Dollar Feels A Slight QE Pang After NFPs, Bigger Waves Ahead

By John Kicklighter, Currency Strategist

  • Dollar Feels a Slight QE Pang After NFPs, Bigger Waves Ahead
  • Euro: As Crisis Concerns Return, True Bear Trend Takes Root
  • Australian Dollar Sensitive to Rate Outlook, Risk Trends, China
  • Swiss Franc: What are the SNB’s Options
  • Japanese Yen Produces Stand Out Rally, Will BoJ Act Next Week?
  • British Pound : Now the Monetary Speculation Really Begins
  • Gold is in Trouble If Stimulus Expectations or Liquidity Problems Arise

Dollar Feels a Slight QE Pang After NFPs, Bigger Waves Ahead

The unique opportunity for currency traders to react to the March NFPs report without the broader capital markets complicating the reaction didn’t do the dollar any favors Friday. The disappointing data and shallow market depth translated into a measured retreat for the greenback. But, the benchmark currency may yet find redemption through the coming week. We have an excess of high-potential fundamental drivers ahead of us – the kind that can change the course and pace of investor sentiment. A dense board of catalysts for a market that has been unsettled by the implications of stimulus withdrawal and revived financial strain in the Euro Zone creates a perfect opportunity to trade in the subdued markets of the past months and return to the type of themes that revive market-wide correlations.

We should start our assessment of what the coming week can bring by reflecting on the inauspicious bearings of the benchmark S&P 500 Index through the past week and the notable drop from the Dow Jones FXCM Dollar Index in response to Friday’s payrolls. Many benchmarks for sentiment (carry, commodities, high yield bonds, etc) have conspicuously underperformed equities – raising concern. As such, it may have struck some as unusual that the dollar actually dropped in the wake of wide, 120,000 miss for last month’s NFPs. As a safe haven, we’d expect the dollar to rally on the disappointing news, right? Perhaps if capital markets were online for the release, we could have generated a stronger current in risk trends; but instead, this news would tip the finely balanced expectations of the Fed’s next move on monetary policy: further easing before the year is out or a first rate hike (and eventual balance sheet wind-down) by 2013.

To be clear, the US dollar has not abandoned its role as a favored safe haven asset through its position as the world’s primary reserve currency. Rather, we simply have not had a meaningful deleveraging trend since 2012 began. In fact, the modest 0.7 percent drop from the S&P 500 this past week was its worst performance since the period ending December 16 th . We need direction and conviction on a market-wide basis. Concern that the world’s largest monetary policy groups are backing off lift-giving stimulus and the largest collective economy is destined for a second round of crisis are enough to keep risk off balance. The start of 1Q earnings session or Chinese GDP could tip us over the edge.

Euro: As Crisis Concerns Return, True Bear Trend Takes Root

The troubles that the Euro Zone financial sector has faced never really disappeared, they have just been overlooked by speculators comforted enough by short-term fixes to take advantage of higher yields. Over the past week, the majority seems to have come to believe that the next swell in the ongoing tumult is closer than they are comfortable with. The ECB’s persistent hawkishness, Spain’s nearly-failed bond auction and the surge in periphery sovereign yields spreads sets the tone. Through the coming week, we have relatively few key economic indicators, but that won’t prevent speculation and muckraking, financial journalism. Notable events on the Euro docket to watch next week include: Italian bond auctions, Greece employment figures, Spanish housing transactions, Euro Zone investor confidence and regional inflation reports.

Australian Dollar Sensitive to Rate Outlook, Risk Trends, China

There is a lot of potential energy behind the financial markets, but the Australian dollar may well be the most sensitive asset out there. There are three very active catalysts that could easily set the currency off. Ever present, underlying risk trends turns the wheel on carry interest. That is particularly concerning for the Aussie dollar given its underperformance to generally level sentiment trends. Rate expectations tap into the same carry trade interest. And, thanks to the RBA’s dovish comments at its last statement, fear of cuts will only exacerbate the ‘risk off’ theme. Finally, we have the China-effect. If the region’s largest economy slows, so does Australian. That leverages the importance of China’s 1Q GDP data .

Swiss Franc: What are the SNB’s Options

The SNB has a bit of a problem. They have put their credibility on the line by vowing to keep EURCHF above 1.2000, yet the exchange rate has already dipped below the figure and now hovers ominously just above the critical level heading into the new week. It is rumored that the central bank has another €9 billion in orders to keep the market up, but that will be nowhere near enough to block safe haven flows if another wave of crisis fear sweeps over the Euro Zone. Officials have a few options of varying effectiveness. The least influential is to simply buy untold levels of euros should it close in on 1.2000. This will passively absorb a lot of losses. Second, they could lift the floor to shake safe haven convictions – though it wouldn’t likely be permanent. The ‘nuclear’ option would be introducing a tax or capital curb, but that is a government decision.

Japanese Yen Produces Stand Out Rally, Will BoJ Act Next Week?

Price action was generally restrained in the FX market through the final 24 hours of this past week, but the yen bucked liquidity conditions to post an impressive rally. The move was substantial enough to drive USDJPY to its lowest level in a month as well as force bearish break outs for GBPJPY, AUDJPY, CADJPY and NZDJPY congestion patterns through the close. What was pulling the pairs lower? Fear of a risk off wave. However, the BoJ recognizes the threat. There is a BoJ rate decision next week and the government has been pushing hard for more stimulus.

British Pound : Now the Monetary Speculation Really Begins

You would think that speculation of monetary policy would precede an actual rate decision, but for the sterling, it will happen after the BoE announced its decision to hold and remain mum. By the next policy gathering, we will have completed the third round of bond purchases, there will be fresh GDP and inflation figures to work with, and the Euro Zone could once again find itself in financial straits. Pound traders should keep an eye on Euro-area fundamental developments as well as the 10 and 2 year gilt yields.

Gold is in Trouble If Stimulus Expectations or Liquidity Problems Arise

The rebound this past Thursday and Friday saved gold from a deeper weekly plunge and its lowest close in three-months. That said, the five-week bear trend hasn’t turned, and the fundamental landscape is looking more precarious as we move forward. The most pressing issue for the metal is the curbed expectations of stimulus – particularly with building expectations for the Fed’s next move to be one of tightening. This diminishes its alternative asset appeal. Risk aversion could prove an issue as well as liquidity troubles are a recurring burden to the metal.

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ECONOMIC DATA

N ext 24 Hours

GMT

Currency

Release

Survey

Previous

Comments

23:50

JPY

Current Account Total (FEB)

-437.3B

Japanese February trade expected to improve from last month on Chinese, US growth. YoY still expected to be weak

23:50

JPY

Adjusted Current Account Total (FEB)

115.6B

23:50

JPY

Current Account Balance YOY% (FEB)

-180.0%

23:50

JPY

Trade Balance - BOP Basis (FEB)

-1381.6B

CNY

Foreign Exchange Reserves (MAR)

$3200.0B

$3181.1B

Reserves continuing to expand on global goods demand

CNY

New Yuan Loans (MAR)

750.0B

710.7B

Money supply still expected to grow quickly. Government may hold back on tightening as manufacturing sector remains in downtrend

CNY

Money Supply - M0 (YoY) (MAR)

8.8%

CNY

Money Supply - M1 (YoY) (MAR)

5.2%

4.3%

CNY

Money Supply - M2 (YoY) (MAR)

13.0%

13.0%

1:30

CNY

Producer Price Index (YoY) (MAR)

-0.3%

0.0%

Consumer prices starting to reach target levels as heavy fine tuning expected to slow

1:30

CNY

Consumer Price Index (YoY) (MAR)

3.5%

3.2%

4:30

JPY

Bankruptcies (YoY) (MAR)

5.2%

Domestic financials improving

8:30

EUR

Eurozone Sentix Investor Confidence (APR)

-8.2

Weak, largely unchanged

14:30

CAD

Business Outlook Future Sales (1Q)

-4

Retail expectations still softer

14:30

CAD

BoC Senior Loan Officer Survey (1Q)

-6.3

Canadian credit still tight

23:01

GBP

Lloyds Employment Confidence (MAR)

-69

Labor markets remain large problem for BoE; index may have some sway

23:01

GBP

RICS House Price Balance (MAR)

-13%

Following other surveys lower

JPY

Eco Watchers Survey: Current (MAR)

45.9

Japanese economy expected to recover moderately, hinges on US, EU, Chinese demand

JPY

Eco Watchers Survey: Outlook (MAR)

50.1

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 & 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

16.5000

2.0000

9.2080

7.8165

1.3650

Resist 2

7.5800

5.6625

6.1150

Resist 1

14.3200

1.9000

8.5800

7.8075

1.3250

Resist 1

6.5175

5.3100

5.7075

Spot

12.9842

1.7946

7.8834

7.7644

1.2607

Spot

6.7522

5.6804

5.7875

Support 1

12.5000

1.6500

6.5575

7.7490

1.2000

Support 1

6.0800

5.1050

5.3040

Support 2

11.5200

1.5725

6.4295

7.7450

1.1800

Support 2

5.8085

4.9115

4.9410

INTRA-DAY PROBABILITY BANDS 18:00 GMT

\ Currency

EUR/USD

GBP/USD

USD/JPY

USD/CHF

USD/CAD

AUD/USD

NZD/USD

EUR/JPY

GBP/JPY

Resist. 3

1.3238

1.6005

82.55

0.9279

1.0054

1.0431

0.8297

108.29

131.19

Resist. 2

1.3203

1.5972

82.32

0.9252

1.0034

1.0400

0.8272

107.93

130.78

Resist. 1

1.3167

1.5938

82.09

0.9226

1.0013

1.0369

0.8247

107.57

130.38

Spot

1.3096

1.5871

81.64

0.9173

0.9972

1.0307

0.8196

106.86

129.57

Support 1

1.3025

1.5804

81.19

0.9120

0.9931

1.0245

0.8145

106.15

128.75

Support 2

1.2989

1.5770

80.96

0.9094

0.9910

1.0214

0.8120

105.79

128.35

Support 3

1.2954

1.5737

80.73

0.9067

0.9890

1.0183

0.8095

105.43

127.94

v

--- Written by: John Kicklighter, Senior Currency 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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Original Article: http://www.dailyfx.com/forex/fundamental/daily_briefing/session_briefing/daily_fundamentals/2012/04/07/Dollar_Feels_a_Slight_QE_Pang_After_NFPs_Bigger_Waves_Ahead.html