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FOREX: Dollar Slide Halted as Risk Trends Unable to Compensate for NFP Forecasting

FOREX: Dollar Slide Halted as Risk Trends Unable to Compensate for NFP Forecasting

2011-02-03 02:36:00
John Kicklighter, Chief Currency Strategist
Share:
  • Dollar Slide Halted as Risk Trends Unable to Compensate for NFP Forecasting
  • Euro Holds Up Well through Portuguese Bond Sale and Ireland Downgrade, ECB Up Next
  • British Pound Unexpectedly Strong with Construction and BoE Debate Providing Backdrop
  • New Zealand Dollar Tumbles after Unemployment Rises More than Expected
  • Japanese Yen Takes an Economic Blow after Government Officials Says Double Taxes
  • Australian Dollar Traders Crave Larger Fundamental Catalysts than Trade and Service Sector Data

Dollar Slide Halted as Risk Trends Unable to Compensate for NFP Forecasting

Heading into Thursday’s active trading session, the capital markets are already entering the gravity of Friday’s non-farm payrolls (NFP) report. This is a common occurrence whereby the expected volatility of the indicator discourages market participants from taking significant positions to avoid the potential turbulence expected with its release. Net effect for currency traders in the preceding trading days: a diminished effort to project trends and decelerating volatility. It is this absence of fundamental pressure that allowed the greenback to put in for a modest bounce through Wednesday’s session - rather than offhand suggestions that a deterioration in the Egyptian political crisis led to a meaningful shift towards the harbor of safe haven assets. Taking stock of the market’s bearings heading into the final 48 hours of the trading week, it is clear that the risk appetite drive that began at the start of the week is merely pausing. Our favored benchmark for speculative activity – the S&P 500 – was just slightly off the two-and-a-half year high it set the previous day. Amongst the majors, EURUSD retraced a mere 18 pips; USDJPY moved 25 pips in the dollar’s favor; AUDUSD eased back 10 pips; and GBPUSD actually climbed for a third consecutive day. This is hardly the robust start to a recovery – especially when the dollar is just off a three-month low.

Looking for event risk to work with Wednesday, the fundamental trader looking for activity would come up short. Between the two means for potential activity, neither risk appetite trends nor the economic docket would give much in the way of an impetus. Keeping tabs on investor sentiment (and thereby the dollar’s role as safe haven and funding currency), there was the potential for volatility to be stirred in the European markets. A Portuguese bond sale shoots right to the heart of the financial market’s concerns while the surprise Ireland sovereign downgrade offered an unexpected angle to the scene. Yet, neither of these would significantly pressure the euro and give the dollar the satisfaction of a risk aversion and reserve diversification move. Alternatively, the bullish run following Tuesday’s impressive global manufacturing update proved short-lived, suggesting it is taking more fundamental fuel to generate an equivalent advance from capital markets.

For scheduled event risk, the docket was populated by second tier releases. The 11.3 percent swell in mortgage applications reported by MBA last week (the most since October) and the sharp drop in job cut announcements in the Challenger report were notable; but not meaningful enough to the fundamental picture to generate much interest. What carries a little more clout is the ADP Employment Change report. This series is valuable employment data; but their effort to ‘curve fit’ to more closely match the later-released NFPs inadvertently undermines its individual value and further skews its performance from that of the government report. Using this to benchmark NFPs is not a good idea. In calm before the fundamental storm tomorrow; the event risk picks up significantly. The ISM service sector activity survey, ICSC store sales report, factory orders and jobless claims numbers are all influential. Yet, with the NFPs just around the corner, their sway will be substantially reduced.

Related: Discuss the Dollar in the DailyFX Forum, John’s Analyst Picks: Quick GBPAUD and NZDUSD Returns Offset USDCAD Losses

Euro Holds Up Well through Portuguese Bond Sale and Ireland Downgrade, ECB Up Next

For many, the euro’s restrained level of volatility Wednesday was completely unexpected. From the docket, Portugal would unintentionally provide an outlet for the market to cast its vote in confidence for the European financial market and the currency in turn. However, given the rally in the euro and pull back in periphery government bond yields recently, the 1.255 billion euro actual would actually draw healthy demand and lower yields – in effect given an implicit vote of confidence. Standard & Poor’s downgrade of Ireland’s sovereign credit rating was not on the radar; but the repercussions are modest given the nation’s access to emergency funds. Something overlooked that will certainly come up again in the future (perhaps with Friday’s EU policymaker meeting) was a German official’s suggestion that the nation wouldn’t support EFSF bond buying. For the upcoming European session, the ECB rate decision will most likely be a non-event. Trichet already make his slight hawkish shift.

British Pound Unexpectedly Strong with Construction and BoE Debate Providing Backdrop

The sterling’s sensitivity to fundamental developments in its own economic performance leveraged the influence of a bigger-than-expected jump in the construction activity reading for January. A 53.7 reading puts it back into expansionary territory – surprising given the performance of sales data. In other news, BoE members Sentance and Bean squared off over the influence and permanence of inflation. The rate debate is growing.

New Zealand Dollar Tumbles after Unemployment Rises More than Expected

One of the largest moves in the late-US / early-Asian session was the New Zealand dollar’s tumble across the board. Clearly not risk-based, this particularly slide was instigated by the unexpected 0.5 percent drop in employment levels through the fourth quarter that subsequently pushed the unemployment rate up 0.4 percentage points to 6.8 percent. Not a good sign for rate hikes; but neither is it a serious obstacle.

Japanese Yen Takes an Economic Blow after Government Officials Says Double Taxes

Following another round of concerns about the volatility and level of the Japanese yen (which the market happily ignores at this point), we saw a genuine fundamental concern develop out of a proposal that came from Prime Minister Kan’s tax panel. To have an impact on the nation’s unsustainable deficit situation, it was suggested that the consumption tax be doubled from 5 to 10 percent. Good way to slow the economy.

Australian Dollar Traders Crave Larger Fundamental Catalysts than Trade and Service Sector Data

Cyclone Yasi has passed over the populated-dense segment of Queensland; and the damage assessment is ongoing. Given the impact of the torrential floods that preceded the storm, the cumulative effect will be significant; yet it is not exactly a shock. It is big events like this weather incidence that actually helps to curb the influence of regular data. A drop in service activity and a jump in the trade balance just don’t cut it.

For Real Time Forex News, visit: http://www.dailyfx.com/real_time_news/

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

ECONOMIC DATA

Next 24 Hours

Currency

GMT

Release

Survey

Previous

Comments

AUD

22:30

AiG Performance of Service Index (JAN)

46.4

Rose last month from 46.2 November reading.

USD

ICSC Chain Store Sales (YoY) (JAN)

3.1%

Increased annually in the last 13 months.

AUD

0:30

Building Approvals (MoM) (DEC)

1.3%

Building approvals fell in November for a third time in four months

AUD

0:30

Building Approvals (YoY) (DEC)

-13.7%

AUD

0:30

Trade Balance (Australian dollar) (DEC)

1600M

1925M

Trade surplus narrowed in November as the value of coal exports dropped.

CNY

1:00

Purchasing Manager Index Non-Manufacturing (JAN)

56.5

Posted a below-60 reading the last two months.

CHF

7:15

Trade Balance (Swiss franc) (DEC)

1.93B

Switzerland’s exports declined in November as a stronger franc made goods less competitive abroad

CHF

7:15

Exports (MoM) (DEC)

-3.4%

CHF

7:15

Imports (MoM) (DEC)

-3.3%

EUR

8:45

Italian Purchasing Manager Index Services (JAN)

50.8

50.2

The Euro-Zone Purchasing Manager Index Composite reading was 56.3 in January, the highest in six months, as the German economy expanded. ECB President Trichet is optimistic, stating that “strong business confidence could provide more support to domestic activity in the euro area than is expected.”

EUR

8:50

French Purchasing Manager Index Services (JAN F)

57.1

57.1

EUR

8:55

German Purchasing Manager Index Services (JAN F)

60.0

60.0

EUR

9:00

Euro-Zone Purchasing Manager Index Services (JAN F)

55.2

55.2

EUR

9:00

Euro-Zone Purchasing Manager Index Composite (JAN F)

56.3

56.3

GBP

9:30

Purchasing Manager Index Services (JAN)

51.0

49.7

Index fell to a 20-month low in December.

GBP

9:30

Official Reserves (Changes) (JAN)

$976M

Reserves increased in four of the past 5 months.

EUR

10:00

Euro-Zone Retail Sales (MoM) (DEC)

0.5%

-0.8%

Retail sales declined in November for a fourth consecutive month

EUR

10:00

Euro-Zone Retail Sales (YoY) (DEC)

0.2%

0.1%

EUR

12:45

European Central Bank Interest Rate Decision

1.00%

1.00%

Market implies no chance of a 25 bp rate hike.

USD

13:30

Non-Farm Productivity (4Q P)

2.0%

2.3%

Likely rose in 4Q for a third quarter this year.

USD

13:30

Unit Labor Costs (4Q P)

0.5%

-0.1%

Declined in four of the past five quarters.

USD

13:30

Initial Jobless Claims (JAN 29)

420K

454K

Initial jobless claims rose by 51K last week to 454K, higher than 405K estimated.

USD

13:30

Continuing Claims (JAN 22)

3991K

USD

15:00

ISM Non-Manufacturing Composite (JAN)

57.0

57.1

December reading was highest since May 2006.

USD

15:00

Factory Orders (DEC)

1.0%

0.7%

Factory orders rose in November after posting a 0.7% decline the month prior.

NZD

21:45

New Zealand Net Migration s.a. (DEC)

630

November reading was lowest in five months.

Currency

GMT

Upcoming Events & Speeches

USD

22:30

Fed's Elizabeth Duke Speaks on U.S. Economy

EUR

13:30

ECB President Jean-Claude Trichet Delivers Policy Statement

USD

18:00

Fed Chairman Ben Bernanke Speaks on U.S. Economy

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

1.4025

1.6420

89.00

1.0000

1.0922

1.0600

0.8230

127.60

146.05

Resist 1

1.3875

1.6300

86.00

0.9775

1.0750

1.0200

0.8000

120.00

140.00

Spot

1.3827

1.6145

81.43

0.9362

0.9919

1.0118

0.7805

112.59

131.46

Support 1

1.3425

1.5750

80.00

0.9300

0.9800

0.9600

0.6850

103.80

125.00

Support 2

1.2900

1.5315

75.00

0.9000

0.9700

0.9375

0.6585

100.00

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

1.6575

7.4025

7.8165

1.4945

Resist 2

7.7500

5.7800

6.2750

Resist 1

12.5000

1.6300

7.2825

7.8075

1.4655

Resist 1

7.5800

5.6625

6.1150

Spot

11.9935

1.5817

7.1373

7.7916

1.2712

Spot

6.3741

5.3913

5.6961

Support 1

11.7200

1.5300

6.9900

7.7490

1.2700

Support 1

6.2850

5.2625

5.7030

Support 2

11.4400

1.4725

6.8000

7.7450

1.2500

Support 2

6.1250

5.1000

5.5200

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

1.3930

1.6251

82.46

0.9504

1.0054

1.0262

0.7884

113.21

132.51

Resist 1

1.3879

1.6198

81.95

0.9433

0.9987

1.0190

0.7845

112.90

131.99

Pivot

1.3784

1.6104

81.63

0.9385

0.9943

1.0077

0.7778

112.39

131.46

Support 1

1.3733

1.6051

81.12

0.9314

0.9876

1.0005

0.7739

112.08

130.94

Support 2

1.3638

1.5957

80.80

0.9266

0.9832

0.9892

0.7672

111.57

130.41

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

1.4005

1.6318

82.33

0.9476

1.0019

1.0253

0.7912

114.07

133.08

Resist. 2

1.3961

1.6274

82.10

0.9448

0.9994

1.0219

0.7885

113.70

132.67

Resist. 1

1.3916

1.6231

81.88

0.9419

0.9969

1.0185

0.7858

113.33

132.27

Spot

1.3827

1.6145

81.43

0.9362

0.9919

1.0118

0.7805

112.59

131.46

Support 1

1.3738

1.6059

80.98

0.9305

0.9869

1.0051

0.7752

111.85

130.65

Support 2

1.3693

1.6016

80.76

0.9276

0.9844

1.0017

0.7725

111.48

130.25

Support 3

1.3649

1.5972

80.53

0.9248

0.9819

0.9983

0.7698

111.11

129.84

v

Written by: John Kicklighter, 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

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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