Dollar Advances Alongside Stocks After Fed Decision, Stress Test

By John Kicklighter, Currency Strategist
  • Dollar Advances Alongside Stocks After Fed Decision, Stress Test
  • Euro Stumbles on a ‘Risk On’ Day as ECB Starts to Talk Withdrawal
  • Japanese Yen Drops Across the Board as Risk, BoJ Accommodation Feed Trend
  • British Pound a Standout Performer on a Remarkable Day
  • Swiss Franc Starts to Slide Ahead of SNB, Sentiment Survey
  • Australian Dollar Can’t Keep Pace with Equities’ Gains
  • Gold Tests a Six-Week Low as Both Risk And Dollar Advance

Dollar Advances Alongside Stocks After Fed Decision, Stress Test

Though we have seen very little consistency in underlying momentum and fundamental trends, correlations drawn by risk appetite across the different asset classes have generally held firm. That is why this past trading session was so extraordinary – and why the upcoming session is critical to direction for many markets. For macro traders, the standout event of the past trading session was the S&P 500’s surge above 1,380 and on to near, four-year highs. As a traditional benchmark for investor sentiment, we would have expected this move to have coincided with a climb in carry, speculative commodities and tumble in traditional safety assets. Yet, that wasn’t the case. Those other markets tapped into the ever-evolving equilibrium of risk and reward were either lagging or contradicting equities’ performance. Most notably, the dollar (the favored safe haven currency) put in for a gain of its own. From the Dow Jones FXCM Dollar Index, the advance led the currency to post its highest close since January 20 th . This was unusual in itself, but it’s even more remarkable that it occurs when there is such a strong showing from risk.

The risk-positive run began in the lead up to the FOMC rate decision . With no change to rates or stimulus programs (as expected), the focus turned to the central bank’s outlook. With yields – and arguably sentiment – tied to stimulus , the suggestion that financial stress had “eased”, the jobless rate had “declined notably” and inflation would be leveraged “temporarily” by energy prices; speculators could have argued a drop in the probability of QE3 for 2012 just as readily as they could point out economic improvement. This perhaps started the rift between the stock benchmark and the dollar, but the divergence really kicked in when news that certain TARP banks planned buybacks and increased dividend payouts. JPMorgan started the wave before the Fed released its Stress Test results two days early. According to the report, 15 of the 19 banks tested passed the ‘worst case scenario’ assessment (13 percent jobless rate, 21 percent drop in home prices and 50 percent drop in stocks). However, the clean bill of health doesn’t matter as much to traders as the boost in share price and the financial sector. Yet, the important question here is whether this surge from the S&P 500 is the trend-setter or a short-lived, market-derived ‘stimulus’ move. Either way, correlations are likely to converge. However, if it is the stock benchmark that gives, we could create a ‘blow off top’. Otherwise it’s a big ‘risk on’ signal.

Euro Stumbles on a ‘Risk On’ Day as ECB Starts to Talk Withdrawal

For one of the FX market’s most fundamentally troubled players, a positive showing for traditional growth-linked assets should set an encouraging tone for the euro. Yet, the currency found itself underperforming through the past session. On the docket, we were presented with headlines that would traditionally be construed as bullish. ECB member Weidmann said the central bank was starting to look at means to withdrawal stimulus, while President Draghi called on banks and governments to use the current financial lull to strengthen their financial positions. Normally, we would expect these to be hawkish and bullish. Yet, this may be construed as too aggressive for the EZ’s fragile state. Furthermore, a circulating Troika report warned that while the second bailout will help Greek stability, they could require more in 2014.

Japanese Yen Drops Across the Board as Risk, BoJ Accommodation Feed Trend

While the dollar was contemplating its response to the equities’ rally this past session, the yen had no such qualms. The world’s most renowned funding currency – and arguably its most fundamentally over-extended – took the opportunity to tumble for yet another day against all of its major counterparts. To this point, USDJPY is now up 9.3 percent since its bullish run catalyzed back in the beginning of February. The yen sell off could have come with greater momentum however if the Bank of Japan had announced further asset purchases . Rather than increase asset purchases, the central bank announced a 3.5 trillion yen increase to a growth program and voiced its independence from political pressure.

British Pound a Standout Performer on a Remarkable Day

We shouldn’t simply attribute the sterling’s remarkable performance this past session to a side-effect of the volatile risk appetite mix. In fact, the pound showed remarkable strength of its own well before the headlines were buzzing with the Fed rate decision and stress test. On the morning, the increase in the January trade deficit was smaller than expected and the RICS housing indicator improved more quickly than expected. Yet, the improved yield outlook likely carries more weight year – overnight swaps show the 12-month forecast for rates is at its highest level since early August. We’ll look to see if the currency can capitalize on this performance in the upcoming session on February jobs figures.

Swiss Franc Starts to Slide Ahead of SNB, Sentiment Survey

Something remarkable happened this past trading day. I’m not referring to the surge from equities or the split in long-standing correlations. Just as unusual: EURCHF actually followed through on a bounce. Even at 80 pips, this is the most consistent bullish run for the pair since the drive at the beginning of February. Why is the franc starting to drop now where previous ebbs and flow for risk trends and oscillations for the euro have failed? The SNB. The Swiss central bank wasn’t likely pushing this market higher, but speculators are preparing for the upcoming central bank rate decision (due Thursday). Though the risk may be low that they will lift the floor or introduce curbs, the reward in long-franc is low too…

Australian Dollar Can’t Keep Pace with Equities’ Gains

There is a hierarchy of performance along the risk appetite axis. Though sentiment trends themselves were struggling for influence Tuesday, there was still a level of activity on that front. That said, the Australian dollar would find itself deposed from its position as the top carry currency amid the unusual activity of the day. Of the currency’s that would post an actual advance against the greenback, the Aussie dollar eked out the smallest gain. Though it is subtle when risk trends are flat-lined, we see the influence that a negative yield forecast can have on a currency when there is a strong drive for rates. If we needed further convincing, the Westpac consumer sentiment gauge dropped 5 percent in March.

Gold Tests a Six-Week Low as Both Risk And Dollar Advance

There are a number of roles that gold plays in the global capital markets, but two of its most prominent positions are its appeal as a safe haven and an alternative store of wealth to manipulation and inflation-prone currencies. That said, when both the S&P 500 and US dollar are on the rise, we have an unusual but effective bearish driver for gold. Futures volume showed limited interest on the day and implied volatility dipped temporarily to a seven-month low – suggesting speculative efforts were limited. This seems a straightforward fundamental move.

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ECONOMIC DATA

N ext 24 Hours

GMT

Currency

Release

Survey

Previous

Comments

0:30

AUD

Dwelling Starts (4Q)

-3.0%

-6.8%

Construction expected weaker

2:00

NZD

Non Resident Bond Holdings (FEB)

59.3%

Interest in bonds falling

4:30

JPY

Industrial Production (MoM) (JAN F)

2.0%

Japanese industrial sector may recover, though final Jan data will not account for yen weakening effects

4:30

JPY

Industrial Production (YoY) (JAN F)

-1.2%

6:00

JPY

Machine Tool Orders (YoY) (JAN F)

-8.6%

9:30

GBP

Claimant Count Rate (FEB)

5.0%

5.0%

British labor data expected to improve, though weakness still exists in overall economy; stimulus view may not continue to change

9:30

GBP

Jobless Claims Change (FEB)

5.0K

6.9K

9:30

GBP

Average Weekly Earnings (3M/YoY) (JAN)

1.9%

2.0%

9:30

GBP

Weekly Earnings exBonus (3M/YoY) (JAN)

1.9%

2.0%

9:30

GBP

ILO Unemployment Rate (3M) (JAN)

8.4%

8.4%

10:00

EUR

Euro-Zone CPI - Core (YoY) (FEB)

1.6%

1.5%

Zone wide inflation still stable, gives room for additional easing if needed

10:00

EUR

Euro-Zone CPI (MoM) (FEB)

0.5%

-0.8%

10:00

EUR

Euro-Zone CPI (YoY) (FEB)

2.7%

2.6%

10:00

EUR

Euro-Zone Industrial Production s.a. (MoM) (JAN)

0.6%

-1.2%

Industrial production may increase on US imports

10:00

EUR

Euro-Zone Industrial Production w.d.a. (YoY) (JAN)

-0.7%

-2.0%

10:00

CHF

ZEW Survey (Expectations) (MAR)

-21.2

Confidence still weak

11:00

USD

MBA Mortgage Applications (MAR 9)

-1.2%

Weekly data seeing turn

12:30

CAD

Capacity Utilization Rate (4Q)

81.5%

81.3%

Higher on US demand likely

12:30

USD

Import Price Index (MoM) (FEB)

0.6%

0.3%

Import prices jumping in near term as commodities account for largest part of rise

12:30

USD

Import Price Index (YoY) (FEB)

5.6%

7.1%

12:30

USD

Current Account Balance (4Q)

-$114.0B

-$110.3B

Trade deficit still increasing

21:30

NZD

Business NZ Perf of Manufacturing Index (FEB)

50.5

Manufacturing stable

CNY

Actual FDI (YoY)

14.6%

-0.3%

Foreign investment expected to rise, though lower rates view may cut into additional investment

GMT

Currency

Upcoming Events & Speeches

13:00

USD

Fed's Bernanke Speaks to Community Bankers in Nashville

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

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

12.5680

1.7906

7.5369

7.7607

1.2604

Spot

6.7785

5.6865

5.7057

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

1.3222

1.5838

84.03

0.9345

0.9971

1.0668

0.8316

110.11

132.05

Resist. 2

1.3185

1.5805

83.79

0.9318

0.9950

1.0636

0.8290

109.74

131.66

Resist. 1

1.3148

1.5771

83.55

0.9292

0.9930

1.0603

0.8264

109.37

131.26

Spot

1.3075

1.5704

83.08

0.9239

0.9889

1.0538

0.8211

108.63

130.47

Support 1

1.3002

1.5637

82.61

0.9186

0.9848

1.0473

0.8158

107.89

129.68

Support 2

1.2965

1.5603

82.37

0.9160

0.9828

1.0440

0.8132

107.52

129.28

Support 3

1.2928

1.5570

82.13

0.9133

0.9807

1.0408

0.8106

107.15

128.89

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/2012/03/14/Dollar_Advances_Alongside_Stocks_After_Fed_Decision_Stress_Test.html

DailyFX is the forex news and research arm of FXCM (NYSE: FXCM), which provides currency trading and brokerage services and is an advertiser on TheStreet websites. Any opinions, news, research, analyses, prices, or other information is provided as general market commentary, and does not constitute investment advice. Dailyfx will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Currency trading involves significant risk of loss. Individual authors may hold positions in the currencies discussed in the article.