Dollar Suffers First Two-Day Drop Since Debt Ceiling Standoff Ends

Talking Points:

• Dollar Suffers First Two-Day Drop Since Debt Ceiling Standoff Ends
• Euro Drops after EU Downgrades Region’s Growth, Debt Outlook
• British Pound, Yield Forecast Rise on Upgraded Growth Forecast

Dollar Suffers First Two-Day Drop Since Debt Ceiling Standoff Ends

We are a day away from the release of the 3Q US GDP release and two from the October NFPs – event risk that can materially alter FOMC taper forecasts and thereby the US dollar’s bearings. In the lead up, however, a lack of conviction and lingering volatility can create unusual trading conditions. The 0.1 percent slip from the Dow Jones FXCM Dollar Index (ticker = USDollar) marked the first consecutive decline for the benchmark since the deficit standoff ended October 17 and ultimately marked the turning point for a bull wave. For event risk, the past session offered up the ISM’s service sector activity survey for October. A 55.4 reading from the benchmark bested expectations, but it was the jump in the employment component that perhaps generates a little more interest in the lead up to official labor stats due Friday. The next trend we see from the dollar, carry and broader financial markets is very likely to originate from risk trends that are touched off by stimulus expectations. That leverages the importance of Fed commentary as well. It seems there is concerted effort to prepare the market for the Taper.

Euro Drops after EU Downgrades Region’s Growth, Debt Outlook

When it rains, it pours. The euro has already been pummeled this past week by souring rate expectations after the disappointing inflation report for the Euro-area. As we head into the ECB decision that will verify or dispel the resurgence of dovish fears by euro traders, there is a natural inclination for the speculative tides to moderate. Yet, the EU’s (European Union) Fall economic forecasts would ensure the concern stretched a little further. According to the authority, the group that shares the euro would grow 1.1 percent versus the 1.2 percent projected in May. More concerning, the jobless rate was seen unchanged from the current record high. Furthermore, individual member countries were looking at greater problems. Greece was still looking at a 4.0 percent contraction this year (slightly better than May’s view), Spain’s deficit ratio was expected to balloon while Ireland and Portugal are seen having issues with accessing the market.

British Pound, Yield Forecast Rise on Upgraded Growth Forecast

In direct contrast to the unfavorable turn for the Eurozone’s growth outlook, the UK was given a big boost for its own prospects. According to the Fall forecasts, the United Kingdom will grow 1.3 percent this year (previously expected to be 0.6 percent) and 2.2 percent in 2014 (previously 1.7 percent). That is a substantial upgrade, but one that we have seen reinforced by more than a few items this week. The CBI’s own upgrade last week was a smaller magnitude, but sets a similar tone. Meanwhile, the Markit service sector activity survey for October printed the highest reading since 1997. All of this translates into increased fodder for rate speculators to doubt the BoE’s cautious forecasts for rate hikes to be delayed until 2016. Meanwhile, the swaps curve has not steepened materially in response to the recent run of data – though the 10-year gilt yield jumped 3.7 percent. Perhaps this represents fundamental room for the sterling to cover after Thursday’s BoE decision…

New Zealand Dollar Posts Biggest Rally in 8 Weeks on Jobs Data

For short-term volatility derived from specific event risk, the New Zealand dollar takes scored a serious hit this morning with the release of the 3Q labor statistics. The kiwi advanced against all of its major counterparts – between 0.5 percent against the pound and 1.4 percent versus the franc – as the data showed a 1.2 percent increase in employment through the three-month period. That is the biggest increase on a quarterly basis since 2Q 2008. Other noteworthy statistics: the annual pace (2.4 percent) of jobs growth and average hourly earnings increased at the fastest pace since 2Q 2006, while the unemployment rate slipped to 6.2 percent as expected. This is a hefty booster to rate expectations which are still off their September highs (at one point pricing in 97 bps of hikes over 12 months). Carry appeal is supported by this move, but risk trends tells us whether we should prize carry, and that thread is attached to upcoming event risk.

Australian Dollar: Is the RBA’s Warning Reason to Sell?

According to the Reserve Bank of Australia’s statement that accompanied its rate decision, theAustralian dollar is still “uncomfortably high” and a decline for the currency is likely needed to achieve a balanced pace of growth. How influential is a central bank’s evaluation of exchange rates? Given the modest and inconsistent reaction from the currency itself in the wake of these remarks - not much. Attempting to ‘talk down’ a currency by labeling overvalued or inconsistent with fundamentals is nothing new. And, on the scale of verbal intervention, this is relatively modest. The market takes such sentiment seriously when they believe they can lead to policy action in either intervention or a shift in the standard tools (rate cut). Yet, looking at swaps post policy meeting, expectations for a hike are still the highest since June 2011.

US Oil Closes as Fresh Five-Month Low

Oil has dropped for six consecutive trading days. This is the longest drop without reprieve since the collapse through May 2012 and it has ushered the market to its lowest close in five months. That is a long way to fall in less than six weeks – 16.8 percent down from a two-and-a-half year high. This economic benchmark continues to deviate from the traditional risk on / risk off measures. In fact, the benchmark US oil (WTI active nearby) futures contract is currently showing its lowest 20-day correlation to the S&P 500 since July 2008. If we are paying attention to economic activity and the supply-and-demand aspects of this market, the upcoming session will be particularly interesting. The US Dept of Energy’s inventory and implied demand figures for the week of November 1 are due (15:30 GMT). A seventh week of inventory is expected, but the forecast is potentially modest at 1.69 million barrels.

Gold Decline Secures its Sixth Straight Day as Stimulus Speculation Approaches

Until recently, low volatility translated into a positive response from gold. In fact, the rolling 20-day (one trading month) correlation between the precious metal and the CBOE’s gold volatility measure was a robust -0.80 not a month ago. Now, however, we find the same activity gauge at the lower bound of its seven-month range and the commodity itself has closed its sixth consecutive day in the red. If we see one more down day, we will have a streak that matches the drop through May 17 which itself was the longest decline since March 2009. As prolific as these time frames are, this bear wave still only measures 3.0 percent on a close basis. Like the capital markets, gold is in a holding pattern ahead of the monetary policy headlines Thursday and Friday. Yet, with this wind down, we are seeing the market potentially fortifying itself to an outcome where a dollar rally can diminish the appeal of the alternative store of wealth should the Taper move forward.

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ECONOMIC DATA

GMT	Currency	Release	Survey	Previous	Comments
0:01	GBP	BRC Shop Price Index YoY (Oct)	0.1%	-0.2%	Industry inflation report expected to post first increase in prices in six months
0:30	AUD	Trade Balance (Sep)	-500M	-815M	Australia has not had a trade surplus since December of 2011.
8:45	EUR	Spain PMI Services (OCT)			After a few good weeks of economic data out of Europe, the appreciation of the currency as of late may have a negative impact on data from October.
8:45	EUR	Italy PMI Services (Oct)	51.2	52.7
8:50	EUR	French PMI Services (Oct F)	50.2	50.2
8:55	EUR	Germany PMI Services (Oct F)	52.3	52.3
9:00	EUR	PMI Services (Oct F)	50.9	50.9
9:00	EUR	PMI Composite (Oct F)	51.5	51.5
9:30	GBP	Industrial Production MoM (Sep)	0.6%	-1.1%	If the YoY Industrial Production print meets estimates, it will be the highest reading since January of 2011.
9:30	GBP	Industrial Production YoY (Sep)	1.8%	-1.5%
9:30	GBP	Manufacturing Production MoM (Sep)	1.1%	-1.2%
9:30	GBP	Manufacturing Production YoY (Sep)	0.8%	-0.2%
10:00	EUR	Retail Sales MoM (Sep)	-0.4%	0.7%	Missed prints here may give market participants an idea of the impact that an appreciating Euro has had. As the Euro saw higher levels in October than September, these prints may add to recent pressure on the Euro.
10:00	EUR	Retail Sales YoY (Sep)	0.6%	-0.3%
11:00	EUR	Germany Factory Orders MoM (Sep)	0.5%	-0.3%
11:00	EUR	Germany Factory Orders WDA YoY (Sep)	5.6%	3.1%
12:00	USD	MBA Mortgage Applications (41579)		6.4%	Mortgage applications remain a crucial print as the Fed looks towards evidence of a ‘recovering’ housing market.
12:30	USD	Challenger Job Cuts YoY (Oct)		19.1%
13:30	CAD	Building Permits MoM (Sep)	6.0%	-21.2%	Business activity and housing stats are an important growth and credit health update
15:00	CAD	Ivey Purchasing Managers Index SA (Oct)	52	51.9
15:00	USD	Leading Index (Sep)	0.6%	0.7%	Reading will round out 3Q and offer benchmark for official GDP data
15:00	GBP	NIESR GDP Estimate (Oct)		0.8%	August reading was the highest in three-years – a strong pace
15:30	USD	DOE U.S. Crude Oil Inventories (41579)	2200K	4087K	The four-week (1-month) inventories average is the highest since April 2012
15:30	USD	DOE Crude Oil Implied Demand (41579)		14728
22:30	AUD	AiG Perf of Construction Index (Oct)		47.6	The prior print was the highest since mid-2010.

GMT	Currency	Upcoming Events & Speeches
10:00	EUR	ECB Announces Allotment in 84-Day Dollar Tender
12:00	EUR	Portuguese Government Leaders Meet EU Commission in Brussels
13:30	USD	U.S. Treasury Announces Quarterly Refunding
17:00	GBP	BOE's Don Kohn Speaks in Oxford, England
18:10	USD	Fed's Pianalto Speaks on Housing and Economy in Columbus, Ohio

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	13.4800	2.0850	10.7250	7.8165	1.3650		Resist 2	7.5800	5.8950	6.5135
Resist 1	13.2400	2.0450	10.5000	7.8075	1.3250		Resist 1	6.8155	5.8475	6.2660
Spot	13.1571	2.0310	10.2432	7.7520	1.2447		Spot	6.5192	5.5348	5.9836
Support 1	12.6000	1.9140	9.3700	7.7490	1.2000		Support 1	6.0800	5.3350	5.7450
Support 2	12.4200	1.9000	8.9500	7.7450	1.1800		Support 2	5.8085	5.2715	5.5655

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	1.3584	1.6172	99.44	0.9216	1.0522	0.9590	0.8452	134.12	1339.87
Res 2	1.3558	1.6142	99.20	0.9196	1.0506	0.9567	0.8429	133.77	1332.94
Res 1	1.3531	1.6113	98.97	0.9176	1.0489	0.9544	0.8405	133.42	1326.01
Spot	1.3477	1.6054	98.49	0.9135	1.0457	0.9498	0.8358	132.73	1312.14
Supp 1	1.3423	1.5995	98.01	0.9094	1.0425	0.9452	0.8311	132.04	1298.27
Supp 2	1.3396	1.5966	97.78	0.9074	1.0408	0.9429	0.8287	131.69	1332.94
Supp 3	1.3370	1.5936	97.54	0.9054	1.0392	0.9406	0.8264	131.34	1339.87

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

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