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Dollar Tumbles Across the Board as Stability Highlights Weakness

By , Chief Currency Strategist
16 August 2011 03:59 GMT
  • Dollar Tumbles Across the Board as Stability Highlights Weakness
  • Euro: Is ECB Bond Purchases a Bullish or Bearish Sign?
  • British Pound Prepares a Muted Reaction to CPI Data
  • Australian Dollar Finds Little Guidance in RBA Minutes
  • Swiss Franc Looking to Stabilize Ahead of Possible SNB Peg
  • Gold Advances for the First time in Three Days, But this Isn’t a Trend

Dollar Tumbles Across the Board as Stability Highlights Weakness

It is easy to forget about the dollar’s underlying fundamental currents when the currency is posting an aggressive rally against a few of its more risk-tuned counterparts. However, we shouldn’t confuse these extremely sensitive currency pairs with the base case for the greenback. Over the past week-and-a-half, the Dow Jones FXCM Dollar Index (ticker = USDollar) developed a consistent 100-125 point range as the conviction in risk appetite trends evaporated and the panicked need for liquidity receded well before the stabilization in sentiment. Starting out this new week, we have seen more than just the loss of momentum behind the bear wave. Volatility has dropped off sharply as well. Maintaining a market-wide risk aversion effort is extraordinarily difficult as it is an unnatural state as capital needs to be invested somewhere (rarely is it kept in cash). That puts the dollar in a very unflattering position as the currency really only shines when liquidity is top priority – when capital markets fall apart.

Financial and economic troubles are certainly still lingering in the background; but the urgency to shift capital has settled. For the markets, that translates into tentative and tame rebounds in the more speculative currencies while the safe havens struggle. Given the dollar is the most selective of the havens; the bearish move is a near certainty. That said, the lack of volatility and fears that the big financial themes will come roaring back have helped moor the currency against too severe of losses. Against fellow safety currencies (the Japanese yen and Swiss franc), the dollar would post tepid gains. With the S&P 500 advancing 2.2 percent on the day (a move that doesn’t even seem to register after last week’s extreme swings) the high-yield Aussie dollar and investment favorite Canadian dollar would each gain significant ground. Yet the most impressive sign of anti-dollar sentiment came through EURUSD and GBPUSD. These pairs don’t often follow the regular risk flows – reserving themselves for the deeper drivers. And yet, the euro posted a hearty 1.4 percent advance while the cable rose 0.7 percent.

Until US yields are once again competitive (that doesn’t look like it will be in the cards for some time given the Fed’s suggestion that the benchmark will be kept low through mid-2013); the dollar will be reliant on the liquidity consideration in its fading reserve status. That doesn’t mean, however, that it will be a straight shot down for the dollar in the absence of fear. Scheduled event risk is certainly good for short-term moves. Greenback traders should keep any eye on the euro, yen, franc situation. Given Japanese and Swiss officials’ recent predilection for market-altering stimulus; the dollar looks more attractive by default. At the same time, a catalyst may be found in the euro. As the greenback’s primary alternative as a reserve currency, trouble for the Euro-Zone is an indirect boost for the dollar.

In the meantime, we should also keep tuned into the steady shift in scheduled event risk. On the docket through the past trading day, we noted that the Empire manufacturing report showed a drop in the future conditions reading to its lowest level since February 2009 – not encouraging given the support manufacturing lent to the country’s recovery. Similarly disappointing, the TIC capital flow report showed selling of Treasuries outside of the central bank group hit a record in June. These are lesser indicators; but extraordinary readings. Will the same happen Tuesday?

Related:Discuss the Dollar in the DailyFX Forum, John’s Video: Be Careful with Calling EURUSD, USDCHF and USDJPY Breakouts

Euro: Is ECB Bond Purchases a Bullish or Bearish Sign?

Is it an encouraging sign that the ECB has boosted its presence in the financial markets in a big way or a discoursing one? Monday, the central bank reported that it had purchased a record 22 billion euros worth of government bonds (presumably with heavy concentration in Spanish and Italian debt given the drop in their respective yields) through this past Thursday. In 66 weeks of the Securities Market Program, that is the most aggressive effort by policy officials to stabilize the market backdrop. To the optimist, this is a sign that policy officials are willing to do what it takes to snuff the financial crisis and turn region’s largest collective economy around. Yet, to the skeptic (there seem to be more of those nowadays), this is merely a sign that conditions continue to deteriorate and necessitate further desperation moves. It’s all about perception. In the meantime, we will see whether those hold out bulls on the region can keep their head above water with the first reading of 2Q German GDP.

British Pound Prepares a Muted Reaction to CPI Data

We are coming up to what used to be one of the sterling’s most influential economic indicators: the consumer price index. Inflation has historically been the Bank of England’s defining monetary policy guide. Yet, after 18 months of inflation that is at or above the 2 to 3 percent target band and no action from the MPC, it is now crystal clear that hold outs for hikes will be burned. So, even if we do get a surprise jump in the July CPI figures; the market will be instantly dubious of its impact as the BoE has maintained its dovish bearing.

Australian Dollar Finds Little Guidance in RBA Minutes

We have dispelled the insinuation that high current rates also means high interest rate expectations before. And for the 4.75 percent benchmark behind the RBA, we see a forecast of 120 bps of cuts through 12 months and a 77 percent chance of a 25 bps rate cut next month in overnight swaps. The minutes from the last decision speaks of tempered expectations; but doesn’t necessarily translate into an immediate rate cut.

Swiss Franc Looking to Stabilize Ahead of Possible SNB Peg

The Swiss franc is currently the most at-risk currency amongst the majors. Speculation of an imminent decision by the SNB to peg the franc to the euro in order to prevent further appreciation threatens to essentially kill all speculative longs. On the other hand, price stability would actually encourage the natural safe haven flows. And, we have to remember that not all pegs are successful.

Gold Advances for the First time in Three Days, But this Isn’t a Trend

Despite the positive general bearing for risk trends, the market’s favorite alternative asset – gold – managed its first bullish close in three active trading days. Given the metal likely pulled back through last week as the demand for free capital forced some liquidation, this is a reprieve from this cash raising effort. That said, we have to respect the heights this commodity is treading. Every asset can be fairly valued and overbought.

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**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

2:00

CNY

Conference Board China Leading Eco Index (JUN)

155

May stagnate as tightening slows

4:00

JPY

Tokyo Condominium Sales (YoY) (JUL)

-1.3%

-32.9

Lower demand expected to recover

6:00

EUR

German GDP n.s.a. (YoY) (Q2 P)

3.2%

5.2%

German output may hinge on level of exports, weaker due to slowdown in global recovery

6:00

EUR

German GDP s.a. (QoQ) (Q2 P)

0.5%

1.5%

6:00

EUR

German GDP w.d.a. (YoY) (Q2 P)

3.1%

4.9%

8:30

GBP

DCLG UK House Prices (YoY) (JUL)

-1.6%

One of the main gauges used by the BoE

8:30

GBP

Consumer Price Index (MoM) (JUL)

-0.1%

-0.1%

Calmer inflation after the Bank of England’s report could indicate a lower held rate for extended periods of time

8:30

GBP

Consumer Price Index (YoY) (JUL)

4.3%

4.2%

8:30

GBP

Core Consumer Price Index (YoY) (JUL)

3.0%

2.8%

8:30

GBP

Retail Price Index (JUL)

234.7

235.2

Retail prices should follow in direction of consumer prices

8:30

GBP

Retail Price Index (YoY) (JUL)

5.0%

5.0%

8:30

GBP

Retail Price Index (MoM) (JUL)

-0.2%

0.0%

8:30

GBP

Retail Price Index Ex Mort Int.Payments (YoY) (JUL)

5.1%

5.0%

9:00

EUR

Euro-Zone GDP s.a. (QoQ) (JUL)

0.3%

0.8%

Total zone-wide GDP may be hit by continuing austerity, peripheral problems

9:00

EUR

Euro-Zone GDP s.a. (YoY) (JUL)

5.0%

2.5%

9:00

EUR

Euro-Zone Trade Balance s.a. (euros) (Q2 A)

0.0B

-0.6B

Trade balance could lower due to less imports as global recovery slows

9:00

EUR

Euro-Zone Trade Balance (euros) (Q2 A)

1.1B

0.0B

12:30

USD

Import Price Index (MoM) (JUL)

-0.1%

-0.5%

Import prices seen to benefit from moderately stronger dollar

12:30

USD

Import Price Index (YoY) (JUL)

13.4%

13.6%

12:30

CAD

Manufacturing Shipments (MoM) (JUL)

-0.7%

-0.8%

Canadian shipments to US is major part

12:30

USD

Building Permits (MoM) (JUL)

-1.0%

2.5%

Construction sector expected to be weaker again due to weaker domestic recovery and expected weakness cutting into new orders

12:30

USD

Building Permits (JUL)

605K

624K

12:30

USD

Housing Starts (JUL)

608K

629K

12:30

USD

Housing Starts (MoM) (JUL)

-3.3%

14.6%

13:15

USD

Capacity Utilization (JUL)

76.9%

76.7%

Industries still shows weakness, leading into the end of summer months

13:15

USD

Industrial Production (JUL)

0.5%

0.2%

22:45

NZD

Producer Prices- Inputs (QoQ) (Q2)

1.1%

2.2%

Producer prices may see decrease due to strength of NZD last quarter

22:45

NZD

Producer Prices- Outputs (QoQ) (Q2)

0.8%

1.7%

GMT

Currency

Upcoming Events & Speeches

1:30

AUD

Reserve Bank's Board August Minutes

SUPPORT AND RESISTANCE LEVELS

CLASSIC SUPPORT AND RESISTANCE - 18:00 GMT

Currency

EUR/USD

GBP/USD

USD/JPY

USD/CHF

USD/CAD

AUD/USD

NZD/USD

EUR/JPY

GBP/JPY

Resist 2

1.5160

1.6600

86.00

0.8275

1.0275

1.0800

0.9020

118.00

146.05

Resist 1

1.5000

1.6475

81.50

0.8000

1.0000

1.0500

0.8750

113.50

140.00

Spot

1.4449

1.6392

76.79

0.7843

0.9808

1.0503

0.8324

110.95

125.86

Support 1

1.4000

1.5935

77.00

0.7000

0.9425

0.9925

0.7745

109.00

124.00

Support 2

1.3700

1.5750

76.25

0.6800

0.9055

0.9700

0.6850

106.00

119.00

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

13.8500

1.8235

7.4025

7.8165

1.3650

Resist 2

7.5800

5.6625

6.1150

Resist 1

12.5000

1.7425

7.3500

7.8075

1.3250

Resist 1

6.5175

5.3100

5.7075

Spot

12.2134

1.7660

7.1027

7.7927

1.2011

Spot

6.3978

5.1560

5.4345

Support 1

11.5200

1.6500

6.5575

7.7490

1.2000

Support 1

6.0800

5.1050

5.3040

Support 2

11.4400

1.5725

6.4295

7.7450

1.1800

Support 2

5.8085

4.9115

4.9410

INTRA-DAY PIVOT POINTS 18:00 GMT

Currency

EUR/USD

GBP/USD

USD/JPY

USD/CHF

USD/CAD

AUD/USD

NZD/USD

EUR/JPY

GBP/JPY

Resist 2

1.4635

1.6505

77.34

0.8116

0.9939

1.0631

0.8459

112.39

126.66

Resist 1

1.4542

1.6449

77.06

0.7979

0.9874

1.0567

0.8391

111.67

126.26

Pivot

1.4384

1.6352

76.83

0.7862

0.9840

1.0449

0.8323

110.30

125.51

Support 1

1.4291

1.6296

76.55

0.7725

0.9775

1.0385

0.8255

109.58

125.11

Support 2

1.4133

1.6199

76.32

0.7608

0.9741

1.0267

0.8187

108.21

124.36

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

1.4427

1.6522

78.67

0.7697

1.0019

1.0412

0.8411

112.31

128.88

Resist. 2

1.4373

1.6479

78.43

0.7663

0.9988

1.0370

0.8375

111.84

128.42

Resist. 1

1.4319

1.6436

78.19

0.7629

0.9957

1.0328

0.8340

111.37

127.96

Spot

1.4211

1.6350

77.71

0.7562

0.9895

1.0244

0.8269

110.43

127.05

Support 1

1.4103

1.6264

77.23

0.7495

0.9833

1.0160

0.8198

109.49

126.13

Support 2

1.4049

1.6221

76.99

0.7461

0.9802

1.0118

0.8163

109.02

125.68

Support 3

1.3995

1.6178

76.75

0.7427

0.9771

1.0076

0.8127

108.55

125.22

v

Written by: John Kicklighter, Senior Currency Strategist for DailyFX.com

To receive John’s reports via email or to submit Questions or Comments about an article; email jkicklighter@dailyfx.com

The information contained herein is derived from sources we believe to be reliable, but of which we have not independently verified. Forex Capital Markets, L.L.C.® assumes no responsibility for errors, inaccuracies or omissions in these materials, nor shall it be liable for damages arising out of any person’s reliance upon this information. Forex Capital Markets, L.L.C.® does not warrant the accuracy or completeness of the information, text, graphics, links or other items contained within these materials. Forex Capital Markets, L.L.C.® shall not be liable for any special, indirect, incidental, or consequential damages, including without limitation losses, lost revenues, or lost profits that may result from these materials. Opinions and estimates constitute our judgment and are subject to change without notice. Past performance is not indicative of future results.

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16 August 2011 03:59 GMT