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Dollar Advances for Third Straight Day, Momentum and Fear Easing

By , Chief Currency Strategist
25 May 2012 04:09 GMT
  • Dollar Advances for Third Straight Day, Momentum and Fear Easing
  • Euro: Crisis Headlines Diminish while Growth Data Reports Slowing
  • Swiss Franc Tumbles Thursday, Is this the SNB’s Work?
  • British Pound Dives as Gilt Rates Undermine Safe Haven Talk
  • Japanese Yen Struggling for Progress as Risk Eases, JGB Yields Rise
  • New Zealand Dollar Pulled Lower by Worst Rate Outlook in Three Years
  • Gold Consolidating Dangerously Above 1525, Volatility Still High

Dollar Advances for Third Straight Day, Momentum and Fear Easing

Volatility eased for a second day Thursday and underlying risk trends (measured through the S&P 500) carved out a fourth day of consolidation. Normally, we would expect the dollar, as the premier liquidity haven, to respond to this shift with a meaningful downturn of its own. Yet, that has been the case. In contrast to the technical (close over close) four-day advance from the benchmark US equities index, the Dow Jones FXCM Dollar Index has advance for three consecutive sessions. Furthermore, each of these drives higher has set a fresh 15-month record for the currency. What are we to make of this? The 20-day rolling correlation between the S&P 500 and Dollar Index is still an exceptional -0.93 (-1.00 indicates that they generally move in exactly the opposite direction); but the shorter, five-day (one-week) reading relationship reading has actually flipped to a significant positive figure.

It would be hasty to label this relationship change as a critical shift in the dollar’s association to underlying fundamental trends. That said, a breakdown in correlations often occurs after a thematic driver eases off on the pressure. Naturally, when we do have make turns (whether they are temporary corrections or true reversals), we see the intensity behind a fundamental drive ease and market participants ease off the gas in anticipation of the next catalyst – more sensitive to both favorable and unfavorable developments. The divergence in correlation is working on the dollar’s favor – as are the momentum behind the euro unwind, the deteriorating rate outlook for its investment currency counterparts and the greater sensitivity of the high-yield currencies. However, these factors are unlikely to continue working in harmony to supplement the dollar’s primary safe haven role. If equities gain traction in a rebound or should the second factors fade against a slow risk build, the dollar will falter.

Euro: Crisis Headlines Diminish while Growth Data Reports Slowing

The euro posted another uniform decline across the board Thursday (with the very unique exception of the EURCHF pair – more on that below). When there is an aggressive, market-wide risk-aversion effort; the euro finds itself at immediate risk as the most fundamentally-troubled and derided currencies amongst the majors recently. Yet, the fear surrounding the stability of the regional economy and financial market must be particularly onerous if the euro is extending its decline when investor sentiment itself is leveling off. Looking at the headlines, the key words and topics are growing more repetitious and thereby require less repricing. Notable headlines from this past session include: ECB’s Asmussen’s statement that the ECB was exploring Greece exit fallout options even if others weren’t; credit rating agency Standard & Poor’s Kraemer comments that a Greek exit would be calamitous and Eurozone bonds wouldn’t solve the region’s crisis; and the report that Spanish Prime Minister made a blatant call for the ECB to buy his nation’s bonds to lower yields. Also painful were the weak Euro-area PMI figures.

Swiss Franc Tumbles Thursday, Is this the SNB’s Work?

Without doubt, the most remarkable development of the past 24 hours was the unexpected tumble from the Swiss franc. Considering the market has stood by waiting for the SNB to either fail in its effort to hold up the 1.2000 floor or lift the base to shake market commitment, it comes as no surprise that the first thought was that the 60-plus pip EURCHF rally (fully 10-times the daily average range of the previous 20 trading days) was the work of the central bank. However, after analyzing the move, there is evidence to suggest that was not the case. In the SNB repertoire, a large purchase (not aimed at offsetting heavy franc purchase pressure) has not been entertained. If they acted, it would likely have been a floor increase or introduction of capital curbs. This was more likely the covering of a larger short position in otherwise quiet market conditions.

British Pound Dives as Gilt Rates Undermine Safe Haven Talk

Interest rate expectations are still one of the more active drivers for the sterling. We can make our connections to the European crisis, but spill over is still difficult to gauge. Similarly, the regional safe haven status the pound is afforded by the euro’s pain has been tempered by the reduction in bombastic headlines. So what is the next most important driver in the currency’s list: rate / stimulus expectations. While there is little chance of rate cuts, a bolstered stimulus effort is debatable. And, on that the benchmark 10-year gilt yield fumbles to fresh record lows.

Japanese Yen Struggling for Progress as Risk Eases, JGB Yields Rise

While the yen managed to squeeze out modest gains against its more yield-intensive counterparts, the fundamental carry component was not finding a hearty bid against all counterparts on an aggressive carry unwind bender. As US equities level off, the general pressure on risk trends recedes and carry interest itself stabilizes. Another interesting aspect of the yen’s performance is that we have also seen a notable upswing in JGB yields this past week – indicating that traders are unwinding carry exposure but not necessarily seeking safety in Japan.

New Zealand Dollar Pulled Lower by Worst Rate Outlook in Three Years

We have watch the New Zealand dollar take a remarkable tumble against most of its counterparts these past weeks. On the wide-yield differential pairs, this kiwi tumble is justifiable through regular risk aversion flow. However, there has been an additional element of momentum on pairs like NZDUSD and NZDJPY that can best be isolated by looking at AUDNZD. A pair of two high-yield currencies (and an Aussie dollar under heavy rate cut pressure), we have seen the kiwi lose considerable ground here. This must speak to inherent weakness, which we can tap through rate expectations. Though the RBA is looking at 133bps in cuts in 12 months, the RBNZ’s cut outlook is just now hitting three-year highs.

Gold Consolidating Dangerously Above 1525, Volatility Still High

Though the dollar has extended its consistent drive into the later part of this week, its flagging momentum would be absorbed by gold. As a safe haven itself and alternative store of wealth, the previous metal offers a better counterpoint to lacking risk aversion moves that don’t tip into the ‘financial crisis and liquidity demand’ tolerance level. That said, we are still very close to the critical 1625 level that has held the market up for nearly a year, and volatility for the asset is still at multi-month highs. It wouldn’t take much to trigger another leg lower.

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ECONOMIC DATA

Next 24 Hours

GMT

Currency

Release

Survey

Previous

Comments

1:35

CNY

MNI Business Condition Survey (MAY)

Manufacturing activity figures have cooled recently, suggesting business conditions will likely follow suit

6:00

EUR

German GfK Consumer Confidence Survey (JUN)

5.6

5.6

Business confidence fell more sharply than expected, are consumers in the same boat?

6:45

EUR

French Consumer Confidence Indicator (MAY)

88

88

Enough discontent about economic conditions was had to change governments

8:00

EUR

Italian Retail Sales s.a. (MoM) (MAR)

-0.3%

0.6%

Italian consumer confidence dropped to its lowest level since 1996. This is likely a reflection of wages / jobs and further impacted spending

8:00

EUR

Italian Retail Sales (YoY) (MAR)

0.1%

9:00

EUR

Italian Hourly Wages (MoM) (APR)

0.0%

9:00

EUR

Italian Hourly Wages (YoY) (APR)

1.2%

13:55

USD

U. of Michigan Confidence (MAY F)

77.8

77.8

A final reading is unlikely to rouse much market interest

1:30

CNY

Industrial Profits (YTD) (YoY) (APR)

-1.3%

A measure of business activity for an economy that is showing distinct signs of cooling

GMT

Currency

Upcoming Events & Speeches

7:00

EUR

ECB's Peter Praet Speaks on Euro Economy

9:30

USD

Fed's Charles Plosser Speaks on Monetary Policy

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

14.0236

1.8461

8.3546

7.7625

1.2789

Spot

7.1846

5.9299

6.0401

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

1.2696

1.5807

80.48

0.9740

1.0390

0.9886

0.7644

101.38

126.46

Resist. 2

1.2655

1.5769

80.28

0.9705

1.0362

0.9850

0.7616

101.01

126.03

Resist. 1

1.2614

1.5731

80.08

0.9671

1.0334

0.9815

0.7587

100.63

125.60

Spot

1.2532

1.5654

79.69

0.9603

1.0279

0.9744

0.7530

99.87

124.75

Support 1

1.2450

1.5577

79.30

0.9535

1.0224

0.9673

0.7473

99.11

123.89

Support 2

1.2409

1.5539

79.10

0.9501

1.0196

0.9638

0.7444

98.73

123.47

Support 3

1.2368

1.5501

78.90

0.9466

1.0168

0.9602

0.7416

98.36

123.04

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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25 May 2012 04:09 GMT