Talking Points:
Dollar: Market No Longer Expects a 2015 Rate Hike
British Pound Tumbles Despite Strong Employment Data
Euro Financial and Sovereign Risks Creep Back In
Dollar: Market No Longer Expects a 2015 Rate Hike
The Dow Jones FXCM Dollar Index (ticker = USDollar) suffered its biggest daily drop this past session in 13 months. It isn’t the scale of the decline that is particularly remarkable though. It is the fundamental circumstances against which the losses were tallied. Once again, risk aversion dominated the trading landscape Wednesday with a number of especially severe shocks to the system. While there were sizable moves behind global government bonds, ‘junk’ bonds, carry trade and other speculative benchmarks, it was global equities that truly stood out. Though the S&P 500 would close out the day only 0.8 percent lower, the index was down as much as 3 percent through the middle of day. Furthermore, the VIX volatility index (derived from S&P 500 options) closed at its highest level in nearly two-and-a-half years. As the most enduring proponents of complacency and risk appetite, these readings are showing a troubling collapse in confidence.
If risk aversion is solidifying, why is the Dollar still not picking up on its safe haven appeal? In fact, the Greenback isn’t the only departure from a rise in fear. The Yen crosses, volatility readings of asset classes outside of the equity world and emerging market are a few other well-known sentiment measures that haven’t succumb to panicked unwind. They are certainly trendline towards concern – as the Dollar is trading higher – but not yet caught in the riptide. It can take time to flip a belief that has dominated for five years and is still supported by an unprecedented global stimulus regime. Yet, as risk aversion persists (and builds) a holdouts will eventually conform as liquidation presents essential needs. Until a demand for liquidity ramps the dollar, it yield premium that will continue to burn off. In fact, Fed Funds futures are now pricing in a benchmark rate of 1.235 percent through the end of 2016 – that is lower than what the FOMC itself has projected for the end of 2015! It will be worthwhile to watch Treasuries as they will transition from a Fed forecast tool to safe haven at the market’s tipping point.
British Pound Tumbles Despite Strong Employment Data
From an academic perspective, the UK docket was encouraging this past session. You wouldn’t know it from the Pound’s performance however. The currency dropped against most counterparts – only keeping its balance versus more severe losses for the US and Canadian dollars. Fundamentally, the improvement in the employment statistics is reassuring for rate hikes. The drop in jobless claims last month may have been the smallest since May of last year, but they are still falling. Furthermore, the ILO unemployment rate for August dropped to a six year low. And yet, hawkish expectations were still burning. The 2-year Gilt yield plunged 14.7 percent this yesterday to a 8-month low and the 1-year-2-year swap collapsed 15.7 percent to an 11-month low. If global growth slows, rate hopes cool everywhere…especially for the most hawkish.
Euro Financial and Sovereign Risks Creep Back In
A dovish monetary policy bearing from the ECB has driven the Euro to massive declines over the past four months. However, the impact this relative effort has had and will have pales in comparison to what would happen if confidence in European markets soured. Given the wave of capital that flooded the region during the yield-chase years after the ECB vowed to do whatever was necessary to stabilize the Eurozone after its crisis (2012 to 2014), the dam is attempting to hold back a flood of liquidity that could soon seek safety. And, the cracks are growing. We’ve already noted the drop in interest/exposure for proxies like the Vanguard/FTSE Europe ETF. A new facet to this situation is the rise in Yields for the periphery Eurozone. A reflection of demand and confidence, Greece’s yield in particular has soared this week as the country has backtracked on its claim that it would rely solely on the market for its funding needs.
Japanese Yen Mixed on a Strong Risk Aversion Day…
USDJPY may have dropped Wednesday, but that was a move that was more indicative of the Dollar’s drop rather than the Yen’s rally. Most of the yen crosses were little changed or slightly higher on the day. Given the carry trade implications these positions have, risk aversion should be driving them lower. As the sentiment continues to clear cut through its glut on low-yielding, expensive exposure; these pairs will conform. In the meantime, the Deutsche Bank Carry Harvest Index is trading at a 7-month low having dropped 3.7 percent since September’s high.
Oil Price Collapse Slows but Volume Still Heavy in Selling
After Tuesday’s collapse (4.6 percent, the biggest daily drop in nearly two years), US oil prices cooled their decline with a much more modest 0.1 percent slip. That said, volume on the day was just as heavy as the previous session’s heavy selling. What’s more, West Texas Intermediate (WTI) is down another 1.2 percent in early Thursday trade. The losses keep piling up.
Emerging Markets Tumble, Currencies Mixed but Real Tumbles
Just like US equity indexes, the MSCI Emerging Market ETF put in for a strong rebound through the second half of the trading session Wednesday. We would still end up at the lowest level and with the highest volume (122 million shares) in six months. For FX, the Russian Ruble has wrested a tepid gain after months of tumble, while the Brazilian Real dropped 2.3 percent – the election honeymoon is over.
Gold Volatility Soars Far Further than the Metal Itself
Gold advanced another 0.7 percent to a five-month high having nearly avoided a fatal bearish break earlier this month. Yet, doubt remains for this commodity. Its safe haven status could still prove a boon should financial spasms combine with the rising dovish view of the major central banks. That said, liquidity may be a serious concern – which a five-year low in ETF holdings and surge in gold volatility may reflect.**Bring the economic calendar to your charts with the DailyFX News App.
ECONOMIC DATA
GMT
Currency
Release
Survey
Previous
Comments
0:00
AUD
Consumer Inflation Expectation (OCT)
3.5%
Not enough pressure to force RBA
0:30
AUD
RBA Foreign Exchange Transaction (A$) (SEP)
381M
Not a measure of intervention
8:00
EUR
Italian Trade Balance (Total) (euros) (AUG)
6857M
Augusts total trade balance was a record surplus
8:00
EUR
Italian Trade Balance EU (euros) (AUG)
3312M
9:00
EUR
Euro-Zone Consumer Price Index (MoM) (SEP)
0.4%
0.1%
Inflation figures may be a ‘final’ reading (revision), but the implications of deflation and economic trouble will feed stimulus expectations
9:00
EUR
Euro-Zone Consumer Price Index (YoY) (SEP F)
0.3%
0.3%
9:00
EUR
Euro-Zone Consumer Price Index – Core (YoY) (SEP F)
0.7%
0.7%
9:00
EUR
Euro-Zone Trade Balance s.a. (euros) (AUG)
13.3B
12.2B
9:00
EUR
Euro-Zone Trade Balance (euros) (AUG)
21.2B
12:30
CAD
International Securities Transactions (C$) (AUG)
5.30B
A capital outflow in previous the market turn could signal trouble
12:30
CAD
Manufacturing Shipments (MoM) (AUG)
-1.8%
2.5%
12:30
USD
Initial Jobless Claims (OCT 11)
290K
287K
Continuing claims are the lowest in 8 years. Close to 13-year low
12:30
USD
Continuing Claims (OCT 4)
2380K
2381K
13:15
USD
Industrial Production (SEP)
0.4%
-0.1%
Economic indicators continue to show stability – similar to Fed’s forecasts but contradictory to current market fears
13:15
USD
Capacity Utilization (SEP)
79.0%
78.8%
13:45
USD
US Economic Expectations – Bloomberg (OCT)
14:00
USD
NAHB Housing Market Index (OCT)
59
59
15:00
USD
DOE U.S. Crude Oil Inventories (OCT 10)
5015K
Oil prices plunged 25% in 4 months
20:00
USD
Net Long-term TIC Flows (AUG)
-$18.6B
US capital flows for August, so won’t encompass current shock
20:00
USD
Total Net TIC Flows (AUG)
$57.7B
23:50
JPY
Japan Buying Foreign Bonds (Yen) (OCT 10)
-¥179.0B
Foreign interest in Japanese bonds saw the biggest jump in over three years in the last reading
23:50
JPY
Japan Buying Foreign Stocks (Yen) (OCT 10)
¥439.0B
23:50
JPY
Foreign Buying Japan Bonds (Yen) (OCT 10)
¥1224B
23:50
JPY
Foreign Buying Japan Stocks (Yen) (OCT 10)
¥186.5B
GMT
Currency
Upcoming Events & Speeches
5:45
CHF
SECO Economic Forecasts
8:30
EUR
Spain to Sell Bonds
8:50
EUR
France to Sell Bonds
9:30
GBP
UK to Sell 10-Year Inflation Bonds
12:00
USD
Fed’s Charles Plosser Speaks on U.S. Economy
13:00
USD
Fed’s Dennis Lockhart Speaks on U.S. Economy
13:00
EUR
ECB’s Ignazio Visco Speaks at OMFIF Meeting
14:00
USD
Fed’s Narayana Kocherlakota Speaks on Monetary Policy
17:00
USD
Fed’s James Bullard Speaks on U.S. Economy
17:00
GBP
BoE’s Jon Cunliffe Speaks on U.K. Economy
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
14.0100
2.3800
12.7000
7.8165
1.3650
Resist 2
7.5800
5.8950
6.7400
Resist 1
13.5800
2.3000
11.8750
7.8075
1.3250
Resist 1
7.3285
5.8475
6.5135
Spot
13.3930
2.2618
11.2060
7.7538
1.2697
Spot
7.2098
5.8372
6.3980
Support 1
13.0300
2.0700
10.2500
7.7490
1.2000
Support 1
6.7750
5.3350
6.3145
Support 2
12.8350
1.7500
9.3700
7.7450
1.1800
Support 2
6.0800
5.2715
6.1300
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
1.2850
1.6421
109.56
0.9547
1.1181
0.8873
0.8008
139.63
1245.51
Res 2
1.2825
1.6394
109.33
0.9526
1.1159
0.8851
0.7987
139.35
1239.83
Res 1
1.2801
1.6367
109.10
0.9506
1.1137
0.8830
0.7966
139.08
1234.16
Spot
1.2752
1.6314
108.64
0.9466
1.1093
0.8786
0.7925
138.53
1222.81
Supp 1
1.2703
1.6261
108.18
0.9426
1.1049
0.8742
0.7884
137.98
1211.46
Supp 2
1.2679
1.6234
107.95
0.9406
1.1027
0.8721
0.7863
137.71
1205.79
Supp 3
1.2654
1.6207
107.72
0.9385
1.1005
0.8699
0.7842
137.43
1200.11
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
Sign up for John’s email distribution list, here.
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.Learn forex trading with a free practice account and trading charts from FXCM.
Source: Daily fx