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Dollar Struggles to Recovery Alongside Weakening S&P 500

By , Chief Currency Strategist
01 May 2012 03:06 GMT
  • Dollar Struggles to Recovery Alongside Weakening S&P 500
  • Australian Dollar: Setting up RBA Trading Conditions
  • Euro a Mixed Bag, Market Reaction to Spain Recession Tempered
  • British Pound Ends its Best Run in Two Decades, Be Careful of Reversal Calls
  • Canadian Dollar Drops Across the Board as GDP Slump Offsets Rate Outlook
  • Japanese Yen Receives a General Boost from Risk Aversion
  • Gold Posts Another Late-Day Recovery as Dollar Struggles

Dollar Struggles to Recovery Alongside Weakening S&P 500

The dollar took a substantial hit through the second half of this past week. With a four-day advance in risk appetite (measured through the S&P 500), the Dow Jones FXCM Dollar was forced to make an unfavorable break from its terminal, long-term wedge. However, the surprising momentum behind that selloff conflicted with the general state of listlessness that has relegated currencies and capital markets to broad ranges this past month. Therefore, without a meaningful, fundamental follow up; the dollar’s bearish wave would come to an abrupt pause. Rarely do you see individual currencies or assets develop a trend outside the major themes. That said, fundamentals winds can change without warning.

If we are to see a strong press behind the dollar’s slide, we need something tangible that encourages an unwinding of dollar exposure. The greatest potential rests with underlying risk trends and the dollar’s roles as a safe haven asset. That said, equities, commodities and other risk sensitive assets have not left the confines of general range for weeks. Furthermore, measures of implied (expected) volatility measures are scraping along at multi-month lows – suggesting there is a lead need for a liquidity buffer like the greenback. For traditional risk trends, the threshold for negative developments to shake confidence seems to have been raised to exceptional levels after the disappointing first quarter GDP figures and less accommodative rate forecast from the Fed reported last week failed to crack the zombie-like markets.

Looking for something to stir risk trends over the coming 24 hours, we can look at the abstract issues like global recession concerns, the Euro Zone financial crisis spreading to the rest of the world or the backlash of a mass leverage write down; but there is nothing in particular that we can point to that can carry that much influence. Meanwhile, inherent strength on the dollar’s part is difficult to come by. The distant rate outlook hasn’t given the currency much to hold onto as Treasury yields have come to rest firmly below 2.00 percent. The Chinese manufacturing activity report from this morning precedes the US ISM; but if it doesn’t rouse underlying risk trends, it probably won’t do anything for the dollar.

Australian Dollar: Setting up RBA Trading Conditions

If you have heard of the phrase ‘buy the rumor, sell the news’, you may see the trouble the Australian dollar is facing. Though, for this particular instance we could be looking at the opposite actions (sell the rumor and buy the news). There is always a level of speculation from the markets from those that try to move in ahead of potential fundamental developments. The more uncertain the outcome or the greater the number of possible outcomes for an event, the heavier its actual release will be. However, for the RBA rate decision we are coming upon; the scenarios and most likely outcome are well known. Governor Stevens set the stage after the last policy meeting (in which they deferred a cut) when he said that a drop in inflation would decide whether they make a move at the May 1st meeting. The first quarter inflation report cooled, and the market has subsequently priced in a certainty of a 25bp cut and further a near 35 percent chance of a 50bp cut. If the market is depending on a larger cut or a heavy bearish message to follow this decision; the standard, measured pace could offer a relief rally.

Euro a Mixed Bag, Market Reaction to Spain Recession Tempered

Against both the dollar and Japanese yen, the euro posted a notable bearish correction Monday. That said, the currency put in for a technical advance against all of its other top liquidity counterparts. This could be carved along the divisions of risk appetite, but equities in the New York session had actually retraced which would suggest the shared currency should have gained against high yielders like the Aussie and Kiwi dollar as well. This is just as much a mixed picture as last week. On the docket Monday, we were delivered the disappointing (but not necessarily shocking) news that Spain entered into a double dip recession and Egan Jones downgraded the country’s debt to junk status. This has about as much impact as the S&P downgrade and disappointing round of data last week. We need to see market rates suffer, not economic stats.

British Pound Ends its Best Run in Two Decades, Be Careful of Reversal Calls

The Cable (GBPUSD) ended an incredible run. On Friday’s close, the pair put in for its first 10 consecutive day bull run in two decades. Ending that run was inevitable. From a fundamental perspective, the cooling off makes sense against the double dip recession confirmed last week. From a market activity viewpoint, this pair was posting momentum where most other markets were struggling for direction. Now the question is what happens next. It may seem a sharp reversal is in order, but history suggests that doesn’t happen. And, again, follow through is lacking.

Canadian Dollar Drops Across the Board as GDP Slump Offsets Rate Outlook

One of the strongest currencies last week, the Canadian dollar took a dive Monday. While this currency certainly had pressure to bleed, a fundamental catalyst certainly helps things along. The February GDP reading unexpectedly printed a contraction in the world’s eighth largest economy and the year-over-year reading printed its weakest pace of expansion since January 2010. That certainly trips up the recent, hawkish expectations that developed around the Canadian rate outlook. The 46 percent chance of 25bp hike now is 34 percent. It could fall further.

Japanese Yen Receives a General Boost from Risk Aversion

There was a serious disconnect for the Japanese yen with equities on the rise last week and the funding currency nevertheless gaining ground. It is therefore a far greater issue risk trends flag against the already disappointing performance of the yen crosses. That was the case this past session as US equities broke trend. The yen’s smallest gain was suffered against the counterpart safe haven USD (0.56 percent). Everything else put some pace on its yen gains. The BoJ is quickly falling back to square one with its manipulation effort. USDJPY is again below 80.

Gold Posts Another Late-Day Recovery as Dollar Struggles

Another late-session recovery for gold has extended the metals bullish performance. Though there is almost nothing in pace to this upswing, the commodity is nevertheless up for a fifth consecutive day – the longest run since the same string through January 5th. It’s worth noting COT figures which show net long speculative positioning dropped to its lowest level since January 2009. Gold took a turn higher after that extreme…

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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 Hours

GMT

Currency

Release

Survey

Previous

Comments

0:00

AUD

RPData-Rismark House PX Actual (MAR)

0.2%

1:00

CNY

PMI Manufacturing (APR)

53.6

53.1

Expected to be slightly stronger despite marked slowdown in Chinese growth

1:30

AUD

House Price Index QoQ (1Q)

-0.5%

-1.0%

Soft housing prices would strengthen the case for further RBA rate cuts

1:30

AUD

House Price Index YoY (1Q)

-3.9%

-4.8%

4:30

AUD

RBA Rate Decision

4.00%

4.25%

Rate cut highly likely; RBA statement to draw attention

5:00

JPY

Vehicle Sales (YoY) (APR)

78.2%

6:30

AUD

RBA Commodity Price Index (APR)

99.7

6:30

AUD

RBA Commodity Index SDR YoY% (APR)

2.7%

8:30

GBP

PMI Manufacturing (APR)

51.5

52.1

Manufacturing activity predicted to be weaker as UK enters double-dip recession

14:00

USD

Construction Spending MoM (MAR)

0.5%

-1.1%

Manufacturing expected to have slowed in April as US economic data show signs of weakness

14:00

USD

ISM Manufacturing (APR)

53.0

53.4

14:00

USD

ISM Prices Paid (APR)

59.0

61.0

21:00

USD

Total Vehicle Sales (APR)

14.40M

14.32M

Auto sales remain one of the bright spots of the US economy

21:00

USD

Domestic Vehicle Sales (APR)

11.10M

11.09M

23:50

JPY

Monetary Base (YoY) (APR)

-0.2%

GMT

Currency

Upcoming Events & Speeches

16:30

USD

Fed’s Evans, Lockhart Speak on Monetary Policy in Beverly Hills, CA

19:00

USD

Fed’s Plosser Speaks on Economic Outlook in San Diego, CA

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

13.1917

1.7882

7.8403

7.7616

1.2521

Spot

6.7493

5.6699

5.7637

Support 1

12.5000

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

1.3261

1.6162

82.33

0.9267

0.9990

1.0479

0.8277

108.30

132.21

Resist. 2

1.3226

1.6129

82.12

0.9241

0.9970

1.0450

0.8252

107.95

131.81

Resist. 1

1.3190

1.6096

81.91

0.9215

0.9949

1.0420

0.8228

107.61

131.42

Spot

1.3120

1.6030

81.49

0.9164

0.9908

1.0362

0.8179

106.91

130.63

Support 1

1.3050

1.5964

81.07

0.9113

0.9867

1.0304

0.8130

106.21

129.84

Support 2

1.3014

1.5931

80.86

0.9087

0.9846

1.0274

0.8106

105.87

129.44

Support 3

1.2979

1.5898

80.65

0.9061

0.9826

1.0245

0.8081

105.52

129.04

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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01 May 2012 03:06 GMT