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
As remarkable as gold’s rally was Wednesday, the metal would promptly reverse the rally the following day to deflate any hopes for a more substantive breakout. The spot metal dropped 0.8 percent through Thursday to close back below $1,300. While the switchback in price was worth a sizable jump behind the market’s specific volatility index – a 6 percent jump to 14.6 vols – complacency is certainly setting in with the familiarity of a wedge that is essentially two months in the making. With $30 worth of range ($20 recently), we find the markets once again coiling up for a definitive catalyst to resolve indecision…even if it is only a temporary solution. Interest rates and their tangible connection to monetary policy expectations are likely to be offer the trend, but a meaningful dollar move would be more effective for a break.**Bring the economic calendar to your charts with the DailyFX News App.
ECONOMIC DATA
GMT
Currency
Release
Survey
Previous
Comments
03:30
JPY
JPY Industrial Production (YoY)
7.0%
Price action in JPY continues to remain in the context of developments in the US equity and bond market.
03:30
JPY
JPY Industrial Production (MoM)
-2.3%
03:30
JPY
JPY Capacity Utilization (MoM)
-2.6%
05:00
EUR
EUR EU 25 New Car Registrations
10.6%
With the Euro continuing to fall in the month of May, any negative data here provides further fuel to the selling fire.
05:45
EUR
EUR French Non-Farm Payrolls (QoQ)
0.1%
05:45
EUR
EUR French Wages (QoQ)
0.2%
06:00
EUR
Eurozone Economic Survey – Bloomberg (MAY)
09:00
EUR
EUR Euro-Zone Trade Balance (euros)
16.0B
13.6B
09:00
EUR
EUR Euro-Zone Trade Balance s.a. (euros)
15.0B
12:30
CAD
CAD International Securities Transactions (C$)
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
— 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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