Forex: Dollar Finding Little Support on Risk Trends, Turns to FOMC

DailyFX

Talking Points:

  • Dollar Finding Little Support on Risk Trends, Turns to FOMC
  • Euro Stubbornly Holds Above 1.3900 Through Weak Data
  • British Pound Drops Amid BoE Updates, Minutes and Data Ahead

Dollar Finding Little Support on Risk Trends, Turns to FOMC

The dollar has been backed into a corner. EURUSD is within reach of 1.4000, GBPUSD is ready to find direction after weeks of sideways price action and AUDUSD has made a technical move for a bullish break. And, to tie this all back to the greenback’s tense position, we find the Dow Jones FXCM Dollar (ticker = USDollar) within a ‘terminal’ congestion pattern that must inevitably end with a break. Traders know it isn’t the initial breakout that matters, but rather the follow through found after the first jolt. That is where the week’s top scheduled event risk comes into play: the FOMC rate decision. With a market feigning a reduced risk profile via volatility measures and equities while doubt gains traction and volume, this is the type of event risk that can elicit more than just a dollar response.

While the Fed policy meetings are generally market-worthy events, this particular gathering carries far more weight than usual. The market’s first evaluation of this event is whether the central bank will keep up the Taper. Referring to Bloomberg’s poll of economists, there is a 96 percent probability that a third $10 billion Taperof the monthly purchases of Treasuries and MBS (to $55 billion) will be announced. The market’s assessment of the odds are likely very close – and there is a general belief that the group will maintain this pace until the stimulus program is fully wound down by December – so the short-term impact on dollar and capital markets may be inherently dampened. That said, conditions supporting ‘risk appetite’ have steadily deteriorated: growth forecasts have cooled, earnings projections lowered, capital inflows pinched, leverage pushed to record levels and market gains coming in shorter bursts. This is the kind of high profile, singular event that the masses can use to ‘recognize’ a fundamental imbalance is properly motivated.

Beyond the initial interest in the Taper, the market will move on to absorb the updated forecasts for growth, inflation and interest rates. Half an hour later, Fed Chair Janet Yellen will hold her first press conference in her new role. These are the areas in this event where dollar traders are more likely draw their bearings. With a mind to any ‘risk’ response to the event; gauging hawkish or dovish lean in forecasts, establishing pace via changes to forward guidance and setting a speculative timeline for the first Fed rate hike will be key for the currency.

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Euro Stubbornly Holds Above 1.3900 Through Weak Data

The euro refuses to give ground against the dollar – and well it should. Without a definitive move from the broader capital market to unwind risky positions (that certainly include growing exposure to periphery Eurozone assets) or motivation for the ECB to curb its balance sheet reductions, the currency will continue to gain structural ground against its benchmark counterpart. This past session, the docket items were unflattering for the currency. The January trade balance for the Eurozone was a small €900 million and the region’s investor confidence survey for the current month dropped sharply from its previous 10 year high. Yet, beyond the data, we learned Portugal successfully bought back bonds; Greece came to a deal with the Troika to release funds; and the latter country planned to sell bonds before May. Status quo favors the euro.

British Pound Drops Amid BoE Updates, Minutes and Data Ahead

With the exception of GBPCAD, the British pound dove this past session. The docket was light for data, but the Bank of England delivered a few important updates. Governor Mark Carney announced a management shakeup that will take effect generally on June 1. It’s unclear whether the changes will materially change the net vote and views of the MPC. Speaking after the release of a report on the central bank’s strategy, Carney remarked that that the low rate environment is conducive to complacency but they don’t plan to “take risks” with the UK economy by tightening too early. This hands-off talk still doesn’t curb speculation of a forward shifted rate hike (at least compared to the Fed and others). The upcoming BoE minutes and February employment statistics will offer us a little more clarity for traders. Dovish headlines could crack 1.6500 GBPUSD.

Japanese Yen Crosses Tepid Risk Performance Suggests BoJ Doubts

Global equities and emerging markets were charging higher while volatility measures shrunk. A broad gauge of ‘risk on’, we should expect the carry interest underlying the yen crosses to leverage their own climb. Yet, the Japanese currency instead gained ground against most. This could speak to sentiment’s shaky health, but more likely it shows the growing doubt over the BoJ’s commitment to drive the yen lower.

Canadian Dollar Slides as BoC Warns Rate Cuts are an Option

The Canadian dollar was the worst performer this past session and diverged sharply from the performance of its fellow investment currency (the Aussie and Kiwi dollars). Rather than take advantage of the yield push, the loonie tumbled on unexpectedly dovish comments from BoC Governor Poloz. While not a preemptive warning, the central banker’s warning that rate cuts were still an option speaks to his fears.

Australian and New Zealand Dollars Gaining Traction – Carry or Risk?

Australian and New Zealand 10-year government bond yields jumped yesterday, bolstering the carry trade appeal of their respective currencies. There are two ways carry currencies like these can leverage their position: general risk appetite build or yield forecasts improve. We are seeing the latter here. That being said, swaps are not driving up forward projections; so this mid-range yield upgrade may not last long.

Emerging Markets: Ukraine Standoff Intensifies, Emerging Market Rights it Off

International tension continues to build over the Ukraine / Crimea situation after reports that Russia recognized the disputed region’s sovereignty and unidentified soldiers gained access to a Crimea military base. With the West vowing sanctions, the risk is that a Russia issue could turn into an emerging market one. Yet that doesn’t seem the worry for traders as the MSCI EM ETF jumped 1.4 percent and the FX group was mixed.

Gold at Risk of Only Second Three-Day Decline of 2014 with Fed Ahead

With risk trends showing improvement (dubious as they may be) and geopolitical tensions doing little to draw panic from the financial system, gold has lost some of its luster as a safe haven and alternative store of wealth. The precious metal dropped a second day – by 0.8 percent – on distinctly lower volume. If the Fed’s maintenance of Taper heartens the dollar today, we may see our second three-day drop of 2014.**Bring the economic calendar to your charts with the DailyFX News App.

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

4:30

JPY

Japanese All Industry Activity Index MoM (JAN)

1.10%

-0.10%

The Japanese All Industry Activity Index MoM tends to gravitate towards 0%.Expectations of increased activity could promote short term appreciation of the yen.

5:00

JPY

Japanese Leading Index CI (JAN F)

--

112.2

5:00

JPY

Japanese Coincident Index (JAN F)

--

114.8

7:45

EUR

French Current Account Balance (JAN)

--

-1.2B

Deficit reduced by 1B since 2013; Avg. Balance of -2.8B over the past 5-years

9:30

GBP

British Claimant Count Rate (FEB)

3.50%

3.60%

Unemployment claimants peaked in 2009 at 138K and have been falling since. Claimants rebounded in the 4Q, rising by 17K. Modest reduction in claims expected

9:30

GBP

British Jobless Claims Change (FEB)

-25.0K

-27.6K

9:30

GBP

British ILO Unemployment Rate 3Mths (JAN)

7.20%

7.20%

10:00

CHF

Credit Suisse ZEW Survey Expectations (MAR)

--

28.7

Growth expectations have been steadily improving since Sept. 2011 after bottoming out at -80 in 2011

11:00

USD

MBA Mortgage Applications (MAR 14)

--

-2.10%

High amount of volatility in the quantity of applications; currently falling, but could rebound based on the historical average

12:30

CAD

Canadian Wholesale Trade Sales MoM (JAN)

0.80%

-1.40%

Has oscillated between -2% and 4% over the last five years. Potential for rebound

12:30

USD

US Current Account Balance (4Q)

-$88.0B

-$94.8B

Deficit has declined by $25.65B since Sept. 2010

18:00

USD

Fed QE3 Pace (MAR)

$55

$65

The upcoming FOMC Rate decision will have serious implications for the USD. Currently, the Fed is expected to continue with its taper, but most are not anticipating an interest rate hike just yet.

18:00

USD

Fed Pace of Treasury Pur (MAR)

$30

$35

18:00

USD

Fed Pace of MBS Purchases (MAR)

$25

$30

18:00

USD

FOMC Rate Decision (MAR 19)

0.25%

0.25%

21:45

NZD

New Zealand GDP SA QoQ (4Q)

0.90%

1.40%

New Zealand Real GDP QoQ rose by about 1% in Q3. A slight pullback is expected

21:45

NZD

New Zealand GDP YoY (4Q)

3.10%

3.50%

23:50

JPY

Foreign Buying Japan Bonds (MAR 14)

--

-¥267.1B

Net Foreign (Equity) Securities Investment bottomed out at -750B Yen at the beginning of 2014 and has since increased by 1135.7B Yen

23:50

JPY

Foreign Buying Japan Stocks (MAR 14)

--

¥383.8B

GMT

Currency

Upcoming Events & Speeches

5:00

JPY

BoJ Governor Kuroda Speaks at IIMA Panel Discussion

9:30

GBP

Bank of England Releases Minutes From Mar 5-6 Meeting

18:30

USD

Fed's Yellen Holds Press Conference in Washington

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

14.0200

2.3800

12.7000

7.8165

1.3650

Resist 2

7.5800

5.8950

6.5135

Resist 1

13.5800

2.3000

11.8750

7.8075

1.3250

Resist 1

6.8155

5.8475

6.2660

Spot

13.2934

2.2478

10.8921

7.7616

1.2684

Spot

6.3739

5.3841

5.9554

Support 1

13.0000

2.1000

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

1.3953

1.6728

103.84

0.8841

1.1192

0.9043

0.8548

144.06

1381.75

Res 2

1.3930

1.6701

103.60

0.8824

1.1172

0.9021

0.8527

143.71

1376.01

Res 1

1.3907

1.6674

103.37

0.8807

1.1152

0.8998

0.8505

143.35

1370.27

Spot

1.3861

1.6620

102.90

0.8773

1.1112

0.8954

0.8462

142.63

1358.79

Supp 1

1.3815

1.6566

102.43

0.8739

1.1072

0.8910

0.8419

141.91

1347.31

Supp 2

1.3792

1.6539

102.20

0.8722

1.1052

0.8887

0.8397

141.55

1341.57

Supp 3

1.3769

1.6512

101.96

0.8705

1.1032

0.8865

0.8376

141.20

1335.83

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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