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How Much Traction has the Dollar Regained with EURUSD Below 1.3000?

By , Chief Currency Strategist
09 October 2012 03:39 GMT
  • How Much Traction has the Dollar Regained with EURUSD Below 1.3000?
  • Euro Takes a Battering Monday Before Crisis Upgraded, Growth Downgraded
  • British Pound the Worst Performer on the Day, Is There Follow Through?
  • Australian Dollar Holds 1.0150 Against Dollar, Rallies Versus Euro on Risk-Off Day
  • Japanese Yen Outperforms Majors, Pulls USDJPY Back from 79 Break
  • Swiss Franc Tumbles after State Street Announces Charging for Franc Deposits
  • Gold 1800 Ambitions Questioned after Data Shows Speculative Longs Build a Seventh Week

How Much Traction has the Dollar Regained with EURUSD Below 1.3000?

Despite the bearish flavor to Monday’s headlines, there wasn’t a strong bearish reaction from the capital and FX markets through the week’s opening session. Without a definable risk aversion effort from the broader market, the dollar would find itself unable to capitalize (as a safe haven currency) on an otherwise promising set of circumstances. The first line of resistance holding the dollar back was the lack of progress by US equity benchmarks (the pinnacle of sentiment-sensitive assets). The S&P 500 slipped a modest 0.4 percent on the day – refusing to significantly fall back from the multi-year, 1475 high and refusing the first line bullish trend reversal below 1450. For the dollar itself, EURUSD dropped back below 1.3000; but the carry heavy AUDUSD and competitive safe haven USDJPY both reflected greenback losses. The fact that the dollar did not gain further on a day that saw a significant downgrade in growth forecasts by the IMF (with severe cuts to Eurozone and Japanese GDP projections and warning the risk of a global slowdown was “alarmingly high”) suggests redirected interests. Perhaps earnings.

Euro Takes a Battering Monday Before Crisis Upgraded, Growth Downgraded

The fundamentals didn’t do the euro any favors over the opening 24 hours of trading this week. On the docket, the Eurozone investor confidence index (Sentix) for October posted a smaller recover than expected and remained deep in pessimistic territory. What should have been a positive announcement that the ESM was finally activated was marred by the Moody’s response of offering a ‘Negative’ outlook onto its ‘Aaa’ rating of the fund. Later in the day, the headlines worsened. The EU Finance Ministers’ meeting ended with the standard optimism expected from policy makers, but it also carried a sense of doubt for Greece – the most troubled of the region’s members. And, making the situation even more troubled: the IMF’s forecasts stated the EU crisis hasn’t abated as expected. In turn, the region was expected to grow 0.2 percent in 2013 (versus a previously projected 0.7 percent) and group suggested the ECB may have to cut rates further. Yet the bulk of this news happened after the euro’s drop. We shouldn’t take this as a ‘positive’ response to negative data, rather a lack of surprise and redirected interests.

British Pound the Worst Performer on the Day, Is There Follow Through?

There was little mistaking the sterling’s unique performance through Monday. The currency managed losses against all its major counterparts -hearty ones for the most part and even outpacing the Euro’s own weakness. Where does this significant weight come from? The docket through Monday was relatively light. The FTSE 100 was holding out better than its Euro-area counterparts. Even the 10-year Gilt’s yield was joining the climb though the opening session. Perhaps this is a greater respect for the fundamental trouble the UK faces moving forward with the Eurozone’s financial issues spilling over rather than dissipating and global growth trends negating hope of a growth-by-exports scenario. Though this was released after the sizable GBPUSD drop, the IMF’s growth forecast downgrade was one of the biggest amongst the advanced economies: projecting a 0.4 percent contraction in 2013 versus a previous forecast for 0.2 percent growth.

Australian Dollar Holds 1.0150 Against Dollar, Rallies Versus Euro on Risk-Off Day

If the wave of downgraded growth forecasts and renewed concerns with the Euro-area’s financial situation couldn’t weigh US equities lower, there was little reason to suspect the high-yield Australian dollar would make its own move lower. Indeed, the carry currency marked a notable rally against its funding alternatives that marked a very high-profile turn at 1.0150 by AUDUSD and AUDSDJPY rebound from 79.50. What is far more interesting is the rebound in AUDCAD from an 18-month support (0.9950) and strong retracements from EURAUD and GBPAUD. This suggests inherent Aussie dollar strength. The 78 percent probability of a 25bp rate cut at the next RBA meeting priced into the swaps market is not encouraging, but a 12-month forecast of 89bps of easing is materially better than 115bps last week. Has the market priced it all in?

Japanese Yen Outperforms Majors, Pulls USDJPY Back from 79 Break

Even though we didn’t have much of a ‘risk aversion’ drive through Monday, the best performer amongst the majors in the FX market was the safe haven Japanese yen. The crosses performance ranged from a 0.3 percent decline from CADJPY up to a 1.1 percent plunge by GBPJPY. We know there was considerable fundamental drive behind the currency’s counterparts, but the consistency from the yen cannot be dismissed. Risk aversion is typically the currency’s calling card – as much for an unwinding of carry interest as it is for investors seeking out opening positions for stability. Through Monday, the most encouraging headline was from the World Bank which lowered its growth forecasts for East Asia and the Pacific to 7.2 percent (from 7.6 previously). This leverages appetite for a regional safe haven. That appeal was curbed somewhat, however, with the IMF’s downgraded growth forecast for 2012 (from 2.4 to 2.2 percent) and 2013 (from 1.5 to 1.2 percent).

Swiss Franc Tumbles after State Street Announces Charging for Franc Deposits

Short-term market and government bond rates in Switzerland have hovered near (and even below) zero for some time. A negative yield is a persuasive argument against hording capital in Swiss accounts, but that never really panned out as an immediate driver for the Swiss crosses through most of 2012. Yet, we could say that the ‘fair value’ of EURCHF was rising given the fundamental inequity – it was simply masked by the unnatural 1.2000 floor the SNB imposed. Now that we are above that level, we may better see the influence of these unusual financial aspects on capital flows. A good litmus test in the early morning hours Tuesday was an announcement by State Street that the financial firm would charge 0.25 percent on franc deposits. We have made the transition from small returns for holding Swiss assets to paying for it.

Gold 1800 Ambitions Questioned after Data Shows Speculative Longs Build a Seventh Week

Gold bulls lost their momentum weeks ago. Now the metal is just trying to prevent a significant reversal. The implications for risk trends over the coming week with growth and earnings figures casting a darker shadow over the capital markets have a stubbornly neutral impact on gold. Though the commodity is a safe haven in the broadest sense, a lack of yield and certainly the lack of immediate momentum represent a heavy resistance to forming another leg higher. From a fundamental standpoint, without another strong push for stimulus from one of the largest policy bodies (undermining fiats in general); it will be a serious struggle to revisit record highs. In the meantime, the COT figures this past Friday showed net speculative interest grew more bullish for a seventh consecutive week. That is the longest run since October 2007.

**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

0:30

AUD

NAB Business Conditions (SEP)

-

1

Conditions seen supported as RBA committed to ease to offset Chinese slowdown

0:30

AUD

NAB Business Confidence (SEP)

-

-2

4:30

JPY

Bankruptcies (YoY) (SEP)

-

-5.8%

Domestic economy improving yet credit still tight

5:00

JPY

Eco Watchers Survey: Current (SEP)

-

43.6

Indices have stabilized in recent months

5:00

JPY

Eco Watchers Survey: Outlook (SEP)

-

43.6

8:30

GBP

Manufacturing Production (MoM) (AUG)

-0.6%

3.2%

British industries expected to fall again as double-dip recession continue; BoE however is indicating end of additional QE

8:30

GBP

Industrial Production (MoM) (AUG)

-0.5%

2.9%

8:30

GBP

Manufacturing Production (YoY) (AUG)

-0.6%

-0.5%

8:30

GBP

Industrial Production (YoY) (AUG)

-1.1%

-0.8%

8:30

GBP

Visible Trade Balance (Pounds) (AUG)

-£8300

-£7149

British trade deficits expected to widen as continued European uncertainty drags on demand

8:30

GBP

Total Trade Balance (Pounds) (AUG)

-£2550

-£1517

8:30

GBP

Trade Balance Non EU (Pounds) (AUG)

-£4000

-£2877

11:30

USD

NFIB Small Business Optimism (SEP)

-

92.9

September expected to be supported

12:15

CAD

Housing Starts (SEP)

200.0K

224.9K

Housing may slow ahead of expectations for BoC to tighten

14:00

USD

IBD/TIPP Economic Optimism (OCT)

-

51.8

October report expected to buoyed by easing, moderate recovery

14:00

GBP

NIESR GDP Estimate (SEP)

-

0.2%

British economy still stalling

23:30

AUD

Westpac Consumer Confidence (OCT)

-

1.6%

Australian confidence seen gaining as cheap credit reaching consumers

23:30

AUD

Westpac Consumer Confidence (OCT)

-

98.2

GMT

Currency

Upcoming Events & Speeches

1:00

AUD

RBA's Lowe Speaks at Financial Services Luncheon in Tasmania

7:30

EUR

ECB’s Draghi Speaks on Euro Economy

-:-

USD

3Q Earnings Season - Alcoa

17:30

GBP

BoE Governor King Speaks on UK Economy

-:-

ALL

IMF Releases Parts of Global Financial Stability Report

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

9.1900

7.8075

1.3250

Resist 1

6.5175

5.3100

5.7075

Spot

12.7920

1.8122

8.8890

7.7527

1.2284

Spot

6.6287

5.7452

5.7108

Support 1

12.5000

1.6500

8.5650

7.7490

1.2000

Support 1

6.0800

5.1050

5.3040

Support 2

11.5200

1.5725

6.5575

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

1.3102

1.6149

78.82

0.9433

0.9820

1.0330

0.8299

102.71

126.67

Resist. 2

1.3072

1.6122

78.68

0.9412

0.9803

1.0306

0.8279

102.43

126.39

Resist. 1

1.3043

1.6095

78.54

0.9391

0.9786

1.0282

0.8259

102.16

126.11

Spot

1.2983

1.6041

78.26

0.9349

0.9752

1.0233

0.8218

101.61

125.54

Support 1

1.2923

1.5987

77.98

0.9307

0.9718

1.0184

0.8177

101.06

124.98

Support 2

1.2894

1.5960

77.84

0.9286

0.9701

1.0160

0.8157

100.79

124.69

Support 3

1.2864

1.5933

77.70

0.9265

0.9684

1.0136

0.8137

100.51

124.41

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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09 October 2012 03:39 GMT