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Forex: Dollar - Why is the Greenback Tumbling while Risk Appetite is Sliding?

Forex: Dollar - Why is the Greenback Tumbling while Risk Appetite is Sliding?

2011-02-24 05:52:00
John Kicklighter, Chief Currency Strategist
Share:
  • Dollar: Why is the Greenback Tumbling while Risk Appetite is Sliding?
  • British Pound Interest Rate Fires Stoked after the BoE Minutes Notch a Third Dissenter
  • Euro Faces Fresh Concerns over a March Financial Resolution yet Continues its Advance
  • New Zealand Dollar Losing its Investment Advantage as the RBNZ Talks Stimulus
  • Canadian Dollar Quickly Recovers Ground as Oil Hits a 28-Month High of $100
  • Swiss Franc a Different Safe Haven than Yen or Dollar

Dollar: Why is the Greenback Tumbling while Risk Appetite is Sliding?

The battle between risk and reward continues in the currency market. On the risk side, we have financial uncertainties and soaring commodity prices that threaten the stability of the economic recovery. If we focused on the progress of this consideration alone, it would seem that the US dollar isn’t syncing up tot fundamentals. However, the balance is still more finely tuned than many may be accounting for. While S&P 500 futures (and other equity indexes that have been open for the entire week) have extended a steady decline since Monday’s open, the fear of loss and wholesale withdrawal from ‘risky’ assets has yet to sweep over the market. This is particularly obvious in the FX market where deep liquidity and difficulty with manipulation leads to a natural inclination to stability. Taking stock of traders concerns, we note that that the more speculative majors (AUDUSD and USDCAD) are refusing to give in to the cloudy forecast. Another unique view of this optimistic tenacity is the aggregate volatility index for the broader currency market. The implied volatility in the three-month reading has not risen from its 30-month low.

Without full conviction in the effort to shift capital away from risky assets into a safe haven that specializes in liquidity and regulated markets, a crowd used to consistent capital returns for the better part of six months will look to take advantage of yield potential. On this front, the dollar falls far behind its Euro-Zone and UK counterparts. Where the euro and sterling are backed by growing expectations of a full percentage increase in benchmark rates by this time next year; the Fed’s own 12-month forecast has dropped back from 50 basis points two weeks ago to 27 basis points today. This divergence is particularly unusual given the fundamental developments over the past 24 hours. On the docket, existing home sales unexpectedly rose to an eight-month high 5.36 million units. That said, the reality that median price dropped down to a nine-year low and the percentage of foreclosure purchases jumping to a 12-month high puts this sector’s health into performance. Nevertheless, the real influence for rate forecasting rested with Fed commentary. Uber-hawk Hoenig notched the rhetoric up a couple levels when he said low rates leads to speculation and asset build up. Morever, he warned that conditions would foster a greater number of crises with ever increasing costs. Perhaps more remarkable though was the Fed’s Plosser. He said he won’t rule out an early exit to QE2 and that rates may be hiked with jobless still high.

Related:Discuss the Dollar in the DailyFX Forum, John’s Analyst Picks: GBPUSD and EURJPY Temporarily Boosted by Rate Speculation

British Pound Interest Rate Fires Stoked after the BoE Minutes Notch a Third Dissenter

Interest rate expectations were already elevated for the British pound – and we have seen the influence these hawkish projections have afforded to the currency. However, it seemed that after last week’s CPI reading (hitting an astounding 4.0 percent annual clip) and the Bank of England’s quarterly inflation report that fundamental traders had as much as they needed to price in that near-term rate hike. Yet, there is still some vagary as to the timing of that eventual tightening and what type of pace the regime will entail after the first move. Benchmarking the first change in primary lending rate since the March 2009 cut, the BoE minutes to this past February’s meeting proved there is still room just to be a little more hawkish. In the statement, the most remarkable development was a third hawkish dissenter to join MPC members Andrew Sentance and Martin Weale’s repeat call for a firming of the overnight rate. Spencer Dale, until now, fell into the majority keeping a cautious outlook on inflation pressures while deeming them transient enough to keep to the wait-and-see approach. That changed with Dale’s vote for a 25 bps hike that further offset Adam Posen’s call for an additional 50 billion sterling of bond purchases. For the FX trader, this particular development has helped boost the probability of a quarter-percent rate hike at the next meeting up to 24 percent. On the other hand, the 12-month outlook for rates is little changed at 88 bps. This warrants a modest boost to the bullish outlook for the sterling; but this speculation may also add to a medium-term reversal should the reality of a staggered pace of hikes filter into the market’s collective outlook.

Euro Faces Fresh Concerns over a March Financial Resolution yet Continues its Advance

It seems that concern over European officials’ ability to make meaningful concessions for stabilizing the region’s financial troubles degrades on a daily basis; and yet the euro has lost none of buoyancy. This speaks to the attention span of the speculative masses and power that interest rate expectations still hold the currency market. Taking stock of Wednesday’s developments, German Chancellor Merkel reversed the supportive comments she made the previous day when she said extending Greece’s bailout aid was an option that was “on the table” by listing those compromises that would not made. Chief among them was her suggesting that Germany was “staunchly against” joint bonds. Furthermore, she went on to suggest that Ireland’s low corporate tax (a particularly attraction for firms in over the years) was partly to blame for current conditions. With the pocketbook for the EU unwilling to budge on the more immediate reforms, how optimistic should we be about the euro’s future?

New Zealand Dollar Losing its Investment Advantage as the RBNZ Talks Stimulus

As was to be expected after such a devastating natural disaster, the outlook for New Zealand interest rates has completely collapsed. While Moody’s said that the damage and rebuilding would not affect the nation’s rating; RBNZ Governor Alan Bollard made it clear that he was ready to inject cash into the system should banks need it. From expectations of 50 bps of hikes just a week ago and 100 bps three months ago; the 12 month forecast now stands at zero. More importantly, the market is pricing in an 88 percent chance of a 25 bps cut at the next meeting.

Canadian Dollar Quickly Recovers Ground as Oil Hits a 28-Month High of $100

With the slide in European shares carrying over to selling pressure into the US session yesterday, the weight on risk trends in the FX market was increasing. The drive certainly translated over to USDCAD which climbed as far as 0.9960. However, the plunge seemed to stall in the second half of the New York session; and to take its place, US oil stepped into with a surge to a two-year high to the psychological $100 level.

Swiss Franc a Different Safe Haven than Yen or Dollar

When we mention safe haven currency, it is reference to a broad category – essentially a currency that appreciates as riskier assets fall. However, there are nuances between them. The yen is largely an anti-carry while the dollar is valued when liquidity in global financial markets is troubled. In contrast, the franc is the closest thing to a safe haven as that term would denote; and that is a factor that could drive EURCHF lower.

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ECONOMIC DATA

Next 24 Hours

Currency

GMT

Release

Survey

Previous

Comments

AUD

23:00

Conference Board Leading Index (DEC)

0.2%

Index rises 0.7% in DEC

AUD

0:30

Average Weekly Wages (YoY) (NOV)

4.5%

Weekly wages rise 1.1% QoQ in November

AUD

0:30

Average Weekly Wages (QoQ) (NOV)

0.4%

AUD

0:30

Private Capital Expenditure (4Q)

2.3%

6.2%

Expenditures rise 1.3% in 4Q

EUR

7:00

German Gross Domestic Product s.a. (QoQ)

0.4%

0.4%

The German economy is likely to grow modestly for a second quarter, after sizzling growth during mid-2010. A sharp slowdown in government spending and a decline in construction investment are the reasons for this slowing of economic growth

EUR

7:00

German Gross Domestic Product w.d.a. (YoY)

4.0%

4.0%

EUR

7:00

German Gross Domestic Product n.s.a. (YoY)

4.0%

4.0%

EUR

7:00

German Domestic Demand (4Q F)

0.2%

0.4%

EUR

7:00

German Exports (4Q F)

1.1%

2.3%

EUR

7:00

German Capital Investment (4Q F)

2.0%

1.3%

EUR

7:00

German Government Spending (4Q F)

0.2%

1.1%

EUR

7:00

German Construction Investment (4Q F)

-2.0%

-0.4%

EUR

7:00

German Imports (4Q F)

0.6%

1.9%

EUR

7:00

German Private Consumption (4Q F)

0.2%

0.4%

EUR

7:45

French Consumer Confidence Indicator (FEB)

85

85

Likely to hold at historically low levels

CHF

8:15

Employment Level (4Q)

4.086M

4.080M

One of the strongest labor markets in Europe will get even stronger

CHF

8:15

Employment Level (YoY) (4Q)

1.2%

1.0%

EUR

9:00

Italian Retail Sales s.a. (MoM) (DEC)

0.2%

-0.3%

Much of the prior month’s decline may be recouped

EUR

9:00

Italian Retail Sales (YoY) (DEC)

1.2%

1.0%

EUR

10:00

Euro-Zone Business Climate Indicator (FEB)

1.61

1.58

Consumer confidence expected to improve, remaining at surprisingly high levels given the negative European news flow. The same goes for the other confidence indicators

EUR

10:00

Euro-Zone Consumer Confidence (FEB)

-10

-11.2

EUR

10:00

Euro-Zone Economic Confidence (FEB)

106.8

106.5

EUR

10:00

Euro-Zone Industrial Confidence (FEB)

6.5

6

EUR

10:00

Euro-Zone Services Confidence (FEB)

9.5

9.2

EUR

10:00

Italian Business Confidence (FEB)

103.8

103.6

Highest since February 2008

GBP

11:00

CBI Reported Sales (FEB)

28

37

Falling back from December’s 56 record

USD

13:30

Chicago Fed Nat Activity Index (JAN)

0.09

0.03

Regional surveys are not very useful

USD

13:30

Initial Jobless Claims

405K

410K

Holdings near recent lows as U.S. labor market recovers very gradually

USD

13:30

Continuing Claims

3880K

3911K

USD

13:30

Durable Goods Orders (JAN)

3.0%

-2.3%

Extremely volatile series should be viewed over time

USD

13:30

Durables Ex Transportation (JAN)

0.5%

0.8%

USD

13:30

Capital Goods Orders Non defense ex Air (JAN)

-1.0%

1.4%

Extremely volatile series should be viewed over time

USD

13:30

Capital Goods Ship Non defense ex Air (JAN)

1.7%

USD

14:45

Consumer Comfort Index

-43.4

Not a widely-followed measure

USD

15:00

New Home Sales (JAN)

300K

329K

Near the 274K record low set late last year

USD

15:00

New Home Sales (MoM) (JAN)

-8.8%

17.5%

USD

15:00

House Price Purchase Index (QoQ) (4Q)

-1.5%

-1.6%

Home prices have only risen once in the last five months

USD

15:00

House Price Index (MoM) (4Q)

-0.1%

0.0%

Currency

GMT

Upcoming Events & Speeches

USD

13:30

Fed's Bullard Speaks in Bowling Green, Kentucky

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

1.3746

1.6202

82.53

0.9336

0.9902

1.0017

0.7460

113.44

133.70

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

7.4525

7.8165

1.4945

Resist 2

7.7500

5.7800

6.2750

Resist 1

12.5000

1.6300

7.4025

7.8075

1.4655

Resist 1

7.5800

5.6625

6.1150

Spot

12.1833

1.6079

7.1263

7.7957

1.2778

Spot

6.4091

5.4237

5.6376

Support 1

11.7200

1.5300

7.1775

7.7490

1.2700

Support 1

6.2850

5.2625

5.7030

Support 2

11.4400

1.4725

6.9900

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

1.3865

1.6343

83.15

0.9429

1.0007

1.0096

0.7552

114.26

135.18

Resist 1

1.3806

1.6273

82.84

0.9383

0.9955

1.0057

0.7506

113.85

134.44

Pivot

1.3727

1.6203

82.58

0.9345

0.9906

1.0019

0.7467

113.42

133.91

Support 1

1.3668

1.6133

82.27

0.9299

0.9854

0.9980

0.7421

113.01

133.17

Support 2

1.3589

1.6063

82.01

0.9261

0.9805

0.9942

0.7382

112.58

132.64

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

1.3908

1.6361

83.39

0.9443

0.9994

1.0142

0.7558

114.83

135.28

Resist. 2

1.3867

1.6321

83.17

0.9416

0.9971

1.0111

0.7533

114.48

134.88

Resist. 1

1.3827

1.6281

82.96

0.9389

0.9948

1.0080

0.7509

114.13

134.49

Spot

1.3746

1.6202

82.53

0.9336

0.9902

1.0017

0.7460

113.44

133.70

Support 1

1.3665

1.6123

82.10

0.9283

0.9856

0.9954

0.7411

112.75

132.91

Support 2

1.3625

1.6083

81.89

0.9256

0.9833

0.9923

0.7387

112.40

132.52

Support 3

1.3584

1.6043

81.67

0.9229

0.9810

0.9892

0.7362

112.05

132.12

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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