Dollar Rallies…Sans Traditional Fundamental Support

Talking Points:

• Dollar Rallies…Sans Traditional Fundamental Support
• British Pound Drops as Tempered Inflation Further Drains Rate Hike Conviction
• Euro Reflects Little of the Strength Seen in European Capital Markets

Dollar Rallies…SansTraditional Fundamental Support

The US Dollar has soared over the past 24 hours. And yet, this move seems to draw a stark contrast to the fundamental backdrop. This will keep FX traders on guard as they gauge the conviction behind one of the strongest moves we have seen from this benchmark in weeks. From the greenback itself, the Dow Jones FXCM Dollar Index’s (ticker = USDollar) performance paints the picture well enough. The 0.4 percent rally Tuesday – and follow through this morning – lift the Index to a six month high and further reinforces the bullish trend change tentatively marked last month. Beyond the magnitude of the move though, it is the ‘breadth’ that truly impresses. Gains were tallied against high yield, safe haven and interest rate prospects alike. And this performance was generated on a relatively subpar event calendar.

There was a surprise from US fundamentals this past session – but it wasn’t the one that we would expect to carry weight with dollar traders. Housing starts in July jumped 15.7 percent to a 1.09 million unit pace. While this was the biggest jump in 8 months, housing represents relatively little untapped potential for the dollar bulls. Alternatively, the CPI inflation statistics could weigh in on rate forecasts for the Fed, which the market is still significantly discounting versus the estimates offered up by the FOMC and economists. The in-line 2.0 percent reading keeps the mid-2015 time frame on track, but it doesn’t leverage the hawkish view. Meanwhile, the ‘safe haven’ appeal was fully off course with equities charging higher. Ahead, we have the FOMC minutes; but the heavy hitting event risk comes Thursday with PMI data and Jackson Hole.

British Pound Drops as Tempered Inflation Further Drains Rate Hike Conviction

The speculative rate forecast for the Bank of England is furthering its retreat. Mimicking some the exceptional momentum seen last Wednesday after the Quarterly Inflation Report redirected the focus to lackluster wage growth, we saw GBPUSD drop another 0.7 percent on heavy volume. The existing bearish bias set the stage, but the fire was lit by another round of disappointing data. Among a range of inflation indicators, the July CPI report stood out with a 1.6 percent annual reading that anchors the vital rate-deciding statistic to a five-year low.

Euro Reflects Little of the Strength Seen in European Capital Markets

European assets are performing exceptionally well. Demand for sovereign government bonds has returned yields for the likes of Spain and Italy to record lows. Meanwhile, the region’s burdened equity indexes have enjoyed hearty gains – comparable to the losses they suffered during the retreat through July and early August. Yet, despite this tangible appetite from speculators, little of the bullishness seems to be carrying the euro forward. It’s worth noting that foreign demand for Euro ETFs and the like have not recovered from their tumble.

Australian Dollar: RBA and Stevens Exasperatedly Claim Currency Unreasonably High

There is little missing the RBA’s attempt to talk its currency down. However, the success of this effort is still lacking. Tuesday morning, the RBA minutes reiterated a neutral policy stance through the foreseeable future and that the Australian dollar was still ‘high’. Governor Glenn Stevens amplified the bearish view on the currency in his semi-annual monetary policy statement. He specifically remarked that short-term speculators that are long the currency are underestimating the risk that the Aussie dollar will drop. Traders don’t seem too concerned.

Swiss Franc Closes in on SNB’s 1.2000 EURCHF Barrier

Monetary policy over the past three years for the Swiss National Bank (SNB) has revolved around maintaining an unnatural floor on EURCHF to prevent economic fallout from what they deem an unjustified appreciation in their currency. Over the past two years, the clouds seemed to be lifting for the central bank, but the exchange rate never seemed to escape the gravity of that prominent figure. That failure to launch means the ECB’s renewed effort to devalue its own currency through policy easing will put the pressure back on this currency pair. The more effective the European Central Bank is with its own efforts, the heavier the burden its Swiss counterpart will face. What will the latter do? Try to weather a strong storm with constant headwinds at 1.2000 for an undefined time? Or attempt another move to try and loosen the relationship?

Emerging Markets ETF Hits 19-Month High, Currencies Less Robust

Once again, there is a distinct performance contrast between the Emerging Market capital markets and the currency set. The MSCI Emerging Market ETF advanced 0.5 percent this past session to top its highest close since the opening trading day of 2013. A similar sentiment is reflected in the segment’s sovereign debt – the Bloomberg Index rose a fifth consecutive session – as well as the JPMorgan volatility index which continues to retreat. Meanwhile, most EM currencies were lower against the dollar this past session. While the greenback itself was putting up resistance, the speculative appetite clearly fell short on the higher yielding assets. The Brazilian Real was the lone strong performer with a 0.5 percent gain. Meanwhile, the Russian Ruble slipped 0.3 percent and the South African Rand dropped 0.4 percent.

Gold Relative Strength to Silver Wavers at 3-Month Highs

There is a strong relationship between gold and silver – in fact, the current three-month correlation is 0.89 (very high). For an inflation hedge or alternative to traditional currency drive, silver is an acceptable and less expensive speculative substitute. However, for traders, the substitution qualities between the two differ substantially under a ‘risk’ focused market. The imbalance means that when risk aversion kicks in (volatility increases), the ratio of gold-to-silver usually rises. Currently, the ratio is at a 3-month high just above 66.67. However, the VIX run has taken a different tack over the past few weeks. This could prove a weight on gold moving forward – especially relative to its counterpart.

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ECONOMIC DATA

SUPPORT AND RESISTANCE LEVELS

To see updated SUPPORT AND RESISTANCE LEVELS for the Majors, visit Technical Analysis Portal

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CLASSIC SUPPORT AND RESISTANCE

INTRA-DAY PROBABILITY BANDS 18:00 GMT

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--- Written by: John Kicklighter, Chief Strategist for DailyFX.com

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