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Dollar Stumbles but Doesn’t Break Trend Into Week End

By , Chief Currency Strategist
19 May 2012 05:32 GMT
  • Dollar Stumbles but Doesn’t Break Trend Into Week End
  • Euro: Moving Away from Scheduled Event Risk to Rumor and Panic
  • British Pound Takes a Shot Across the Bow by Posen
  • Japanese Yen Traders Wonder: Will the BoJ Up Stimulus, Does it Matter?
  • Swiss Franc: Will the SNB Simply Wait for a Eurozone Explosion to Act?
  • Australian Dollar Plunges Fresh 7 Month Lows as Speculative Interest Nearly Flips
  • Gold Capitalizes on Dollar’s Weakness, Posts Biggest Two-Day Rally Since October

Dollar Stumbles but Doesn’t Break Trend Into Week End

The Dow Jones FXCM Dollar Index put in for its first two-day bearish performance in three weeks Thursday and Friday, but this was more a technical development than a trend change. Ending the week at exactly 10,100 (the breaking point for the 16-months of congestion prior to Wednesday’s drive), we can see that the market is hesitant to abandon the safe haven dollar so quickly. The disappointing performance for the greenback is particularly surprising when we look to what the more traditional gauges of risk appetite had done through the close. The S&P 500 – often sheltered from the winds of risk by the open-ended hope of further stimulus from the Fed – dropped for a sixth consecutive session (the longest bear run since November 25) to a four-month low below 1300. Why is the high-risk barometer dropping and the key safe haven not taking advantage? Intensity. Volatility is a critical factor to the dollar’s performance. Without panic, a negative, real US rate of return dissuades.

Euro: Moving Away from Scheduled Event Risk to Rumor and Panic

The euro managed to advance against all of its most liquid majors Friday. Did the fundamental headlines improve through the final trading session? No. That said, they didn’t exactly build in bearish intensity either. After such an aggressive selloff, we have to assume that a significant amount of pain has been priced in for the shared currency. The question is whether it stands at enough of a discount to accurately represent the troubles that lie ahead. That is unlikely. Through Friday’s session, there was more rumor than actual headline news. Spain reportedly revised its final 2011 budget deficit numbers up to 8.9 percent (from 8.5) and LCH (the clearing house) raised its margin requirements to trade Spanish government bonds, but that is hardly headline-worthy news. Far more interesting were reports that German Chancellor Merkel was calling on Greek officials to put a referendum for the country to remain in the EU up for vote alongside the governmental election. This was later refuted by one of the Chancellor’s spokespeople, but Greek officials took it seriously enough to angrily reply. Another rumor early Saturday is that Greece would look to exit the Euro Zone come Monday. That is an unlikely scenario under a caretaker government. Keep watching the feeds next week.

British Pound Takes a Shot Across the Bow by Posen

You don’t need to be a fundamental expert to recognize that the sterling has lost a serious strut to its bullish foundation. The sterling dropped 2.8 percent against the yen and 1.6 percent against the dollar this past week. Why would the pound take up a risk sensitivity when not too long ago, it was seemed completely immune to such changes in tide? The shift is in subtle rate expectations. Not long ago, the dollar fought the current under a short-lived surge in rate expectations, and this was the pound’s turn. That turn, however, is over. The double dip recession brought doubt, but perma-dove Adam Posen confirmed expectations Friday by suggestion more QE may be needed. That said, he will exit in August.

Japanese Yen Traders Wonder: Will the BoJ Up Stimulus, Does it Matter?

USDJPY closed virtually at its low for the day Friday and subsequently set a fresh three month low. One of the most common questions that traders ask me happens to be: when is the right time to go long USDJPY. Those that ask are often looking for a hard level, but a line in the sand will not be deciding factor with this pair. Far more important here is the momentum. There is some fundamentally balance to this pair (both currencies are safe havens, low yielders, have tremendous debt loads) but when we look further into the future, we see that the dollar has an advantage of both absolute liquidity demand, structural economic projections and a return of yield. The balance now falls to the cross winds that are coming off of the more effectual carry pairs unwind. Against that backdrop, is there any weight being assigned to the BoJ meeting?

Swiss Franc: Will the SNB Simply Wait for a Eurozone Explosion to Act?

Don’t let the 7 pip average daily range on EURCHF fool you. There is tremendous pressure behind this pair. On one side, we have an unstoppable force – risk aversion specifically sourced from Europeans’ fears that their capital is in jeopardy. On the other, the immovable object – the SNB holding the line at 1.2000 with a pledge of unlimited intervention to maintain the floor. Yet, Friday’s close (1.2005) is the second lowest since the unusual policy effort was introduced, and it reminds us that something has to give. If the Swiss central bank is determined to sit on its hands, it could very well be their pledge that is broken as the Euro-region crisis intensifies. They no doubt realize this truth. And, if they realize it, they are likely weighing their options. The question is: what would it take to approve the nuclear option?

Australian Dollar Plunges Fresh 7 Month Lows as Speculative Interest Nearly Flips

Though the greenback’s losses were not doubt offering some counter-trend, bullish pressure on AUDUSD; the pair would not break stride. A 13th decline in the past 15 active trading days speaks to a very serious trend. General risk aversion (headed by the S&P 500) certainly supported momentum, but there was perhaps a level of gravity to Friday’s move that outpaced a simply risk aversion push on carry unwind. A morning Chinese business sentiment indicator was modestly disappointing, but the real hit for the carry currency was in its yield (both current and outlook). The benchmark 10-year Australian government bond yield was already on the decline, but Friday saw an unexpected plunge that brought the rate to a generational low 3.08 percent. In turn, the swaps market is now pricing in a certainty of a 25 basis point cut next next with a near 75 percent chance of a 50 basis point move, and the 12 month forecast has jumped from a quarter-point in a day (to 126 bps).

Gold Capitalizes on Dollar’s Weakness, Posts Biggest Two-Day Rally Since October

Now this is what a reversal from an oversold position looks like. When a market or individual asset overruns its fundamental boundaries leveraged by speculation rather than fundamentals, the subsequent correction is often just as dramatic. Gold put in for an impressive back-to-back rally Thursday and Friday (2.2 and 1.2 percent respectively) for the best two-day performance since October 26. However, we need to run this impressive move through the fundamental process. The previous metal’s decline has been heavily influenced by the strength of the US dollar. The greenback certainly lost its pace through the end of the week, but it didn’t correct with the same level of veracity as was seen in gold. The disconnect comes from the fact that in the place of the dollar’s influence, we were reminded of European (and global) risks concerns.

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ECONOMIC DATA

Next 24 Hours

GMT

Currency

Release

Survey

Previous

Comments

22:45

(5/20)

NZD

Net Migration SA (Apr)

--

130

New Zealand suffering net outmigration for most months since Feb 2011 earthquake

23:01

(5/20)

GBP

Rightmove House Prices (MoM) (May)

--

2.9%

UK home prices remain sluggish, with homeowners squeezed by austerity policies and stagnant wages

23:01

(5/20)

GBP

Rightmove House Prices (YoY) (May)

--

3.4%

3:00

NZD

Credit Card Spending SA (MoM) (Apr)

--

0.3%

Generally resilient, but high unemployment and modest disaster recovery could weigh on NZ consumer spending

3:00

NZD

Credit Card Spending (YoY) (Apr)

--

5.2%

4:30

JPY

All Industry Activity Index (MoM) (Mar)

--

-0.1%

Japanese economy exhibiting signs of stronger recovery in 1Q 2012

5:00

JPY

Leading Index CI (Mar F)

--

96.6

5:00

JPY

Coincident Index CI (Mar F)

--

96.5

5:45

CHF

SECO Consumer Confidence (Apr)

-14

-19

Swiss consumer confidence beginning to recovery after falling sharply on economic slowdown

7:00

JPY

Convenience Store Sales YoY (Apr)

--

0.4%

7:00

CHF

Money Supply M3 YoY (Apr)

--

6.6%

Liquidity ample as SNB maintains zero interest rate policy

9:00

EUR

Eurozone Construction Output SA MoM (Mar)

--

-7.1%

Construction has plummeted since start of 2012 in part due to cold weather, but recessions in key Eurozone economies also a factor

9:00

EUR

Eurozone Construction Output WDA YoY (Mar)

--

-12.9%

9:00

EUR

Italian Current Account (mlns euro) (Mar)

--

-5138M

Lack of global competitiveness remains an important obstacle to Italy’s economic prospects

12:30

USD

Chicago Fed Nat Activity Index (Apr)

--

-0.29

One of the indicators showing signs of weakness in US economy

GMT

Currency

Upcoming Events & Speeches

18-19

ALL

G-8 Summit at Camp David

7:00

CHF

SNB Publishes Monthly Bulletin

9:15

USD

Fed’s Lockhart Speaks on Monetary Policy in Tokyo

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

13.8608

1.8334

8.3767

7.7689

1.2752

Spot

7.2070

5.8607

5.9923

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

1.2849

1.5923

80.22

0.9600

1.0315

0.9982

0.7700

102.22

126.90

Resist. 2

1.2808

1.5884

80.01

0.9567

1.0288

0.9947

0.7671

101.84

126.47

Resist. 1

1.2766

1.5845

79.81

0.9535

1.0262

0.9912

0.7643

101.47

126.05

Spot

1.2683

1.5767

79.41

0.9470

1.0208

0.9842

0.7587

100.71

125.20

Support 1

1.2600

1.5689

79.01

0.9405

1.0154

0.9772

0.7531

99.95

124.35

Support 2

1.2558

1.5650

78.81

0.9373

1.0128

0.9737

0.7503

99.58

123.93

Support 3

1.2517

1.5611

78.60

0.9340

1.0101

0.9702

0.7474

99.20

123.51

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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19 May 2012 05:32 GMT