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Dollar Fails to Rally on Post-NFP S&P 500 Slide

By , Chief Currency Strategist
10 April 2012 03:28 GMT
  • Dollar Fails to Rally on Post-NFP S&P 500 Slide
  • Japanese Yen Crosses Primed for Bank of Japan Decision
  • Euro Pulls Higher Despite Higher Periphery Sovereign Yields
  • Australian Dollar Traders On Watch for Chinese Trade Figures
  • Swiss Franc Gaps Higher Against Euro on Week Open, SNB Running Out of Time
  • Canadian Dollar Finds Good Timing in Data, Helps Prevent USDCAD Breakout
  • Gold Slowly Drifting Higher, Three Year Bull Trend Still at Risk

Dollar Fails to Rally on Post-NFP S&P 500 Slide

The greenback’s performance Monday was exactly the opposite of what would have been expected through Fundamentals. The S&P 500 equity index – the epitome of persistent risk appetite trends – marked a dramatic tumble on Monday’s open to close at four-week lows, yet the benchmark safe haven currency would itself drift lower. Should we give up on fundamentals all together? Absolutely not. The Dow Jones FXCM Dollar’s (ticker = USDollar) decline on the day does diverge from the normal performance expects we would expect from the FX market’s top reserve currency, but it shouldn’t come as a surprise. US equities’ aggressive tumble on the open was not a ‘fresh’ move, rather it was an effort to catch up to Friday’s NFP release. The capital markets could absorb the significant disappointment from the payrolls report as much of the western world was offline for an extended holiday weekend. Though, it could be argued that the US dollar this past Friday failed to follow carry-sensitive pairs in the ‘risk off’ (carry unwind) that followed the data. That takes us to a deeper fundamental vein.

With the global financial markets’ most risk-sensitive crowd offline this past Friday, it was difficult to cater to the greenback’s safe haven appeal – as a much smaller contingent was actively seeking harbor (this is different than carry unwind which is an offsetting approach). Instead, the currency would fall under the bearish light that a disappointing jobs reading would hold for monetary policy plans: trouble for one of the Fed’s dual mandates translates into a greater probability for further easing. For the greenback, the liberation from its funding status (the first step to a return of competitive yields) is the most important driver after risk trends. That said, if this S&P 500 slip turns into an outright reversal and bear trend below 1375, that safe haven appeal will likely overwhelm most QE3 talk (more likely another Operation Twist anyways) and rally the dollar.

Japanese Yen Crosses Primed for Bank of Japan Decision

Since putting in a one-year high back on March 14 just around 84.15, USDJPY has backed out a third of its biggest rally in three years. This is not a unique move. All of the yen crosses have retraced a good portion of their hearty gains. The fundamental issue at question here is not a return to yen strength for strength’s sake, rather we have a real catalyst at work: risk trends. The carry trade is first and foremost a funding currency for the FX market. If confidence breaks down and market participants grow panicked, carry unwinding will lead to a surge for the yen. We need to remember this during the upcoming BoJ decision. The policy meeting carries distinct potential for forcibly driving the yen down (yen crosses higher). For evidence to that influence, we only need to look back to the reaction to February’s announcement for an additional 10 trillion yen in asset purchases in the BoJ’s stimulus effort. If they announce another stimulus increase (which many expect), the currency will be driven lower; but it won’t be a clean driver. It will have to compete with any risk appetite sentiment in the market. Alternatively, if no balance sheet swell is found, there will be modest unwinding of speculative long interest heading into the event and risk trends will be even more potent.

Euro Pulls Higher Despite Higher Periphery Sovereign Yields

There was another round of headlines speaking to the fragile financial and economic situation in the Euro Zone, and there will no doubt be fresh fodder over the coming 24 hours. For a trader, the critical consideration with news and event risk is its influence over price action. In other words, were reports that Greece plans to dissolve Parliament on Wednesday, Spain is looking for €10 billion in education and health care costs, and Spanish and Italian banks have purchased an inordinate amount of their home-nation’s debt meaningful to the balance of strength for the currency. To measure that, we can look at periphery government bond yields. Greek, Spanish, Portuguese and Italian yields are all higher.

Australian Dollar Traders On Watch for Chinese Trade Figures

We have run through a little Aussie-specific event risk over the opening 24 hours of trading this week, but its influence hasn’t reached much further than to stir volatility. At least until the labor statistics hit the wires Thursday morning, Aussie dollar traders will concern themselves with underlying risk appetite trends and the Chinese fundamental strength. For the former, the S&P 500 (the most persistent of bullish indicators for sentiment) took a deep tumble Monday, but it remains to be seen whether there is follow through on the NFP shock. In the meantime, we need to keep an eye out for Chinese Trade figures for March. There is no scheduled release time, which makes it far more a volatility threat.

Swiss Franc Gaps Higher Against Euro on Week Open, SNB Running Out of Time

When the FX markets filled back out for speculative interest for the week, EURCHF opened once again below the 1.2000 threshold. The pair promptly rallied back above the contentious level soon after liquidity was restored, but the market’s threat was already made. That was the second time that the SNB’s convictions have been tested since they first announced the institution of the exchange rate floor back on September 6. The current plan / threat of buying unlimited euros will only last so long under this pressure. A new strategy could come soon.

Canadian Dollar Finds Good Timing in Data, Helps Prevent USDCAD Breakout

Timing in fundamentals or technicals is an important consideration in maintaining trend or congestion. However, when they both line up at the same moment, it can be a wondrous thing. With USDCAD this past trading session, the approach towards parity (which itself is the top of a technical wedge dating back to January 29) raised the risk of a meaningful breakout. Of course, the rebound in US equities after the morning stumble helped reduce the breakout threat, but it was the strong first quarter business sales outlook survey that offered active rejection.

Gold Slowly Drifting Higher, Three Year Bull Trend Still at Risk

Gold climbed for its fourth consecutive positive close through Monday’s session, but there has been a notable flagging in the pace of this recovery. Gold is struggling for traction as the dollar (the benchmark for confidence in fiat stores of wealth) refuses to be bent by yield demand and global central banks ease off on the stimulus accelerator. Like the dollar and even the S&P 500 itself, we are in trend limbo for the precious metal. To pick a trend and run with it, we need a distinct catalyst with definable momentum.

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**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar

ECONOMIC DATA

Next 24 Hour

GMT

Currency

Release

Survey

Previous

Comments

1:30

AUD

NAB Business Conditions (MAR)

3

NAB surveys showing improvement, though still weak

1:30

AUD

NAB Business Confidence (MAR)

1

5:45

CHF

Unemployment Rate (MAR)

3.3%

3.4%

Swiss labor market stable despite strong franc, EU improvements seen helping

5:45

CHF

Unemployment Rate s.a. (MAR)

3.1%

3.1%

6:00

EUR

German Exports s.a. (MoM) (FEB)

-1.2%

2.4%

German exports expected to fall, may weigh on economic performance for coming month

6:00

EUR

German Imports s.a. (MoM) (FEB)

1.3%

2.4%

6:00

EUR

German Current Account (euros) (FEB)

12.0B

8.0B

6:00

EUR

German Trade Balance (euros) (FEB)

12.0B

13.1B

6:00

JPY

Machine Tool Orders (YoY) (MAR P)

-8.6%

Domestic industries still weak

6:45

EUR

French Industrial Production (MoM) (FEB)

0.3%

0.3%

French industries and manufacturing continuing slowdown, though German data expected to move markets more

6:45

EUR

French Industrial Production (YoY) (FEB)

-1.4%

-1.5%

6:45

EUR

French Manufacturing Production (MoM) (FEB)

0.0%

0.2%

6:45

EUR

French Manufacturing Production (YoY) (FEB)

-1.7%

-1.2%

8:30

GBP

DCLG UK House Prices (YoY) (FEB)

0.2%

BoE monitored index weak

8:30

EUR

Euro-Zone Sentix Investor Confidence (APR)

-9.1

-8.2

Will offer an objective evaluation of recent EZ crisis flair up

11:30

USD

NFIB Small Business Optimism (MAR)

95

94.3

Domestic surveys still expected to improve, indicating recovery still on-track

22:00

NZD

NZIER Business Opinion Survey (1Q)

0

Tracking Chinese economy

23:01

GBP

BRC Sales Like-For-Like (YoY) (MAR)

0.0%

-0.3%

Retail improving

23:50

JPY

Bank Lending Banks ex-Trust (MAR)

0.7%

0.8%

Japanese credit market still weak, looks to government and bank to continue weakening

23:50

JPY

Bank Lending incl Trusts (YoY) (MAR)

0.6%

23:50

JPY

Machine Orders (YoY) (FEB)

3.0%

5.7%

Month to month data indicating Japanese economy may slow down again

23:50

JPY

Machine Orders (MoM) (FEB)

-0.8%

3.4%

JPY

Bank of Japan Rate Decision

0.1%

0.1%

BoJ seeing possible membership change, degree of easing may slow down

CNY

Trade Balance (USD) (MAR)

-$3.15B

-$31.48B

Trade expected to slow, may prompt additional government changes to ease economy

CNY

Exports (YoY) (MAR)

7.0%

18.4%

CNY

Imports (YoY) (MAR)

9.0%

39.6%

GMT

Currency

Upcoming Events & Speeches

16:30

USD

Fed's Fisher Speaks on the Economy in Oklahoma

16:45

USD

Fed's Lockhart Gives Welcome at Markets Conference in Georgia

18:30

USD

Fed's Kocherlakota Speaks in Minnesota

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

16.5000

2.0000

9.2080

7.8165

1.3650

Resist 2

7.5800

5.6625

6.1150

Resist 1

14.3200

1.9000

8.5800

7.8075

1.3250

Resist 1

6.5175

5.3100

5.7075

Spot

13.1813

1.8298

7.9516

7.7618

1.2719

Spot

6.7826

5.7501

5.9324

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 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

1.3096

1.5727

77.65

0.9464

1.0227

1.0620

0.8168

100.92

121.26

Resist. 2

1.3055

1.5689

77.49

0.9434

1.0203

1.0586

0.8142

100.59

120.94

Resist. 1

1.3014

1.5652

77.33

0.9405

1.0179

1.0552

0.8116

100.27

120.61

Spot

1.2931

1.5576

77.01

0.9345

1.0132

1.0484

0.8063

99.62

119.97

Support 1

1.2848

1.5500

76.69

0.9285

1.0085

1.0416

0.8010

98.97

119.32

Support 2

1.2807

1.5463

76.53

0.9256

1.0061

1.0382

0.7984

98.65

119.00

Support 3

1.2766

1.5425

76.37

0.9226

1.0037

1.0348

0.7958

98.32

118.67

--- 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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10 April 2012 03:28 GMT