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Dollar Advances on Week, Either Rally Ahead or EURUSD Above 1.3000

By , Chief Currency Strategist
13 October 2012 05:16 GMT
  • Dollar Advances on Week, Either Rally Ahead or EURUSD Above 1.3000
  • Euro Strength These Past Months Put to the Test with Risk, EU Summit
  • Australian Dollar will Depend More on Chinese Data than its Own to Break 1.03
  • British Pound Faces Crowded Docket as GBPUSD, EURGBP Await Cues
  • Canadian Dollar: Watch Capital Flows Report to See if AUDCAD Should Break 0.9950
  • Japanese Yen: China and Japan Attempt to Thaw Trade Crisis over Island Row
  • Gold Suffers its Biggest Weekly Drop Since June, Is 1800 Out of Reach

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Dollar Advances on Week, Either Rally Ahead or EURUSD Above 1.3000

When we are faced with major technical levels and a building pace of turnover, something must give. So it is with the dollar and US equities looking ahead to next week. Riding out a four-week advance (the longest stretch in four months) the Dow Jones FXCM Dollar Index (ticker = USDollar) is now hitting its head on resistance that defines the ceiling of a channel that has guided the greenback lower since the June 1 peak. To transition the next stage of its rally (and drive EURUSD below 1.2825), the benchmark needs a push. Risk trends can accomplish that – and I will use an S&P 500 break below 1425 with a swell of momentum to carry it as my signal. Otherwise, volatility can play out on a different course.

Where the traditional activity figures may be producing exceptionally low levels (the FX-based VIX hit a five-year low 7.68 percent and the equities version is still at 16 percent), they have a directional bias behind them. Price action itself is showing great fluctuation, suggesting a break from congestion is imminent. The prevailing trend is still bullish risk (bearish the dollar), but a conclusion to this volatility increase in that direction will run out of steam quickly as it contradicts larger issues. Watch 3Q earnings news, Chinese GDP and the EU Summit next week.

Euro Strength These Past Months Put to the Test with Risk, EU Summit

Over the past two months, the Euro has advanced against all of its counterparts - from 7.4 percent against the Aussie dollar to 0.7 percent versus the anchored Swiss franc. After such a move, it is difficult to say that the shared currency is exceptionally oversold given the fundamental issues that are still in play. That is what we must remember with the EURUSD just below 1.30000 and expectations once again building into the next EU Summit. Policymakers will meet once again Thursday and Friday to discuss the state of the Euro-region’s financial health and likely debate whether there are immediate provisions that can be offered to Greece and Spain to help alleviate the sense of fear that is never far from the collective economy. Depending on how risk trends are playing out in the lead up to the event, this event can prove a catalyst regardless of the outcome. If both countries are left to twist in the wind, any hope that built up for a quick resolution will come crashing down.

Australian Dollar will Depend More on Chinese Data than its Own to Break 1.03

The 20-day (1 month) rolling correlation between the S&P 500 (a favored risk measure) and the AUDUSD has dropped to its lowest level in 21 months. This is due to the combination of a serious downturn in Australian rate expectations and a listless investor sentiment trend. Don’t mistake this pair’s connection to risk trends however. Should there be a definitive trend to develop in the coming days or weeks, AUDUSD will fall into line. In the meantime, the Aussie dollar can continue to generate its own volatility – possibly even produce notable breakouts – on data. There are indicators on the currency’s own docket, but it is the China data that truly matters. Let’s see how Monday opens after the trade stats.

British Pound Faces Crowded Docket as GBPUSD, EURGBP Await Cues

UK fundamentals have long been on the backburner for the British pound. Either the currency has adopted its position on the risk spectrum or played the role of an extended relative of the trouble Euro-area. Those relationships will remain – especially if speculative appetites or the Euro crisis come roaring back – but the sterling will increasingly take its own guidance moving forward. The growth vs budget debate weighs heaviest with the UK given the persistence to cull the budget. Will the economy continue to pay for the effort? We have jobs and debt data on deck.

Canadian Dollar: Watch Capital Flows Report to See if AUDCAD Should Break 0.9950

The USDCAD pair does not often take to trends. A substantial deterioration or improvement for its top trade partner - the US economy - will translate into similar for the Canadian economy. If you want to see more of the loonie’s own fundamental health show through, look to the pairs that pit investment currency against investment currency. AUDCAD is hovering just off of a multi-year support just below parity, and the perception that capital (for safety or investment) will start shifting to Canada can lead to an immense shift a pair that still has a substantive carry.

Japanese Yen: China and Japan Attempt to Thaw Trade Crisis over Island Row

On the week, the Japanese yen was up against all its major counterparts with the exception of the Australian dollar. That is a performance from a safe haven currency that mirrors the drop in equities - and risk sentiment in general. However, the balance between yield appetite and fear of capital evaporation falls moving forward, the yen will respond. Its position as a funding currency and regional harbor will override every other fundamental consideration (even direct intervention after a brief shock as we have seen in the past). In the absence of a definitive bearing on the appetites of the crowd, there are bigger developments that we should chew on. The balance between debt and growth is a dangerous one Japan, so reports that talks will be held with China over the disputed purchase of regional islands could thaw the worst trade dispute between the two since 2005. As for debt, the OECD added an unnecessary warning that it was too high. For those looking further into the future, it is worth considering what happens if sustainable inflation is achieved and the yields on all this debt starts to rise…

Gold Suffers its Biggest Weekly Drop Since June, Is 1800 Out of Reach

For the past four weeks, gold has swung back and forth within a 50-point range – with the 1800-figure always just out of reach. Yet through this move, we could still label the underlying trend a bullish one. Since the mid-August breakout, we haven’t seen a significant retracement from the precious metal. This past week, however, gold closed out its biggest weekly loss (1.5 percent) since the week of June 22 (the pullback before the commodity took off). This decline doesn’t yet carry much momentum – not to mention futures volume has trended lower through the slide and the CBOE’s gold volatility index hasn’t turned higher. That said, this commodity is just as sensitive as every other asset that finds itself temporarily sidetracked after a strong run. A dollar rally would likely carry the most volatile response from the metal, but we can’t write off the anti-stimulus leverage that could potentially come from an EU Summit that sees a Spanish bailout or more aid for Greece. As a side note, COT figures show net long interest amongst speculators has risen 8 consecutive weeks, matching the longest build up on record.**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

22:30

(Sun)

NZD

Performance Services Index (SEP)

50

Services index at stalling level

23:01

(Sun)

GBP

Rightmove House Prices (MoM) (OCT)

-0.6%

BoE-watched index slowing down, could result in extended QE at current levels

23:01

(Sun)

GBP

Rightmove House Prices (YoY) (OCT)

0.7%

0:30

AUD

New Motor Vehicle Sales (YoY) (SEP)

6.4%

Major purchases continue to grow as credit looser

0:30

AUD

New Motor Vehicle Sales (MoM) (SEP)

3.6%

0:30

AUD

Investment Lending (AUG)

-2.7%

Lending may recover in August report, expand further in coming months

0:30

AUD

Home Loans (AUG)

1.5%

-1.0%

0:30

AUD

Value of Loans (MoM) (AUG)

-1.4%

1:30

CNY

Consumer Price Index (YoY) (SEP)

1.9%

2.0%

Dramatic reversal of Chinese inflation could result in more aggressive easing by government

1:30

CNY

Producer Price Index (YoY) (SEP)

-3.5%

-3.5%

4:30

JPY

Industrial Production (MoM) (AUG F)

-1.3%

Secondary sector continues to decline as strong yen hurts exports

4:30

JPY

Capacity Utilization (MoM) (AUG F)

0.5%

4:30

JPY

Industrial Production (YoY) (AUG F)

-4.3%

7:15

CHF

Producer & Import Prices (YoY) (SEP)

0.1%

-0.1%

Swiss producer prices expected stable, no SNB change warranted

7:15

CHF

Producer & Import Prices (MoM) (SEP)

0.2%

0.5%

12:30

USD

Empire Manufacturing (OCT)

-4.00

-10.41

NY manufacturing could recovery slightly after sharp drop

12:30

USD

Advance Retail Sales (SEP)

0.8%

0.9%

Sales may see moderate pick up as consumer confidence elevated

12:30

USD

Retail Sales Ex Auto & Gas (SEP)

0.4%

0.1%

12:30

USD

Retail Sales Less Autos (SEP)

0.6%

0.8%

12:30

USD

Retail Sales "Control Group" (SEP)

0.5%

-0.1%

13:00

CAD

Existing Home Sales MoM (SEP)

-5.0%

-5.8%

Declines seen as prices drop

14:00

USD

Business Inventories (AUG)

0.5%

0.8%

Tracking wholesale data

14:30

CAD

Business Outlook Future Sales (3Q)

13.25

15

Outlook continues to be strong

14:30

CAD

Band of Canada Senior Loan Officer Survey (3Q)

-10.8

Lending weakening as rates rise

21:45

NZD

Consumer Prices Index (QoQ) (3Q)

0.5%

0.3%

Slowing inflation cutting need for RBNZ rate rises

21:45

NZD

Consumer Prices Index (YoY) (3Q)

1.0%

1.0%

GMT

Currency

Upcoming Events & Speeches

1:20

JPY

BOJ Deputy Governor Yamaguchi Speech on Economy

12:00

USD

3Q Earnings (Citigroup)

14:30

CAD

Bank of Canada's Business Outlook and Loan Officer Surveys

16:45

USD

Fed's Lacker Speaks on U.S. Economy in Roanoke, Virginia

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

9.1900

7.8075

1.3250

Resist 1

6.5175

5.3100

5.7075

Spot

12.8682

1.8070

8.7295

7.7515

1.2222

Spot

6.6975

5.7593

5.7098

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

1.3065

1.6175

79.00

0.9414

0.9870

1.0327

0.8245

102.71

127.21

Resist. 2

1.3036

1.6149

78.86

0.9395

0.9853

1.0304

0.8225

102.43

126.93

Resist. 1

1.3008

1.6124

78.72

0.9375

0.9836

1.0280

0.8205

102.16

126.65

Spot

1.2951

1.6072

78.44

0.9335

0.9802

1.0233

0.8165

101.61

126.09

Support 1

1.2894

1.6020

78.16

0.9295

0.9768

1.0186

0.8125

101.06

125.53

Support 2

1.2866

1.5995

78.02

0.9275

0.9751

1.0162

0.8105

100.79

125.25

Support 3

1.2837

1.5969

77.88

0.9256

0.9734

1.0139

0.8085

100.51

124.97

v

--- Written by: John Kicklighter, Chief Strategist for DailyFX.com

To contact John, email jkicklighter@dailyfx.com. Follow me on twitter at http://www.twitter.com/JohnKicklighter

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13 October 2012 05:16 GMT