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Dollar Drive to 1.0250 Against Aussie Helps Cap EURUSD Below 1.3000

By , Chief Currency Strategist
03 October 2012 02:06 GMT

  • Dollar Drive to 1.0250 Against Aussie Helps Cap EURUSD Below 1.3000
  • Euro: Is this Two-Day Advance a Trend Shift?
  • Australian Dollar Moving Purposefully Towards 1.0175
  • British Pound Quickly Retraces Gains, GBPUSD Right Back to 1.6100
  • Japanese Yen Lower on Mixed Day for Risk Trends
  • Swiss Franc: Are Yields and Sight Deposits Enough to Keep EURCHF Off 1.2000?
  • Gold’s Drive Flagging, Eurozone Crisis a Necessary Catalyst for 1800

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Dollar Drive to 1.0250 Against Aussie Helps Cap EURUSD Below 1.3000

The dollar is showing us a contrasting performance. If we were to just take our assessment from EURUSD, it would seem that the greenback is under pressure. The benchmark pair has put in for its first back-to-back advance in two weeks – though the pair has clearly found itself unable to overtake the closely watched 1.3000 level despite the effort. In fact, perhaps we should view this pair’s progress as one of restraint – the euro (which outperformed all of its counterparts the past two days) was tempered by an otherwise strong dollar. For a better sense of the US currency’s own strength, we can look to the Dow Jones FXCM Dollar Index (ticker = USDollar) which advanced another 22 points through Tuesday’s close for a third consecutive, daily advance. It’s worth noting that we haven’t seen a four-day climb for the Index since the series through May 25 - during the most prolific bull trend since the November surge.

To upgrade this bullish drift into a robust and durable trend, we need serious fundamental support. Given the dollar’s place in the risk spectrum, the push that would leverage the Dollar Index above and beyond 10,000 would likely be the same that tipped the S&P 500 and Dow Jones Industrial Average into a collapse (below 1425 and 13,335 respectively): market-wide risk aversion. We have yet to see the event risk that can disrupt the stimulus-bred confidence behind riskier assets. The docket certainly fills out, however, as we press deeper into the week, month and quarter. In the upcoming session, we test the market’s confidence / interest in broader growth trends. A round of service sector activity readings is due for the US, Eurozone, UK, Australia and China (already released weak readings). Investors and analysts seem to pay more attention to the manufacturing readings as more distinctive measures of trade (many policy officials around the world still believe they will export their way to growth), but the service measures are arguably better measures for domestic growth. This is particularly true for the US economy where most jobs are service sector side. So this is both a good reading of the trend for US GDP as well as a lead into the Friday’s NFPs.

As we keep watch for catalysts that can tip the scales of investor sentiment, it is important to keep the fundamental backdrop for risk trends in mind. For the ‘return’ column, the 3Q US earnings session looms large. Meanwhile, the aggregate yield for the majors’ 10-year government bonds has dropped for seven consecutive days (and is just off of recent record lows). The last time we have seen easing of this magnitude and consistency was back in May and July-August of last year - during severe declines for US equities and a stark rally for the dollar. What is holding us back this time around? Volatility. Despite the prevalence of fundamental problems, risk is stubbornly anchored on stimulus hope.

Euro: Is this Two-Day Advance a Trend Shift?

The euro posted gains against all of its major counterparts Tuesday, the second consecutive session with which this has occurred. What is driving this move? Standard data (employment statistics Monday and factory inflation yesterday) are hardly up to the task. Risk trends can’t claim responsibility as currencies like the Kiwi and Canadian dollars would have likely outperformed the lower-yielding and fundamentally-troubled euro. That would suggest that there is a level of relief rally in fundamentals. Recent headlines were hardly supportive of the shared currency, however. Spanish Prime Minister Rajoy shot down rumors that the country was close to asking for a full bailout, while Moody’s said it was still studying Spain’s credit rating. Meanwhile, Greece’s finance minister said he was unsure that the country would have a deal with the Troika by the EU summit. These are not bullish developments, yet bond yields and default swaps are showing improvement. But for how long?

Australian Dollar Moving Purposefully Towards 1.0175

The Aussie dollar took a significant hit this past session thanks to the RBA’s rate cut. Though swap markets suggested a significant contingent of the market was already pricing in a 25 bps cut to 3.25 percent, there was clearly a significant position of the market (including myself) that though it less likely. Looking at updated rate forecasts, there is still remarkable speculation of further easing (a 75 percent probability of 25bp cut in November and outlook for 90 bps of easing over 12 months). A negative rate bias certainly hurts a carry currency, but it carries more weight with pairs that aren’t heavily risk-biased (AUDNZD and AUDCAD). For AUDUSD and AUDJPY, we need risk aversion to support momentum.

British Pound Quickly Retraces Gains, GBPUSD Right Back to 1.6100

The sterling was putting in for a decent advance against the safe haven dollar through the morning session Tuesday, but the gains were completely unwound through the end of the day. GBPUSD can’t seem to find lift off of the 1.6100 level. The trouble with a fiscal-focus instead of growth push by the government and the Euro-area’s troubles are both potential catalysts. But the most bank for our buck on cable is risk trends.

Japanese Yen Lower on Mixed Day for Risk Trends

Investor sentiment was generally mixed on the day. US equity indexes ended the day with mixed results, the euro was universally higher but the Aussie dollar was sharply lower (driven by event risk). Yet, despite the mixed picture, the yen suffered almost universally against safe haven and carry currency alike (with exception for AUDJPY). Perhaps investors are taking the new Ministers’ threats of manipulation seriously.

Swiss Franc: Are Yields and Sight Deposits Enough to Keep EURCHF Off 1.2000?

Recently, we have seen in the SNB’s data that sight deposits (good measures of safety demand) dropped through the week of September 28for the first time since May. Furthermore, we have seen yields on the shorter end of the Swiss yield curve (5 year and below) trend back towards positive territory. This mix of sentiment and return seems to suggest EURCHF can hold off 1.2000. Yet, like Euro stability, it is unlikely to last.

Gold’s Drive Flagging, Eurozone Crisis a Necessary Catalyst for 1800

If there was any doubt that gold has lost its bullish drive from August-September, it should be banished by the close of the 12th consecutive day that the metal has failed to close above 1780 despite its immediate proximity. This doesn’t mean that gold can’t recharge its rally and overtake 1800 and move on towards record highs. Rather, we need a drive to accomplish this move. The most readily available issue: the Euro crisis.

**For a full list of upcoming event risk and past releases, go towww.dailyfx.com/calendar

ECONOMIC DATA

Next 24 Hours

GMT

Currency

Release

Survey

Previous

Comments

1:00

CNY

Non-manufacturing PMI

-

56.3

The manufacturing sector is considered far more integral to China’s health, but service sector figures are good measures of domestic vs export considerations

1:00

AUD

HIA New Home Sales (MoM)

-

-5.6%

For those that were bearish on Australia before China fears heated up or the RBA cut, a housing bubble was a persistent concern

1:30

AUD

Trade Balance (Australian dollar)

-685M

-556M

Strong currency may dampen exports but supportive for cheaper imports.

1:30

AUD

Retail Sales s.a. (MoM)

0.4%

-0.8%

Domestic trends are quickly becoming more important as Chinese data shows a steady cooling

7:45

EUR

Italian Purchasing Manager Index Services (SEP F)

44.1

44

Final readings of service-sector measures rarely produce dramatic changes. However, with the focus on growth and financial health, the market will be more vested in this accurate GDP proxy

7:50

EUR

French PMI Services (SEP F)

46.1

46.1

7:55

EUR

German PMI (SEP F)

50.6

50.6

8:00

EUR

Euro-Zone PMI Composite (SEP F)

45.9

45.9

8:00

EUR

Euro-Zone PMI Services (SEP F)

46

46

8:30

GBP

Purchasing Manager Index Services (SEP)

53

53.7

Unlike Euro-area figures, this UK service reading is our first look, and growth concerns are taking greater precedence over price action

8:30

GBP

Official Reserves (Changes)

-

$732M

Following first, three-month increase in reserves since April 2011

9:00

EUR

Euro-Zone Retail Sales (MoM)

-0.1%

-0.2%

Retail sales have been down since August 2011.

9:00

EUR

Euro-Zone Retail Sales (YoY)

-1.9%

-1.7%

11:00

USD

MBA Mortgage Applications

-

2.8%

The fixed-rate mortgage rate measured with the last update touched a record low 3.63%

12:15

USD

ADP Employment Change (SEP)

140K

201K

The ADP figures far outpaced the official NFP figures in the August data. Traders will tread cautiously

14:00

USD

ISM Non-Manufacturing Composite (SEP)

53.2

53.7

Has been posting moderate growth figures since January 2010.

14:30

USD

DOE U.S. Crude Oil Inventories

-

-2446K

Volatility in inventory figures still very high following biggest increase in six months two weeks ago.

GMT

Currency

Upcoming Events & Speeches

09:30

EUR

Portugal to Sell 3.35%, 2015 Bonds

15:00

USD

Fed to Purchases $1.75-2.25 Bln in Treasury Notes

16:00

EUR

EBA to Release Capital Raising Results

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

12.8595

1.7917

8.3677

7.7549

1.2306

Spot

6.6086

5.7703

5.7052

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

7.5800

5.6625

6.1150

7.5800

5.6625

6.1150

7.5800

5.6625

6.1150

Resist. 2

6.5175

5.3100

5.7075

6.5175

5.3100

5.7075

6.5175

5.3100

5.7075

Resist. 1

6.6086

5.7703

5.7052

6.6086

5.7703

5.7052

6.6086

5.7703

5.7052

Spot

6.0800

5.1050

5.3040

6.0800

5.1050

5.3040

6.0800

5.1050

5.3040

Support 1

5.8085

4.9115

4.9410

5.8085

4.9115

4.9410

5.8085

4.9115

4.9410

Support 2

7.5800

5.6625

6.1150

7.5800

5.6625

6.1150

7.5800

5.6625

6.1150

Support 3

6.5175

5.3100

5.7075

6.5175

5.3100

5.7075

6.5175

5.3100

5.7075

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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03 October 2012 02:06 GMT