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Daily Report: Dollar Dived as Fed Avoided Tapering Print E-mail
Market Overview | Written by | Sep 19 13 02:18 GMT

Daily Report: Dollar Dived as Fed Avoided Tapering

Financial markets were rocked by FOMC's decision to keep the pace of asset purchases unchanged at $85b a month overnight. DOW rose 147.21 pts to close at new record high of 15676.94. S&P 500 also rose 20.75 pts to close at new record high of 20.76. 10 year yield tumbled to close at 2.708% and breached an important support level at 2.707%, which suggests larger fall ahead. Gold rode on weakness in dollar and jumped back to 1360 level while crude oil also strengthened back above 108 level. Dollar index suffered a sharp loss and broke an important support of 80.50, which indicates larger trend reversal. In the currency markets, dollar plummeted against all other major currencies with Aussie and Kiwi gaining most.

To our and the market majority's surprise, the Fed refrained from tapering QE measures in September. Although the job market has shown signs of improvement, policymakers believed that the outlook has remained uncertain and they were concerned that premature tightening would lead to slowdown of the economic recovery. Bernanke hinted several months ago about tapering in September, it failed to materialize. Regarding the timing for tapering to really take place, the Chairman stated that "there is no fixed calendar schedule" and "if the data confirm our basic outlook" for economic recovery and the employment market, "then we could begin later this year". He also stressed that the first rate hike might not come until the unemployment rate is "considerably below" 6.5%. the unemployment rate slipped to 7.3% in August.

The new set of economic projections indicated policymakers remained cautious about the economic outlook. For 2013, the range of GDP growth was lower to +1.8% to +2.4% from June's projection of +2.0% to +2.6%. For 2014, GDP growth would reach a range of +2.2% and +3.3%, down from +3.3% and +3.6% in June. The outlook for the job market has improved. The unemployment rate would reach 6.9% to 7.3% this year, compared with June's prediction of 6.9% to 7.5%. For 2016, the Fed is predicting an unemployment rate of 5.2% to 6%. In 2016, the Fed will target a rate closer to 2% although this is not the consensus.

Suggested Readings:

Dollar index's sharp fall overnight and the break of 80.50 support significantly raised the chance of medium term trend reversal. That is, the rise up trend from 2011 low of 72.69 could have completed at 84.75 already on bearish divergence condition in weekly MACD. Near term outlook will now stay bearish as long as 82.67 resistance holds and deeper decline would be seen back to 78.91 support. Decisive break there will confirm this bearish case and should pave the way for medium term decline back to lower trend line support at around 75 level.

On the data front, New Zealand GDP rose 0.2% qoq in Q2, inline with expectation. Japanese trade deficit came in narrower than expected at JPY -0.79T in August. SNB rate decision will be a major focus in European session but may not provide anything new to the markets. Swiss will release trade balance, UK will release retail sales. US will release jobless claims, Philly Fed survey, existing home sales and leading indicators later today.

USD/CAD Daily Outlook

Daily Pivots: (S1) 1.0176; (P) 1.0246; (R1) 1.0293; More...

USD/CAD's fall accelerated to as low as 1.0201 so far. The break of 1.0245 support is taken as a signal that up trend from 0.9633 has completed at 1.0608 already. Intraday bias remains on the downside and current fall should extend back to 1.0013 cluster support (61.8% retracement of 0.9633 to 1.0608 at 1.0005). On the upside, above 1.0317 minor resistance will turn bias neutral first. But recovery should be limited well below 1.0567 resistance and bring another decline.

In the bigger picture, price actions from 0.9406 are viewed as a consolidation pattern with rise from 0.9633 as the third leg. Current development argues that this third leg has already finished. It's uncertain whether the consolidation is totally completed already or is developing into a triangle pattern. In either case, deeper decline would be seen back to below parity. We'd be cautious on rebound ahead of 0.9633.

USD/CAD 4 Hours Chart

USD/CAD Daily Chart

Economic Indicators Update

GMT Ccy Events Actual Consensus Previous Revised
22:45 NZD GDP Q/Q Q2 0.20% 0.20% 0.30% 0.40%
23:50 JPY Trade Balance (JPY) Aug -0.79T -0.81T -0.94T -0.91T
4:30 JPY All Industry Activity Index M/M Jul 0.30% -0.60%
6:00 CHF Trade Balance (CHF) Aug 2.74B 2.38B
7:30 CHF SNB Rate Decision 0.00% 0.00%
8:30 GBP Retail Sales M/M Aug 0.40% 1.10%
10:00 GBP CBI Trends Total Orders Sep 2 0
12:30 CAD Wholesale Sales M/M Jul 1.50% -2.80%
12:30 USD Initial Jobless Claims (SEP 13) 330K 292K
12:30 USD Current Account Balance Q2 -$96.3B -$106.1B
14:00 USD Philly Fed Survey Sep 10 9.3
14:00 USD Existing Home Sales Aug 5.25M 5.39M
14:00 USD Leading Indicators Aug 0.60% 0.60%
14:30 USD Natural Gas Storage 65B

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