Forex Euro Virtually No Expectation of ECB Stimulus from the Market

DailyFX

Talking Points:

  • Dollar Steady Despite Risk Push that Sends S&P 500 to Record
  • Japanese Yen Crosses Rally after Sales Tax Hike Implemented
  • Euro: Virtually No Expectation of ECB Stimulus from the Market

Dollar Steady Despite Risk Push that Sends S&P 500 to Record

It was a strong start to the week for capital markets. Leading the charge, the S&P 500 advanced 0.7 percent and posted yet another record high close. Joined by yen crosses, emerging markets and bond yields; the shape of a risk appetite run into the new trading quarter would be a reasonable assessment. Yet, if that is indeed the case, it wasn’t a robust enough speculative drive to sour appetite for the dollar. The Dow Jones FXCM Dollar Index (ticker = USDollar) rose the most in 8 days as the currency leveraged gains versus the pound and yen while EURUSD was put off by impending event risk. The ISM manufacturing report was a modest booster this past session, we’ll see what ADP does today.

Japanese Yen Crosses Rally after Sales Tax Hike Implemented

In the wake of a substantial 3 percentage point tax hike and looking ahead to a Bank of Japan (BoJ) rate decision next week that is expected to end with no change to the stimulus program, we would expect Japanese capital markets would be struggling and the yen crosses in retreat. And yet, the Nikkei 225 is up 1.6 percent this morning and USDJPY is now climbing for its fifth consecutive session. It seems optimism – or complacency – is infectious. Follow through on this across-the-board advance from the crosses, however, is doubtful. Back in 1997when Japan last raised taxes, the Nikkei fell over 20 percent through the remainder of the year. And no QE upgrade is a serious matter for low yield carry.

Euro: Virtually No Expectation of ECB Stimulus from the Market

We are fast closing in on the market’s most exposed monetary policy update this week: the European Central Bank (ECB) rate decision on Thursday. With such a high-profile event ahead, euro traders are timid about building up meaningful bullish or bearish positions in the event that there is a surprise awaiting them. The lack of courage is interesting given how certain the market seems to be of the outcome. Looking at Bloomberg’s survey of economist forecasts, 54 of the 57 respondents expect no additional easing. A Reuters’ survey showed 70 of its 72 participants expected the same. Speculators seem to be positioning under similar belief. Yet, an April wait-and-see doesn’t preclude a move by the central bank later on. In fact, there is still a consensus for easing later on. And, neither euro nor EU rates are adjusted for that scenario.

British Pound Retreats as Manufacturing PMI Drops to 8-Month Low

Interest rates matter to the British pound – moreso than many other majors. Having been driven to its heights over the past 9 months on the back of sharply upgraded rate expectations – interest rates are pricing in a BoE hike by March 2015 – there is considerable risk to the sterling’s position to anything that undermines the hawkish outlook. A weak showing by the manufacturing PMI survey – though still well in ‘growth’ territory – delivered the cable its first red close in seven trading days. Gilt yields conformed with a slip from more than two year highs.

Australian Dollar Gains Tempered after RBA Hold, Yields Rising

Looking back at the Reserve Bank of Australia’s (RBA) monetary policy outcome Tuesday morning, the central bank took the same status quo approach to its commentary that it offered through rates. A likely period of ‘interest rate stability’ puts the group firmly on hold – not hawkish, but more importantly, not dovish. While more attention is paid to the lament over the rebound in the Aussie dollar, it likely carries little proactive threat by the group to actually change their policy unless the climb gains serious momentum – and another viable economic excuse arises, like a slowdown in China (actions directed at exchange rates are frowned upon for major central banks). Looking to carry appetites in the context of rising equities, the 2-year Australian government bond yield has advanced to its highest level in a year (2.981 percent).

New Zealand Dollar Worst Performing Major on the Day

Through Tuesday’s close, the New Zealand dollar was already on the lam. With the turn to the new trading session, the pressure was amplified. In early Wednesday trade, the kiwi was down against all of its major counterparts including the weakened Japanese yen. This drive has little to do with traditional economic data – as the only indicator in sight was the commodity inflation index from ANZ which contracted slightly (0.1 percent). In the meantime, both the IMF and New Zealand Finance Minister Bill English weighed in on the health of the currency. The former organization Article 4 Consultation – essentially an evaluation and recommendations – said it was a ‘good time’ for the central bank to be raising rates and expected a steady implementation. Meanwhile, it identified China’s economic pinch and the local housing market as the biggest risk. English’s suggestion that a deficit reduction could curb the kiwi’s rise will carry limited market interest.

Emerging Markets: A Nine-Day Consecutive Rally

All but three emerging market currencies gained ground against the safe haven US dollar Tuesday. Further commentary on the bearing for risk trends through the session. That said, gains of 0.6 percent for the Korean Won, 0.4 percent for the Brazilian Real and 0.3 percent for the Russian Ruble reflect the same lack of drive that we are left to suspect in capital markets and yen crosses. As a group measure, the MSCI Emerging Market ETF rallied another 1.2 percent on the session – furthering a fresh high for 2014 and extending the bull run for a ninth straight day. In the derivative’s 11-year life, we have only seen three other moves of this consistency. In the session ahead, top scheduled event risk includes the Brazil central bank rate decision. An eye should also be kept on possible tsunamis following an 8.3 level earthquake that struck off the coast of Chile.

Gold Extends Decline as Volume Eases

Another $5 drop for gold (0.4 percent) brought the metal to its lowest close since February 10 and extended a bearish reversal that is now over 8 percent lower than last month’s highs. What should not be overlooked in this move is that the market has retraced more than half of the gains that it took 54 days to generate in the span of just 11 active trading sessions. In those terms, the bears are proving more forceful. Looking at the conviction in this gold tumble though, we find that volume via ETFs and futures has notable cooled from Monday’s session. In the futures market, aggregate open interest (a loose measure of participation) showed a tick up from five-year lows – though this does not likely insinuate that a return of speculative appetite is at hand. Short-term trader interest is still the metal’s best option for regaining traction, but ‘bargain hunting’ is unlikely to prize this metal in the risk spectrum. Meanwhile, emerging market instability has dissipated and the dollar remains steady. **Bring the economic calendar to your charts with the DailyFX News App.

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

EUR

Italian Budget Balance (euros) (MAR)

-12.8B

0:30

AUD

Job Vacancies (FEB)

-1.7%

0:30

AUD

Building Approvals (MoM) (FEB)

-2.0%

6.8%

0:30

AUD

Building Approvals (YoY) (FEB)

27.9%

34.6%

6:00

GBP

Nationwide House Prices s.a. (MoM) (MAR)

0.8%

0.6%

6:00

GBP

Nationwide House Prices n.s.a. (YoY) (MAR)

9.6%

9.4%

8:30

GBP

Markit PMI Construction (MAR)

63.0

62.6

9:00

EUR

Euro-Zone Producer Price Index (MoM) (FEB)

0.0%

-0.3%

9:00

EUR

Euro-Zone Producer Price Index (YoY) (FEB)

-1.6%

-1.4%

10:00

EUR

Ireland Unemployment Rate (MAR)

11.9%

11:00

USD

MBA Mortgage Applications (MAR 28)

-3.5%

12:15

USD

ADP Employment Change (MAR)

190K

139K

14:00

USD

Factory Orders (FEB)

0.8%

-0.7%

22:30

AUD

AiG Performance of Service Index (MAR)

55.2

23:15

JPY

Markit/JMMA PMI Composite (MAR)

--

23:15

JPY

Markit Purchasing Manager Index Services (MAR)

--

23:50

JPY

Japan Buying Foreign Stocks (Yen) (MAR 28)

-¥54.1B

23:50

JPY

Japan Buying Foreign Bonds (Yen) (MAR 28)

-¥395.5B

23:50

JPY

Foreign Buying Japan Bonds (Yen) (MAR 28)

-¥399.6B

23:50

JPY

Foreign Buying Japan Stocks (Yen) (MAR 28)

-¥191.0B

GMT

Currency

Upcoming Events & Speeches

EUR

EU Finance Ministers/Central Bankers Meet in Athens

2:00

AUD

RBA Governor Glenn Stevens Speaks on Australian Economy

10:00

GBP

UK to Sell £2.5 Bln in 30-Year Bonds

16:30

USD

Fed's Dennis Lockhart Speaks on U.S. Economy

20:00

USD

Fed's James Bullard 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

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

13.0576

2.1867

10.5850

7.7578

1.2610

Spot

6.4765

5.4320

5.9991

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

1.3845

1.6728

103.09

0.8940

1.1090

0.9378

0.8778

141.82

1318.08

Res 2

1.3820

1.6701

102.86

0.8922

1.1069

0.9356

0.8756

141.47

1312.11

Res 1

1.3795

1.6673

102.62

0.8904

1.1049

0.9334

0.8735

141.12

1306.15

Spot

1.3745

1.6619

102.16

0.8867

1.1007

0.9290

0.8693

140.42

1294.23

Supp 1

1.3695

1.6565

101.70

0.8830

1.0965

0.9246

0.8651

139.72

1282.31

Supp 2

1.3670

1.6537

101.46

0.8812

1.0945

0.9224

0.8630

139.37

1276.35

Supp 3

1.3645

1.6510

101.23

0.8794

1.0924

0.9202

0.8608

139.02

1270.38

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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