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FOREX: Dollar Advance Suspiciously Concentrated through Fridays Fundamentally Active Markets

FOREX: Dollar Advance Suspiciously Concentrated through Fridays Fundamentally Active Markets

2011-05-07 08:35:00
John Kicklighter, Chief Currency Strategist
Share:
  • Dollar Advance Suspiciously Concentrated through Friday’s Fundamentally Active Markets
  • Euro Troubles Deepening as Rumors of a Greek Withdrawal from the Union Put the Focus on Financials
  • British Pound Traders Will Look to Gauge the BoE’s Commitment with Next Week’s Quarterly Report
  • Canadian Dollar Can’t Hold Gains after Employment Report Shows Jobless Rate at Two-Year Low
  • Australian Dollar: Will Australia’s Federal Budget Further Elevate its Fiscal Position?
  • Japanese Yen Continues its Climb as the Market Speculates on the Intervention Tipping Point
  • Gold Rallies as European Financial Strains Pose Risk to Normally Functioning Markets

Dollar Advance Suspiciously Concentrated through Friday’s Fundamentally Active Markets

Dollar bulls have found themselves vindicated – whether their support for the currency has come recently or was in place for the long haul. Through Friday’s close, the EURUSD put in for a second dramatic decline (the biggest back-to-back drop in years) and closed out the worst week since the very start of the year. However, we should not be so quick to throw our full support into this revival. The fundamentals behind the currency’s performance this past week are not as solid as price action suggests. What’s more, the dollar’s gains were not consistent across its major counterparts. While the greenback surged against the euro, it actually lost ground against the sterling and commodity currencies. Furthermore, its advance against the Japanese yen can be traced back to the modest bounce in risk appetite (and thereby carry); while USDCHF’s climb sees the franc associating to its primary counterpart – the euro. True strength from the reserve currency would see consistent gains across the board and the fundamentals to back its progress. Will we see these pieces fall into place in the coming week and beyond?

To establish a better understanding of the dollar’s bearings, we need to separate the catalysts behind its performance across the majors. Clearly, the standout is EURUSD – the most liquid currency pair in the market by a wide margin. Here, we have seen the most dramatic price action; and it is clear that the greater part of its performance traces back to the euro – not the greenback. With a critical reversal that began after an ECB press conference that telegraphs the group’s intentions to push back a rate decision followed by the wild-fire speculation that Greece is preparing to leave the euro; the connection is easy to make. The depth of this specific cross certainly spills over to its counterparts; but it will take remarkable levels of momentum to sustain a dollar-wide bid through these indirect means. If this particular fundamental aspect is ignored, the dollar’s strength seems to significantly diminish. The safe haven appeal is relatively week as the most stable gauges for risk appetite (I prefer the S&P 500) has seen a controlled decline from multi-year highs. At the same time, the interest rate outlook hasn’t shown any meaningful progress – as is evident in a one-week US Libor rate hitting a recent record low and the 12-month Fed rate forecast pricing in only 28 bps.

Some dollar bulls may point to the recently released April NFPs (printing a better-than-expected 244,000-net increase) as evidence for a better monetary policy outlook; but the increase in the jobless rate (to 9.0 percent) doesn’t fit the central bank’s mandate. The upcoming week will prove critical for establishing whether the greenback is in for a permanent recovery. Our first concern should be the euro’s troubles as it can lead to gains for its primary counterpart. However, looking to the end of the period, we also have April CPI which will play to the Fed’s other mandate.

Related:Discuss the Dollar in the DailyFX Forum, John’s Video: Is this a True Dollar Recovery or Just a EURUSD Rebound?

Euro Troubles Deepening as Rumors of a Greek Withdrawal from the Union Put the Focus on Financials

If the rumors are true; the impact of a Greece withdrawing from the euro could present the greatest risk to the currency that we have seen throughout its relatively short life. However, the likelihood that this will happen in the immediate future is not as high as volatility would suggest. Not long after the Der Spiegel report hit the newswires, EU Finance Ministers met to discuss the financial developments in Greece. Officials say that the country’s abandoning the shared currency was not a topic, nor was restructuring; but the EU’s Juncker did suggest that “further adjustment” would be discussed at the next official meeting. Is this perhaps a bargained solution to Greece’s threats? We may never know officially; but this problem may nevertheless be swept under the rug. In its place, we should turn back to rates forecasts and 1Q GDP figures.

British Pound Traders Will Look to Gauge the BoE’s Commitment with Next Week’s Quarterly Report

There wasn’t much potential in this past Thursday’s Bank of England rate decision; because a pass leaves us with no guidance on what the central bank is looking at for the future. However, we may find our delayed monetary policy reaction this coming Wednesday. The outlook for growth and inflation trends along with the MPC’s lean on monetary policy that we would normally expect from the decision itself will be reflected in the Quarterly Inflation report. Will rate speculation recover its relevance or further shake out? Rate expectations support the latter.

Canadian Dollar Can’t Hold Gains after Employment Report Shows Jobless Rate at Two-Year Low

The immediate reaction to the April Canadian labor data was a strong one. The net 58,300-job increase in payrolls was nearly triple the consensus forecast and the jobless rate dropped to match a 27-month low 7.6 percent. However, that rally was quick to die and ultimately reverse. Risk trends, the correlation to crude and an enduring link to the greenback will continue to complicate the loonie’s course.

Australian Dollar: Will Australia’s Federal Budget Further Elevate its Fiscal Position?

While it hasn’t shown through in overnight swaps, interest rates expectations have started to rebound for the Australian dollar. And, depending on the composition of the federal budget due this coming week; the currency can be in the unique position that it is both pursuing financial austerity while still maintaining a strong economic footing and relatively high interest rates. A perfect scenario, if risk appetite holds up…

Japanese Yen Continues its Climb as the Market Speculates on the Intervention Tipping Point

What is the level for the yen that Japanese officials can rouse the G7 to once again coordinate an intervention effort to prevent the yen from appreciating? The historic agreement that was struck in March was borne from exceptional volatility rather than remarkable lows. To rouse the cooperative to respond once again could be very difficult; and fewer will be convinced of their influence after the ineffective first dip.

Gold Rallies as European Financial Strains Pose Risk to Normally Functioning Markets

Though the dollar gained against the euro, it wouldn’t post a similar performance against gold. In fact, the precious metal showed gains across the board Friday. To some extent this is a natural bounce after a substantial sell-off. Yet, this is likely further a reflection of uncertainty surrounding Europe’s troubles. If the euro itself is at risk, and the dollar is diminished as an alternative; gold is a good safe haven.

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**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar

ECONOMIC DATA

Next 24 Hours

GMT

Currency

Release

Survey

Previous

Comments

23:01

GBP

Lloyds Employment Confidence (APR)

-65

May decline further from gov austerity

1:30

AUD

ANZ Job Advertisements (MoM) (APR)

1.3%

Trend growing slower, may indicate cooling of AU economy

6:00

EUR

German Current Account (euros) (MAR)

8.9B

Exports may fall from stronger Euro, will serve to confirm lower industrial orders data last week

6:00

EUR

German Trade Balance (euros) (MAR)

12.1B

6:00

EUR

German Exports s.a. (MoM) (MAR)

2.8%

6:00

EUR

German Imports s.a. (MoM) (MAR)

4.0%

6:30

EUR

Bank of France Business Sentiment (APR)

110

Dropping since post-recession high

8:30

EUR

Euro-Zone Sentix Investor Confidence (MAY)

14.2

Outlook may be dampened by risk in peripheral countries

12:15

CAD

Housing Starts (APR)

185.1K

May be weaker after lower construction, house price data

22:45

NZD

NZ Card Spending - Retail (MoM) (APR)

1.3%

Spending expected to increase as earthquake rebuilding continues

22:45

NZD

NZ Card Spending (MoM) (APR)

0.5%

23:01

GBP

BRC Sales Like-For-Like (YoY) (APR)

-3.5%

If prices weaker, will give more support to keep rates stable

23:01

GBP

RICS House Price Balance (APR)

-23%

GMT

Currency

Upcoming Events & Speeches

23:50

JPY

BOJ to Publish Minutes of April 6-7 Board Meeting

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

1.5160

1.6750

89.00

0.9345

1.0275

1.1800

0.8400

127.60

146.05

Resist 1

1.5000

1.6600

86.00

0.8900

1.0000

1.1000

0.8215

125.90

140.00

Spot

1.4316

1.6367

80.63

0.8790

0.9666

1.0700

0.7907

115.44

131.97

Support 1

1.4000

1.6200

80.00

0.8600

0.9500

1.0400

0.7825

115.70

125.00

Support 2

1.3700

1.5750

75.00

0.8500

0.9055

1.0200

0.6850

105.50

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

1.3650

Resist 2

7.5800

5.6625

6.1150

Resist 1

12.5000

1.6300

7.3500

7.8075

1.3250

Resist 1

6.5175

5.3100

5.7075

Spot

11.6370

1.5445

6.7051

7.7716

1.2393

Spot

6.3090

5.2091

5.5329

Support 1

11.5200

1.5040

6.5575

7.7490

1.2145

Support 1

6.0800

5.1050

5.3040

Support 2

11.4400

1.4725

6.4295

7.7450

1.2000

Support 2

5.8085

4.9115

4.9410

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

1.4682

1.6504

81.42

0.8877

0.9777

1.0918

0.8043

118.47

133.65

Resist 1

1.4499

1.6436

81.03

0.8834

0.9721

1.0809

0.7975

116.95

132.81

Pivot

1.4405

1.6395

80.54

0.8755

0.9648

1.0694

0.7906

116.09

132.01

Support 1

1.4222

1.6327

80.15

0.8712

0.9592

1.0585

0.7838

114.57

131.17

Support 2

1.4128

1.6286

79.66

0.8633

0.9519

1.0470

0.7769

113.71

130.37

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

1.4514

1.6534

81.59

0.8911

0.9765

1.0849

0.8020

117.27

134.04

Resist. 2

1.4465

1.6492

81.35

0.8881

0.9740

1.0812

0.7992

116.81

133.52

Resist. 1

1.4415

1.6450

81.11

0.8850

0.9716

1.0774

0.7963

116.35

133.01

Spot

1.4316

1.6367

80.63

0.8790

0.9666

1.0700

0.7907

115.44

131.97

Support 1

1.4217

1.6284

80.15

0.8730

0.9616

1.0626

0.7851

114.53

130.94

Support 2

1.4167

1.6242

79.91

0.8699

0.9592

1.0588

0.7822

114.07

130.42

Support 3

1.4118

1.6200

79.67

0.8669

0.9567

1.0551

0.7794

113.61

129.91

v

Written by: John Kicklighter, Senior 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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