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US Dollar Falls, Commodity Currencies Rise as Payrolls Data Looms

Talking Points:

  • Commodity bloc FX gains, US Dollar retreats as payroll data looms
  • Fed officials’ commentary a wildcard in otherwise deliberative trade
  • British Pound may fall as soft PMI data weighs on BOE policy bets

The Australian, Canadian and New Zealand Dollars advanced in overnight trade. The sentiment-linked currencies shrugged off weakness across Asian stock exchanges – where prices seemed to reflect follow-on weakness carrying over from losses on Wall Street – to rise alongside the more forward-looking S&P 500 futures.

The US Dollar retraced downward having launched a broad-based recovery against its major counterparts in the first half of the week. Taken together, price action probably reflects corrective pre-positioning ahead of Friday’s much-anticipated release of April’s US labor-market data after commodity-bloc FX underperformed in the prior 48 hours.

The deliberative tone is likely to carry forward absent an uncharacteristically brazen comment from Fed officials due to speak in the hours ahead. Remarks from James Bullard, Dennis Lockhart and John Williams – Presidents of the Fed’s St. Louis, Dallas and San Francisco branches respectively – are due to cross the wires.

UK PMI data headlines the economic calendar in European hours. The composite gauge is expected to show that the pace of manufacturing- and service-sector activity growth narrowly slowed in April. UK economic news-flow has increasingly disappointed relative to median forecasts over the past month, opening the door for a downside surprise that may hurt BOE policy bets and weigh on the British Pound.

What does FXCM traders’ positioning say about FX market trends? Find out here!

Asia Session

European Session

Critical Levels

— Written by Ilya Spivak, Currency Strategist for DailyFX.com

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Volatility Unsettles Rather Reassures and FX Activit Is Leading the Way

Talking Points

  • The FX Volatility Index is near its highest level in four years
  • A speculative element has altered the simple ‘haven’ appeal these measures are attributed
  • The strong speculative short view in VIX futures and sharp rise in open interest highlight distortion

See the DailyFX Analysts’ 2Q forecast for US Oil along with their favorite 2016 trading opportunities on the DailyFX Trading Guides page.

Volatility measures for many of the key asset classes have withdrawn to remarkably low levels. However, the backdrop for market risk and the persistence of FX volatility signal conditions are far more troubling than what these simple indicators may suggest.

Most implied volatility measures are backed out of their relative, underlying products’ options pricing. This is essentially the cost of the unknown. And, if these products are used to hedge their underlying exposure from adverse moves, we end up with an assumption of market direction. Since the bulk of market participants in equities for example are of the buy-and-hold mentality, the hedge is usually against declines which makes the stock-oriented VIX indicator a favored ‘fear’ gauge. However, these simplistic interpretations do not always hold.

Volatility Unsettles Rather Reassures and FX Activity Is Leading the Way

Below is the net speculative positioning among large trader in the futures product based on the VIX Index. As can be seen, there has been a sharp increase in short positions for VIX futures despite the underlying index standing at the lower bound of its range the past year. That may reflect an optimism for ‘risk appetite’ that see equities and the like advance, but why build a significant short in an already thin return derivative? With derivatives, there is a time value that can be collected by the short side but is worth very little in the way of return. It is a topping off return but draws considerably more risk than yield. The saying is ‘picking up pennies in front of a steamroller’.

Volatility Unsettles Rather Reassures and FX Activity Is Leading the Way

Another interesting circumstance is the level of exposure to this popular volatility product. Volume or trading in the VIX futures tends to follow the level of the market – higher volatility generally begets more reaction – but open interest is more sentiment oriented. Open interest is the total exposure the market has to this product, and we have seen a remarkable swell over the past few months back towards record highs of past years. This could be a speculative reach, but it is more likely the reflection of a market increasingly uncertain of its risky exposure and a demand for insurance.

Volatility Unsettles Rather Reassures and FX Activity Is Leading the Way

While the VIX index for equities is perhaps the most popular measure, there are measures for many asset classes including bonds, emerging markets, commodities and FX. Similar to that for equities, volatility measures for commodities like gold and oil, Treasuries and emerging markets have substantially deflated from their early February swells. As with shares, this may reflect a blend of speculative reach and a warped haven appeal. Yet, what we can also garner from this comparison is that FX volatility seems to be holding more persistently buoyant.

Volatility Unsettles Rather Reassures and FX Activity Is Leading the Way

While the FX market is itself not nearly as volatile as stocks or commodities, its level compared to its own historical trend has swollen these past few years and actually now holds just off the four-year highs the index set last month. We can see the comparison more clearly below in the comparison to the traditional VIX and we set scale on different axes.

Volatility Unsettles Rather Reassures and FX Activity Is Leading the Way

Why are the FX markets seen as being significantly more prone to volatility than its counterparts? There are a few aspects that contribute to this. One structural consideration is that there is much less of the directional bias in volatility measure for the FX market than there is for other capital markets. There isn’t a traditional buy-and-hold view for currency markets as we are long one currency and short another by virtue of exposure. That said, speculative appetite doesn’t curb readings as readily and it more directly reflects actual activity levels.

Volatility Unsettles Rather Reassures and FX Activity Is Leading the Way

Another characteristic of the FX market that contributes to higher volatility levels is the direct influence of completive monetary policy regimes. In a world of generally accommodative monetary policy and artificially augmented risk appetite, there is a common reach for yield with a complacency around the risks the exposure represents. However, in FX, we pit these regimes against each other. And, the competitive effort to implement policy that alters currency value – some would say ‘currency war’ – reflects a destabilizing element.

Volatility Unsettles Rather Reassures and FX Activity Is Leading the Way

Competitive monetary policy has long ago shown strain through exchange rates with dramatic moves from the likes of USDJPY and the Yen crosses, the Swiss Franc after the SNB’s policy failure, a Dollar rally after the Fed took a small step to normalize and the Euro’s plunge as the ECB played catch up with its own QE program. The realized – rather than expected – volatility impact this has had in currency markets has been profound. The visualization is below. Yet, the influence this carries is not isolated to FX. The fallout of competition in these regimes and the ultimate limitation of global easing is quickly becoming a popular concern across the market. So, should we be soothed by relatively low volatility readings or concerned by the complacency that it may represent?

Volatility Unsettles Rather Reassures and FX Activity Is Leading the Way

Compare how retail speculators are positioning in US Oil relative to USDCAD to see if there is shifting current using the FXCM Speculative Sentiment Index (SSI) data on DailyFX.

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Crude Oil, Gold Prices Look Ahead to US Jobs Data for Direction

Talking Points:

  • Crude oil prices break monthly uptrend, expose support near $42/barrel
  • Gold prices in corrective mode after testing resistance near 3-month high
  • Directional commitment likely to wait for Friday’s US employment data

Crude oil prices have pulled back from six-month highs alongside retreating stock prices. The move seems to reflect a broad-based moderation in risk appetite ahead of Friday’s much-anticipated release of April’s US Employment report.

A concurrent moderation in priced-in 2016 FOMC rate hike expectations implied in Fed Funds futures suggests the markets are positioning to evaluate the outcome at face value. This implies that a soft result will be interpreted as negative for sentiment trends even as it argues for a more dovish monetary policy stance.

Interestingly, gold prices have pulled back from three-month highs despite deterioration in the outlook for interest rates, which might have been expected to boost anti-fiat assets. This may speak to the broadly corrective mood in Fed-sensitive assets ahead of the US jobs data release.

Absent unexpected headline risk, pre-positioning flows are likely to remain in focus into Wall Street Friday morning. Commentary from James Bullard, Dennis Lockhart and John Williams – Presidents of the Fed’s St. Louis, Dallas and San Francisco branches respectively – may stir interim volatility. Officials’ penchant for hedged rhetoric will probably limit lasting follow-through however.

Are DaliyFX analysts expecting a larger crude oil recovery? See our forecast here!

GOLD TECHNICAL ANALYSIS Gold prices are edging cautiously downward after finding resistance in the 1294.26-1307.49 area, marked by the January 22, 2015 high and the 38.2% Fibonacci expansion. The first layer of support is at 1261.70, the 23.6% level, with a break below that on a daily closing basis exposing a rising trend line at 1229.07. Alternatively, a push above resistance targets the 50% Fib at 1324.58.

Crude Oil, Gold Prices Look Ahead to US Jobs Data for Direction

CRUDE OIL TECHNICAL ANALYSIS Crude oil prices declined after a Spinning Top candlestick identified earlier in the week developed into a full-blown bearish Evening Star pattern. A breach of trend line support guiding the upswing from the early-April swing low suggests a larger downward reversal may be in the cards. A daily close below the 41.87-42.35 area (March 22 high, 38.2% Fibonacci retracement) exposes the 50% level at 40.99. Alternatively, a push above the 14.6% Fib at 45.07 opens the door for a retest of the April 29 top at 46.76.

Crude Oil, Gold Prices Look Ahead to US Jobs Data for Direction

— Written by Ilya Spivak, Currency Strategist for DailyFX.com

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Contact and follow Ilya on Twitter: @IlyaSpivak

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GBP/USD Reversal Approaching Initial Support Targets

Talking Points

  • GBPUSD reversal approaching initial support targets
  • Move lower to offer long-entries
  • Updated targets & invalidation levels

GBPUSD Daily

GBP/USD Reversal Approaching Initial Support Targets

Chart Created Using FXCM Marketscope 2.0

Technical Outlook: We’ve been tracking this Cable setup since the start of the week on SB Trade Desk with an impressive outside-day reversal off the 2016 open / median-line resistance yesterday shifting the focus lower. The reversal is now approaching some areas of interest for possible support at the March high-day close at 1.4472. A break here keeps the downside bias in play targeting 1.4347/58 with the broader bullish invalidation level set just below at the ascending lower median-line parallel. Note that daily momentum has failed at 60 with a pending support trigger extending off the lows now in play.

Avoid the pitfalls of near-term trading strategies by steering clear of classic mistakes. Review these principles in the “Traits of SuccessfulTraders” series.

GBPUSD 30min

GBP/USD Reversal Approaching Initial Support Targets

Notes: A break of an ascending median-line formation alongside a move below the weekly open reinforced the near-term reversal with the decline now testing interim support. Immediate focus remains lower sub-1.4580/88 (weekly open / February high-day close). Near-term momentum divergence suggests we may be vulnerable for a rebound here but we’ll be looking to sell rallies / support triggers with a break lower targeting 1.4415 & 1.4347/58.

Keep in mind ulitamately we would be looking to buy a dip ahead of our bullish invalidation level at the lower median-line parallel / 1.4296-1.4305. Added caution is warranted heading into U.K. PMI data tomorrow & U.S. Non-Farm Payrolls on Friday with the releases likely to fuel increased volatility in their respective crosses. A quarter of the daily average true range (ATR) yields profit targets of 31-34 pips per scalp. Continue tracking this setup and more throughout the week- Subscribe to SB Trade Desk and take advantage of the DailyFX New Subscriber Discount!

Check out SSI to see how retail crowds are positioned as well as open interest heading into the close of the week.

Looking for trade ideas? Review DailyFX’s 2016 2Q Projections!

Relevant Data Releases

GBP/USD Reversal Approaching Initial Support Targets

Other Setups in Play:

—Written by Michael Boutros, Currency Strategist with DailyFX

Follow Michaelon Twitter @MBForex contact him at mboutros@dailyfx.com or Click Here to be added to his email distribution list

Join Michael for Live Scalping Webinars on Mondays on DailyFX and Tuesday, Wednesday & Thursday’s on SB Trade Desk at 12:30 GMT (8:30ET)

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China’s Market News: PBOC Cuts Fixing, Extends Credit

This daily digest focuses on market sentiment, new developments in China’s foreign exchange policy, changes in financial market regulations and Chinese-language economic coverage in order to keep DailyFX readers up-to-date on news typically covered only in Chinese-language sources.

- The PBOC made the biggest downward move in the daily fix since the Yuan was de-pegged last August.

- The Central Bank began to issue monthly Pledged Supplementary Lending to three policy banks starting in May.

- CFETS launched the standard Yuan forward (C-forward) in the interbank market on May 3rd.

To receive reports from this analyst,sign up for Renee Mu’ distribution list.

PBOC News: China’s Central Bank.

- China’s Central Bank fixed the Yuan rate 378 pips weaker against the US Dollar to 6.4943 on May 4th, the biggest downward move since the Yuan was de-pegged against the US Dollar last August. Following the fix, the onshore USD/CNY broke 6.50, the first time in a month.

- Beginning in May, the PBOC will issue Pledged Supplementary Lending (PSL) to the three policy banks, China Development Bank, Agricultural Development Bank of China and China Import Bank, at the beginning of each month.

- On May 4th, the Central Bank added 100 billion yuan through 7-day reverse repurchase agreements (repos) with an interest rate of 2.25%. The repos maturing on that day were 120 billion yuan. The net withdrawal was 20 billion yuan.

- China Foreign Exchange Trade System (CFETS), a sub-institution of the PBOC, launched standardized Yuan forward contracts (C-forward) in the interbank foreign exchange market on May 3rd. During the first trading day, 25 institutions provided quotations on 9 types of C-forwards; 21 institutions reached 62 C-forward deals.

China Finance Information: a finance online media administrated by Xinhua Agency.

- The Ministry of Finance issued 15 billion yuan of 3-year certificated Government bonds, with an interest rate of 3.9% and 15 billion yuan of 5-year maturities, with an interest rate of 4.32%. Compared to the government bonds issued in March, the interest rate on both 3 and 5-year maturities has dropped by 0.1%.

- China’s fixed asset investment (excluded in the agriculture sector) in Q1’2016 was 8.583 trillion yuan, increasing by 10.7% from a year ago. The investment in infrastructure increased 19.6% to 1.538 trillion Yuan. The investment in the real estate sector rose 6.2% to 1.768 trillion yuan, and in the manufacturing industry increased 6.4% to 2.772 trillion yuan.

- The debt of China Railway Corp., the national railway operator, hit 4.14 trillion yuan in the Q1’2016, increasing 10.4% from a year ago. The net loss was 8.73 billion yuan during the same period, increasing 35.1% year-on-year. The continued drops in rail freight transport were the largest contributor to China Railway’s losses. Over the past three years, the rail freight transport volume has been shrinking at an accelerating rate. In the Q1’2016, the volume of rail freight transport dropped by an additional -9.43%.

Written by Renee Mu, DailyFX Research Team

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Price Action Strategy for Short-Side USDJPY Continuation

Talking Points:

- One of the strongest trends thus far in 2016 (USD-weakness) continues to see retracement. But with heavy US data on the docket for the remainder of this week, this may not last long. We go over the technical setup in USD to highlight what traders can watch for to look for the continuation move.

- We focus in on USD/JPY to investigate price action strategy. This is likely one of the more attractive pairs to play continued USD-weakness, but price action is still incredibly oversold after the outsized run that the pair has put in thus far on the year. We look at two different ways to approach this market (inside and outside price action).

- If you’re looking for trading ideas, check out our Trading Guides. And if you want something more short-term in nature, check out our SSI indicator.

One of the more pertinent themes across markets at the moment is the volatility being seen in the US Dollar. As the Fed shifted focus away from the four rate hikes that were expected by the bank in 2016, traders have sold out of the Greenback as rate expectations have continued to dwindle lower. The starting point for this theme was around February 11th, which was day two of Ms. Yellen’s twice-annual testimony in front of Congress. Like a light switch, market tonality went from aggressively ‘risk off,’ and back to ‘risk on.’ Since then, each Fed meeting has only fed (pun intended) more weakness into USD as the bank’s taken on progressively more dovish leanings.

We looked at this theme yesterday as the Dollar was finally putting in some element of strength. But the bigger question was how long it might last; especially given the heavy US data due to come out during the remainder of the week (Non-Farm Payrolls is on Friday). In yesterday’s article, we looked at setups in both AUD/USD and EUR/USD; but today we’re going to take that a step further by looking at five different USD-pairs to plot how traders might be able to approach each moving forward.

Below, we look at the Dow Jones FXCM Dollar Index, and on the right side of the chart are the same resistance zones we identified in yesterday’s article. Specifically, the level at 11,787 has become workable over the past 24 hours as price action broke up to this prior level of support, and attempted to find resistance although that didn’t hold. Now, on the 4-hour chart below, we can see where this level is now showing as short-term support. We’ve also seen quite a bit of indecisive price action here, which could be indicative of a turn; we just don’t have enough evidence yet to indicate that to be the case. NFP could provide that evidence, if we don’t get it sooner.

Price Action Strategy for Short-Side USDJPY Continuation

Created with Marketscope/Trading Station II; prepared by James Stanley

USD/JPY

This is probably one of the more attractive venues to voice this recent theme of USD-weakness. After the Bank of Japan held policy in April, the bears came back to sell USD/JPY with aggression. As we’ve been saying for a while now, the Yen remains one of the world’s most attractive safe haven currencies as the Bank of Japan is likely in the least flexible position of the major Central Banks. Buying stocks with QE, as they did starting with their surprise Halloween announcement in 2014; or moving to negative rates in another surprise announcement this January has done nothing to turn the deflationary tides for Japan, and at this point it’s difficult to imagine what in the Neo-Keynesian spectrum of economics might be able to actually, finally do that.

The Yen is still working around a key support level at 106.64, which is the 61.8% Fibonacci retracement of the bull market run in USD/JPY (taking the 2011 low to the 2015 high). After making a quick move towards the 105.00 psychological level yesterday, price action has snapped back and resistance has begun to show around this Fib level.

But if we go down to the 4-hour chart, we’ll see that price action has begun to work on a higher-high (around the 107.50 psychological level), and what could be a ‘higher-low’ around 106.25. So, the potential for a continued retracement higher is still looking likely, and this will be the case until a lower-low actually prints.

This means that traders can look at re-entry in one of two ways: Either we can wait for a deeper resistance level, such as re-test of prior support at 107.60; in order to play the short-term reversal (of the retracement), in terms of the longer-term trend. Or let price action break this short-term low to prove that the down-trend may be on its way back; at which point we can look to sell resistance at this 106.64 level.

While neither of these methods will ensure of catching the swing, they can both help to moderate risk outlay on each attempt (if you want to learn more about risk management, check out our Traits of Successful Traders research).

Price Action Strategy for Short-Side USDJPY Continuation

Created with Marketscope/Trading Station II; prepared by James Stanley

— Written by James Stanley, Analyst for DailyFX.com

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Contact and follow James on Twitter: @JStanleyFX