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Dollar Tumbles Into Weekend – A Sign of What’s to Come Monday?

By , Chief Currency Strategist
14 July 2012 05:29 GMT
  • Dollar Tumbles Into Weekend – A Sign of What’s to Come Monday?
  • Euro Faces Another Round of Disappointment, May Still Rebound
  • British Pound Receives a Significant Boost from BoE Lending Details
  • Australian Dollar Looks to Sentiment as its Yield Continues its Drop
  • Canadian Dollar: BoC Rate Decision on Tap, Reminder of Loonie’s Unique Position
  • Swiss Franc: Bond Yields Plunge into Negative Territory, Will Investors Waver?
  • Gold Rallies Against Euro, High Yield Currencies on Risk-Positive Session

Dollar Tumbles Into Weekend – A Sign of What’s to Come Monday?

Having worked so hard to finally overtake resistance that had capped bullish ambitions for an entire month, you’d think the dollar would have won some respite from the sentiment-based headwinds. That said, Friday ended with a sizable decline for the Dow Jones FXCM Dollar Index (ticker = USDollar) back below that closely-watched 10,190 level. Once again, we are reminded of the critical difference between a breakout and break with follow through. The immediate reversal from the greenback is perhaps a little more surprising given the initial move was supported by a general slide in risk trends. That said, when we are confronted with technical boundaries like the midpoint of the EURUSD’s historical range and the fact that there are few fundamental catalysts to actively drive capital towards safe havens that provide no (or even negative) yield, the lack of follow through becomes a little more comprehensible. Can we jump start a trend for the dollar – whether bullish or bearish?

If you were looking for fundamental cues from the fundamental event risk from the final 24 hours of this past week as guidance for where we will go heading forward, you may be disappointed. The Chinese 2Q GDP figures (setting the tone for global growth expectations amongst investors) printed below expected with a 7.6 percent annual pace of expansion – the weakest pace in three years but not enough of a surprise to stir concern. Closer to home, JPMorgan started the ball rolling for the US earnings season with a view into the closely-monitored financial market. A massive $4.4 billion loss via the CIO debacle didn’t seem to materially hamper adjusted earnings. As dubious as corporate earnings are (as a gauge for capital gains and yields for the equities market – the favored investment of retail trader), we cannot ignore it if the market is placated by the figures. The earnings season continues next week with Bank of American, Citigroup, Goldman Sachs, Apple and Google amongst other notables. Watch it with a mind to how the masses read the numbers. Though it is difficult to see any, individual fundamental event as a potential catalyst to truly drive risk appetite forward; Fed Chairman Bernanke’s monetary policy report will always carry the possibility of an announcement of intentions for further stimulus. To what degree markets are still holding out hope (and thereby possibly be disappointed) remains to be seen.

Euro Faces Another Round of Disappointment, May Still Rebound

The euro has dropped sharply over the past two weeks, so a correction is not difficult to wrestle from overexposed bears. From a medium-to-long term fundamental perspective, uncertainty and lack of a solid safety net for another wave of Euro panic leaves the currency and region exposed. Yet, we have seen far too many instances were underwhelming or incomplete efforts have bought the euro time - whether through an easily soothed Euro market or simply an improvement in underlying sentiment is debatable. The media and analysts punched holes in the EU Summit’s vows almost immediately after they were issued, but that baton seems to have been dropped. In the upcoming week, we will nevertheless be reminded of the situation. On Wednesday, the EU will release a report on the public finances of the Euro Zone; but the bigger headline will be Friday’s Finance Ministers meeting, where they are supposed to finally agree on Spain’s rescue terms and potentially touch on Greece and the bigger terms of using the ESM to participate in the ongoing stability effort. Though it doesn’t draw much immediate market reaction, it is also worthwhile to keep an eye on important bond auctions. Spain, Greece and Portugal are all on deck to sell debt; and the rates that they draw (more than the aggregate demand, which can be national banks) reminds us of the market’s expectations.

British Pound Receives a Significant Boost from BoE Lending Details

Though it was somewhat lost in the general advance for most risk-based currencies, the sterling managed to rally against everyone of its major counterparts – safe havens, high yield carry currencies and euro alike. Clearly there was an additional fundamental factor, and that came from the Bank of England. The policy authority issued details on its lending program whereby banks can borrow T-Bills to use as collateral for loans. The program could boost credit as much as 80 billion sterling. Next week, keep an eye on the BoE minutes and jobs figures.

Australian Dollar Looks to Sentiment as its Yield Continues its Drop

Wherever risk trends head, the Australian dollar will inevitably follow (the AUDUSD’s 20-day rolling correlation to the S&P 500 is currently 0.89 percent). That said, there will be a question as to whether the Aussie shows greater sensitive to a rise or a fall in sentiment. The RBA has already delivered a string of cuts against heavy projects of easing. There would imply that there is some relief available from over-extended dovish forecasts, but the 12 month rate forecast is actually heading lower again (now calling for more than 100 bps of cuts again). Furthermore, the benchmark 10-year Australian government bond yield is at 5-week lows – very near the record low set in early June.

Canadian Dollar: BoC Rate Decision on Tap, Reminder of Loonie’s Unique Position

It seems that whenever there is a lull in serious calendar event risk, that the Canadian dollar steps in to fill the void with its own offerings. That will be the case in the coming week. On deck we have a few important readings. The Bank of Canada’s rate decision carries the most flash. Though they won’t alter policy, they will likely retain their neutral to hawkish lean that draws such a stark contrast to global counterparts (especially recently). The Monetary Policy report will follow shortly after along with an expected rebound in inflation pressures on Friday.

Swiss Franc: Bond Yields Plunge into Negative Territory, Will Investors Waver?

The yields on the short-end of the Swiss yield curve were already in negative territory, but the pressure significantly increased this past Friday. The 2-year note’s rate closed at -0.402 percent - a record low. Swiss authorities have repeatedly threatened negative interest rates as a further deterrent against an appreciating franc, but this is clearly not an option. That leaves a floor raise or capital curbs if they have to act.

Gold Rallies Against Euro, High Yield Currencies on Risk-Positive Session

A tumble for the US dollar is good enough reason for gold to find some traction, but to see the precious metal rally against higher yielding currencies is something else. For a risk-positive day, we would expect capital to move away from alternative stores of wealth and into something with higher (any) yield. Such a situation can often times be a sign that risk trends are flimsy and likely to fall apart.

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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

CNY

CNY Actual FDI (YoY)

-2.0%

0.1%

Indicator of confidence in China’s economy

22:30

NZD

NZD Performance Services Index

56.8

June PMI: 50.2

07:15

CHF

CHF Industrial Production (QoQ)

7.9%

Last month was the first retracement in a 3 month decline.

07:15

CHF

CHF Industrial Production (YoY)

-1.4%

09:00

EUR

EUR Euro-Zone Consumer Price Index - Core (YoY)

1.6%

1.6%

Many EU countries have already reports a decrease in inflationary pressure during June.

09:00

EUR

EUR Euro-Zone Consumer Price Index (MoM)

0.0%

-0.1%

09:00

EUR

EUR Euro-Zone Consumer Price Index (YoY)

2.4%

2.4%

09:00

EUR

EUR Euro-Zone Trade Balance s.a. (euros)

6.2B

Germany’s trade balanced declined during May.

09:00

EUR

EUR Euro-Zone Trade Balance (euros)

5.2B

12:30

CAD

CAD International Securities Transactions (Canadian dollar)

10.2B

12:30

USD

USD Empire Manufacturing

5.00

2.29

12:30

USD

USD Advance Retail Sales

0.2%

-0.2%

June Vehicle sales beat expectation.

12:30

USD

USD Retail Sales Less Autos

0.0%

-0.4%

May Wholesale inventory growth rate slowed down.

12:30

USD

USD Retail Sales Ex Auto & Gas

0.1%

-0.1%

14:00

USD

USD Business Inventories

0.3%

0.4%

GMT

Currency

Upcoming Events & Speeches

-:-

ALL

IMF to Release Updated Growth Forecasts

-:-

USD

Q2 Earnings – Morgan Stanley and Citigroup

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

15.5900

2.0000

9.2080

7.8165

1.3650

Resist 2

7.5800

5.6625

6.1150

Resist 1

15.0000

1.9000

8.5800

7.8075

1.3250

Resist 1

6.5175

5.3100

5.7075

Spot

13.2904

1.8111

8.2656

7.7575

1.2649

Spot

7.0319

6.0732

6.0992

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

1.4000

1.6100

81.50

0.9660

1.0675

1.0400

0.9020

112.00

131.00

Resist. 2

1.3650

1.5690

79.50

0.9300

1.0675

1.0100

0.8750

108.00

128.30

Resist. 1

1.2249

1.5575

79.18

0.9804

1.0141

1.0226

0.7959

96.98

123.32

Spot

1.3150

1.5325

76.80

0.8500

0.9950

0.9650

0.7500

102.85

120.35

Support 1

1.3025

1.5100

75.50

0.7800

0.9750

0.9400

0.6850

100.70

116.00

Support 2

1.4000

1.6100

81.50

0.9660

1.0675

1.0400

0.9020

112.00

131.00

Support 3

1.3650

1.5690

79.50

0.9300

1.0675

1.0100

0.8750

108.00

128.30

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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14 July 2012 05:29 GMT