US Dollar: Rally or Collapse Depends on FOMC’s Risk Read

DailyFX

Talking Points:

  • Dollar: Rally or Collapse Depends on FOMC’s Risk Read
  • British Pound will US BoE Minutes to Compare UK to US Policy
  • Japanese Yen Ready for FOMC Risk Reactions, Keep an Eye on BoJ Response

Dollar: Rally or Collapse Depends on FOMC’s Risk Read

We have finally reached one of the most talked-about event risks in months, and expectations for its impact range from ‘non-event’ to explosive volatility. One thing that traders should appreciate: regardless of immediate volatility, this event will have trend implications. The September Federal Open Market Committee (FOMC) meeting has been pegged as the policy gathering at which the central bank would embark on its effort to rein in its expansive stimulus program – now commonly referred to as the Taper – since Chairman Bernanke laid out a time frame back in June. In the press conference that followed the June 19 rate decision, the captain of the largest stimulus program in history announced that he expected to being reducing the $85 billion-per-month QE3 program ‘later in 2013’ and possibly end it by ‘mid-2014’.

Simple deduction has led the market to its consensus that the first move to moderate would come today. Considering the policy authority wants to progress at a moderate pace in its wind down to mid-2014, that Bernanke is expected to retire in January and the best opportunity to ‘explain’ the move comes during the quarterly meetings (the next is December); September ultimately seems the most reasonable time for a move. As an alternative scenario, though, no Taper would trigger a considerable backtrack on months of adjustment that would be felt most fully in Treasuries and the dollar. The current debate no revolves around how large the cut will be and the pace thereafter.

While there are contradictory reads on what the market expects between an 85 percent rally in 10-year Treasury yields and record highs for US equity markets, expectations are likely to mirror the consensus amongst economists. According to Bloomberg’s poll of the group, the central bank is prepared to lower its monthly dip by $5 to $10 billion. From there, we have a benchmark for the event’s ‘surprise quotient’. If the group decides to cull more to the tune of $15 billion or higher (the New York Fed’s Primary Dealer survey projected this figure), a considerable portion of the market will likely need to reposition.

While the first Taper is absorbed and the market gains a clearer view of the central bank’s future pace of policy, the focus for traders looking for the heaviest market impact must be on this event’s influence over risk trends. While we have seen the market’s effort to discount the stimulus turn range from extreme (with Treasuries) to more modest (as with the dollar), the benchmark for risk appetite – the S&P 500 – has defied correction. For a market built on record amounts of leverage, a cooling economic backdrop and flimsy investor participations; this important barometer is extremely exposed. Conditions are ideal for a deleveraging that exposes the broader financial system to risk aversion. It is important to recognize that the initial reaction may be blurred and volatility stunted, but don’t underestimate its implications.

British Pound will US BoE Minutes to Compare UK to US Policy

According to the August CPI figures, inflation pressures have cooled in the UK. Yet, that doesn’t seem to have curbed the market’s expectations of rate hikes. Looking at forward rates and government bond yields, we find investors rebuffing Bank of England Governor Mark Carney’s vow to hold rates at their exceptionally low levels through 2016. In today’s London session, the MPC will attempt to reassert their commitment to low rates to help encourage growth through the BoE minutes. Yet, it will be difficult to shake the consensus rate forecast – and the Fed focus.

Euro Unimpressed by Surge in Investor Confidence Survey

The Eurozone’s ZEW investor sentiment survey offered up a remarkable reading with its September update. According to the measure, confidence in the region’s markets is at its highest level in four years. That is an encouraging read for a financial system that was said to be on the verge of a meltdown just a year ago. Nevertheless, there is plenty to counter any excessive confidence this may inspire. Spain’s building debt and the denial for a relaxing of Portugal’s bailout terms aside, the next hurdle is yet another Italy vote on Berlusconi’s seat.

New Zealand Dollar Soars Ahead of 2Q GDP DataThe high-yield New Zealand dollar will certainly find itself jostled by any risk waves generated by the FOMC rate decision, but it is important to remember the currency’s fundamental backdrop. For medium-term trends on yield-sensitive pairs and especially the low-risk type (like AUDNZD), the underlying appeal of this currency has improved tremendously. With a currently 10 year bond yield at a 2-year high, the 12 month rate forecast pricing 100 bps of hikes, a hands-off-exchange rates central bank and steady economy; the kiwi is in a league of its own.

Japanese Yen Ready for FOMC Risk Reactions, Keep an Eye on BoJ Response

In the scale of undervalued safe havens, the Japanese yen is far more likely to enjoy a surge should the market tip into a tailspin of deleveraging after the Fed’s policy meeting. The timing of the BoJ’s stimulus program earlier this year, the complacency on the yen crosses association to risk trends and the substantial deviation between exchange rates and actual yield leaves these pairs highly exposed. Yet, another consideration after the Fed’s changes: how does the Japanese monetary policy authority respond? They are far more active in the stimulus field.

Australian Dollar Gains Limited Traction on RBA Minutes

While the Reserve Bank of Australia is not taking the option of further rate cuts off the table, the central bank’s minutes made it clear that a further easing was not an imminent event. That is a positive for a carry trade currency decimated by a heavy regime of easing. Yet, we have also seen a notable speculative rebound in recent weeks as the change in tone became clear, and we a brake on the markets in the form of sizable event risk surrounding the US central bank’s policy. If the Fed decision hammers the dollar, AUDUSD is one of the best setups.

Gold Drops Below $1,300 Before Fed Meets, On to Momentum?

In the lead up to major event risk, there is a drop in participation and hesitance in trying to overrun major technical levels. That said, the thinned market can sometimes generate volatility and low-threshold breakouts. This morning, we have seen gold take a pre-FOMC dive below $1,300 – a notable level of support. This sets the tone for the market and suggests it would be easier to build momentum on continued selling rather than forge a reversal. It is difficult to see the dollar seriously devalued after its rout to this point and thereby leverage gold’s appeal.

**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

0:00

AUD

Conference Board Leading Index (JUL)

-0.2%

The Aussie has been supported in the last 24 hours due to RBA minutes, but disappointing prints here can severely shift sentiment ahead of the Fed.

0:30

AUD

Westpac Leading Index (MoM) (JUL)

0.0%

1:30

CNY

Property Prices (AUG)

Although fears of a hard Chinese landing have faded in recent weeks, the rapid rise of home prices still pose threats to the Chinese banks and the economy.

9:00

CHF

ZEW Survey (Expectations) (SEP)

7.2

The survey has been positive every month of 2013 except January.

9:00

EUR

Euro-Zone Construction Output s.a. (MoM) (JUL)

0.7%

Construction output YoY in the EU has only been positive once in the past year and a half.

9:00

EUR

Euro-Zone Construction Output w.d.a. (YoY) (JUL)

-3.0%

11:00

USD

MBA Mortgage Applications (SEP 13)

-13.5%

MBA Mortgage Applications was at its worst reading since October of 2011. After a slow and steady rise in Housing Starts since 2009, the print appears to have topped out for most of 2013. These data points hint at smaller reductions in MBS purchases by the Fed compared with Treasury purchase reductions.

12:30

USD

Housing Starts (AUG)

923K

896K

12:30

USD

Housing Starts (MoM) (AUG)

3.0%

5.9%

12:30

USD

Building Permits (AUG)

950K

943K

12:30

USD

Building Permits (MoM) (AUG)

-0.4%

2.7%

14:30

USD

DOE U.S. Crude Oil Inventories (SEP 13)

-219K

14:30

USD

DOE U.S. Distillate Inventory (SEP 13)

2586K

14:30

USD

DOE U.S. Gasoline Inventories (SEP 13)

1658K

18:00

USD

Federal Open Market Committee Interest Rate Decision

0.25%

0.25%

This will by far be one of the most important event risks of 2013 and liquidity will be sure to dry up ahead of the print and Bernanke comments.

18:00

USD

FOMC Mortgage-Backed Securities Purchases

$40B

$40B

18:00

USD

FOMC Treasury Purchases

$35B

$45B

22:45

NZD

Gross Domestic Product (QoQ) (2Q)

0.2%

0.3%

NZD GDP YoY has not been negative since September of 2009.

22:45

NZD

Gross Domestic Product (YoY) (2Q)

2.3%

2.4%

23:50

JPY

Adjusted Merchandise Trade Balance (Yen) (AUG)

-824.5B

-944.0B

Despite the push by Abe to reinvigorate the Japanese economy, Japanese trade balance prints have indicated deficits for the past year.

23:50

JPY

Merchandise Trade Balance Total (Yen) (AUG)

-1113.8B

-1024.0B

23:50

JPY

Merchandise Trade Exports (YoY) (AUG)

14.8

12.2

23:50

JPY

Merchandise Trade Imports (YoY) (AUG)

18.7

19.6

GMT

Currency

Upcoming Events & Speeches

EUR

EU to Propose Legislation for Benchmark Rates for Financial Instruments

5:30

EUR

ECB's Benoit Coeure Speaks on Financial Markets

8:30

GBP

Bank of England Meeting Minutes

14:40

CAD

BoC Governor Stephen Poloz Speaks on Canadian Economy

18:00

USD

Fed Releases Summary of Economic Projections

18:30

USD

Fed Chairman Ben Bernanke Holds Press Conference

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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