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Dollar Sanguine after Second Biggest EUR/USD Drop in 6 Months

By , Chief Currency Strategist
05 February 2013 05:18 GMT
  • Dollar Sanguine after Second Biggest EUR/USD Drop in 6 Months
  • Euro Marks Biggest Plunge in 13 Months, Crisis Fears Returning?
  • Australian Dollar: Interest Rates, Risk Trends, Capital Flows
  • Japanese Yen Posts First Advance in Four Day...A Top?
  • British Pound Draws European Safe Haven Flow
  • Swiss Franc Gives a Troublesome Review of the Euro
  • Gold Advances Cautiously as ‘Euro Crisis’ Talk Heats Up

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Dollar Sanguine after Second Biggest EUR/USD Drop in 6 Months

The dollar found itself in exactly the opposition position it was in this past week. Where the EURUSD diverged from a broadly strong dollar this past week; Monday, the Dow Jones FXCM Dollar Index (ticker = USDollar) was steady while the EURUSD tumbled 126 pips from its highest close in 14 months. This may initially seem an unfavorable deal for the greenback; but if the fundamentals behind this shift continue to develop, it may finally put the benchmark currency back onto a meaningful bull trend. That is because there are two elements to this individual pair’s plunge. On the one hand, we have an exceptionally weak Euro (more on that below). In the simplest interpretation of this comparative performance, we have seen the world’s second most liquid currency bow to the undisputed global reserve. Looking more critically into this development, though, we have the necessary elements for a systemic shift in investor sentiment.

One of the currency trader’s most practiced mantras should be: “the US dollar is the market’s favored safe haven currency”. When we grasp that fact, we know when and where to expect meaningful trends from the benchmark. To start the dollar advance and – more critically – keep it moving, the market needs to be infected by the mania of risk aversion and the wholesale deleveraging that comes along with it. Up until last week, there were a few initial hints of concern showing up in various places. We noted USDollar’s stubborn buoyancy (helped by pairs like USDJPY and AUDUSD) alongside the advance in the FX VIX index and drop in high-yield debt ETFs. These fringe signs were joined by the more mainstream on the open of this week.

The EURUSD’s plunge was a significant sign of risk trends spreading through the forex market, but more remarkable is the drop in equity benchmarks. Euro-area indexes took the brunt of the pain Monday with a Euro Stoxx 50 collapsing 3.1 percent – the biggest drop since March 6 – as a focal point for many unflattering, regional index drops. To permanently engage risk aversion, the selling pressure has to spread outside of just the Euro-area boundaries. Asian benchmarks (the Hang Seng and ASX 200) have thrown in their hat to the bearish pressure. Yet, it is the US standard bearers – S&P 500 and Dow Jones Industrial Average – that the market often offers final sayon decisions for global sentiment. Why? The greatest concentration of stimulus (investor ‘safety net’) in the world rests with the Fed. Once that boat turns, fear is contagious.

Euro Marks Biggest Plunge in 13 Months, Crisis Fears Returning?

There was no mistaking the euro’s individual weakness this past session. While the EURUSD’s turn from a multi-month high stood out Monday, the shared currency’s pain was universal. Its losses on the session ranged between a 0.7 percent drop against the otherwise steady Canadian dollar up to a sizable 1.4 percent crumple to the British pound and Japanese yen. What makes this particular development especially concerning is that there isn’t an individual catalyst that seems responsible for the move. That means that there isn’t an simple return to prevailing tail winds after that headline passes or is offset by a countervailing indicator or headline. Some responsibility seems to be heaped on the corruption allegations against Spain’s ruling body, the rise of Berlusconi’s campaign in Italy and protests in Greece; but these issues are neither especially damning for the currency nor are they new. Nevertheless, we find government bond yield spreads once again rising; credit default swaps climbing; and of course equities under pressure. If evidence of capital outflow from the region returns; there is real trouble.

Australian Dollar: Interest Rates, Risk Trends, Capital FlowsThe Australian dollar is under pressure this morning as a very direct catalyst places the currency under pressure. As the only central bank still actively adjusting its interest rate, the Reserve Bank of Australia (RBA) was largely expected by both the market and economists to hold its benchmark rate at 3.00 percent. It did not deviate from that script. However, there was more for speculators to work with when it came to the statement released alongside the rate decision. Amongst concerns about a high currency, below trend growth and an approach ‘peak in resource investment’; the most direct threat was that the inflation outlook offered scope for further easing.

Japanese Yen Posts First Advance in Four Day...A Top?

Having climbed 2.3 percent through the second half of last week – to a two-and-a-half-year high nonetheless – USDJPY has finally put in for its first decline in four trading days. The question on most traders’ minds is whether this is the sign of a top and subsequent reversal. Practically speaking, it is too early to make that assessment. That said, a universal advance from the Japanese yen speaks to a deeper movement. Fundamentally, a recognition of an overwrought move on limited actual stimulus can carry a move; but we may need risk trends for a spark.

British Pound Draws European Safe Haven Flow

Typically, what is bad for the Eurozone is also bad for the UK – due to growth, financial and political connections. Yet, in another sign that risk trends are facing serious pressure; we saw that financial concern emanating from the Euro financial system sent safe haven seekers to London markets. If such risk trends remain, expect indicators (like the services survey and official reserves) to amplify its existing move or be ignored.

Swiss Franc Gives a Troublesome Review of the Euro

Perhaps the most threatening sign of serious Euro trouble is EURCHF’s 0.9 percent drop back below 1.2300. That is the biggest single-day decline for the pairing since December 15, 2011. Increased volatility for this pair makes it a more reasonable move. Though, its progress makes it more unique to concerted bearish interests. If we return to 1.2000 on this pair, the franc will move in lockstep with the Euro once again.

Gold Advances Cautiously as ‘Euro Crisis’ Talk Heats Up

There were many stories about gold’s ‘surge’ through Monday’s session, but the precious metal actually moved a rather modest 0.4 percent high and further worked its way into another terminal congestion pattern. A breakout in the near future is highly likely. The pull will be between a possible strengthening of the dollar on risk aversion (that would hurt gold) and building stimulus efforts outsidethe US (gold bullish).

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

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

0:01

GBP

BRC Sales Like-For-Like YoY

0.3%

Large swings in data set.

0:30

AUD

Trade Balance (Australian dollar)

-800M

-2637M

In a trade deficit since 2012, gap widened over 2012.

0:30

AUD

House Price Index (YoY)

0.9%

0.3%

Steady recovery from the low on 01/12 when at -4.4.

0:30

AUD

House Price Index (QoQ)

0.3%

0.3%

Has reached positive territory since 03/12, yet heading towards 0.

1:45

CNY

HSBC Services PMI

51.7

3:30

AUD

Reserve Bank of Australia Rate Decision

3.0%

3.0%

Expected to remain unchanged.

7:00

CHF

Trade Balance (Swiss franc)

2.00B

2.90B

Strong export momentum, less volatile in starting in 2012..

7:00

CHF

Exports (MoM)

6.0%

Both increased on 10/12 – 11/12, while export surged in a larger magnitude than import.

7:00

CHF

Imports (MoM)

0.2%

8:45

EUR

Italian Purchasing Manager Index Services

45.8

45.6

Has remained below 50 since 05/11, weak service sector.

8:50

EUR

French Purchasing Manager Index Services

43.6

43.6

Touched 50 on 07/12 and stayed below 50 so far.

9:30

GBP

Purchasing Manager Index Services

49.5

48.9

Above 50 for the last two years, slipped below on 11/12.

9:30

GBP

Official Reserves (Changes)

-$350M

Has held less reserve since 09/12, adopting a more easing tone.

10:00

EUR

Euro-Zone Retail Sales (MoM)

-0.5%

0.1%

Large volatility in MoM data, which is currently in positive territory while YoY data remained below 0 since 03/12.

10:00

EUR

Euro-Zone Retail Sales (YoY)

-1.4%

-2.6%

15:00

USD

IBD/TIPP Economic Optimism

46.5

46.5

15:00

USD

ISM Non-Manufacturing Composite

55

55.7

Has moved within the range between 52 and 56 over 2011/12.

GMT

Currency

Upcoming Events & Speeches

9:30

EUR

Hollande, Barroso Speak to EU Parliament

11:30

EUR

ESM to Sell €2Bln in 3-Month Bills

18:00

USD

Congressional Budget Office (CBO) Releases Budget Outlook

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 GMT

SCANDIES 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

5.8300

6.1150

Resist 1

15.0000

1.9000

9.1900

7.8075

1.3250

Resist 1

6.8155

5.7350

5.8200

Spot

12.7100

1.7601

8.8943

7.7537

1.2389

Spot

6.3284

5.5192

5.4777

Support 1

12.5000

1.6500

8.5650

7.7490

1.2000

Support 1

6.0800

5.4440

5.5000

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

1.3638

1.5879

93.46

0.9164

1.0048

1.0517

0.8511

126.71

147.44

Resist. 2

1.3607

1.5849

93.18

0.9144

1.0032

1.0497

0.8491

126.23

146.95

Resist. 1

1.3577

1.5820

92.90

0.9123

1.0016

1.0476

0.8471

125.75

146.47

Spot

1.3516

1.5760

92.33

0.9082

0.9984

1.0434

0.8432

124.79

145.50

Support 1

1.3455

1.5700

91.76

0.9041

0.9952

1.0392

0.8393

123.83

144.54

Support 2

1.3425

1.5671

91.48

0.9020

0.9936

1.0371

0.8373

123.35

144.05

Support 3

1.3394

1.5641

91.20

0.9000

0.9920

1.0351

0.8353

122.87

143.57

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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05 February 2013 05:18 GMT