- Dollar In a Dangerous Position Ahead of a Contentious FOMC Decision
- British Pound: Bar Set High for UK 1Q GDP after Sterling’s Rally
- New Zealand: It May not Carry the Potential of the RBA, But RBNZ Decision One to Watch
- Australian Dollar Holds Floor, Recovers after CPI Confirms Cut on the Way
- Euro Advances against Safe Haven and High Yields as EFSF Sells Debt, Spain Improves
- Japanese Yen: How Much Weight does a Dovish BoJ Official Have?
- Gold’s Average Activity Level Hits a New 11-Month Low
Dollar In a Dangerous Position Ahead of a Contentious FOMC Decision
The US dollar is in a dangerous position both fundamentally and technically. The combination of suspiciously ‘quiet’ trading conditions for the currency against the backdrop of heavy event risk in the upcoming Fed policy decision sets the stage for a potentially explosive return to more active trading conditions. To give you a sense of the greenback’s susceptibility to a return to more active trading levels, we can refer to what the technically inclined FX traders are looking at. The Dow Jones FXCM Dollar Index has worked its way into an extremely confined ‘wedge’ pattern with only 30 points of wiggle room. For reference, the average daily range of the index (a five-day or weekly reading) is just over 32 points – itself the lowest reading for the activity gauge since we have high and low data (just over a year ago). Furthermore, we can look at one-month implied volatility readings (measures of expected activity over the coming month) for key pairs. For EURUSD, activity measures are at their lowest since August 2008. AUDUSD’s measure is on similar footing matching 2010 lows. Experienced traders know, extremes are contrarian opportunities.
What we need to ignite this tinder box is a genuine catalyst. There are many possibilities that can tip a temporary break that simply fizzles out and returns to congestion with a freshly widened range. To capitalize on a break with meaningful follow through, we need a driver that taps into a serious, underlying theme. How about risk appetite trends? In the upcoming trading session, we have a very important FOMC rate decision. Normally, I would play down the importance of these policy decisions as there is unlikely to be any change. Of course, the guidance from the statement carries some weight, but meaningful changes to their tone are irregular. This time around, things are special. In an effort to be more transparent, the central bank now releases forecasts for interest rates and growth on a quarterly basis alongside a scheduled press conference with Chairman Bernanke. Has the Fed banished an option for QE3 or is it a bullet still in the chamber? This event will clarify.
Everyone should keep track of the upcoming event risk, and its impact. The first complication in this event risk is the fact that there are three times that we need to be aware of: 16:30 GMT (the actual rate decision); 18:00 GMT (the release of the FOMC’s projections on rates and economic activity); and 18:15 (Bernanke’s press conference begins). The forecasts carry the most potential as they tap into the heavy speculation over whether another stimulus program is still on the menu this year. Recently the Fed has attempted to douse expectations of additional easing, yet the capital markets have yet to unwind that hope. Watch both the dollar and S&P 500 as our benchmark for risk trends.
British Pound: Bar Set High for UK 1Q GDP after Sterling’s Rally
For influence, the UK 1Q GDP reading may fall short of the market-wide potential of the Fed rate decision; but the data can certainly leverage a heavy reaction from the British pound. Over the past few weeks, the sterling has climbed aggressively in the aftermath of the BoE minutes. In that wrap up of the previous BoE rate decision, the market became aware that one of the group’s most ardent doves succumbed to inflation concerns. The relief rally on monetary policy has thereby given the sterling a boost and set the bar high for further bullish surprises. That in turn means there is considerable risk in a GDP reading that misses the mark. Disappoint here and the premium build up will take a hit.
New Zealand: It May not Carry the Potential of the RBA, But RBNZ Decision One to Watch
With the Fed rate decision dominating the economic calendar, some will miss the RBNZ rate decision due an hour after the New York session close. Both economists and market participants expect no change in the benchmark rate – and rightfully so. Yet, there is still considerable potential in the policy decision through the commentary that Governor Bollard offers. Will he maintain his hawkish outlook in light of the slowdown in 1Q CPI reported last week (hitting a 1.6 percent year-over-year pace)? Without a hawkish tone, the kiwi could follow the Aussie.
Australian Dollar Holds Floor, Recovers after CPI Confirms Cut on the Way
A rate cut from the RBA on May 1st is all but certain now. The first quarter CPI data printed a spectacular miss (1.6 percent) on an already low forecast (2.2 percent), and the market instantly recalled what Governor Glenn Stevens said about the next policy decision hinging on inflation measures. And yet, despite the dovish inflation stats, the Aussie dollar avoided critical breaks to fresh bearish trends and has subsequently rebound from lows. Where is this revival coming from? The market has long expected this rate cut. This is selling the rumor, buying the news.
Euro Advances against Safe Haven and High Yields as EFSF Sells Debt, Spain Improves
The negative headlines continue to roll out of Europe, yet the bearish influence from the negative updates seem to be losing its foothold. At the start of the week, the confirmation that we would be heading into a second French election (May 6th) had limited impact on the currency as it was largely expected. A little more surprising, but equally lackluster for impact, was news that the Dutch government was dissolved, unable to reach agreement on austerity. That said, an EFSF and Spanish debt auction that met higher yields and rates was treated as a success.
Japanese Yen: How Much Weight does a Dovish BoJ Official Have?
Former BoJ policy member Nakahara voiced his opinion just the other day that the central bank should double its inflation target and increase its JGB purchases by 20 percent at its next policy meeting at the end of this week. Ex-central bankers often grow exceptionally opinionated after they leave public service, but does their opinion matter to the FX trader after they no longer have the vote? Only if it is known that other policy makers still on the board share their opinion. That said, the BoJ has more than ex-members adding pressure. They have the government.
Gold’s Average Activity Level Hits a New 11-Month Low
Regardless of what measure you use (the CBOE’s volatility index or the average true range), it is clear that activity levels on gold are painfully quiet. When we hit extremes in activity levels – just like anything else – the possibility of a reversal in that particular dynamic is highly likely. As such, we are looking at hot bed for potential explosions in gold volatility. That is a dangerous position for the metal to be in given its proximity to its three-and-a-half year bullish trendline, but appropriate given the Fed’s forecasts due in the upcoming session.
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Next 24 Hours
Machine Tool Orders (YoY) (MAR F)
Recent Japanese data has taken a better turn, but further BoJ action looms
GDP (QoQ) (1Q A)
UK expected to have returned to positive growth in 1Q, escaping recession
GDP (YoY) (1Q A)
Index of Services (MoM) (FEB)
Index of Services (3mth/3mth) (FEB)
CBI Trends Total Orders (APR)
CBI Trends Selling Prices (APR)
CBI Business Optimism (APR)
MBA Mortgage Applications (41019)
Durable Goods Orders (MAR)
Slowdown in orders could add to concerns of US slowdown; durable orders expected to fall
Durables Ex Transportation (MAR)
Cap Goods Orders Nondef Ex Air (MAR)
Cap Goods Ship Nondef Ex Air (MAR)
Teranet/National Bank Home Price Index (FEB)
Data comes amid concerns of ballooning household debt in Canada
Teranet/National Bank HPI (MoM%) (FEB)
Teranet/National Bank HPI (YoY%) (FEB)
FOMC Rate Decision (Apr. 25)
Statements regarding monetary policy direction to be key; Fed could take more dovish stance on recent string of softer data
RBNZ Official Cash Rate (Apr. 26)
No change in overall policy expected; latest CPI data subdued
Nationwide Consumer Confidence (MAR)
Upcoming Events & Speeches
ECB’s Draghi Testifies Before European Parliament
FOMC Releases Projections for Economy, Fed Funds Rate
Fed’s Bernanke Holds Press Conference
BoC’s Carney Testifies Before Canadian Senate
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— Written by: John Kicklighter, Senior Currency Strategist for DailyFX.com
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