Forex: Dollar Traders Tense as Risk Coiled, Fed Taking Steps

Talking Points:

• Dollar Traders Tense as Risk Coiled, Fed Taking Steps

• Euro Growth Outlook Firm but Downside Risks Highlighted

• Yen Crosses Working a Day Closer to Breakout

Dollar Traders Tense as Risk Coiled, Fed Taking Steps

The tension in the markets is palpable. The likelihood of a high-profile S&P 500 breakout to record highs is growing, and with it the assumptions for risk appetite follow. That is a dangerous equation for the already stricken US dollar. Though the currency’s relationship to the favored ‘risk’ benchmark has diminished over the past year or so, periods of volatility tend to sync the two on opposite ends of the risk spectrum– and thereby opposite ends of the performance tables. A move above 1,850 for the equity index is not the variable FX traders are necessarily concerned with however. Rather, the concern is whether such a move would necessarily represent or encourage a genuine underlying sentiment run. The S&P 500 is just a thermometer for the balance between demand for return and safety – and it is a faulty one at that.

In measuring the heft and momentum behind risk trends, it is important to establish how broad and intense the perspective is. If the eagerness for return were truly robust, we would expect to see global equities, Yen crosses and Emerging Markets rise with gusto in concert. The escalation in risk exposure would need to be significant though for the dollar to resolve itself to a discarded safe haven. Yet, where would a sudden and enduring appetite for further exposure come from? The docket ahead is light for market-moving events/data, and growth forecasts have diminished. Furthermore, there is little scope for a ‘rebound’ when we are at or near highs and volatility measures show there is little discount to work off. So, beyond a few technical breaks, speculators will need to find their inspiration elsewhere.

While we await the appraisal on sentiment, dollar traders are also taking note of some Fed movement. This past session, the FOMC released its discount rate meeting minutes which noted optimism for the economic outlook and a repeat vote from the directors of the Kansas City, Philadelphia and Dallas Fed branches for a hike in the rate to 1.00 percent. Though the hawks were overruled, the pressure remains. Receiving less press, the Fed had also announced an increase to its overnight repo rate from 4 to 5 bps. While this is an experimental facility now, it has been used heavily as of late, and will likely bridge the gap between the end of QE3 and the eventual rate hikes.

Euro Growth Outlook Firm but Downside Risks Highlighted

There was a mixed picture for the euro this past session, and EURUSD is notably still stuck in its 75-pip range below 1.3775. While the likes of EURUSD and EURJPY may seem traditional risk candidates, the same building pressure is present amongst most of the euro crosses. This past session, the headlines gave traders more to chew on. The European Union’s Winter Economic forecast was updated for 2014 from 1.1 to 1.2 percent projected growth. That said, a 12 percent jobless rate and debt-to-GDP level of 95.9 percent curbed optimism. The outlook noted downside risks from possible stalled reforms, a drop in inflation and Emerging Market troubles. These perceived risks, however, don’t seem to concern traders…at least not yet. Meanwhile, ECB President Draghi’s emphasis on the March ECBdecisionmay prove a capable catalyst.

Yen Crosses Working a Day Closer to Breakout

Some of the more liquid Yen crosses have worked themselves into exceptionally tight ranges – a hundred pips or less. USDJPY above 102, EURJPY at 140 and GBPJPY holding 170 presents a breakout risk not just for an individual pair – which would dry up quickly – but for the broader Yen crosses. A uniform rally or collapse from this carry-favored group is a strong contributor to the risk theme. That said, the impetus for follow through on a break – bullish or bearish – requires the same drive as equity indexes or the dollar. And fuses are in short supply.

British Pound Stoic Through Strong Retail Sales, Housing Data

There was a remarkable round of economic data to add to the bombastic UK growth story. And yet, the sterling seemed to find little inspiration from it. From the BBA, home loans figures for February showed a surge to 49,972 applications – the highest since September 2007. From the CBI, the retail sector health index surged with its best showing (+37) since June 2012. There was barely any response from interest rate measures on this data which is increasingly necessary at these levels. Coming up, we have the 4Q GDP details to digest.

Australian Dollar Correlation to ASX Second Lowest in 8 Years

The Australian dollar is a carry currency, but it certainly isn’t acting like one. Capital markets are on the rise – supposedly on the back of optimism for growth and investment trends – and yet, the Aussie struggles to gain traction. In fact, the 20-day correlation (percentage change-based) between AUDUSD and the ASX 200 is the second lowest (-0.50) since mid-2006. China, true risk appetite and RBA outlook play in here.

Natural Gas Continues to Burn with 6% Drop

Just because a market suffers its largest single-day drop in years, doesn’t mean that a strong rebound will immediately follow. In the wake of Natural Gas’s incredible 11.3 percent plunge on Monday, the energy product fell another 6.4 percent Tuesday. Today is the last trading day of the March Nat Gas NYMEX contract, so expect volatility and maybe unusual price activity as the market rolls to the next contract.

Emerging Markets: Chinese Yuan Sees Biggest Drop in Decades

For a general assessment of Emerging Markets, the MSCI EM ETF dropped 1.1 percent – the most since February 3 – on a bump in volume. Once again the currency table was split with the South African rand leading those in the green after a strong 4Q GDP release. One currency that sticks out as of late though is the Chinese yuan. The currency dropped 0.4 percent this past session and over the past week it has dropped more than 1.1 percent. This is the fastest drop in a few decades, and unusual given cash market stress has dropped to seven-month lows. This is likely a reflection of central bank (PBoC) activity aiming to curb speculative flows. Control is critical now given the lending and credit ‘bubble’.

Gold Closing in on $1,350, Awaiting Next Dollar Hit

Through only a 0.3 percent performance, gold nevertheless rose for a fourth consecutive trading day Tuesday. This advance set a fresh four-month high with the market now within striking distance of $1,350. Of concern, EFT volume behind the move was particularly light – though the derivative’s holdings of the precious metal have recently trended up from multi-year lows. The next thrust likely falls to the dollar connection.**Bring the economic calendar to your charts with the DailyFX News App.

ECONOMIC DATA

GMT	Currency	Release	Survey	Previous	Comments
0:30	AUD	Australia Construction Work Done (4Q)	0.2%	2.7%	The figure has not been negative since March.
7:00	EUR	Germany Consumer Confidence - GfK (MAR)	8.2	8.2	Last figure was the best since 2007.
7:00	CHF	Switzerland Consumption Indicator - UBS (JAN)		1.81	With USD/CHF at major support, poor Swiss data could go a long way in determining price action.
8:00	EUR	Spain Total Mortgage Approvals (DEC)		-26.9%
9:30	GBP	UK GDP - Details (4Q P) (QoQ)	0.7%	0.7%	QoQ GDP growth has faltered at these levels before including in 2012 and 2010.
12:00	USD	US Mortgage Applications - MBA (Feb 21)		-4.1%	A missed print here will likely add to a long list of poor housing data adding to growth and Taper worries
15:00	USD	US New Home Sales JAN)	400K	414K
17:00	EUR	France Total Jobseekers (JAN)	3302.8k	3303.2K	Last reading was the highest on record.
21:45	NZD	New Zealand Trade Balance (JAN)	230M	523M	Last print was the highest since the spring of 2013.
23:00	KRW	South Korea Current Account Balance (JAN) (Emerging Markets)		$6429.1M	USD/KRW appears to have made a double bottom and Chinese weakness in 2014 could be a catalyst for an unwinding of the short positioning built up over the past few years.
23:50	JPY	Japan Net Foreign Stock & Bond Investment (Feb 21)

GMT	Currency	Upcoming Events & Speeches
9:25	GBP	BoE's Broadbent to Speak on Economy
10:15	EUR	ECB Announces Alottment in 3-Month Refi Tender
10:30	EUR	Germany to Sell €3 Bln in 30-Year Bonds
-:-	BRL	Brazil Central Bank Rate Decision - Expected Hike (EM)
-:-	VEF	[Feb 24-28] Venezuela GDP (4Q) (Emerging Markets)
13:00	EUR	ECB's Mersch to Speak on the Renminbi
15:30	USD	US Dept of Energy US Oil Inventories | Implied Demand (Feb 21)
16:30	USD	US to Sell $13 Bln in 2-Year Floating Notes
17:00	USD	Fed's Rosengren to Speak on Economy
17:00	CAD	Canada to Sell 30-Year Bonds
18:00	USD	US to Sell $35 Bln in 5-Year Notes

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	13.2388	2.1785	10.8853	7.7558	1.2627		Spot	6.4839	5.4204	6.0378
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	1.3860	1.6812	103.23	0.8946	1.1024	0.9093	0.8379	142.25	1340.67
Res 2	1.3837	1.6781	102.99	0.8928	1.1005	0.9072	0.8358	141.88	1335.05
Res 1	1.3813	1.6750	102.75	0.8910	1.0986	0.9050	0.8336	141.51	1329.43
Spot	1.3766	1.6688	102.26	0.8873	1.0947	0.9007	0.8294	140.77	1318.20
Supp 1	1.3719	1.6626	101.77	0.8836	1.0908	0.8964	0.8252	140.03	1306.97
Supp 2	1.3695	1.6595	101.53	0.8818	1.0889	0.8942	0.8230	139.66	1301.35
Supp 3	1.3672	1.6564	101.29	0.8800	1.0870	0.8921	0.8209	139.29	1295.73

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--- 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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