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Forex: Dollar to Drift Until Fiscal Cliff Talks, Risk Return

By , Chief Currency Strategist
23 November 2012 05:49 GMT
  • Dollar to Drift Until Fiscal Cliff Talks, Risk Return
  • Euro Advances Across the Board, EURUSD Barely Misses 1.2900
  • Japanese Yen Finally Puts in a Reversal…A Modest One
  • Australian Dollar Awaits Next Yield Push, Outlook at 8 Month High
  • Canadian Dollar Suffers Retail Sales Hit, CPI Up Next
  • Swiss Franc: SNB Official Speaks of Risk in 1.2000-Floor
  • Gold Breakout Guaranteed, Direction and Momentum Uncertain

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Dollar to Drift Until Fiscal Cliff Talks, Risk Return

A quiet trading session does not necessarily equate to a stationary US dollar. In fact, tame market conditions actually encourage a depreciation of the world’s reserve currency – as we witness this past trading session. And, considering activity levels are expected to see limited excitement through the final 24 hours of the trading week, that slow decline may drag EURUSD closer to 1.3000 and possibly even drive the Dow Jones FXCM Dollar Index (ticker = USDollar) below the closely watched 10,000-figure.

With the US capital markets offline Thursday for the Thanksgiving holiday, there was a clear break in the cycle of risk trends. Looking to measures of activity, we saw a considerable drawdown on volume figures in Europe and Asia while the FX Volatility Index held below the 7.5 percent mark - barely off the five-year low set earlier in the week. If the risk of a sudden risk aversion move is exceptionally low (even when the fundamental backdrop looks as troubled as ever), there is little reason to stay with the dollar and suffer negative, real rates (adjusted for inflation) of return. In other words, those securing capital in the most liquid assets available could repatriate / unwind.

That being said, this period of calm is temporary. Volume will return next week, and the big ticket fundamental items that constantly hang over the market can easily spark volatility after the October-November deleveraging effort set investors on edge. In measuring threats to risk trends, it is important to prioritize immediate and definable threats to financial stability. The Fiscal Cliff was on pause as a catalyst this past week as the reports of ‘constructive’ conversation between President and Congressional leaders last Friday left us with a sense of ambiguity, and the former’s tour of Asia prevented progress. Both parties are expected to hold meetings on this critical cliffhanger next week, but no times or dates have been offered. Far more clear cut to the observant speculator is the return to the Greece crisis negotiations. Had liquidity been topped off this past week, the delay on a resolution to the country’s next tranche of aid this week would have no doubt fueled risk and the dollar.

Euro Advances Across the Board, EURUSD Barely Misses 1.2900

The euro struggled for its gains over the opening half of the trading week, pushing higher despite the pained fundamental backdrop. The currency seemed to have less of a problem pushing higher this past session though – even if the fundamental on the day were hardly supportive of the move. If there is any currency that truly benefits from the absence of a large speculative contingent (that theoretically processes probabilities for fundamental trends, especially unfavorable scenarios), it is the euro. That is a theory that was fleshed out in its performance through Thursday by rallying against all of its liquid counterparts. Specifically for EURUSD, this performance translated into a notable move above considerable resistance at 1.2825 and lead the pair to climb just short of 1.2900.

Moving forward those watching the headlines will have both on and off-docket event risk to digest. However, just as the PMI figures (showing a 10th monthly contraction in growth) and EU Budget Summit (ending with considerable contention amongst members) failed to generate much movement either way, the upcoming highlights will likely also lack for influence. Nevertheless, keep an eye on the German IFO business sentiment report and day two of the Budget meet. For real activity, we must look forward to next Monday when the Greece talks start again.

Japanese Yen Finally Puts in a Reversal…A Modest One

The run from the yen crosses was starting to grow extreme. USDJPY, CADJPY and AUDJPY were all on six-day advances. Though there were some comparable moves consistency-wise in October, they did not possess the level of momentum we had seen through this week. What makes it all the more remarkable was the fact that risk trends were tempered just as surely as speculative deleveraging due to the lack of speculative volume. In other words a pullback was inevitable. That correction came Thursday with a mild bounce for the yen. At this rate, a deeper drop is likely as the speculative element that has participated in this move will see an opportunity to take profit in non-trending markets.

Australian Dollar Awaits Next Yield Push, Outlook at 8 Month High

Though a lot of the permanently bullish Aussie dollar traders (those hungry for a decent, consistent yield) have taken to the IMF’s review of the currency as a possible reserve, this label will hardly change its medium-term bearings. There are two things that matter to the high-yield unit: risk trends and yield forecasts. Sentiment will be sidelined for the rest of the week unless there is an unforeseen shock, though they will likely return after the weekend. It is the rate outlook that acts as a stubborn buffer to AUDUSD. The 12-month forecast is at an 8-month high -50 bps outlook.

Canadian Dollar Suffers Retail Sales Hit, CPI Up Next

When more prominent fundamental considerations like sentiment trend are on ice, normally overlooked catalysts like mundane economic releases can carry more market impact. That was the case for the Canadian retail sales this past session which came in well below expectations and led the loonie to a notable and consistent decline. We will see if CPI figures in the upcoming session can accomplish the same.

Swiss Franc: SNB Official Speaks of Risk in 1.2000-Floor

SNB member Zurbruegg took a different tack than what his monetary board companions usually steer. Instead of simply sticking to the dedication to the EURCHF’s 1.2000-floor, the central banker said that this was an extreme measure with ‘considerable risks’. That doesn’t sound like an ‘at all costs’ commitment should we find the exchange rate back at its floor. Are they bending with FX reserves at 70 percent of GDP?

Gold Breakout Guaranteed, Direction and Momentum Uncertain

The range on gold is at unsustainable levels. Technical traders can quite clearly identify the terminal wedge that has nowhere to move. A breakout is guaranteed after speculative volumes pick up and stir the dollar to life. However, direction and follow through on initial moves are open to prevailing fundamental winds. If we return to risk aversion Monday, the dollar benefit would likely resolve with a gold tumble.

**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

1:35

CNY

MNI Flash Business Sentiment Indicator (NOV)

51.86

May improve in 4Q

7:00

EUR

German GDP w.d.a. (YoY) (3Q F)

0.9%

0.9%

Final revision expected to show slow growth of German economy, expanded data more important

7:00

EUR

German GDP n.s.a. (YoY) (3Q F)

0.4%

0.4%

7:00

EUR

German GDP s.a. (QoQ) (3Q F)

0.2%

0.2%

7:00

EUR

German Domestic Demand (3Q)

-0.1%

German exports, domestic demand will be focused to see if German economy will be able to weather external shocks

7:00

EUR

German Imports (3Q)

0.5%

2.1%

7:00

EUR

German Exports (3Q)

1.1%

2.5%

7:00

EUR

German Private Consumption (3Q)

0.2%

0.4%

7:00

EUR

German Capital Investment (3Q)

0.0%

-0.9%

7:00

EUR

German Government Spending (3Q)

0.2%

0.2%

7:00

EUR

German Construction Investment (3Q)

0.8%

-0.3%

9:00

EUR

German IFO - Business Climate (NOV)

99.5

100

IFO surveys expected to show continued weakness

9:00

EUR

German IFO - Current Assessment (NOV)

106.3

107.3

9:00

EUR

German IFO – Expectations (NOV)

93

93.2

9:30

GBP

BBA Loans for House Purchase (OCT)

32000

31175

Cheap credit may not be enough

13:30

CAD

CPI (MoM) (OCT)

0.1%

0.2%

Canadian inflation still stable, though Bank may comment on rising house prices as reason to start tightening

13:30

CAD

CPI (YoY) (OCT)

1.0%

1.2%

13:30

CAD

CPI s.a. (MoM) (OCT)

0.2%

13:30

CAD

Core CPI s.a. (MoM) (OCT)

0.0%

13:30

CAD

Bank of Canada CPI Core (MoM) (OCT)

0.3%

0.2%

13:30

CAD

Bank of Canada CPI Core (YoY) (OCT)

1.2%

1.3%

13:30

CAD

CPI (OCT)

122

GMT

Currency

Upcoming Events & Speeches

-:-

JPY

Japanese Markets Closed for Labor Thanksgiving Day

-:-

EUR

EU Officials Attend Second Day of Budget Negotiations

19:00

EUR

Portugal Release Year-to-Date Budget Report

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

6.1875

6.1150

Resist 1

15.0000

1.9000

9.1900

7.8075

1.3250

Resist 1

6.8155

5.9190

5.8200

Spot

13.0323

1.7980

8.9264

7.7508

1.2246

Spot

6.6759

5.7873

5.6854

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

1.2985

1.6043

83.00

0.9416

1.0041

1.0476

0.8235

107.17

132.49

Resist. 2

1.2960

1.6020

82.81

0.9399

1.0026

1.0456

0.8217

106.87

132.16

Resist. 1

1.2936

1.5996

82.62

0.9382

1.0011

1.0436

0.8200

106.57

131.83

Spot

1.2886

1.5949

82.24

0.9347

0.9981

1.0395

0.8165

105.97

131.16

Support 1

1.2836

1.5902

81.86

0.9312

0.9951

1.0354

0.8130

105.37

130.50

Support 2

1.2812

1.5878

81.67

0.9295

0.9936

1.0334

0.8113

105.07

130.16

Support 3

1.2787

1.5855

81.48

0.9278

0.9921

1.0314

0.8095

104.77

129.83

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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23 November 2012 05:49 GMT