Forex: Dollar Gaps Lower, S&P 500 Higher on Fresh FOMC News

DailyFX

Talking Points:

  • Dollar Gaps Lower, S&P 500 Higher on Fresh FOMC News
  • British Pound Looks for Inflation Data to Thwart BoE’s Low Rate Promise
  • Gold Eyeing $1,300 Despite the Dollar’s Recent Troubles

Dollar Gaps Lower, S&P 500 Higher on Fresh FOMC News

Is the September Taper off? Forex and capital markets traders alike were caught off guard with a sizable gap on Monday’s open on news relating to the outlook for US monetary policy. However, the headline this time was not directly linked to ‘on / off’ speculation surrounding the probability of a moderated stimulus program come Wednesday’s FOMC meeting. Rather, this sharp and all-encompassing move was derived from speculation on the direction and pace of the central bank’s program well after the first the Taper is on the books. Over the weekend, Lawrence Summers – the frontrunner to replace Fed Chairman Ben Bernanke when he is expected to retire when his term ends in January – announced he was bowing out of the race. That was read by the market as a ‘risk on’ development with the dollar dropping to three-month lows while the S&P 500 advanced to an intraday record high. Yet, the fundamental connection between this headline and the market’s reaction is weak; and this event may have exploited heavy speculation to further exacerbate a market imbalance before serious event risk.

Between Lawrence Summers and Fed Vice Chairman Janet Yellen, the former is considered to be more ‘hawkish’ in his views of exceptional monetary policy. Therefore, his bowing out of the contest leaves a relatively more dovish candidate to take the helm at the central bank. However, how much slack does Yellen’s nomination buy a market deeply entrenched in ‘moral hazard’? By some accounts, the FOMC member could reduce the targeted ‘full employment’ level to 5.5 percent (from 6.5 percent) and subsequently push the first Fed rate hike out to 2016. While that would certainly validate a drop from the greenback and record highs on equities, it is an ambitious leap – especially when the market is currently awaiting the Taper. The 52-pip gap down on the Dow Jones FXCM Dollar Index (ticker = USDollar) – the biggest on record – may better reflect the unpredictable and explosive nature of the markets in the lead up to Wednesday’s major event risk. That said, Monday’s equity and dollar move only further leverages risk positioning before a turbulent event.

British Pound Looks for Inflation Data to Thwart BoE’s Low Rate Promise

In the past four months, the benchmark UK 10-year government bond (Gilt) yield has surged nearly 50 percent to top 3.00 percent. Over that same period, the sterling has advanced against all of its major counterparts with particularly strong showings against the ‘high-yield’ majors. This performance has a lot to do with the interest rate outlook that has developed for the country since Mark Carney took over as Governor. In this currency and yield rally, the market has projected a competitive monetary policy regime that would see higher yield for the United Kingdom than its global counterparts can manage. And yet, those same assumptions confound the projections Carney made in his forward guidance to keep rates at their currently level until 2016. A market playing out its doubts is not unusual, but defying policy can only last so long. A key update to how bold the yield forecasts will be comes in the form of the August inflation data. The year-over-year CPI reading is expected to ease slightly to 2.7 percent. This series hasn’t dropped below 2.0 percent since November 2009.

Australian Dollar Climbs on Yield Appetite, Retreats after RBA Minutes

Equities weren’t the only benefactor to the boost in Fed stimulus confidence following Summer’s withdrawal. Yield appetite in the FX market would similarly advance with the Deutsche Bank carry trade index up 0.2 percent through Monday. Yet, that advance was light in conviction with a heavy 290 resistance holding back the measure for a fifth consecutive day. The Aussie dollar was under similar constraints. A warmed yield interest supports the heavily discounted carry currency, but without a heavy bid for yield, it is difficult to carry AUDUSD above 0.9400. The RBA minutes this morning did little to improve the situation. Protests over a high Aussie dollar and keeping further cuts as an option add little.

Euro Unfazed by Deepening Spain, Portugal, Italy TroublesA range of headlines through the opening 24 hours reminds us of the unbalanced conditions in the Eurozone. On the positive side, the IMF approved Cyprus’ €84.7 million aid disbursement after a review following the Eurozone’s own €1.5 billion payment. Yet, other Eurozone members were not so fortunate. Portugal’s appeal for relaxed goals was rebuffed by the region’s finance ministers late last week. Meanwhile, Spain reported its debt-to-GDP topped the government’s goal at 92.2 percent; and Italy is still grappling with a possible coalition government collapse due to Berlusconi’s possible ouster. Coming up, Greece will be the limelight with an IMF review and a series of Samaras meetings.

New Zealand Data Disappoints, Trade Numbers Could Trigger Graver Doubts

Data from the New Zealand docket offered little encouragement to bolster a risk appetite run. From the headlines, we witnessed disappointing turns for August housing sales and service sector reports as well as a slip for a 3Q consumer confidence survey. Yet, all of that data will be superseded by the upcoming event risk. Wednesday brings 2Q trade figures while the subsequent session is set to release GDP for the same period. In the past two weeks, the kiwi has rallied over 1000 pips versus the euro, 600 against the yen and 500 compared to the dollar.

US Oil Gaps Down on the Week’s Open as Syria

The benchmark US oil futures contract dropped 1.5 percent Monday and subsequently led the market to a move below the 50-day moving average as well as the lowest close in three weeks. The presumptions of cross-market influence don’t hold here as there was a general swell in risk positioning on the Fed news that would usually cater to the commodity’s speculative side. This performance was once again a reflection of the supply-and-demand factors that have held consistent sway over the market. The US and Russia agreed to the outline of a deal that would see Syria turn over its chemical weapons and thereby further reduce the probability of an attack that leads to regional instability.

Gold Eyeing $1,300 Despite the Dollar’s Recent Troubles

Has gold’s role as an alternative to fiat currency and specifically the US dollar vanished? Despite the largest bearish gap for the USDollar on record and a universal slide against its major counterparts, the precious metal still dropped 1.0 percent. The connection should not be measured via the simple fluctuations between the two assets – but rather the fundamentals that are encouraging the movement. In this case, the greenback’s trouble is an over-exaggerated dose of risk appetite in the guise of altered Fed policy forecasts. Yet, rather than debate a 2015 vs 2016 rate hike; gold traders are focused on the immediate concern of a Wednesday Taper.

**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

1:30

AUD

Reserve Bank of Australia Meeting Minutes

RBA comments in reference to the housing market may indicate the central bank is fearful of lowering interest rates further for fears that it may fuel a rise in home prices. This is a similar dilemma faced by the RBNZ, but to a greater degree.

1:30

AUD

New Motor Vehicle Sales (MoM) (AUG)

-3.5%

1:30

AUD

New Motor Vehicle Sales (YoY) (AUG)

3.0%

4:00

JPY

Tokyo Condominium Sales (YoY) (AUG)

31.6%

May’s print was the highest since April, 2012.

6:00

EUR

EU 25 New Car Registrations (AUG)

Since April, current account has been on the decline. This is the first steady downward move since 2010.

8:00

EUR

Euro-Zone Current Account s.a. (euros) (JUL)

16.9B

8:00

EUR

Euro-Zone Current Account n.s.a. (euros) (JUL)

26.1B

8:30

GBP

Consumer Price Index (MoM) (AUG)

0.5%

0.0%

This period since 2012 has been the longest and most stable 2-2.5% CPI level in the past decade.

8:30

GBP

Consumer Price Index (YoY) (AUG)

2.7%

2.8%

8:30

GBP

Core Consumer Price Index (YoY) (AUG)

2.1%

2.0%

8:30

GBP

Retail Price Index (YoY) (AUG)

3.2%

3.1%

Slightly higher inflation levels may send the Pound higher as it would pressure the BoE to wind down their easing cycle for fears of rising prices.

8:30

GBP

Retail Price Index ex Mort Int.Payments (YoY) (AUG)

3.2%

3.2%

8:30

GBP

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

3.0%

5.0%

8:30

GBP

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

1.8%

2.1%

8:30

GBP

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

1.1%

1.1%

8:30

GBP

DCLG UK House Prices (YoY) (JUL)

3.4%

3.1%

9:00

EUR

Euro-Zone ZEW Survey (Economic Sentiment) (SEP)

44

Expectations of economic growth have had their longest sustained gains since late 2009 / early 2010 and have not been at these levels since.

9:00

EUR

German ZEW Survey (Economic Sentiment) (SEP)

45

42

9:00

EUR

German ZEW Survey (Current Situation) (SEP)

20.0

18.3

9:00

EUR

Euro-Zone Trade Balance s.a. (euros) (JUL)

14.9B

9:00

EUR

Euro-Zone Trade Balance (euros) (JUL)

17.3B

12:30

CAD

Manufacturing Shipments (MoM) (JUL)

0.5%

-0.5%

12:30

USD

Consumer Price Index (YoY) (AUG)

1.6%

2.0%

An uptick in inflation would be seen as playing into a possible FOMC move to taper asset purchases. On the other hand, sustained low inflation rates from last month may fuel dovish comments that asset purchases must be sustained in order to keep any deflation fears at bay.

12:30

USD

Consumer Price Index ex Food & Energy (YoY) (AUG)

1.8%

1.7%

13:00

USD

Total Net TIC Flows (JUL)

-$19.0B

13:00

USD

Net Long-term TIC Flows (JUL)

-$15.0B

-$66.9B

14:00

USD

NAHB Housing Market Index (SEP)

59

59

22:45

NZD

Current Account Balance (2Q)

-1.900B

-0.663B

Current account balance to GDP ratio has been on the decline since 2010, but has flattened for most of the past year.

22:45

NZD

Current Account Deficit-GDP Ratio (2Q)

-4.8%

-4.8%

GMT

Currency

Upcoming Events & Speeches

EUR

Next Troika Review of Greece Bailout Begins

7:00

EUR

ECB's Ewald Nowotny Speaks on Euro Economy

8:00

EUR

ECB's Erkki Liikanen Speaks on Euro Economy

14:00

USD

US Congressional Budget Office Federal Budget Outlook

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

13.5900

2.1000

10.7250

7.8165

1.3650

Resist 2

7.5800

5.8950

6.5135

Resist 1

13.4800

2.0500

10.5000

7.8075

1.3250

Resist 1

6.8155

5.8475

6.2660

Spot

12.9529

2.0034

9.8192

7.7547

1.2638

Spot

6.5147

5.5936

5.9079

Support 1

12.8900

1.9750

9.3700

7.7490

1.2000

Support 1

6.0800

5.5600

5.8700

Support 2

12.6000

1.9075

8.9500

7.7450

1.1800

Support 2

5.8085

5.4440

5.7400

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

1.3438

1.6013

100.43

0.9363

1.0402

0.9401

0.8265

133.91

1347.63

Res 2

1.3412

1.5983

100.13

0.9341

1.0384

0.9375

0.8241

133.50

1339.00

Res 1

1.3386

1.5954

99.83

0.9319

1.0366

0.9350

0.8217

133.10

1330.37

Spot

1.3333

1.5896

99.22

0.9275

1.0329

0.9299

0.8169

132.29

1313.10

Supp 1

1.3280

1.5838

98.61

0.9231

1.0292

0.9248

0.8121

131.48

1295.83

Supp 2

1.3254

1.5809

98.31

0.9209

1.0274

0.9223

0.8097

131.08

1339.00

Supp 3

1.3228

1.5779

98.01

0.9187

1.0256

0.9197

0.8073

130.67

1347.63

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

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