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Dollar: JPMorgan Fiasco Fails to Set Off Crisis, Back to Europe

By , Chief Currency Strategist
12 May 2012 03:16 GMT
  • Dollar: JPMorgan Fiasco Fails to Set Off Crisis, Back to Europe
  • Euro Facing a Fundamental Mine Field with Crisis Meetings, GDP Reports
  • British Pound Traders Starting to Question Stimulus Outlook Again
  • Japanese Yen: Would a Strong Rebound in 1Q GDP Add to BoJ’s Trouble?
  • Canadian Dollar Rallies after Best Back-to-Back Jobs Showing in Decades
  • Australian Dollar Facing Parity Against USD as Rate Outlook Levels Off
  • Gold’s Worst Weekly Performance this Year Ushers in Possible Trend Change

Dollar: JPMorgan Fiasco Fails to Set Off Crisis, Back to Europe

Any way you cut it, the dollar’s recent performance is impressive. So far this month, the Dow Jones FXCM Dollar Index (ticker = USDollar) has climbed 1.9 percent to its highest weekly close since the middle of December. Looking at currency’s performance in specific corners of the market, we find the EURUSD is below 1.3000, AUDUSD is at its lowest level this year and the greenback has even been able to muscle gold (another safe haven) into a potentially critical reversal of a trend that goes back over three years. This is a remarkable performance, but it still isn’t the definitive return to bull trend that has eluded the benchmark currency since the first half of 2010. We need more than just a passive unwinding of the most at-risk carry and capital positions. We need the disorderly deleveraging that bolsters the greenback’s liquidity status.

If we are looking for the visual evidence of said dramatic shift, we need look no further than the Dollar Index’s move above 10,100 and the Dow Jones Industrial Average’s slide below 12,750. In those two readings, we will see that demand for liquidity is trumping the anemic yield that the greenback has to offer and the threat of stimulus that has propped up US equities simply can’t maintain the market’s indecision any longer. Fundamental traders that want to monitor the transition need to keep an eye on those drivers that can be reasonably expected to trigger such a significant change in sentiment. Expecting inflation or retail sales data from the US next week to accomplish this task is unrealistic. If you want to find the fire, you move towards the heat. For the global markets, the greatest threat to stability is the Euro-area’s debt and economic troubles.

Euro Facing a Fundamental Mine Field with Crisis Meetings, GDP Reports

The euro, without doubt, is the most fundamentally loaded currency heading into next week. Through the close of this past week, the currency won temporary stays on two of the most critical threats to regional stability: the Greek election turmoil and Spanish financial troubles. Yet, both situations can quickly flare up once again. For Greece, the short-term concern is creating a new government and seeing whether it assimilates to the Euro Zone’s austerity push. The top three political parties each failed to garner a coalition and the President is likely to meet the same frustration. That means we will see another election. In the short-term (the next few weeks at least), they have received the necessary funds from the EFSF to cover their debts, but the medium-term concern is that they will simply decide to exit the monetary union. As for Spain, the relief in the Bankia nationalization (the region’s largest holder of bad real estate assets) has been muddied by the Economic Minister’s announcement that another €30 billion would need to be set aside for further losses and audits would be done of the region’s banks.

Discussing the particular economic risks, European Union ministers are scheduled to meet in Brussels Monday. At this point, the potential and capability of sweeping reform / rescue is low. Perhaps a little more proactive in its infliction of pain on the Euro Monday are the scheduled Spanish and Italy government bond auctions – like miniature confidence tests that are propped up by government mandates (buy with LTRO capital). It is worth nothing Greek and EFSF bond sales as well the following day. In the end, the greatest net risk to the Euro’s fundamental health next week is the dense round of 1Q GDP readings. Tuesday in particular brings German, French, Portuguese and Greek numbers.

British Pound Traders Starting to Question Stimulus Outlook Again

Just a few weeks ago, the sterling was running under its own fundamental steam – climbing as the market realized the Bank of England’s most dovish member may have marked a turn from an expansive monetary policy regime. A return to recession reported a week later changed the view however. We are still seeing the pound slowly pull back from its heights as the market tries to get a reading on growth, fiscal austerity and monetary stimulus. The docket for the upcoming week will help speed up the assessment. On the health of the economy, we have the April jobs figures and a jobless rate expected to retest 17-year highs. For monetary policy, there is the BoE’s Quarterly Inflation report.

Japanese Yen: Would a Strong Rebound in 1Q GDP Add to BoJ’s Trouble?

Japanese officials’ tactics to devalue the currency are varied but ultimately ineffective. After many failed attempts to threaten the currency lower, outright manipulation and most recently an ignored BoJ stimulus pump; the central bank said it was prepared to use its reserves to stabilize any swells in financial instability. Alongside EFSF purchases and encouraging foreign investment, this is another creative way to push the exchange rate. Meanwhile, risk aversion continues to build. Further, we are expected a big jump in 1Q Japanese GDP. Bullish drive and carry unwind?

Canadian Dollar Rallies after Best Back-to-Back Jobs Showing in Decades

Though its reaction would likely have been greater to an equivalent disappointment, the Canadian dollar nevertheless showed a remarkable rally following an impressive jump in April jobs figures. The 58,200-position increase in payrolls was nearly six times the forecast, but the real impression was made alongside the previous month’s 82,300 increase – the biggest back-to-back improvement in the labor markets in over 30 years. The loonie is standing out more and more against its Aussie and kiwi counterparts. Let’s see if next week’s CPI can elevate its position.

Australian Dollar Facing Parity Against USD as Rate Outlook Levels Off

Over the past two months, the Australian dollar has suffered so prolifically due to a combination of its deteriorating interest rate standing, ties to an ailing China and general deterioration in risk trends. While the outlook for capital markets and speculative interests seems to be at high risk heading into the new week, the other two fundamental nodes could find quick boosters. There has long been talk of a Chinese move to ease monetary policy and the Aussie rate outlook has started to slowly pull up. But, if capital markets collapse, this will all matter little.

Gold’s Worst Weekly Performance this Year Ushers in Possible Trend Change

Last week, gold suffered a 3.8 percent tumble – its worst performance since December’s massive 6.6 percent drop. Though this recent decline was a sizable one, the real concern is in the progress that was forged – driving us to new lows since the opening week of the year and further turning a three-and-a-half year old trend. As with the dollar, the concern is volatility. If fear peaks, liquidity demand will hurt the metal.

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ECONOMIC DATA

Next 24 Hours

GMT

Currency

Release

Survey

Previous

Comments

22:30

(5/13)

NZD

Performance Services Index (APR)

53.9

NZ economy experiencing modest growth

22:45

(5/13)

NZD

Retail Sales Ex Inflation (QoQ) (1Q)

2.2%

23:50

(5/13)

JPY

Domestic CGPI (MoM) (APR)

0.6%

Japanese inflation remains below BoJ’s 1-percent target, maintaining pressure for continued easing

23:50

(5/13)

JPY

Domestic CGPI (YoY) (APR)

0.6%

23:50

(5/13)

JPY

Loans & Discounts Corp YoY (MAR)

0.2%

1:30

AUD

Home Loans MoM (MAR)

-2.5%

Real-estate market cited by RBA as area of weakness in Australian economy

1:30

AUD

Investment Lending (MAR)

4.4%

1:30

AUD

Owner-Occupied Home Loan Value MoM (MAR)

-4.0%

6:45

EUR

Current Account (EURO) (MAR)

-5.0B

7:15

CHF

Producer & Import Prices (MoM) (APR)

0.3%

CHF near SNB floor continues to exert downward pressure on prices in Switzerland

7:15

CHF

Producer & Import Prices (YoY) (APR)

-2.0%

8:00

EUR

Italian CPI (NIC incl. tobacco) (MoM) (APR F)

0.5%

Italian inflation pushed higher by Sept VAT increase, but sluggish growth on government austerity to dampen inflationary pressures

8:00

EUR

Italian CPI (NIC incl. tobacco) (YoY) (APR F)

3.3%

8:00

EUR

Italian CPI - EU Harmonized (MoM) (APR F)

0.9%

8:00

EUR

Italian CPI - EU Harmonized (YoY) (APR F)

3.8%

8:30

EUR

Italian General Government Debt (MAR)

1928.2B

8:30

EUR

Bond Auction – Spain Sells 364 and 518-Day Bills

9:00

EUR

Bond Auction – Italy Sells 2015, 2020, 2022, 2025

9:00

EUR

Euro-Zone Ind. Prod. wda (YoY) (MAR)

-1.9%

Eurozone manufacturing has been in contraction for 9 months

9:00

EUR

Euro-Zone Ind. Prod. sa (MoM) (MAR)

0.4%

GMT

Currency

Upcoming Events & Speeches

-:-

EUR

EU Ministers Expected to Discuss Greece and Spain in Meeting

2:25

AUD

RBA Deputy Gov. Lowe Speaks in Melbourne

15:00

EUR

Eurozone Finance Ministers Meet in Brussels

15:45

CHF

SNB President Jordan Speaks in Zurich

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 GMTSCANDIES 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

13.5367

1.7890

8.0275

7.7640

1.2514

Spot

6.9515

5.7505

5.8665

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

1.3070

1.6261

80.61

0.9401

1.0126

1.0189

0.7943

104.66

130.43

Resist. 2

1.3034

1.6228

80.43

0.9374

1.0104

1.0159

0.7918

104.31

130.03

Resist. 1

1.2998

1.6195

80.25

0.9347

1.0083

1.0128

0.7893

103.96

129.63

Spot

1.2926

1.6129

79.88

0.9293

1.0040

1.0067

0.7843

103.26

128.84

Support 1

1.2854

1.6063

79.51

0.9239

0.9997

1.0006

0.7793

102.56

128.05

Support 2

1.2818

1.6030

79.33

0.9212

0.9976

0.9975

0.7768

102.21

127.66

Support 3

1.2782

1.5997

79.15

0.9185

0.9954

0.9945

0.7743

101.86

127.26

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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12 May 2012 03:16 GMT