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FOREX: Dollar Traders Keep a Close Eye on the Contagion of Nikkei 225 Losses

FOREX: Dollar Traders Keep a Close Eye on the Contagion of Nikkei 225 Losses

2011-03-15 05:58:00
John Kicklighter, Chief Currency Strategist
Share:
  • Dollar Traders Keep a Close Eye on the Contagion of Nikkei 225 Losses
  • Japanese Yen: Why Does a Currency Rally as its own Financial Markets Come Unhinged?
  • Euro Will Hold its Ground against all but Severe Risk Trends as EU Offers Fundamental Hope
  • British Pound Bolstered by Fitch’s Reaffirmation of AAA Sovereign Rating
  • Australian Dollar Finds Greater Drive in Asian Market Volatility than the RBA’s Minutes
  • Gold Falls Despite Asian Market Dramatic Volatility

Dollar Traders Keep a Close Eye on the Contagion of Nikkei 225 Losses

It may finally be happening. Sentiment has been shaken over in the opening push of the week. While the first 24 hours of active trading were colored red; we really didn’t see the fear really bleed through until Asian markets opened for Tuesday’s trading session. The catalyst for a breakdown in market civility was the collapse in the Japanese capital markets. The benchmark Nikkei 225 Index dropped as much as 14.5 percent through the active Tokyo trading session; and panic started to spread. In response, the usually quiet US equities futures saw the S&P 500 contract drop 3 percent. This is the kind of risk aversion that is needed to bolster the dollar’s position as a safe haven. As we have discussed before, there are better options for carry unwinding (the yen) and harbor in otherwise calm seas (the Swiss franc); but when the financial markets themselves start to crack, US liquidity is seen as an invaluable commodity. What is essential for the dollar’s path from here is whether uncertainty and the wholesale flight from risk carries over to the European and US sessions. If so, the dollar can finally climb.

Looking at the forthcoming New York trading session, we already have a substantial break from S&P 500 futures that will be adjusted for on the spot index. This is a big step towards feeding the greenback’s safe haven status. In the meantime, we should also keep a close eye on the Fed. The minutes of the last monetary policy meeting is due soon; and we will watch very closely to see if there is any change in tone to signal an early end to stimulus or perhaps an extension. Another thing to watch out for is whether the Fed vows coordination with Japanese officials.

Related:Discuss the Dollar in the DailyFX Forum,

Japanese Yen: Why Does a Currency Rally as its own Financial Markets Come Unhinged?

The foundation was starting to crumble under the Asian markets. The Australian and Chinese markets were looking at significant declines alongside the other more-volatile emerging indexes; it was the Japanese securities that collapsed. The share magnitude of the benchmark and supposedly liquid Nikkei 225 and other key Japanese assets gives us some perspective into how dire the situation is in this financial capital for the Far East. For perspective, in the span of only five days, the nation’s benchmark stock index has lost over a fifth of its value. The catalyst for these losses is well known at this point. The six worst earthquake in recorded history triggered a deadly tsunami and led to a critical failure at the Fukushima nuclear power plant. The loss of life and quickly rising financial costs (some are pinning its tally to run 3-5 percent of GDP) should be pain enough for the nation; but a loss of investor confidence is yet another agonizing threat for the economy.

Before this unfortunate event befell Japan, the nation was already facing a soft-patch in growth as well as difficulty with agreeing to meaningful steps to rein in the country’s unprecedented debt burden. With this new crisis, the Bank of Japan has moved to ensure liquidity by injecting 15 trillion yen into the money markets and vowing an additional 5 trillion in asset purchases (bonds and ETFs). Stimulus has a questionable influence on a currency – it can devalue by basic supply considerations or it can offer support through promoting stability. That said, the biggest drop in the benchmark equity index in decades has one impact and one impact only. And, despite this compounded and explicit problem for Japan, the yen is still holding firm and actually rising against many of its counterparts. Why is this? There are two contradictory flows at work. On one hand, the global investors will be selling Japanese hand-over-fist in order to minimize their exposure to the extremely volatile market. This naturally leads to the selling of yen as this capital is repatriated. On the other hand, the panic that the Japanese capital markets spreads to other regions encourages a general unwinding of risky positioning across the board. This leads to an unwinding of carry trades which leads those that shorted the yen to initially play the yield differential to reverse flow and buy the currency back. Which direction the yen takes depends on the strength of the opposing flows. It may not seem like it during the panic, but Japanese selling will eventual settle; and risk aversion is still young.

Euro Will Hold its Ground against all but Severe Risk Trends as EU Offers Fundamental Hope

After the market close on Friday, we were left with a surprise round of commentary from EU officials after the special summit in Brussels. While we were not expecting much in the way of progress with financial reform to support the region’s effort to stabilize its bailout effort, the threat of another crisis seems to have prompted the group into action. Positive developments include a conditional 100-basis point cut to Greece’s emergency loan rate, the ability of the EFSF to buy bond new government bond issues and an extension of the support after 2013. On the other hand, Ireland was snubbed, Portugal ignored and the bond buyback program glossed over. Now it is up to the market to decide how remarkable this progress is in securing Euro-area stability. If risk aversion doesn’t kick into high gear, confidence could stay relatively stable, which redirects the focus back to the possibility of an April rate hike. This makes the euro one of the most difficult currencies to trade over the coming weeks.

British Pound Bolstered by Fitch’s Reaffirmation of AAA Sovereign Rating

There are many skeptics of an austerity program applied when the economy suffered a meaningful contraction over the previous quarter; but there are also supporters. One of the reason’s the new government has been able to push through the budget cuts was to secure the nation’s sovereign debt rating; and that is what Fitch reaffirmed Monday. But what happens if growth continues to degrade? We may find out.

Australian Dollar Finds Greater Drive in Asian Market Volatility than the RBA’s Minutes

Yields are the Australian dollar’s primary appeal – especially after the region’s natural disasters cooled domestic activity and China seems to be actively curbing its natural resources demand. So, the RBA’s minutes were certainly lacking for encouragement. They noted that a mildly restrictive policy was warranted, inflation was inline and there were new global risks. There is now speculation of a rate cut come next meeting.

Gold Falls Despite Asian Market Dramatic Volatility

When global investors become panicked and currency market volatility leaves few alternatives, it is usually gold that stands in as the direct benefactor. However, that isn’t the case this morning. Despite stability issues and demand for safety, the precious metal is still lower against most currency benchmarks. This could very well be a sign that capital is needed to cover margin calls or that there was a speculative presence.

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

00:30

New Motor Vehicle Sales (MoM) (FEB)

-1.9%

Sales have declined, YoY, for three consecutive months.

AUD

00:30

New Motor Vehicle Sales (YoY) (FEB)

-2.8%

JPY

06:00

Machine Tool Orders (YoY) (FEB)

73.7%

Orders likely to continue decline, though trend could change following need to rebuild following disaster.

EUR

06:30

French Consumer Price Index - EU Harmonised (MoM) (FEB)

0.6%

-0.3%

Further acceleration of prices in the Euro-zone's second largest economy adds reason for ECB to raise rates at next meeting.

EUR

06:30

French CPI (MoM) (FEB)

0.5%

-0.2%

EUR

06:30

French CPI Ex Tobacco Index (FEB)

120.99

120.32

EUR

06:30

French CPI - EU Harmonised (YoY) (FEB)

1.9%

1.9%

EUR

06:30

French CPI (YoY) (FEB)

1.7%

1.8%

GBP

09:30

DCLG UK House Prices (YoY) (JAN)

2.3%

3.8%

Housing market rebound forecasted to continue.

EUR

10:00

Euro-Zone Employment (QoQ) (4Q)

0.0%

Labor market expected to show signs of stabilization.

EUR

10:00

Euro-Zone Employment (YoY) (4Q)

-0.2%

EUR

10:00

German ZEW Survey (Eco Sentiment) (MAR)

16.0

15.7

Commentary following last ECB decision likely boosted confidence in recovery prospects.

EUR

10:00

German ZEW Survey (Current Situation) (MAR)

84.9

85.2

EUR

10:00

EZ ZEW Survey (Economic Sentiment) (MAR)

29.50

CAD

12:30

Labor Productivity (QoQ) (4Q)

0.2%

0.1%

As labor market reaches pre-recession levels, productivity should rise over coming months.

USD

12:30

Empire Manufacturing (MAR)

16.35

15.43

Index to be positive for fourth consecutive month.

USD

12:30

Import Price Index (MoM) (FEB)

0.9%

1.5%

Imports likely unchanged as Dollar was mixed against majors in February.

USD

12:30

Import Price Index (YoY) (FEB)

6.3%

5.3%

USD

13:00

Total Net TIC Flows (JAN)

$37.5B

$48.2B

Foreign investment could drop amid appealing interest rates elsewhere.

USD

13:00

Net Long-term TIC Flows (JAN)

$55.0B

$65.9B

USD

14:00

NAHB Housing Market Index (MAR)

17

16

Index likely to show housing market still struggling.

USD

18:15

FOMC Rate Decision

0.25%

0.25%

Expected to remain on hold; rhetoric following decision in focus.

USD

20:30

API Cushing Crude OK Inventory

1653K

Inventories could drop amid worries of potential supply shock due to MeNa tensions.

USD

20:30

API U.S. Gasoline Inventories

-3743K

USD

20:30

API U.S. Crude Oil Inventories

3820K

USD

20:30

API U.S. Distillate Inventory

-1473K

Currency

GMT

Upcoming Events & Speeches

AUD

00:30

Reserve Bank's Board March Minutes (MAR)

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

1.3995

1.6180

81.65

0.9243

0.9733

1.0098

0.7399

114.27

132.11

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

11.8908

1.5686

6.8218

7.7907

1.2674

Spot

6.3413

5.3297

5.6033

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

1.4066

1.6308

83.40

0.9350

0.9792

1.0217

0.7475

116.20

134.12

Resist 1

1.4030

1.6244

82.53

0.9297

0.9762

1.0158

0.7437

115.24

133.11

Pivot

1.3968

1.6136

81.57

0.9263

0.9735

1.0102

0.7400

113.87

131.41

Support 1

1.3932

1.6072

80.70

0.9210

0.9705

1.0043

0.7362

112.91

130.40

Support 2

1.3870

1.5964

79.74

0.9176

0.9678

0.9987

0.7325

111.54

128.70

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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