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FOREX: US Dollar Selling to Continue as Risk Appetite Recovers

By , Currency Strategist
07 September 2011 06:55 GMT

Talking Points

  • US Dollar Sold as Shares Recover, Sapping Safe-Haven Demand
  • Franc Cautiously Retraces Losses, Yen Gains on BOJ Inaction
  • S&P 500 Futures Point Toward Recovery in Risk Appetite Ahead
  • German High Court to Weigh in On Legality of EFSF Expansion

The US Dollar came under broad-based selling pressure overnight, sliding against all of its leading counterparts by as much as 0.6 percent on average as stocks rebounded, draining demand for the safe-haven currency. The MSCI Asia Pacific regional equity index added 1.9 percent after growth in the US services sector unexpectedly accelerated – bolstering hopes that growth in the region’s leading export market will keep demand anchored – and as bargain-hunters entered the fray following yesterday’s drop to the lowest valuation since December 2008 (as tracked by the price/earnings ratio). The economic calendar helped reinforce positive cues as second-quarter Australian Gross Domestic Product figures surprised to the upside, showing output grew 1.2 percent in the three months through June.

The buck was also sold against the Swiss Franc and Japanese Yen – heretofore the other safe havens in the FX space – as markets corrected from yesterday’s sharp drop in the former currency while the latter capitalized on inaction from the Bank of Japan. Governor Maasaki Shirakawa and company opted to keep rates unchanged at 0.10 percent and left the size of the bank’s asset-purchase fund and credit-load program in place at 15 trillion and 35 trillion yen respectively. The Yen spiked higher following the announced amid relief that the BOJ did not opt to follow its Swiss counterparts in adopting a more aggressive stance against exchange rate appreciation.

Looking ahead, S&P 500 stock index futures are trading firmly higher overnight and technical positioning reinforces the case for a near-term rebound, hinting the greenback is likely to remain on the defensive as sentiment-linked currencies follow shares higher. UK Industrial Production figures headline a relatively quiet European economic calendar, with expectations calling for a shallow 0.2 percent increase in July after output stalled in the previous month. There appears to be room for a downside surprise however after the timelier Manufacturing PMI report showed the factory sector shrank over the same period. Indeed, the same measure revealed that the pace of contraction accelerated in August, so any positive response to today’s release is likely to be very limited.

On the Euro Zone debt crisis front, traders await a decision from Germany’s high court on the constitutionality of the recent expansion of powers given to the EFSF bailout fund. While the court is unlikely to overturn agreements already in place for fear of unleashing a severe sovereign risk crisis, traders will be on the lookout for any constraints on the rescue mechanisms’ autonomy and are likely to treat anything of the sort as broadly negative for regional stability and the Euro.

Having said that, things will likely get a lot more interesting after the European closing bell as the Federal Reserve Beige Book regional economic conditions report crosses the wires amid continued speculation about another round of stimulus to be unveiled at the September 20-21 FOMC policy meeting. A particularly dour tone to the report will probably bolster expectations of additional easing, underpinning risk appetite further.

Asia Session: What Happened

GMT

CCY

EVENT

ACT

EXP

PREV

23:01

GBP

BRC Shop Price Index (YoY) (AUG)

2.7%

-

2.8%

23:30

AUD

AiG Performance of Construction Index (AUG)

32.1

-

36.1

23:50

JPY

Official Reserve Assets (US$) (AUG)

1218.5B

-

1150.9B

1:30

AUD

Gross Domestic Product (QoQ) (2Q)

1.2%

1.0%

-0.9% (R+)

1:30

AUD

Gross Domestic Product (YoY) (2Q)

1.4%

0.7%

1.0%

3:21

JPY

Bank of Japan Rate Decision (SEP 7)

0.10%

0.10%

0.10%

5:00

JPY

Coincident Index (JUL P)

109.0

108.8

109.3 (R+)

5:00

JPY

Leading Index (JUL P)

106.0

105.9

103.3 (R+)

6:30

AUD

Foreign Reserves (A$) (AUG)

43.8B

-

40.7B

Euro Session: What to Expect

GMT

CCY

EVENT

EXP

PREV

IMPACT

7:00

GBP

Halifax House Price (3M/Y) (AUG)

-2.2%

-2.6%

Low

7:00

GBP

Halifax House Price (MoM) (AUG)

-0.3%

0.3%

Low

8:30

GBP

Industrial Production (MoM) (JUL)

0.2%

0.0%

Medium

8:30

GBP

Industrial Production (YoY) (JUL)

-0.4%

-0.3%

Medium

8:30

GBP

Manufacturing Production (MoM) (JUL)

0.0%

-0.4%

Low

8:30

GBP

Manufacturing Production (YoY) (JUL)

1.9%

2.1%

Medium

10:00

EUR

German Industrial Production n.s.a. (YoY) (JUL)

6.7%

6.7%

Medium

10:00

EUR

German Industrial Production s.a. (MoM) (JUL)

0.5%

-1.1%

Medium

Critical Levels

CCY

SUPPORT

RESISTANCE

EURUSD

1.3887

1.4193

GBPUSD

1.5842

1.6122

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07 September 2011 06:55 GMT