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FOREX: Dollar Drops Below 2010 Lows as EURUSD and GBPUSD Follow Rates, USDJPY Carry

FOREX: Dollar Drops Below 2010 Lows as EURUSD and GBPUSD Follow Rates, USDJPY Carry

2011-03-19 07:07:00
John Kicklighter, Chief Currency Strategist
Share:
  • Dollar Drops Below 2010 Lows as EURUSD and GBPUSD Follow Rates, USDJPY Carry
  • Euro Faces the Top Event Risk This Week but it May Anchor Rather than Catalyze
  • Japanese Yen Faces Heavy Fundamental Seas through Intervention, Economic Uncertainty
  • British Pound Speculators will Look for CPI Data to Leverage the BoE’s Rate War
  • Canadian Dollar Tumbles as Rate Expectations Collapse Under Record Low Inflation Reading
  • Gold Direction: A Factor of Risk Appetite Trends, Dollar Strength or Inflation Hedging?

Dollar Drops Below 2010 Lows as EURUSD and GBPUSD Follow Rates, USDJPY Carry

It seems implausible that the dollar has stumbled to its lowest point since December of 2009 when underling investor sentiment seems to be in the process of marking a meaningful and necessary bearish reversal. Some may consider this evidence that the greenback has simply capitulated to its long-term fall as the world’s reserve currency; but we shouldn’t be so hasty. There is no doubt that the greenback is losing ground on the world stage and that it will continue to claim a smaller and smaller percentage of total transactions going forward. However, shifts like this don’t happen overnight – they take years. In the meantime, there are a lot of very unpredictable yet critical fundamental drivers that can influence the currency now. Among the top concerns through the immediate future are risk appetite trends, interest rate expectations and the shifting seas of stimulus.

Without doubt, the most potent potential catalyst for the dollar over the coming week is risk appetite trends. While the yen the G7 has stepped in to calm volatility in the currency market (specifically with the yen) and the benchmark equities indexes have bounced from multi-month lows; we are far from a situation of stability. Financial turmoil in Japan seems guaranteed and it is a considerable threat for Europe. In the meantime, we shouldn’t forget about interest rate expectations. The FOMC seems to be on a steady course; but there is a lot of Fed chatter scheduled from very opinionated central bank members. What’s more, the ECB, BoE, BoC, RBA and other central banks offer very distinct contrast. Beyond these big-ticket, open-ended threats; the docket also carries durable goods orders, housing data and the Chicago Fed’s National Activity Index.

Related:Discuss the Dollar in the DailyFX Forum, John’s Pick: EURJPY, CADJPY and CHFJPY all Present High Risk / High Reward Setups

Euro Faces the Top Event Risk This Week but it May Anchor Rather than Catalyze

It was hard to look away from the Japanese yen this past week as its fundamental catalysts produced some of the most dramatic swings in price action we have seen in the FX market in many months. Yet, despite the distraction, the yen was not the only fundamentally active currency over the past week. And what’s more, that role may be further usurped in the coming week depending on where the speculative tides should turn. Bound to market traders work for their money, the euro presents vital event risk over the coming period that can define the currency’s trend perhaps for months to come. Looking back for context, we should note that the euro was able to maintain its buoyancy against the dollar and the British pound despite heavy fluctuations in underlying sentiment. This positive performance all the more remarkable consider we witnessed sovereign downgrades, infighting on EU policy steps and disappointing bond auctions. All that seemed forgotten, however, on Friday when traders clung to comments from ECB President Trichet that reassured rate hawks that the central banks had not changed his tone after implicitly signaling to the market that a hike was the most likely outcome from April’s policy meeting.

Interest rate expectations are a powerful aphrodisiac for FX traders as shifts in benchmarks are often preceded by a heavy capital flow to position ahead of the subsequent carry investment. And, considering the euro touts the highest probability of a near-term hike and follow through policy, it seems a simple equation to most. In reality, it is more complicated than the market seems to insinuate. For monetary policy itself, a single hike will not likely turn into a series that can keep the euro move higher. More importantly, there is a risk component to this scenario that the masses seem to be overlooking for now. They won’t be able to ignore it for much longer though. This coming Thursday and Friday, the EU will how its regular summit – at which the primary topic of conversation will be the necessary measures to secure confidence in the region’s markets. And, as confident as everyone seemed after the special meeting the weekend before last, there are still very large gaps in the approach. What’s more, knowing this major catalyst could very well curb speculative interest as traders look to avoid unwanted volatility.

Japanese Yen Faces Heavy Fundamental Seas through Intervention, Economic Uncertainty

We have already flushed through unprecedented price action for the Japanese yen and seen a remarkable call to arms by the G7 to fight further advances in the funding currency. And yet, the yen will almost certainly face further heavy volatility in the week ahead. Policy officials’ efforts to stabilize the situation are admirable; but the underlying mechanics and sentiment to the situation are simply too great to render a clean solution. At the forefront of the situation is the highly unstable situation with the Fukushima nuclear reactor. It is already difficult to assess the damage to from the earthquake to this point; but if this particular aspect degrades substantially, the tool will be far greater. Furthermore, the intervention officials have mounted fights a natural capital flow: the unwinding of carry and return to the yen. Can central banks fight the entire market?

British Pound Speculators will Look for CPI Data to Leverage the BoE’s Rate War

The sterling has fallen well back in the rankings for fundamental activity these past few weeks; but that could change looking through the immediate future. After a sharp drop from an investor sentiment reading Friday and a drop in monetary policy expectations across the board, we saw the 12-month forecast for the BoE slide all the way down to 58 bps (from a high of 92 bps two weeks prior). Yet, hawkish speculation remains; and well it should. On Tuesday, the market is expecting a 4.2 percent annualized CPI reading. Will this force the bank’s hand?

Canadian Dollar Tumbles as Rate Expectations Collapse Under Record Low Inflation Reading

Where the ECB is talking about its path to hikes and the BoE is trying to ignore pressing inflation; expectations for the Bank of Canada outlook are exceptionally high while none of the evidence exists to support such forecasts. In fact, this past Friday, core CPI dropped more quickly than expected to a record low 0.9 percent clip. Perhaps this has finally shaken the market to reality as the 12 month rate forecast dropped 24 bps.

Gold Direction: A Factor of Risk Appetite Trends, Dollar Strength or Inflation Hedging?

One of the most difficult assets from the broader capital markets to get a bearing on recently is gold. Is the commodity acting as the primary counterpart to the dollar, a safe haven asset, a source of funding for margin calls or the ultimate hedge to inflation? In effect it is likely playing all these roles at once. It just so happens that the most pressing issue is the more influential. For that reason, we should watch the need for funds.

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ECONOMIC DATA

Next 24 Hours

Currency

GMT

Release

Survey

Previous

Comments

GBP

00:01

GBP Rightmove House Prices (YoY)

0.3%

Increasing prices a positive sign for a depressed housing market.

GBP

00:01

GBP Rightmove House Prices (MoM)

3.1%

NZD

02:00

NZD Credit Card Spending (MoM)

3.8%

Spending could increase as RBNZ eased credit conditions.

NZD

02:00

NZD Credit Card Spending (YoY)

5.6%

NZD

21:45

NZD New Zealand Net Migration s.a.

450

Figure likely to hold below 1000 for twelfth time since January 2010.

EUR

08:00

EUR French Purchasing Manager Index Manufacturing

55.7

Indexes will remain over 50; haven't contracted since July 2009.

EUR

08:00

EUR French Purchasing Manager Index Services

59.7

CHF

08:00

CHF Money Supply M3 (YoY)

6.7%

Sustained low rates to continue to expand monetary base.

USD

12:30

USD Chicago Fed Nat Activity Index

-0.16

Index has been positive once since August.

USD

14:00

USD Existing Home Sales

5.10M

5.36M

Decline in sales suggests that housing market continues to lag recovery.

USD

14:00

USD Existing Home Sales (MoM)

-4.9%

2.7%

Currency

GMT

Upcoming Events & Speeches

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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

1.4445

1.6420

89.00

1.0000

1.0275

1.0600

0.8230

127.60

146.05

Resist 1

1.4250

1.6300

86.00

0.9775

1.0000

1.0200

0.8000

120.00

140.00

Spot

1.4182

1.6236

80.61

0.9011

0.9856

0.9962

0.7310

114.31

130.88

Support 1

1.4000

1.5750

80.00

0.9000

0.9700

0.9600

0.6850

103.80

125.00

Support 2

1.3700

1.5315

75.00

0.8800

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

12.0454

1.5784

6.9942

7.7997

1.2728

Spot

6.2725

5.2581

5.5657

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

1.4320

1.6379

83.64

0.9149

0.9905

1.0105

0.7415

118.50

135.52

Resist 1

1.4251

1.6308

82.12

0.9080

0.9881

1.0034

0.7362

116.41

133.20

Pivot

1.4116

1.6184

80.48

0.9022

0.9842

0.9907

0.7270

113.47

130.19

Support 1

1.4047

1.6113

78.96

0.8953

0.9818

0.9836

0.7217

111.38

127.87

Support 2

1.3912

1.5989

77.32

0.8895

0.9779

0.9709

0.7125

108.44

124.86

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

1.4346

1.6396

81.74

0.9119

0.9949

1.0094

0.7406

116.00

132.80

Resist. 2

1.4305

1.6356

81.46

0.9092

0.9926

1.0061

0.7382

115.58

132.32

Resist. 1

1.4264

1.6316

81.18

0.9065

0.9903

1.0028

0.7358

115.15

131.84

Spot

1.4182

1.6236

80.61

0.9011

0.9856

0.9962

0.7310

114.31

130.88

Support 1

1.4100

1.6156

80.04

0.8957

0.9809

0.9896

0.7262

113.47

129.92

Support 2

1.4059

1.6116

79.76

0.8930

0.9786

0.9863

0.7238

113.04

129.44

Support 3

1.4018

1.6076

79.48

0.8903

0.9763

0.9830

0.7214

112.62

128.96

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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