QE: Dovish Hawks The Ongoing Debate

The debate over QE continues, but now with a more dovish tilt. Dallas Fed President Richard Fisher, who is considered an ultra-hawk (5 out of 5 on the Thomson/Reuters/ Hawkometer) reiterated Bernanke’s comments of a “dial back” of stimulus should the economic data permit and refrained from making further hawkish comments. On the contrary, he said “an exit is still way out in the future" and stressed the need for “more incentives from fiscal policy makers” for the economy to reach full employment. Minneapolis Fed President Kocherlakota, a non-voting FOMC member (dove/hawk rating: 4), said it was a “mis-perception” that the FOMC had taken a hawkish turn and he also stressed that monetary policy will remain loose “for a considerable time” after the bond-purchasing comes to an end. Fed funds expectations for 2016 were up 9 bps at one point during US trading but ended the day flat after these comments. With even these hawkish FOMC members trying to downplay the immediate implications of the Fed’s “tapering off,” it was no wonder that the USD weakened somewhat.

Yet the US currency did manage to gain against some currencies, notably the SEK, NOK, NZD and CAD. These currencies were also big losers Friday, suggesting that momentum traders have detected a trend here. Look for further weakening of these currencies if the smart money perceives that they are vulnerable. The commodity currencies certainly look so, given the concerns about growth in China.

In the Eurozone, only second-tier data today: French business confidence and Italian retail sales. There are a number of speakers from the ECB today, including President Draghi and Council members Coeure and Liikanen. When Draghi speaks, he usually emphasizes that they still have more they can do to support policy, so this may be negative for the euro. In the UK, the BBA loans for house purchases is forecast to have risen slightly in May. Outgoing Bank of England Gov. King will testify to the Treasury Committee on the May inflation report. In the US, durable goods orders are expected to be up 3.0% mom in May, a decline from +3.5% mom in April, while non-defense capital goods excluding aircraft is expected to be up 0.5%, a slowdown from the +1.2% pace in April. There are also several housing indicators due, including the S&P/Case Shiller house price index and the Federal Housing Finance Agency house price index, which are expected to show house prices continuing to rise, as well as new home sales for May. Finally, Conference Board consumer confidence for June is forecast to show a small decline. All in all the figures are likely to show that the US economy is still on the upward path, but as we saw yesterday, the market is looking more at central banks’ reaction function than the data itself.

The Market

EUR/USD
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• EUR/USD tested 20-day lows on the announcement of improved Chicago Fed National Activity and Dallas Fed Manufacturing Business indices. A rebound above 1.3115 resistance materialised on Fisher’s comments.

• The break of 1.3115 resistance saw resistance just 20 pips higher, failing to test 1.3160 resistance adding to the bearish outlook for the pair. Support below 1.3115 comes at the 1.3075 Fibonacci level that also concentrates the 50- and 200-day MAs, with support thereafter at 1.3030 and just above 1.3000. Resistance comes at 1.3160 and 1.3200.

USD/JPY
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• Concerns in Asia surrounding China’s slowdown have triggered a return to the safe-haven yen as Asian equities slump further, with MSCI Asia ex Japan losing 2.8% since yesterday.

• Resistance comes in the well-tested 97.90 – 98.15 area that sees the 23.6% retracement level of the November – May rally with a breakout likely testing resistance at 98.80, though weak trendline resistance may come at 98.45. Further resistance may be seen in the 99.15 – 99.35 area. Support may be found at 97.05 and 96.40.

USD/NOK
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• USD/NOK is continuing with its rally having broken out from 13-year old trendline resistance as seen on the weekly chart, breaking out from the triangle pattern formation that has been developing the past 5 years, which sets a long-term price target just below 8.0000. Currently, selling pressures seem to compound just below the July 2012 high of 6.1995, which is the highest the pair has been in more than 2 ½ years.

• Resistance above 6.1995 may come at 6.3150 and thereafter at 6.5300. Support may come at 6.0000 and thereafter at the trendline at 5.8600.

Gold

• Gold, as shown in this 4-hour chart, continued consolidating around $1285, the 38.2% retracement level of the 10-year rally from 2001 to 2011. Nonetheless, the lowered forecasts for the metal by Morgan Stanley, which followed those of other investment banks such as UBS, Goldman Sachs, and BNP Paribas, added to the negative outlook as the bank slashed its 2013 price prediction from $1487 to $1409.

• Support is seen in the $1269 - $1275 area with a move below the recent low likely triggering a breakdown with weak support at $1228 and Fibonacci support at $1160. Resistance comes at $1285 and $1302.

Oil

• WTI rebounded yesterday ahead of the API crude oil inventories released today, with the DOE inventories tomorrow scheduled to show a 2.0M barrel reduction in stock as the driving season is well under way. Resistance came at the overlapping Fibonacci levels found at the well tested level around $95.65 as shown in this 4-hour chart.

• Support for the day comes at $94.50 with further support at $94.05, $93.50 and $92.65. Resistance above $95.65 may be seen at $96 and thereafter at $96.95.

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