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Dollar Slows its Descent, Faces Critical Point for Next Phase

By , Chief Currency Strategist
14 October 2011 02:41 GMT
  • Dollar Slows its Descent, Faces Critical Point for Next Phase
  • Euro Faces Spain and Bank Downgrades, Slovakia Vote and More but Volatility Anemic
  • British Pound Advance Stalls as Risk, Gilt Yields Hit Ceiling
  • Australian Dollar Defers to Risk Rather than Follow through on Employment Rally
  • Japanese Yen Unfazed by BoJ’s Warning for More Stimulus
  • Canadian Dollar Finds Little Encouragement from Trade Data, Oil
  • Gold Trading Volume Pulls back to Levels Last Seen in July

Dollar Slows its Descent, Faces Critical Point for Next Phase

Confidence in the market is completely absent. Rather than seeing the balance in sentiment tip from risk appetite to risk aversion; we see that there simply isn’t conviction in any single bearing for capital placement. This lack of interest will almost always leave the greenback sidelined. When uncertainty overtakes the markets, investors will either park their funds in assets with tolerable yield while avoiding exceptional risks. The greenback simply does not fall within these bounds – rather it is on the extreme end of the safe haven spectrum. For the currency itself, we can see this negative trait play out in price action. For the Dow Jones FXCM Dollar Index (ticker = USDollar), we have seen an eight-consecutive day decline (open to close). We have only seen a loss of this magnitude twice in the recent history (the period through December 31st, 2010 and May 13th, 2009). Alone, that would be an extremely bearish signal; but against the backdrop of measured participation, this reads as a trend that could quickly correct its course.

The same measure of reversal potential can be read in many risk-sensitive asset classes and dollar-based currency pairs. For the technically-inclined, daily performance for EURUSD, GPBUSD, AUDUSD and NZDUSD fit patterns that frequently lead to changes in direction and momentum (consistent trouble winning new highs alongside reduced ranges). However, technicals guide price action most efficiently when volume and volatility is heavy. Those certainly aren’t the conditions that we are currently dealing with. We need a catalyst to guide markets to a unified belief and thereby market direction. That said, we have seen the burden for moving this market has risen substantially. Through this past trading session we were met with a number of financially-concerning developments. In addition to Spain’s downgrade and discussion of German banks preparing for larger haircuts for Greek exposure (more on that below); it was reported that Fitch had downgraded a number of important European banks (UBS, Royal Bank of Scotland, Llyods and Landesbank Berlin) while others were put on “Watch Negative”. In a risk-sensitive market, this round of news would have been more than enough for a large shift in capital flow.

As we wait for fear or greed to take over, we must be vigilant for catalysts that can stoke short-term volatility or perhaps trigger a cascade in sentiment. The 3Q earnings season is in full swing; but after the JPMorgan and Google’s reports Thursday; we are essentially done for the week. Monday’s Citigroup and Wells Fargo numbers will be closely watched. In the meantime, we will watch to see if the retail sales and University of Michigan confidence figures generate significant movement from the S&P 500 – as it has greater influence through risk trends.

Related: Discuss the Dollar in the DailyFX Forum, John’s Video: EURUSD, Risk Trends Offer Topping Pattern But Reversal Requires a Push

Euro Faces Spain and Bank Downgrades, Slovakia Vote and More but Volatility Anemic

There were many fundamental headlines for the euro through Thursday; but despite their fundamental importance, they wouldn’t rouse much follow through for price action. The biggest positive that the market could muster was the announcement that Slovakia approved the EFSF expansion proposal after its initial rejections. This was largely expected; and the effort for stabilizing the region goes far beyond this preliminary step. On the opposite side of the risk spectrum, we were regaled by reports that German banks were preparing for losses on Greek exposure to the tune of 50-60 percent (initially it was 21 percent) while Credit Suisse projected 66 banks would fail a revised EU stress test with a 9 percent capital ratio. Those are more concerning than Standard & Poor’s downgrade of Spain; but this event nevertheless had the more direct impact.

British Pound Advance Stalls as Risk, Gilt Yields Hit Ceiling

Following up on the unexpected jump in the UK’s unemployment rate to a 15-year high 8.1 percent; the pound’s docket would take on the August trade balance. This time around, the data offered a tame improvement with a 7.77 billion sterling deficit. This data simply doesn’t compete with risk trends. However, stimulus expectations do factor in; and MPC member Dale’s reflection of a slowdown in Q3 and Q4 growth bode poorly for the currency. Also noteworthy, gilt yields retreated from a two-month high, carving a pattern that look similar to the S&P 500…

Australian Dollar Defers to Risk Rather than Follow through on Employment Rally

The impact of the strong jump from the September employment figures was limited. Labor data’s influence is the grand scheme of fundamentals is as a factor for keeping rates elevated – and its ability to do that is limited. In the meantime, risk trends are acting as an anchor. Aussie trades should also keep an eye on Chinese data Australian imports hit a record high last month; and the 3Q A GDP data is due next week.

Japanese Yen Unfazed by BoJ’s Warning for More Stimulus

There are few options that Japanese officials can tap in order to control the level of their currency. Putting a floor under a yen cross akin to what the SNB is doing would be deemed a large shot in a currency war from the third largest economy in the world. Perhaps the BoJ will take the route of more stimulus to dissuade capital inflow. In the group’s recent report, some members said further easing may be needed.

Canadian Dollar Finds Little Encouragement from Trade Data, Oil

Those that are used to trading news or correlations will need to rethink the Canadian dollar’s drivers. The currency overlooked the C$620 million trade deficit reported for August (the 15th shortfall in 17 months) as well as a slow retreat for crude. Despite different growth and monetary policy bearings, this currency will not give up its connections to risk appetite trends. Where the Aussie dollar and S&P 500 go, so too will the loonie.

Gold Trading Volume Pulls back to Levels Last Seen in July

Activity on gold has slowed significantly from September; yet in reality, a return to normalcy for the commodity. Average daily swings prior to last month’s sharp decline were far more reserved. That said, the limited bounds for price action don’t necessarily justify the dramatic decline in futures volume. Conviction is growing to exceptionally low levels; which suggest this market is prone to a significant shift in trend.

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ECONOMIC DATA

Next 24 Hours

GMT

Currency

Release

Survey

Previous

Comments

2:00

CNY

CPI (YoY) (SEP)

6.1%

6.2%

Inflation expected to flatten out, though PBoC still remains vigilant

2:00

CNY

Producer Price Index (YoY) (SEP)

6.9%

7.3%

2:00

NZD

Non Resident Bond Holdings (SEP)

62.5%

Gauges market interest in NZ yields versus safety

8:00

EUR

Italian Trade Balance (Total) (euros) (AUG)

1438M

Surplus may fall as demand for Italian goods taper

8:00

EUR

Italian Trade Balance Eu (euros) (AUG)

1773M

9:00

EUR

Italian CPI (NIC incl. tobacco) (MoM) (SEP)

0.1%

0.1%

Italian inflation expected to rise at current pace, though YoY still above ECB target

9:00

EUR

Italian CPI (NIC incl. tobacco) (YoY) (SEP)

3.1%

3.1%

9:00

EUR

Italian CPI - EU Harmonized (MoM) (SEP)

1.9%

1.9%

9:00

EUR

Italian CPI - EU Harmonized (YoY) (SEP)

3.5%

3.5%

9:00

EUR

Euro-Zone CPI (MoM) (SEP)

0.8%

0.2%

Higher expected inflation may not prompt a rate rise in the near future as peripheral nations still struggle with debt

9:00

EUR

Euro-Zone CPI - Core (YoY) (SEP)

1.5%

1.2%

9:00

EUR

Euro-Zone CPI (YoY) (SEP)

3.0%

2.5%

9:00

EUR

Euro-Zone Trade Balance (euros) (AUG)

-4.0B

4.3B

Trade deficit may shrink as consumer retail demand shrinks

9:00

EUR

Euro-Zone Trade Balance s.a. (euros) (AUG)

-2.5B

12:30

CAD

Manufacturing Shipments (MoM) (AUG)

0.5%

2.7%

Demand for Canadian goods tapering

12:30

USD

Import Price Index (MoM) (SEP)

-0.4%

-0.4%

Import prices expected to fall as dollar strength gains traction, commodity costs fall

12:30

USD

Import Price Index (YoY) (SEP)

12.5%

13.0%

12:30

USD

Advance Retail Sales (SEP)

0.5%

0.0%

Retail sales expected to rise despite drop in consumer confidence, credit

12:30

USD

Retail Sales Less Autos (SEP)

0.2%

0.1%

12:30

USD

Retail Sales Ex Auto & Gas (SEP)

0.2%

0.1%

13:55

USD

U. of Michigan Confidence (OCT P)

60.4

59.4

Preliminary confidence figures showing a mild turnaround into winter months

14:00

USD

Business Inventories (AUG)

0.4%

0.4%

Stagnant growth indicating sluggish investment spending

SUPPORT AND RESISTANCE LEVELS

CLASSIC SUPPORT AND RESISTANCE - 18:00 GMT

Currency

EUR/USD

GBP/USD

USD/JPY

USD/CHF

USD/CAD

AUD/USD

NZD/USD

EUR/JPY

GBP/JPY

Resist 2

1.4050

1.5900

86.00

0.9400

1.0785

1.0750

0.9020

112.00

126.50

Resist 1

1.3900

1.5775

81.50

0.9250

1.0675

1.0375

0.8750

106.50

123.00

Spot

1.3798

1.5778

76.88

0.8967

1.0184

1.0210

0.7964

106.08

121.30

Support 1

1.3150

1.5300

76.35

0.8500

1.0150

0.9400

0.7500

102.00

116.00

Support 2

1.3025

1.5180

75.50

0.7800

0.9950

0.9125

0.6850

100.00

114.00

CLASSIC SUPPORT AND RESISTANCE

EMERGING MARKETS & 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

16.5000

2.0000

8.5800

7.8165

1.3650

Resist 2

7.5800

5.6625

6.1150

Resist 1

14.3200

1.9000

8.1025

7.8075

1.3250

Resist 1

6.5175

5.3100

5.7075

Spot

13.3415

1.8317

7.8547

7.7765

1.2766

Spot

6.6381

5.3954

5.6166

Support 1

12.6000

1.6500

6.5575

7.7490

1.2000

Support 1

6.0800

5.1050

5.3040

Support 2

11.5200

1.5725

6.4295

7.7450

1.1800

Support 2

5.8085

4.9115

4.9410

INTRA-DAY PIVOT POINTS 18:00 GMT

Currency

EUR/USD

GBP/USD

USD/JPY

USD/CHF

USD/CAD

AUD/USD

NZD/USD

EUR/JPY

GBP/JPY

Resist 2

1.3911

1.5853

77.56

0.9089

1.0316

1.0313

0.8017

107.37

122.50

Resist 1

1.3854

1.5816

77.22

0.9028

1.0250

1.0261

0.7991

106.72

121.90

Pivot

1.3770

1.5741

76.95

0.8978

1.0207

1.0182

0.7940

105.93

121.12

Support 1

1.3713

1.5704

76.61

0.8917

1.0141

1.0130

0.7914

105.28

120.52

Support 2

1.3629

1.5629

76.34

0.8867

1.0098

1.0051

0.7863

104.49

119.74

INTRA-DAY PROBABILITY BANDS 18:00 GMT

\Currency

EUR/USD

GBP/USD

USD/JPY

USD/CHF

USD/CAD

AUD/USD

NZD/USD

EUR/JPY

GBP/JPY

Resist. 3

1.4011

1.5963

77.66

0.9120

1.0316

1.0392

0.8111

107.86

122.98

Resist. 2

1.3958

1.5916

77.46

0.9082

1.0283

1.0347

0.8074

107.42

122.56

Resist. 1

1.3904

1.5870

77.27

0.9043

1.0250

1.0301

0.8037

106.97

122.14

Spot

1.3798

1.5778

76.88

0.8967

1.0184

1.0210

0.7964

106.08

121.30

Support 1

1.3692

1.5686

76.49

0.8891

1.0118

1.0119

0.7891

105.19

120.46

Support 2

1.3638

1.5640

76.30

0.8852

1.0085

1.0073

0.7854

104.74

120.04

Support 3

1.3585

1.5593

76.10

0.8814

1.0052

1.0028

0.7817

104.30

119.62

v

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

To contact John, email jkicklighter@dailyfx.com. Follow me on twitter at http://www.twitter.com/JohnKicklighter

To be added to John’s email distribution list, send an email with the subject line “Distribution List” to jkicklighter@dailyfx.com.

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14 October 2011 02:41 GMT