Forex: Dollar Slips Despite Worst US Equity Drop in Six Weeks

DailyFX

  • Dollar Slips Despite Worst US Equity Drop in Six Weeks
  • British Pound Rallies after Strong Jobs Report, Is There Still QE Support?
  • Euro Finds No Reassurance from Eurozone’s Return to Growth
  • Japanese Yen Crosses Deviate from Nikkei 225 Climb
  • New Zealand Dollar: Data, Bond Yields Shows Drop in Foreign Investment
  • Australian Dollar Traders Look Momentum to Back RBA Bias Shift
  • Gold Maintains Volatility but Loses Direction, Still Strong Above $1,300

Dollar Slips Despite Worst US Equity Drop in Six Weeks

The benchmark Dow Jones Industrial Average posted its biggest drop in six weeks Wednesday and closed at its lowest level in five weeks, yet there was little ‘fear’ behind the move – as evidenced by the USDollar’s pullback. The recent, bearish milestones the US equity indexes are making are a consequence of the absence of conviction amongst speculators this past month and our proximity to record highs. In other words, ‘lows’ for risk measures are not indicative of a wholesale shift in sentiment. And, if the greenback is to reprise its role as a safe haven currency in demand, we have to see a genuine shot of streak of fear shoot though the global capital markets to fuel the demand. For event risk, Fed member James Bullard offered up commentary that obscured his lean at the highly-debated September policy meeting – which many believe will bring the long-awaited Taper for QE3. On one hand, he noted high risk of a swell in inflation going forward, but he also said the FOMC needs more data before making a call on the Taper. According to Bloomberg, 65 percent of economists expect a Taper next month.

British Pound Rallies after Strong Jobs Report, Is There Still QE Support?

A strong labor report and dissent in the Bank of England minutes this past session has pound traders wondering whether the central bank will return to rate hikes earlier than last week’s Quarterly Inflation report suggested. Just last week, BoE Governor Mark Carney issued forward guidance and introduced thresholds for monetary policy – which taken together, led the group to project mid-2016 for the first rate hike. Yet, adding to the skepticism we have seen in rates markets and sterling trading, the July labour data seemed to suggest that time frame is too pessimistic. While the ILO jobless rate held 7.8 percent (the threshold is 7.0 percent), the claimant count rate dropped to a February 2009 low. In the BoE Minutes, Martin Weale dissented, calling for a stronger statement on inflation. Alternatively, some were still open to new QE.

Euro Finds No Reassurance from Eurozone’s Return to Growth

The market absorbed a considerable wave of Euro-based event risk this past week, yet you wouldn’t know it looking at the performance of the region’s currency. Against most of its counterparts, the shared currency was virtually unchanged through Wednesday. That isn’t particularly remarkable considering benchmark Eurozone equity indexes (the DAX, CAC40, FTSE-MIB) put up modest gains and sovereign yields were mixed. Top headline for the day was the round of second quarter, economic activity (2Q GDP) data. On aggregate, the Eurozone posted a better than expected 0.3 percent quarter for the first period of expansion in seven readings. Core economies German and France both bested forecasts while Portugal substantially beat with a 1.1 percent pick up – the first growth reading since 2010. And yet, little from the euro. The shared currency is numb to distant warnings of a return to crisis as well as premature calls on the decisive point of recovery.

Japanese Yen Crosses Deviate from Nikkei 225 ClimbOn a three-month rolling basis, the correlation between USDJPY and the Nikkei 225 is 0.51. That is a considerable, positive relationship suggesting that when Japanese equities rise, the USDJPY – and other yen crosses – will likely rising at a similar pace. That relationship eased Wednesday as the index lurched higher for a second big gap higher and the benchmark currency cross was virtually unchanged with the second smallest daily trading range in three months (New to FX? Watch this Video). The relationship between equity index and exchange rate reflects loosely the capital flows we are seeing: one for carry, the other for regional capital risk. With that in mind, the weekly capital flows report from the Ministry of Finance showed foreign investors sold Japanese stocks at the fastest pace since May 31 last week. Meanwhile, Japanese investors bought ¥1.615 trillion in foreign bonds – the most since August 2010.

New Zealand Dollar: Data, Bond Yields Shows Drop in Foreign Investment

It is always good practice to remember a currency’s place in the broader scheme of global FX markets. Why is the New Zealand dollar considered one of the major currencies when its economy ranks 55th for size? The ‘AAA’ credit rating, stable government and high yield create an ideal ‘investment currency’ candidate. The kiwi’s carry trade position positions it amongst the likes of the dollar, yen and euro. Yet, that role also concentrates its fundamental health. This past session, the July Non-Resident Bond Holdings figures reported a discouraging update with the percentage of foreign holdings of local debt dropping from 68.2 to 67.9 percent. That may seem modest, but it represents a general outflow of carry. An upcoming government bond auction of NZ$300 million sale of 3 percent, 2020 bonds will give a more timely assessment.

Australian Dollar Traders Look Momentum to Back RBA Bias Shift

Last Tuesday, the RBA delivered its most recent cut in its multi-year easing regime. Yet, the Australian dollar rallied shortly after the announcement as the market had effectively discounted the actual easing but wasn’t prepared for the softer tone in the statement towards further easing. Since this event, we have seen interest rate forecasts significantly improve for the high-yield currency. From a 12-month forecast of 55 bps worth of cuts, the forecast is now pricing in only 12 bps of further easing (suggesting there is debate whether the August cut was the last in this cycle). Yet, despite this improved fundamental backdrop, the Australia dollar doesn’t seem to have capitalized on the change in bias to feed a sustainable trend. What the Aussie dollar needs is a convincing climb in carry appetite.

Gold Maintains Volatility but Loses Direction, Still Strong Above $1,300

With the dollar leveling off from its recent rebound and congestion in capital markets reflecting slower capital turnover, it comes as little surprise that gold is has similarly lost momentum. The precious metal advanced a hearty 1.1 percent this past session. However, that move doesn’t throw much weight behind the bulls’ effort to develop a meaningful trend. The performance for the precious metal each day this week has seen repeated shifts in direction with a steady decline in each swings (Tuesday was a 1.2 percent drop while Monday reported a 1.8 percent rally). Without a strong fundamental push behind one of the metal’s most important roles – a swell in volatility behind fiat currency or financial stability concerns – gold may be relegated to range. Currently the CBOE’s Gold Volatility Index is at its lowest level since July 19 at 21.2 percent – though that is still materially higher than the April’s critical break. That said, as long as gold holds above $1,300, bulls still have a footing.

**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

1:00

NZD

ANZ Consumer Confidence Index (AUG)

119.8

After gradual strength in consumer confidence from 2012, the index has been on the decline since June.

1:00

NZD

ANZ Consumer Confidence (MoM) (AUG)

-3.3%

1:00

AUD

Consumer Inflation Expectation (AUG)

2.6%

Median inflation expectations hit a low of 1.70 in December of 2012 and have been on a gradual uptrend since. Still, inflation expectations are at a relatively low level considering the print has remained closer to 3% for much of the past decade.

1:30

AUD

Average Weekly Wages (QoQ) (MAY)

0.2%

1:30

AUD

Average Weekly Wages (YoY) (MAY)

4.9%

1:30

AUD

RBA Foreign Exchange Transaction (A$) (JUL)

993M

1:30

AUD

RBA Foreign Exchange Transaction- Government (JUL)

-977M

1:30

AUD

RBA Foreign Exchange Transaction- Other (JUL)

24M

8:30

GBP

Retail Sales ex Auto (MoM) (JUL)

0.8%

0.2%

Retail sales including auto YoY estimates put the print at its highest level since March of 2012.

8:30

GBP

Retail Sales ex Auto (YoY) (JUL)

2.8%

2.1%

8:30

GBP

Retail Sales Inc Auto (MoM) (JUL)

0.7%

0.2%

8:30

GBP

Retail Sales Inc Auto (YoY) (JUL)

2.5%

2.2%

12:30

USD

Initial Jobless Claims (AUG 9)

333K

Concerns by Fed members about disinflation continue to weigh heavily on the market. After disappointing PPI numbers on Wednesday, those market participants betting on a September taper will be hoping for stable CPI prints or risk further Fedspeak over disinflation fears and the risks of tapering now.

12:30

USD

Continuing Claims (AUG 3)

3018K

12:30

USD

Empire Manufacturing (AUG)

10.00

9.46

12:30

USD

Consumer Price Index (MoM) (JUL)

0.2%

0.5%

12:30

USD

Consumer Price Index (YoY) (JUL)

2.0%

1.8%

12:30

USD

Consumer Price Index ex Food & Energy (MoM) (JUL)

0.2%

0.2%

12:30

USD

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

1.7%

1.6%

12:30

USD

Consumer Price Index n.s.a. (JUL)

233.757

233.504

12:30

USD

Consumer Price Index Core Index s.a. (JUL)

233.643

13:00

USD

Total Net TIC Flows (JUN)

$56.4B

13:00

USD

Net Long-term TIC Flows (JUN)

-$27.2B

13:00

CAD

Existing Home Sales (MoM) (JUL)

3.3%

Market participants will be looking to see whether higher interest rates are disrupting the housing market in Canada.

13:15

USD

Industrial Production (JUL)

0.3%

0.3%

As with Canadian housing data earlier, traders will be looking to see whether relative strength in the housing sector is able to withstand rising mortgage rates this summer.

13:15

USD

Capacity Utilization (JUL)

77.9%

77.8%

13:15

USD

Manufacturing Production (SIC) (JUL)

0.3%

0.3%

14:00

USD

NAHB Housing Market Index (AUG)

57

57

14:00

USD

Philadelphia Fed. (AUG)

15.5

19.8

GMT

Currency

Upcoming Events & Speeches

12:15

USD

Fed's James Bullard to Speak on U.S. Economy, Monetary Policy

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

2.0000

10.7000

7.8165

1.3650

Resist 2

7.5800

5.8950

6.5135

Resist 1

13.2000

1.9500

10.2500

7.8075

1.3250

Resist 1

6.8155

5.8475

6.2660

Spot

12.7245

1.9300

9.9537

7.7551

1.2674

Spot

6.4864

5.6063

5.8683

Support 1

12.6000

1.9100

9.3700

7.7490

1.2000

Support 1

6.0800

5.6000

5.8700

Support 2

12.0000

1.6500

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

1.3412

1.5652

98.96

0.9412

1.0395

0.9285

0.8165

131.54

1373.71

Res 2

1.3385

1.5622

98.65

0.9389

1.0375

0.9259

0.8142

131.16

1366.25

Res 1

1.3358

1.5591

98.34

0.9365

1.0356

0.9232

0.8118

130.78

1358.79

Spot

1.3303

1.5530

97.73

0.9318

1.0317

0.9180

0.8071

130.02

1343.87

Supp 1

1.3248

1.5469

97.12

0.9271

1.0278

0.9128

0.8024

129.26

1328.95

Supp 2

1.3221

1.5438

96.81

0.9247

1.0259

0.9101

0.8000

128.88

1366.25

Supp 3

1.3194

1.5408

96.50

0.9224

1.0239

0.9075

0.7977

128.50

1373.71

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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