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Dollar Suffers Fifth Consecutive Loss as Correlations Start to Crack

By , Chief Currency Strategist
20 July 2012 04:49 GMT
  • Dollar Suffers Fifth Consecutive Loss as Correlations Start to Crack
  • Euro Strays from Risk Trends, Spain Yields Surge Despite Bailout Progress
  • British Pound Climbs but Expectations for Stimulus Setting In
  • Canadian Dollar: Will Fundamental Traders Pay Attention to CPI Data?
  • Australian Dollar Extends its Strongest Run Since November
  • Japanese Yen Notably Steady in this Week’s Risk Drive
  • Gold the Most Congestive in Two Months as Risk and Stimulus Talk Builds

Dollar Suffers Fifth Consecutive Loss as Correlations Start to Crack

The greenback’s suffering continued Thursday as appetite for risk was still a clear fixture across the markets. However, there are signs of fatigue in this speculative drive that could ultimately succumb to the unfavorable fundamental backdrop and onset of the weekend liquidity drain. For the benchmark itself, the Dow Jones FXCM Dollar Index (ticker = USDollar) dropped for a fifth consecutive trading day and raised its net losses over that period to 153 points – the worst bear trend for the currency since last January. The pain is palpable, but the conviction questionable. Where the dollar index tacked on a hearty extension to its decline to hit monthly lows, there was significant dispersion of pace between the different dollar-based majors, the yen crosses and the capital market benchmarks for risk trends. If risk trends were indeed in control of the market and looking to carry us to a new and lasting phase; we’d expect its influence to be far-reaching and overwhelming.

We know the US currency as an extremophile safe haven – it outperforms when risk aversion is at its peak and liquidity demand clouds all ambitions for return. Alternatively, when appetite for yield returns; the exceptional levels of stimulus and record low rates for benchmark US assets divert capital away. Positioned at the extreme of the spectrum, the greenback will naturally be more sensitive to the ebb and flow of investor sentiment. We need to look further away from the fringes, however, and measure ambitions from more stable pairs / assets. Because, if the absence of conviction (in risk or anything else market-worthy) is the quickest way to stall trends and spark reversals from over extended moves. Starting at the extreme, one of the FX market’s favorite pairs (AUDUSD) posted its fifth consecutive with a 64 pip climb (the daily advance has averaged 58 pips in this series). Yet, the S&P 500 – an equally renowned sentiment barometer – barely advanced despite a dalliance into two-month highs.

The true gauge of risk’s influence comes through the most liquid and fundamentally-rooted asset’s performance. If speculative appetites are truly in control and backed by the necessary momentum to feed a trend; it should encompass the entire market. That said, the EURUSD was once again virtually unchanged on the day. Considering the euro is a fundamentally-burdened currency that tumbled to two-year lows against the greenback, genuine investor confidence should theoretically dull its risks and play to its yield potential and play to the appetites of speculators looking for a quick reversal. The cracks are clear, but this doesn’t mean a major dollar reversal is around the corner. An exhausted risk run could generate draw the most ambitious back (AUDUSD), but it would leave the stable (EURUSD) unchanged. When need a catalyst – either way.

Euro Strays from Risk Trends, Spain Yields Surge Despite Bailout Progress

As long as the market’s eyes aren’t glazed over by absolute risk appetite, the euro will remain anchored to its fundamental burden. Though the ‘Eurozone Crisis’ headlines seem to have lost some of their punch through market impact, the threat remains. The top headline this past session from the Euro-area was Spain’s troubled bond auction. Despite Prime Minister Rajoy’s presentation of €65 billion in budget cuts and the Bundestag’s approval of the nation’s bailout, the country grew its highest rates on its 5-year note (6.459 percent) on record. For all three maturities demand (measured by bid-to-call) plunged to 1.9 versus a previous 4.3. In turn, Spain’s benchmark 10-year bond yield hit that attention-grabbing 7 percent threshold. What happens if approval of a bailout at the upcoming Ministers meeting doesn’t offer optimism…

British Pound Climbs but Expectations for Stimulus Setting In

The sterling marked a notable, bullish break from congestion against the US dollar and pushed to yet another multi-year high against the euro. That said, the pound’s fundamental troubles are picking up. Adding weight to the need for additional stimulus going forward, the UK docket showed retail sales missed expectations and mortgage lending dropped 5 percent last month. Already drifting, we find the 3 month pound-based Libor rate has dropped 20 percent this past month (to 0.793 percent) and swaps show expectations of a 25bp cut before the end of the year.

Canadian Dollar: Will Fundamental Traders Pay Attention to CPI Data?

When risk appetite is on the rise, yield becomes the priority. That has lead to a divergence in the performance between the Canadian dollar and its higher-yielding counterpart, the Australian currency. Yet, what happens when the drive for yield-at-any-price cools? In the midst of a dovish rate regime, the Aussie dollar will quickly lose ground. For the loonie, however, we have a hawkish bias. Furthermore, this investment currency has one of the most impressive backdrops for growth and financial health of all the majors.

Australian Dollar Extends its Strongest Run Since November

Despite the hesitance of US equities (typically backed by stimulus-hopes), the Australian dollar climbed across the board Thursday. For AUDUSD, the 5-day rally is the strongest (for progress) since November. This outperformance comes at a price. If there is a correction in risk, the Aussie dollar will be exposed to leveraged reversals. That said, there are underlying fundamentals that offer an additional buffer. The WSJ reported this past session on supposed plans by the Bundesbank to start buying Australian assets to diversify its reserves.

Japanese Yen Notably Steady in this Week’s Risk Drive

With the dollar down five consecutive sessions while the Aussie and US equities rise, it would be fair to make the assumption that the premier funding currency was under extreme duress Thursday. Yet, that wasn’t the case. For Thursday and the entire week, the yen shown a mixed performance. This is telling sign of the conviction in sentiment trends, but it also a serious burden for officials trying to weaken the currency.

Gold the Most Congestive in Two Months as Risk and Stimulus Talk Builds

The average daily range for gold for the past 20 active trading days (a month) hit its lowest level in two-months. In other the market’s a quieting and congestion is squeezing the precious metal. That wouldn’t be a concern if it weren’t for the volatility we are seeing through traditional risk channels (gold is a safe haven) and the growing din of stimulus voices across the board (it is also the premier, anti-fiat).

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ECONOMIC DATA

Next 24 Hours

GMT

Currency

Release

Survey

Previous

Comments

22:45

NZD

Net Migration s.a.

-

160.0

Slightly above a 10 year low.

23:50

JPY

Foreign Buying Japan Bonds (Jul13)

-

-¥20.7B

CViX has been declining since June 1st , though Japan buying foreign stocks and bonds will gauge how willing investors are to take on risky positions.

23:50

JPY

Foreign Buying Japan Stocks (Jul13)

-

-¥3.6B

23:50

JPY

Japan Buying Foreign Bonds(Jul13)

-

¥353.1B

23:50

JPY

Japan Buying Foreign Stocks(Jul13)

-

¥10.3B

01:30

AUD

Export Price Index (QoQ)

0.0%

-7.0%

A decline in export pricings can negatively impact export figures.

01:30

AUD

Import Price Index (QoQ)

1.5%

-1.2%

01:35

CNY

MNI July Flash Business Sentiment Survey

-

FDI declined 6.9% (YoY) in June.

03:00

NZD

Credit Card Spending s.a. (MoM)

-

0.4%

Will provide insight into how consumer sentiment is holding up.

03:00

NZD

Credit Card Spending (YoY)

-

3.9%

06:00

EUR

German Producer Prices (MoM)

-0.2%

-0.3%

Declines in producer prices may lead to lower cost of production.

06:00

EUR

German Producer Prices (YoY)

1.8%

2.1%

07:00

JPY

Convenience Store Sales (YoY)

-

1.7%

Swings in the figure have become more prevalent.

08:30

GBP

Public Finances (PSNCR) (Pounds)

8.5B

-4.4B

Government spending aids the UK economy, but fiscal soundness is becoming more important among rating agencies.

08:30

GBP

PSNB ex Interventions

13.4B

17.9B

08:30

GBP

Public Sector Net Borrowing (Pounds)

11.2B

15.6B

12:30

CAD

Consumer Price Index (MoM)

-0.2%

-0.1%

Canada has been experiencing declining prices, as seen among most developed western countries. U.S. has already reported a 0.2% increase in inflation during the month of June.

12:30

CAD

Consumer Price Index s.a. (MoM)

0.0%

-0.2%

12:30

CAD

Core CPI s.a. (MoM)

0.2%

0.0%

12:30

CAD

Consumer Price Index (YoY)

1.8%

1.2%

12:30

CAD

Bank Canada Consumer Price Index Core (MoM)

0.0%

0.2%

12:30

CAD

Bank Canada Consumer Price Index Core (YoY)

2.3%

1.8%

GMT

Currency

Upcoming Events & Speeches

-

-

-

SUPPORT AND RESISTANCE LEVELS

To see updated SUPPORT AND RESISTANCE LEVELS for the Majors, visitTechnical Analysis Portal

To see updated PIVOT POINT LEVELS for the Majors and Crosses, visit ourPivot Point Table

CLASSIC SUPPORT AND RESISTANCE

EMERGING MARKETS 18:00 GMT

SCANDIES CURRENCIES 18:00 GMT

Currency

USDMXN

USDTRY

USDZAR

USDHKD

USDSGD

Currency

USDSEK

USDDKK

USDNOK

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

13.3726

1.8166

8.1985

7.7546

1.2672

Spot

6.9740

6.0661

6.0969

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

1.2397

1.5657

80.03

0.9907

1.0300

1.0310

0.8041

98.65

124.69

Resist. 2

1.2363

1.5623

79.86

0.9879

1.0280

1.0281

0.8017

98.30

124.31

Resist. 1

1.2329

1.5590

79.69

0.9851

1.0259

1.0252

0.7994

97.96

123.93

Spot

1.2261

1.5524

79.34

0.9796

1.0218

1.0194

0.7946

97.28

123.17

Support 1

1.2193

1.5458

78.99

0.9741

1.0177

1.0136

0.7898

96.60

122.41

Support 2

1.2159

1.5425

78.82

0.9713

1.0156

1.0107

0.7875

96.26

122.03

Support 3

1.2125

1.5391

78.65

0.9685

1.0136

1.0078

0.7851

95.91

121.65

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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20 July 2012 04:49 GMT