News Column

Dollar and Rate Outlook Offered Little Help from CPI

May 15, 2014

John Kicklighter

Talking Points:



  • Dollar and Rate Outlook Offered Little Help from CPI
  • Euro: Expectations for Builds on Weak GDP Release
  • Japanese Yen Crosses Starting to Push Against Risk



    Dollar and Rate Outlook Offered Little Help from CPI



    A tumble from the S&P 500 marked another abrupt decline in ever-fickle risk trends. However, Dollar traders have grown too familiar with the flippant views of risk trends and were too engrossed with interest rates to try and ride a bullish response from the benchmark currency. Marking the contrast, the benchmark equity index tumbled 1.0 percent while the Dow Jones FXCM Dollar Index (ticker = USDollar) ended an otherwise volatile day unchanged. This is not to mean that the greenback's position as a safe haven is forever broken. Rather, traders and investors have grown wary of short-lived sentiment shifts that seem manufactured simply for deriving the next quick rebound. With each day that passes, it becomes increasingly clear that the markets will only revive genuine momentum with a cleansing risk aversion move.



    In the meantime, the harder fought gain for the dollar through its relative interest rate bearing is losing steam. Treasury yields extended their slump this past session with rate on the benchmark 10-year note dropping below 2.50 percent and returning to levels last seen during the government shutdown. Given the Fed's optimistic outlook, the rebound in data from the weak 1Q reports and this past session's upgrade in the CPI reading (the 2.0 percent headline reading is at the Fed's target), the baseline of a mid-2015 first hike seems well supported. That said, Fed Funds rates confirm the timid outlook. Looking at the broader market, this yield compression seems a universal development; which has maintained a relative buoyancy for the dollar against the more aggressive slump amongst its counterparts.



    Euro: Expectations for Builds on Weak GDP Release



    Having suffered a painful tumble this past week, the euro looked like it was trying to catch its balance this past session. With its fundamental backdrop, though, a breather is not likely to evolve into a meaningful rebound. Taking the temperature of fundamentals this past session, the support for additional stimulus from the ECB has only grown. The most prominent listings on the docket were the Euro-area GDP figures for 1Q. The region missed forecasts with a 0.2 percent pace of growth through the period that was half of the consensus. Meanwhile, the different country listings showed the two-speed economy was slowly turning into a one-speed moderation with Italy and France growth slowing as Portugal, Greece and Cyprus continue to suffer. Confidence in a stimulus move come June 5 is growing to the point where markets instead argue over the composition of the package. Yields show there is plenty of premium that can be worked off the euro.



    Japanese Yen Crosses Starting to Push Against Risk



    Conviction eludes risk trends whether it be bullish or bearish. That is a meaningful anchor for those assets that are highly correlated to the underlying theme. USDJPY and the other yen crosses have certainly taken advantage of the situation. If there were a complacency and comfort driving investors for yield wherever it may be, these pairs would have certainly retraced a significant portion of their gains into and after the BoJ introduced its open-ended stimulus program last April. Yet, that faux optimism can't sustain markets forever. Eventually, real returns will need to compensate for risk. And the risk that yen carry is overvalued may find this group as a first mover in a bigger shift.



    British Pound Holds Fast Despite a Sustained Drop in Rate Speculation



    Looking at swaps and Gilt yields, interest rates in the UK continue to ease off their inflated heights heading into the BoE Quarterly Inflation report. The 2-year government bond yield dropped a third straight session - now off 20% from the multi-year highs to start the week.Despite this, the sterling was up against all of its counterparts with the exception of Japanese yen. A chase for yield and a global slump in rates is giving the sterling temporary reprieve. If this effort ebbs, the pound will once again be cast in harsh light.



    Chinese Yuan Unfazed by Risk Aversion, Important Events Next Week



    Another risk measure that was seemingly left out of the 'risk off' move this past session was the Chinese currency. The US dollar - Chinese Offshore Renminbi (USDCNH) rose slightly Thursday to break off two days of retreat. This looks more like an ill-fated congestion between a medium-term depreciation effort on the Renminbi's part and a temporary distraction by traditional risk.



    Emerging Market Equities and Bonds Diverge, Russia Economy Cools in 1Q



    There seems to be a preference in flavor when it comes to risk. Nowhere was that better illustrated than with the Emerging Markets. While the MSCI EM ETF tumbled 0.9 percent Thursday (the most in three weeks), the groups' sovereign debt index inched closer to reaching a record high. In a general search for yield amongst the world's debt offerings, there is both yield and discount in the EM thanks to geopolitical flare-ups. Further interest will be marked by the approach of the Ukrainian elections - and Russia's interest - and the India election results.



    Gold Reverses Sharp Gains, Speculative Interest Close to Flipping





    ECONOMIC DATA



    GMT

    Currency

    Release

    Survey

    Previous

    Comments

    03:30

    JPY

    JPY Industrial Production (YoY)



    7.0%

    Price action in JPY continues to remain in the context of developments in the US equity and bond market.

    03:30

    JPY

    JPY Industrial Production (MoM)



    -2.3%

    03:30

    JPY

    JPY Capacity Utilization (MoM)



    -2.6%



    05:00

    EUR

    EUR EU 25 New Car Registrations



    10.6%

    With the Euro continuing to fall in the month of May, any negative data here provides further fuel to the selling fire.

    05:45

    EUR

    EUR French Non-Farm Payrolls (QoQ)



    0.1%

    05:45

    EUR

    EUR French Wages (QoQ)



    0.2%



    06:00

    EUR

    Eurozone Economic Survey - Bloomberg (MAY)







    09:00

    EUR

    EUR Euro-Zone Trade Balance (euros)

    16.0B

    13.6B



    09:00

    EUR

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



    15.0B



    12:30

    CAD

    CAD International Securities Transactions (C$)



    6.08B



    12:30

    USD

    USD Housing Starts (MoM)



    2.80%

    With mixed data, concerns are building in regards to the US housing market in the context of the Federal Reserve pulling back. Housing data will remain important this summer as economists judge to what degree the market is pulling off as the Fed seeks to end MBS purchases in 2014.

    12:30

    USD

    USD Housing Starts

    1M

    0.9M

    12:30

    USD

    USD Building Permits

    1M

    1M



    12:30

    USD

    USD Building Permits (MoM)



    -2.4%



    13:55

    USD

    USD U. of Michigan Confidence

    84.50

    84.10





    GMT

    Currency

    Upcoming Events & Speeches

    -:-

    INR

    Indian Election Results Expected (Emerging Markets)

    -:-

    EUR

    Moody's to Publish Ireland Sovereign Debt Rating

    10:00

    EUR

    ECB to Announce 3-Year LTRO Repayment

    11:50

    USD

    Fed's Bullard Speaks on Monetary Policy in Little Rock, Ark.









    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

    13.5800

    2.3800

    12.7000

    7.8165

    1.3650



    Resist 2

    7.5800

    5.8950

    6.5135

    Resist 1

    13.1500

    2.3000

    11.8750

    7.8075

    1.3250



    Resist 1

    6.8155

    5.8475

    6.2660

    Spot

    12.8983

    2.0713

    10.3074

    7.7517

    1.2503



    Spot

    6.5569

    5.4407

    5.9239

    Support 1

    12.8350

    2.0700

    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

    1.3806

    1.6865

    102.54

    0.8955

    1.0939

    0.9439

    0.8740

    140.84

    1323.34

    Res 2

    1.3784

    1.6842

    102.36

    0.8939

    1.0924

    0.9421

    0.8721

    140.55

    1318.64

    Res 1

    1.3763

    1.6819

    102.18

    0.8924

    1.0909

    0.9403

    0.8703

    140.27

    1313.95

    Spot

    1.3720

    1.6772

    101.83

    0.8893

    1.0879

    0.9368

    0.8666

    139.71

    1304.55

    Supp 1

    1.3677

    1.6725

    101.48

    0.8862

    1.0849

    0.9333

    0.8629

    139.15

    1295.15

    Supp 2

    1.3656

    1.6702

    101.30

    0.8847

    1.0834

    0.9315

    0.8611

    138.87

    1290.46

    Supp 3

    1.3634

    1.6679

    101.12

    0.8831

    1.0819

    0.9297

    0.8592

    138.58

    1285.76

    v

















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