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FOREX: Dollar Won’t Rally Unless the S&P 500 Finally Collapses…With Conviction

FOREX: Dollar Won’t Rally Unless the S&P 500 Finally Collapses…With Conviction

2011-03-12 06:00:00
John Kicklighter, Chief Currency Strategist
Share:
  • Dollar Won’t Rally Unless the S&P 500 Finally Collapses…With Conviction
  • Euro: Will After-Market EU Summit Concessions Change the Market’s View of the Euro-Region
  • Japanese Yen: Why Did this Currency Rally after a Devastating Earthquake and Rally in Risk
  • British Pound’s Interest in Inflation Indicators Already Tempered Post-BoE
  • Swiss Franc Traders will Keep the Focus on Sentiment, Overlook the SNB Decision
  • Gold Following Volatility in Financial and Currency Markets Rather than Direction

Dollar Won’t Rally Unless the S&P 500 Finally Collapses…With Conviction

It seemed as if the dollar was finally on track to put in a long-awaited recovery heading into the final trading day of this past week. And yet, the remarkable bullish drive the currency was able to secure in the Asian session was completely retraced by the time the New York markets closed. The responsibility for this failed rally fell not to the US economic calendar, Fed talk or the seemingly intra-day fluctuations in growth expectations (as many financial media sources would have us believe); but rather, it was the direct performance of the S&P 500. As we have discussed numerous times before, the greenback is fundamentally valuable in only a few scenarios. Generally, when risk appetite is climbing, low rates in the US encourages borrowing and reinvestment abroad; and even in most circumstances, investors seeking safety will unwind carry through the yen or divert funds to the Swiss banking system. To truly bolster demand for the dollar, we need safe haven flows and concern that the global financial markets themselves are freezing up. That was the initial sentiment Friday morning with the record-breaking earthquake in Japan and a preliminary collapse in global equities. However, follow through was not meant to be; and the speculative markets would quickly stabilize and rebound to non-threatening levels. That said, doubt has already started to seep in. A follow up decline this week will not be so easy to correct.

Looking ahead, not only does the month-long period of congestion and hesitant efforts to sell off risky positions put investor sentiment in danger (and the dollar in a position to rally); but the lack of conviction in Friday’s recovery undermines the effort to keep markets buoyant. Looking at turnover over the S&P 500, volume was 19 percent lower than the previous day’s activity and other risk-sensitive assets marked a similar lack of conviction. The docket ahead holds meaningful data and speeches; but dollar traders should be watching correlations and not the ticker.

Related: Discuss the Dollar in the DailyFX Forum,

Euro: Will After-Market EU Summit Concessions Change the Market’s View of the Euro-Region

The euro put in for a remarkable end to this past week: both on fundamental and technical terms. Looking purely at the activity of the currency, EURUSD followed up its sharpest decline in four weeks and what many would consider a meaningful change in trend with the biggest rally in four weeks. So, in effect, we were left with a dramatic increase in activity but without the clear sense of direction. That said, the performance of this particular pair does not provide the most accurate reflection of the individual currency’s health. Against the Japanese yen, the Australian dollar and the New Zealand dollar; the euro actually lost significant ground. The reason: these currencies hold tighter correlations to underlying investor sentiment trends. The euro has taken on the attributes of a risk-favorable currency thanks to the outlook for yield that the ECB leveraged at its last rate decision and the dependence the EU has for stable market conditions in holding down financing costs for member nations. Yet, with the notable reversal in sentiment seen Friday, the high-yield currencies and the volatile Japanese funding unit would present a better destination for capital.

Where investor sentiment goes, so does the currency market. However, the euro may very well deviate from the traditional risk lines and may even define them over the coming week as the market weighs in on the comments that followed the end of the special EU summit in Brussels. A precursor to the official gathering on the 24th and 25th, expectations for material changes in the financial rescue effort were restrained. Yet, there were a few remarkable points of progress. Most notable was the suggestion that Greece was offered a conditional 100bp decrease in its emergency lending rate and an extension on loans to 7.5 years. Furthermore, it was agreed that the EFSF would be able to directly purchase bonds on the open market (putting the ECB more directly onto its inflation path). That said, the group did not make a similar concession of reduced rates for Ireland (likely due to Prime Minister Kenny’s refusal to raise the nation’s corporate tax); and the group seemed to ignore any market concern with Portugal. The question heading into the new trading week is: how skeptical is the market about Europe’s stability?

Japanese Yen: Why Did this Currency Rally after a Devastating Earthquake and Rally in Risk

Even during normal trading conditions, the fundamental roles specific currencies play can be difficult to ascertain; but when we have a reaction like that seen from the yen this past Friday, it seems to break the bounds of logic. With the Asian session, the financial headlines were plastered with news that the sixth largest earthquake in recorded history struck Japan and triggered a destructive tsunami. Yet, despite the domestic hardship such an event posses, the yen began a steep rally. With the natural disaster, investors that were holding explicit and implicit carry trades with funds invested in local emerging markets would be encouraged to unwind. This dynamic would help sustain the currency’s appreciation through the climb in risk trends through the US session; and the lack of conviction in the rally would further support the yen.

British Pound’s Interest in Inflation Indicators Already Tempered Post-BoE

Given the big fundamental themes and aggressive price action market wide, it was easy to overlook the sterling’s individual performance. However, it is worth noting that the currency struggled when sentiment was firming up even though factory-level inflation data accelerated to its highest level since October of 2008. This may be evidence that rate speculation has cooled – at least until the minutes are released.

Swiss Franc Traders will Keep the Focus on Sentiment, Overlook the SNB Decision

Historically, the ECB and SNB follow very policy paths. This seems intuitive given the ties between the two economies and the tremendous flows of capital between the two regions’ markets. So, does this mean that the SNB will take a hawkish turn; and will the market care? Conditions in Switzerland have supported a hike well before the ECB. That said, the SNB moves at a quarterly pace and risk trends are in flux right now.

Gold Following Volatility in Financial and Currency Markets Rather than Direction

This past week was a remarkable one for gold. After six consecutive weeks of steady advance, the precious metal was finally shaken out of its climb on Thursday. This reversal and the subsequent bounce on Friday maintains an unusual, positive correlation to risk trends. In reality, this performance is indicative not of the metal, but of the currency it is dominated in – dollars. Priced in euros, gold is still range bound.

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

NZD

REINZ Housing Price Index

3119.8

Further contractions are expected following earthquake in Christchurch, though should improve in coming months as RBNZ cut rates earlier this week.

NZD

REINZ Housing Price Index MoM%

-2.6%

NZD

REINZ House Sales (YoY)

-11.3%

NZD

Westpac NZ Consumer Confidence (1Q)

108.3

Confidence has declined for three consecutive months.

CNY

Actual FDI (YoY)

23.4%

Direct investment forecasted to maintain strong pace of growth despite rising wages.

CNY

New Yuan Loans

600.0B

1040.0B

Could fall has PBoC raised reserve-requirement-ratio for banks.

CNY

Money Supply - M0 (YoY)

16.8%

42.5%

Likely to have contracted as PBoC has raised interest rates in recent weeks.

CNY

Money Supply - M1 (YoY)

17.8%

13.6%

CNY

Money Supply - M2 (YoY)

17.0%

17.2%

JPY

BOJ to Hold Regular Policy-Setting Board Meeting in Tokyo

0.10%

0.10%

Meeting postponed following Earthquake.

JPY

23:30

Industrial Production (MoM)

2.4%

Production has gained for three consecutive months.

JPY

23:30

Industrial Production (YoY%)

4.7%

JPY

23:30

Capacity Utilization (MoM)

3.0%

On pace to gain for third month.

JPY

00:00

Consumer Confidence

41.1

Confidence almost guaranteed to plummet in coming months after earthquake.

JPY

00:00

Consumer Confidence Households

41.5

41.1

EUR

05:00

Euro-Zone Industrial Production w.d.a. (YoY)

6.4%

8.8%

German industry remains the driving factor behind Euro-zone production.

EUR

05:00

Euro-Zone Industrial Production s.a. (MoM)

0.3%

0.2%

CAD

07:30

Capacity Utilization Rate (4Q)

79.0%

78.1%

Gains further support notion that Canada among leaders of global recovery.

Currency

GMT

Upcoming Events & Speeches

EUR

18:30

ECB’s Bini Smaghi Speaks in Florence

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

1.4280

1.6420

89.00

1.0000

1.0275

1.0600

0.8230

127.60

146.05

Resist 1

1.4025

1.6300

86.00

0.9775

1.0000

1.0200

0.8000

120.00

140.00

Spot

1.3892

1.6072

81.89

0.9297

0.9730

1.0147

0.7443

113.77

131.61

Support 1

1.3700

1.5750

80.00

0.9200

0.9700

0.9600

0.6850

103.80

125.00

Support 2

1.3450

1.5315

75.00

0.9000

0.9500

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

7.3500

7.8075

1.4655

Resist 1

7.5800

5.6625

6.1150

Spot

11.9084

1.5835

6.8878

7.7885

1.2685

Spot

6.3511

5.3686

5.6116

Support 1

11.7200

1.5300

6.7600

7.7490

1.2700

Support 1

6.2850

5.2625

5.5550

Support 2

11.4400

1.4725

6.5575

7.7450

1.2500

Support 2

6.1250

5.1000

5.5125

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

1.3993

1.6143

83.92

0.9398

0.9832

1.0275

0.7538

116.00

134.95

Resist 1

1.3943

1.6108

82.91

0.9348

0.9781

1.0211

0.7490

114.88

133.28

Pivot

1.3847

1.6042

82.28

0.9308

0.9752

1.0090

0.7409

113.91

132.08

Support 1

1.3797

1.6007

81.27

0.9258

0.9701

1.0026

0.7361

112.79

130.41

Support 2

1.3701

1.5941

80.64

0.9218

0.9672

0.9905

0.7280

111.82

129.21

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

1.4054

1.6228

82.77

0.9405

0.9814

1.0271

0.7538

115.19

133.24

Resist. 2

1.4014

1.6189

82.55

0.9378

0.9793

1.0240

0.7514

114.83

132.83

Resist. 1

1.3973

1.6150

82.33

0.9351

0.9772

1.0209

0.7491

114.48

132.42

Spot

1.3892

1.6072

81.89

0.9297

0.9730

1.0147

0.7443

113.77

131.61

Support 1

1.3811

1.5994

81.45

0.9243

0.9688

1.0085

0.7395

113.06

130.80

Support 2

1.3770

1.5955

81.23

0.9216

0.9667

1.0054

0.7372

112.71

130.39

Support 3

1.3730

1.5916

81.01

0.9189

0.9646

1.0023

0.7348

112.35

129.98

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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