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FOREX: Dollar’s Plunge against the Yen Doesn’t Spread to EURUSD, GBPUSD or AUDUSD

FOREX: Dollar’s Plunge against the Yen Doesn’t Spread to EURUSD, GBPUSD or AUDUSD

2011-03-17 06:37:00
John Kicklighter, Chief Currency Strategist
Share:
  • Dollar’s Plunge against the Yen Doesn’t Spread to EURUSD, GBPUSD or AUDUSD
  • Japanese Yen Collapses as Liquidity, Record Highs and Distorted Markets Create Perfect Storm
  • Euro Fundamental Troubles Deepen on Disappointing Portugal Debt Sale, Spreading Financial Trouble
  • British Pound Conflicted between Labor Data and Interest Rate Expectations
  • Swiss Franc: What Should we Expect from the SNB Rate Decision?
  • Gold Price, Volume and Volatility Slip Despite Cracks in Normal Market Operation

Dollar’s Plunge against the Yen Doesn’t Spread to EURUSD, GBPUSD or AUDUSD

Risk aversion has further cemented itself in the capital markets; but the dollar is not having an easy time of capitalizing on the move. Through Wednesday’s session, the greenback was making meaningful progress against all its major pairings expect for its fellow safe haven currencies. And, it would be this now-familiar contrast that would hammer the dollar into the opening hour of the new trading day. While most of the majors were settling in for the normally quiet transition period after the New York close, USDJPY would explode with its biggest decline since the flash crash back on May 6th on the way to a record low. The liquidity of this particular pair would force the Dollar Index to once again dip below its well-tested, three-year rising trendline while the yen crosses all put in for incredible declines. That said, the short-term threat this would impose on global liquidity and stability incidentally leveraged the currency’s relative position as a safe haven against the speculatively bolstered euro and pound as well as the high-yielding Australian and New Zealand dollars.

Under most conditions, the dollar’s steady and anemic interest rate outlook is a burden; but when yield forecasts are dropping across the board, a stable position quickly turns from burden to boon. And, looking at the 12-month forecasts on the European and UK benchmark rates; the Fed’s suggestion that growth is on a firming footing looks more like anchor when all else is volatile. Yet, we should remain cautious of quick changes in confidence. According to Japanese Finance Minister Noda, the G7 will hold a meeting over the coming day to discuss the international reaction to Japan’s financial crisis. We have seen coordinated efforts to stabilized global markets before; and the impact is distorting to say the least. And, while all of this should keep us occupied; it is worth keeping in mind that we have CPI data due in the upcoming New York session.

Related:Discuss the Dollar in the DailyFX Forum, John’s Pick: GBPUSD and EURUSD are Ready to Reverse Should Fundamentals Offer It

Japanese Yen Collapses as Liquidity, Record Highs and Distorted Markets Create Perfect Storm

Typically, the period after the New York close and before the Asian markets really start rolling is a quiet one. In fact, it is during this period - under normal market conditions - that preexisting trends stall. That certainly wasn’t the case at the open of today’s first trading session. Tentatively slipping below the previous swing low 16 years before at 79.75 just minutes before the session roll over; the speculative pressure was already shifting on the benchmark USDJPY pair. This extreme level was just one component of what would soon become a critical situation. From a purely positioning standpoint, the distinction of that former 1995 swing low likely encouraged the highly speculative crowd to take on long positions with narrow stops on the chance that the pair would naturally reverse course as capital markets stabilized. This would add another layer of complication.

Since the earthquake struck Japan, triggering the devastating tsunami and leading a nuclear power plant into a meltdown spiral; we have seen global investor sentiment falter and investors worldwide begin a carry trade exodus. As the primary funding currency in the preceding build up of this yield trade, the Japanese yen would see enough capital flowing in to offset speculative diversification away from the region because of its new economic and financial problems. Yet, not only would this single-minded effort push USDJPY to the verge of a record low; it would further reduce open interest as the level of carry was dramatically reduced. This means that we had a pair just break into record lows and purely directional traders accounting for a greater presence in the market while heading into a rollover period (at 21:00 GMT) that the previous day had seen a dramatic jump in the overnight Libor rate. What this all adds up to is the perfect storm of liquidity, speculation and capital flows to trigger a dramatic 340-pip plunge for the second most trading currency pair in the FX market. Should we expect such incredible levels of volatility through the immediate future? Unlikely. The severe swing we saw this morning was the result of many unique factors. It is unlikely that we will see such a mix occur again so soon. That said, the fundamental and economic situation in Japan is still unstable. Expect significant moves ahead.

Euro Fundamental Troubles Deepen on Disappointing Portugal Debt Sale, Spreading Financial Trouble

With each day, the fundamental support for the euro deteriorates; and yet, the currency remains buoyant. There is often a struggle between economic potential and speculative expectations; but one side inevitably gives. We have to assess whether hawkish expectations for interest rates will cool and subsequently curb capital inflows; or investor sentiment will stabilize and tip the balance back from risk to reward. As it stands, 12-month interest rate expectations for the ECB have dropped off significantly over the past week; but the market is still pricing in a 100 percent probability of a 25bp hike next month. But, will the central bank be so anxious to hike with global policy makers considering a coordinate effort to stabilize the region. What’s more, will they be so bold to hike when Portugal is pulling 4.331 percent yields on one-year government bills?

British Pound Conflicted between Labor Data and Interest Rate Expectations

The euro is where the pound was a few months ago. However, speculation can only hold up so long before the masses start to lose confidence. Today, we see one-year interest rate forecast stand at 52bps where there were 40 points higher just two weeks ago. The rate hike push is clearly ebbing. In the meantime, the OECD has lowered its 2011 GDP outlook to 1.5 percent; and labor data offers up a mixed batch.

Swiss Franc: What Should we Expect from the SNB Rate Decision?

Speaking of interest rate expectations, the upcoming trading session carries the SNB monetary policy meeting. A week ago, there would have been a reasonable argument to be made that there could be a 25bps hike from this event or clear call for such a move in the wake of their ECB counterpart’s shift. Yet, now with the franc at or near record highs on various pairs and financial markets strained; that is far less likely.

Gold Price, Volume and Volatility Slip Despite Cracks in Normal Market Operation

Gold is the ultimate safe haven and the store of wealth when currencies seem like they are starting to breakdown. Well, at least that is how it is most of the time. When there is a greater speculative presence in the market metal though, that straightforward thinking goes out the window. Still using gold profits to raise capital; traders saw the metals’ volume, volatility and price show remarkably little reaction to the yen’s surge.

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ECONOMIC DATA

Next 24 Hours

Currency

GMT

Release

Survey

Previous

Comments

JPY

Nationwide Department Store Sales (YoY)

1.1%

Leading numbers point to recovering domestic economy

JPY

Tokyo Department Store Sales (YoY)

-1.4%

8:15

CHF

Industrial Production (QoQ) (4Q)

4.60%

1.80%

Stronger surveyed numbers may give steam to SNB rate hike

8:15

CHF

Industrial Production (YoY) (4Q)

6.30%

5.80%

8:30

CHF

Swiss National Bank Rate Decision (MAR 17)

0.25%

0.25%

Forecasted unchanged though with rising exchange, recovering economy

10:00

EUR

Euro-Zone Construction Output s.a. (MoM) (JAN)

-1.80%

Continued decline sign of PIIGS drag on EU-wide construction

10:00

EUR

Euro-Zone Construction Output w.d.a. (YoY) (JAN)

-12.00%

10:00

EUR

Italian Current Account (euros) (JAN)

-5382M

May suggest level of future austerity measures, Italian spending

12:30

USD

Consumer Price Index (YoY) (FEB)

2.00%

1.60%

Preliminary surveyed numbers show price index unchanged, might lead to continued relaxed Federal Reserve policies

12:30

USD

Consumer Price Index (MoM) (FEB)

0.40%

0.40%

12:30

USD

Consumer Price Index Ex Food & Energy (YoY) (FEB)

1.00%

1.00%

12:30

USD

Consumer Price Index Ex Food & Energy (MoM) (FEB)

0.10%

0.20%

12:30

USD

Consumer Price Index Core Index s.a. (FEB)

222.587

12:30

USD

Consumer Price Index n.s.a. (FEB)

220.223

12:30

USD

Initial Jobless Claims (MAR 12)

388K

397K

Jobs report with CPI numbers may set monetary policies for nex

12:30

USD

Continuing Claims (MAR 5)

3750K

3771K

12:30

CAD

International Securities Transactions (Canadian dollar)

9.626B

Transactions may rise as investors clamor for Canadian basic materials

12:30

CAD

Wholesale Sales (MoM) (JAN)

0.50%

0.80%

Decline expected as stronger loonie cuts sales

13:15

USD

Industrial Production

0.60%

-0.10%

A strengthening trend suggest a return to domestic manufacturing

13:15

USD

Capacity Utilization

76.50%

76.10%

13:45

USD

Bloomberg Economic Expectations

4

Higher survey expectations point to recovering US economy

13:45

USD

Bloomberg Consumer Comfort

-44.5

14:00

USD

Leading Indicators (FEB)

0.90%

0.10%

14:00

USD

Philadelphia Fed. (MAR)

28.8

35.9

14:30

USD

EIA Natural Gas Storage Change

-42

-71

Inventory surveyed to fall as domestic demand rises

Currency

GMT

Upcoming Events & Speeches

CHF

6:45

SECO March 2011 Economic Forecasts

JPY

23:50

BOJ to Release Feb. 16-17 Board Meeting 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

1.4280

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

12.1369

1.5892

7.0680

7.7987

1.2820

Spot

6.4817

5.3645

5.6799

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

1.4059

1.6192

81.69

0.9246

1.0055

1.0057

0.7409

114.56

131.70

Resist 1

1.3982

1.6108

80.88

0.9168

0.9982

0.9950

0.7351

112.94

130.00

Pivot

1.3924

1.6047

80.35

0.9120

0.9894

0.9856

0.7301

111.87

128.83

Support 1

1.3847

1.5963

79.54

0.9042

0.9821

0.9749

0.7243

110.25

127.13

Support 2

1.3789

1.5902

79.01

0.8994

0.9733

0.9655

0.7193

109.18

125.96

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

1.4073

1.6184

81.23

0.9201

1.0015

0.9985

0.7398

113.07

130.28

Resist. 2

1.4031

1.6144

80.93

0.9173

0.9988

0.9950

0.7372

112.63

129.78

Resist. 1

1.3989

1.6104

80.64

0.9145

0.9961

0.9914

0.7345

112.20

129.29

Spot

1.3904

1.6024

80.06

0.9090

0.9908

0.9843

0.7293

111.32

128.29

Support 1

1.3819

1.5944

79.48

0.9035

0.9855

0.9772

0.7241

110.44

127.29

Support 2

1.3777

1.5904

79.19

0.9007

0.9828

0.9736

0.7214

110.01

126.80

Support 3

1.3735

1.5864

78.89

0.8979

0.9801

0.9701

0.7188

109.57

126.30

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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