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Forex Analysis: Dollar Advances but Not with the Conviction of Risk Aversion

By , Chief Currency Strategist
08 November 2012 03:33 GMT

  • Dollar Advances but Not with the Conviction of Risk Aversion
  • Euro Drops Back Below 1.2800 on Growth Downgrades
  • New Zealand Dollar Plunges after Unemployment Rate Soars
  • British Pound Traders Prepared for BoE Meet, EU Budget Debate
  • Australian Dollar Rally on Jobs Data Will Fail Against Risk Trends
  • Swiss Franc: Slight Reduction in SNB Reserves Contrasts EU Risk
  • Gold Hedged by Fiscal Cliff, Euro Crisis Risk and Dollar Strength

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Dollar Advances but Not with the Conviction of Risk Aversion

You would expect with the US Presidential (and Congressional) election passed, the markets would find their sense of uncertainty moderated. That isn’t what the markets were saying however with the Dow Jones Industrial Average plunging to a three-month low and EURUSD taking a dive back below 1.2800. Though there are longer-term business and economic implications of incumbent President Barack Obama winning a reelection, the real concern comes from the divide between the Executive and Legislative branches. With a Democrat President and Senate majority paired against a Republican House of Representatives, the threat of an impasse on the US Fiscal Cliff is far greater.

The risk of a substantial risk aversion and deleveraging move by the global financial markets has been a serious danger for months – made all the worse by the ‘moral hazard’ related to stimulus efforts. In the advance for US equity indexes (excellent proxies for investor sentiment) these past years, we have seen confidence outrun economic performance. Growth both in the US and abroad has struggled at best and more recently earnings growth has faded. This unfavorable backdrop was tolerated, however, because investors believed that the Fed and other central banks would step in to curb at the first sign of trouble. That said, market participants have ignored growing risks and used greater leverage to chase increasingly smaller levels of return. Such a level of exposure is highly unstable. Making it a far more volatile situation, the rise in capital market exposure has occurred under severely reduced levels of participation. ICI mutual fund figures (good proxies for the general market) have shown consistent outflow of capital from assets from 2009 despite the advance in the market.

This creates an extremely dangerous mix where risk trends are fully dependent on the hope for more stimulus should markets grow unstable (where the Fed has essentially hit the ceiling with an open-ended QE3) and limited relatively liquidity that can exacerbate the influence of a selloff. All the components are there for a rapid risk aversion move, but those invested have not yet folded. Yet, with the Fiscal Cliff, Eurozone crisis, China government uncertainty, Japan budget countdown, downgrade in growth and fading investor confidence; that may only be a matter of time. Last minute saves could come in with a large stimulus program or a miraculous resolution to the Fiscal Cliff, but both are low probability.

Euro Drops Back Below 1.2800 on Growth Downgrades

There were two, headline events for euro traders to respond to today: the European Union Autumn Economic forecasts and Greece’s austerity vote. As it happened, the first drew a reaction from the market and the later was largely ignored. This alone suggests the market is paying more attention to tangible economic issues and affording less faith in means for temporarily holding the region’s crisis at bay. In the later Austerity vote for Greece, Prime Minister Samaras found support for the €13.5 billion in cuts (from pensions and wages, among other places) by a reasonable margin. Yet, Euro traders saw this as an outcome to merely keep the situation status quo. The national head himself noted that the country needed more than the €31 billion tranche of aid this vote would help unlock. More capital, more time and debt forgiveness are extremely difficult to encourage as the region’s economy slows and the floor on capital needs has yet to be found. In contrast, the EU’s downgrade of the region’s 2013 GDP outlook from 1.0 percent to 0.1 percent growth paints a desolate picture. The EURUSD is looking increasingly heavy.

New Zealand Dollar Plunges after Unemployment Rate Soars

Risk aversion was a prominent fundamental factor this past trading session, but there was an additional weight exacted on the high yield New Zealand dollar. The region’s third quarter employment delivered a considerable surprise to traders. The 0.4 percent drop in the number of employed kiwis through the quarter was far greater than expected and matches the worst pace since 3Q 2009. Furthermore, the unemployment rate unexpectedly jumped (0.5 percentage points) to a 13-year high 7.3 percent. The hawkish view from RBNZ Governor Wheeler (established just last week) suddenly looks far more suspect. If rate expectations drop, the kiwi could suffer the same fate as the Aussie in 2Q.

British Pound Traders Prepared for BoE Meet, EU Budget Debate

The market has a tendency of ignoring the Bank of England’s monetary policy meetings. Under most circumstances, the central bank keeps its policy unchanged. And, even when the MPC does decide to boost its stimulus, the comparatively small level of the central bank’s moves do little to compete in devaluing the currency (versus the Fed and ECB)…and perhaps to also offset the economic slowdown. However, desperation has increased globally and other central banks have amplified their efforts. We should look for changes to the unusual, Funds for Lending program. Beyond this rate decision, we should look to Friday’s EU budget discussion. The UK has taken a strong stance against its main-land counterparts for an increase in spending. In turn, the EU downgraded the UK growth outlook from 1.7 to 0.9 percent.

Australian Dollar Rally on Jobs Data Will Fail Against Risk Trends

Fundamentals always run in order of importance. This morning we were met with a better-than-expected October employment reading. Yet the modest 10,700 jobs added and hold in the unemployment rate doesn’t really fend off serious risk aversion. Be cautious of non-risk advance.

Swiss Franc: Slight Reduction in SNB Reserves Contrasts EU Risk

For the first time in eight months, the Swiss National Bank’s reserves have actually contracted. However, the reduction was modest and the net holding of foreign currency is still extreme. If the Euro-area crisis continues to build steam, expect EURCHF to return to 1.2000.

Gold Hedged by Fiscal Cliff, Euro Crisis Risk and Dollar Strength

Gold was in for a considerable amount of volatility this past session, but there wasn’t much in the way of consistency. The threat of a more certain fiscal cliff and the build in the Euro-area financial crisis are serious, bullish drivers for the precious metal. That said, the dollar’s strength shows a reasonable outlet for the safe haven demand. If the greenback continues to rally expect gold to reconcile with a drop.

ECONOMIC DATA

Next 24 Hours

GMT

Currency

Release

Survey

Previous

Comments

0:00

NZD

ANZ Consumer Confidence Index (NOV)

110.5

New Zealand consumer confidence could strengthen on domestic recovery, CN and AU easing

0:00

NZD

ANZ Consumer Confidence MoM (NOV)

-1.3%

0:30

AUD

Employment Change (OCT)

0.5K

14.5K

Australian labor market expected to be weaker, may drive policy concerns for next meeting

0:30

AUD

Unemployment Rate (OCT)

5.5%

5.4%

0:30

AUD

Full Time Employment Change (OCT)

32.1K

0:30

AUD

Part Time Employment Change (OCT)

-17.7K

0:30

AUD

Participation Rate (OCT)

65.2%

65.2%

4:30

JPY

Bankruptcies (YoY) (OCT)

-7.0%

Easy credit, moderate recovery continues

5:00

JPY

Eco Watchers Survey: Current (OCT)

40.5

41.2

Economic outlook may be most important in survey

5:00

JPY

Eco Watchers Survey: Outlook (OCT)

43.5

6:45

CHF

Unemployment Rate (OCT)

2.9%

2.8%

Labor market still weak on shrinking economy

6:45

CHF

Unemployment Rate s.a. (OCT)

3.0%

2.9%

7:00

EUR

German Exports s.a. (MoM) (SEP)

-1.5%

2.5%

German trade balance expected to be stable, though export drop may cause growth concerns

7:00

EUR

German Imports s.a. (MoM) (SEP)

-0.4%

0.4%

7:00

EUR

German Current Account (SEP)

10.8B

11.1B

7:00

EUR

German Trade Balance (SEP)

15.5B

16.3B

12:00

GBP

BOE Asset Purchase Target

375B

375B

BoE expected to hold policy, but bank may start to withhold further asset purchases as UK forecasted to avoid another recession

12:00

GBP

Bank of England Rate Decision

0.50%

0.50%

12:45

ECB

Deposit Facility Rate

0.00%

0.00%

ECB rates expected to be held while Central Bank waits government reforms before more monetary easing

12:45

EUR

European Central Bank Rate Decision

0.75%

0.75%

13:15

CAD

Housing Starts (OCT)

213.0K

225.2K

Canadian real estate still relatively strong, in demand

13:30

CAD

New Housing Price Index (YoY) (SEP)

2.3%

2.4%

13:30

CAD

New Housing Price Index (MoM) (SEP)

0.2%

0.2%

13:30

CAD

International Merchandise Trade (SEP)

-1.50B

-1.06B

Exports may have been hindered by strong Canadian dollar

13:30

USD

Trade Balance (SEP)

-$45.0B

-$44.2B

Trade deficit continues to widen

13:30

USD

Initial Jobless Claims (NOV 3)

365K

363K

Weekly data may show continued improvement after NFPs

13:30

USD

Continuing Claims (OCT 27)

3260K

3254K

15:30

USD

EIA Natural Gas Storage Change (NOV 2)

65

Demand may increase on seasonal change

21:45

NZD

NZ Card Spending - Retail MoM (OCT)

0.3%

-0.6%

Credit card spending numbers somewhat correlated with inflation

21:45

NZD

NZ Card Spending (MoM) (OCT)

-0.6%

23:50

JPY

Japan Money Stock M3 (YoY) (OCT)

2.0%

2.0%

Money supply continues to grow at steady pace despite calls for powerful easing

23:50

JPY

Japan Money Stock M2+CD (YoY) (OCT)

2.4%

2.4%

GMT

Currency

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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

6.1875

6.1150

Resist 1

15.0000

1.9000

9.1900

7.8075

1.3250

Resist 1

6.7600

5.8175

5.7800

Spot

13.0673

1.7855

8.6434

7.7505

1.2234

Spot

6.6935

5.8460

5.7430

Support 1

12.5000

1.6500

8.5650

7.7490

1.2000

Support 1

6.0800

5.5840

5.6000

Support 2

11.5200

1.5725

6.5575

7.7450

1.1800

Support 2

5.8085

5.3350

5.3040

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

1.2868

1.6084

80.50

0.9534

1.0031

1.0506

0.8251

103.03

128.86

Resist. 2

1.2841

1.6058

80.35

0.9514

1.0015

1.0484

0.8232

102.76

128.56

Resist. 1

1.2814

1.6032

80.20

0.9494

0.9998

1.0462

0.8213

102.48

128.26

Spot

1.2759

1.5981

79.89

0.9455

0.9965

1.0418

0.8176

101.93

127.66

Support 1

1.2704

1.5930

79.58

0.9416

0.9932

1.0374

0.8139

101.38

127.06

Support 2

1.2677

1.5904

79.43

0.9396

0.9915

1.0352

0.8120

101.10

126.76

Support 3

1.2650

1.5878

79.28

0.9376

0.9899

1.0330

0.8101

100.83

126.46

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

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08 November 2012 03:33 GMT