or crush hawkish speculation.

8:30

GBP

Producer Price Index Output n.s.a. (YoY) (SEP)

1.3%

1.6%

8:30

GBP

Producer Price Index Output Core n.s.a. (YoY) (SEP)

0.9%

1.0%

8:30

GBP

DCLG UK House Prices (YoY) (AUG)

3.4%

3.3%

8:30

GBP

Consumer Price Index (MoM) (SEP)

0.3%

0.4%

8:30

GBP

Consumer Price Index (YoY) (SEP)

2.6%

2.7%

8:30

GBP

Core Consumer Price Index (YoY) (SEP)

2.0%

2.0%

8:30

GBP

Retail Price Index (YoY) (SEP)

3.2%

3.3%

9:00

EUR

German ZEW Survey (Economic Sentiment) (OCT)

49.6

49.6

Eurozone confidence reading just off 7-year high (August 2009 peak stands at 59.6)

9:00

EUR

German ZEW Survey (Current Situation) (OCT)

31.3

30.6

9:00

EUR

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

58.6

12:30

USD

Empire Manufacturing (OCT)

8.0

6.29

Importance leveraged due to lack of US data

21:45

NZD

Consumer Prices Index (QoQ) (3Q)

0.7%

0.2%

Critical to interest rate forecasts – a key New Zealand dollar factor

21:45

NZD

Consumer Prices Index (YoY) (3Q)

1.2%

0.7%

23:30

AUD

Westpac Leading Index (MoM) (AUG)

0.6%

Often posts one month peak into correction – August swell was a peak

GMT

Currency

Upcoming Events & Speeches

0:30

AUD

Reserve Bank of Australia Meeting Minutes

1:00

USD

Fed Chairman Ben Bernanke Speaks on Central Banking

7:00

EUR

EU Finance Minister Meet on Economy, Banking Union

EUR

Portugal Government May Give Parliament Budget

9:00

GBP

BoE's Martin Weale Speaks to U.K. Parliament Committee

13:00

EUR

Greece Prime Minister Samaras Speaks in European Parliament

14:00

USD

Fed's William Dudley Speaks on Monetary Policy

15:30

USD

US to Sell $35 Bln in 3-Month Bills

15:30

USD

US to Sell $30 Bln in 6-Month Bills

17:00

EUR

ECB's Peter Praet Speaks on Euro Economy

23:15

USD

Fed's Richard Fisher Speaks on U.S. Economy

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

12.9772

1.9816

9.9032

7.7544

1.2428

Spot

6.4733

5.5023

5.9831

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

1.3657

1.6098

99.54

0.9189

1.0407

0.9613

0.8460

135.02

1308.74

Res 2

1.3631

1.6069

99.28

0.9169

1.0391

0.9590

0.8437

134.64

1299.93

Res 1

1.3606

1.6040

99.02

0.9149

1.0375

0.9568

0.8415

134.27

1291.11

Spot

1.3556

1.5982

98.49

0.9109

1.0342

0.9522

0.8369

133.52

1273.48

Supp 1

1.3506

1.5924

97.96

0.9069

1.0309

0.9476

0.8323

132.77

1255.85

Supp 2

1.3481

1.5895

97.70

0.9049

1.0293

0.9454

0.8301

132.40

1299.93

Supp 3

1.3455

1.5866

97.44

0.9029

1.0277

0.9431

0.8278

132.02

1308.74

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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