News Column

Dollar Ends Congestion with Collapse

May 6, 2014

John Kicklighter





Talking Points:



  • Dollar Ends Congestion with Collapse
  • Euro Receives Further Encouragement for QE
  • New Zealand Dollar: RBNZ Says 'May Intervene'



    Dollar Ends Congestion with Collapse

    Following one of the quietest trading days in the Dow Jones FXCM Dollar Index's (ticker = USDollar) history, the currency suffered its biggest single-day selloff in a month and tumbled to lows not seen in six months. Now the question is whether this is the opening move in a new trend or merely a normalization to the extraordinarily tepid trading conditions as of late. First and foremost, it is important to appreciate that this was a dollar-based move. The greenback tumbled against all of its major counterparts - from a 0.4 percent drop versus the Euro to a 0.8 percent slump against the Australian dollar. And, these were not minor price developments for the core majors. EURUSD broke above 1.3900 and revived the market discussion over how committed the ECB is in keeping this pair from contributing to deflation. USDJPY took out 102 and a trendline that has shaped the pair's bull trend over the past 15 months. Meanwhile, GBPUSD extended its reach to a fresh five year high and has more than a few FX participants wondering whether the BoE may be anxious over its own currency's strength.



    There are clearly two elements to the greenback's progress: the currency's own fundamental drive and the consequences it holds for its global counterparts. In this slump, a few convenient catalysts have been targeted. Some believe it was a delayed response to last week's NFPs while others suggest the OECD's updated forecasts or the recent trade report undermine Fed rate forecasts. Markets are nowhere near inefficient enough to produce such a delay. Meanwhile, neither Treasury yields nor swaps reflect a material change in trend for rate forecasts. If a major theme was not responsible for this spark, it is difficult to imagine a trend following on its heels. That doesn't mean momentum can't development; merely that we need something tangible for traders to unite around - perhaps Fed Chair Yellen will contribute to that today.



    However, as we plot out the dollar's course, it is vital to remember that this is a relative market. If the greenback isn't proactive in finding its bearings, its counterparts can alter its value. That is a very considerable factor to remember with this currency. We have heard threats or seen action targeting a depreciation of the Euro, Japanese Yen, Chinese Yuan, Australian and New Zealand dollars over the past years.





    Euro Receives Further Encouragement for QE

    Over the past weeks, we have heard numerous parties - Eurozone government heads, certain ECB members, foreign governments, and the IMF among others - encourage the ECB (European Central Bank) to adopt a fresh round of stimulus to fight deflation and fend off economic trouble. Add another voice to the din. In the OECD's updated forecasts, the group called on the bank to act to change the trajectory of low inflation. These concerns are certainly not unfounded - nor are they even surprising against the backdrop of this week's data. So far, we have seen an easing in investor confidence, a sustained drop in factory prices and downgraded EC inflation outlook. Onto Thursday's meeting.



    New Zealand Dollar: RBNZ Says 'May Intervene'

    Reserve Bank of New Zealand(RBNZ) Governor Graeme Wheeler doesn't like the level of the currency and he is ready to take steps to arrest its ascent if need be. These were the sentiments the policy head relayed clearly to the market this morning. In his remarks, Wheeler reiterated that the Kiwi dollar was overvalued and its level was unsustainable. His suggestion that should 'fundamentals worsen' the central bank could intervene is an explicit threat to bulls - and there is little doubt this has as much to do with the exchange rate as standard indicators. Yet, intervention is not effective for New Zealand. Far more concerning was his warning that the NZD will be a factor in future rate decisions.



    Yen Crosses Unnerved by USDJPY's Slip

    The Japanese yen was modestly higher against most of its major counterparts this past session and the S&P 500 - as a benchmark for risk appetite and carry demand in the FX market - has not devolved into a bear trend. However, USDJPY's drop Tuesday has put yen cross traders on high alert. These pairs are highly correlated, which means stability for the major can anchor errant moves. But traders are certainly aware of the risk that one break can start a landslide. Meanwhile, QE hopefuls noted Japanese PMI data this morning plummeted on the tax hike.



    British Pound: Data Jump Leverages Rate Forecasts Higher

    There was a variance in performance for the sterling between GBPUSD and the other crosses. The former hit multi-year highs in a clean jump while the others presented a more modest performance. The pound itself, however, had a robust fundamental backdrop to engage bulls - namely through rate expectations. PMI figures release this past session beat expectations and the OECD offered up a hefty upgrade to its UK GDP forecast. Two-year Gilt yields and 1y2y swaps both responded by hitting fresh three-year highs.



    Chinese Yuan Posts Biggest Rally in 11 Months

    For a currency that moves in a managed band, the Chinese Renminbi posted a hearty rally. USDCNH posted its biggest drop in 11 months Tuesday - a concerning point to do so given the publicity surrounding the pair's bull trend over the past months. Yet, when we look moves of similar magnitude going back the past few years, they rarely turn into lasting trends. Data and financing health will be important to watch.



    Emerging Markets Post Uniform Advance Vs Dollar, Not Much Else

    Against the US dollar, virtually all of the Emerging Market currencies posted gains. Yet, when we switch in more stable currencies to benchmark the risky group against; the statistics decay very quickly. From the risk backdrop, equities and high-yield assets were notably struggling. Pricing considerations aside, the standout advance in the group was the Russian Ruble which continues to suffer heavy volatility amid Ukraine tensions.



    Gold Weakness Masked by Dollar's Own Tumble



    ECONOMIC DATA



    GMT

    Currency

    Release

    Survey

    Previous

    Comments

    1:30

    AUD

    Retail Sales s.a. (MoM) (MAR)

    0.4%

    0.2%

    Retail sales are expected to increase from a weak start to the year.

    1:30

    AUD

    Retail Sales ex Inflation(QoQ) (1Q)

    1.6%

    0.9%

    1:45

    CNY

    HSBC PMI Services (APR)



    51.9

    The deceleration in China's GDP growth and 4 months of contracting manufacturing PMI will make these figures closely watched.

    1:45

    CNY

    HSBC PMI Composite (APR)



    49.3

    5:45

    CHF

    Unemployment Rate (APR)

    3.2%

    3.3%

    Switzerland has seen a steadily increasing unemployment rate since 2011.

    5:45

    CHF

    Unemployment Rate s.a. (APR)

    3.2%

    3.2%

    6:00

    EUR

    German Factory Orders s.a. (MoM) (MAR)

    0.4%

    0.6%

    German Factory Orders are expected to continue its two month slowdown after two years of steadily increasing growth.

    6:00

    EUR

    German Factory Orders n.s.a. (YoY) (MAR)

    4.4%

    6.1%

    6:45

    EUR

    French Industrial Production (MoM) (MAR)

    0.2%

    0.1%

    French industrial production is climbing from previous anemic levels including almost 2 years of contraction in the sector. France continues to have a negative trade balance, which it has had since 2004.

    6:45

    EUR

    French Industrial Production (YoY) (MAR)

    0.5%

    -0.8%

    6:45

    EUR

    French Manufacturing Production (MoM) (MAR)

    0.1%

    0.3%



    6:45

    EUR

    French Manufacturing Production (YoY) (MAR)

    2.2%

    1.2%



    6:45

    EUR

    French Trade Balance (euros) (MAR)

    -4000M

    -3368M



    7:00

    CHF

    Foreign Currency Reserves (APR)



    437.9B

    Swiss Foreign currency reserves near all time highs.

    7:30

    EUR

    Markit German PMI Construction (APR)



    52.5

    German PMI Construction sector has seen expansion in May of last year.

    8:00

    GBP

    New Car Registrations (YoY) (APR)



    17.7%

    New car registration has shown consistently upward trend since 2010.

    8:10

    EUR

    Markit Italian Purchasing Manager Index Retail (APR)



    46.5

    After a tough year of contraction in 2012, composite PMI has climbed back steadily in 2013 but the recent weakness threatens to push Italy back into contraction territory.

    8:10

    EUR

    Markit French Purchasing Manager Index Retail (APR)



    50.0

    8:10

    EUR

    Markit German Purchasing Manager Index Retail (APR)



    50.2



    8:10

    EUR

    Markit Euro-Zone PMI Retail (APR)



    49.2



    11:00

    USD

    MBA Mortgage Applications (MAY 2)



    -5.9%

    US MBA applications are cyclical and often rebound after periods of decline.

    12:30

    USD

    US Nonfarm Productivity (1Q P)

    -1.2%

    1.8%

    Important, qualitative measures to support labor and inflation expectations

    12:30

    USD

    Unit Labor Costs (1Q P)

    2.8%

    -0.1%

    12:30

    CAD

    Building Permits (MoM) (MAR)

    4.0%

    -11.6%

    Canadian Building permits are expected to increase after a large drop in February

    19:00

    USD

    Consumer Credit (MAR)

    $15.00B

    $16.49B

    US Consumer credit has been fairly stable since the financial crisis.

    23:01

    GBP

    RICS House Price Balance (APR)

    55%

    57%

    Survey has shown strong increases throughout 2013



    GMT

    Currency

    Upcoming Events & Speeches

    9:30

    GBP

    UK to Sell £1.2 Bln in 30-Year Inflation Bonds

    14:00

    USD

    Fed Chair Janet Yellen Testifies to Joint Economic Committee

    17:00

    USD

    US to Sell 10-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

    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

    13.0904

    2.1320

    10.6238

    7.7533

    1.2569



    Spot

    6.5665

    5.3928

    5.9928

    Support 1

    12.9650

    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

    1.3920

    1.6900

    103.18

    0.8876

    1.1093

    0.9340

    0.8641

    142.89

    1313.81

    Res 2

    1.3899

    1.6877

    102.99

    0.8862

    1.1076

    0.9322

    0.8623

    142.60

    1308.44

    Res 1

    1.3878

    1.6854

    102.81

    0.8847

    1.1059

    0.9304

    0.8604

    142.31

    1303.08

    Spot

    1.3837

    1.6807

    102.43

    0.8817

    1.1024

    0.9268

    0.8568

    141.72

    1292.35

    Supp 1

    1.3796

    1.6760

    102.05

    0.8787

    1.0989

    0.9232

    0.8532

    141.13

    1281.62

    Supp 2

    1.3775

    1.6737

    101.87

    0.8772

    1.0972

    0.9214

    0.8513

    140.84

    1276.26

    Supp 3

    1.3754

    1.6714

    101.68

    0.8758

    1.0955

    0.9196

    0.8495

    140.55

    1270.89

    v
























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    Source: DailyFx


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