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FOREX: Dollar Rally Getting Serious…At Least from a Technical Perspective

FOREX: Dollar Rally Getting Serious…At Least from a Technical Perspective

2011-05-24 04:04:00
John Kicklighter, Chief Currency Strategist
Share:
  • Dollar Rally Getting Serious…At Least from a Technical Perspective
  • Euro Troubles Deepen, What Will It Take to Seriously Concern the Market?
  • British Pound Stumbles Against the Greenback as Traders Doubt BoE Dale’s Pull
  • Australian Dollar Follows Risk Trends Down, Exporters Fear a 1.16 by September
  • Swiss Franc No Longer the Clean Safe Haven it was Treated as Three Months Ago
  • Gold Rallies on Dollar’s Troubles and Euro’s Troubles Alike

Dollar Rally Getting Serious…At Least from a Technical Perspective

The greenback’s bullish reversal was delivered a healthy push through Monday’s session. And though risk aversion could be labeled a meaningful contributor to the move, the real impetus for this drive is likely still more technical than it is fundamental. What is the difference between the greenback rising under its own merits and the market temporarily reversing its position on the world’s most liquid currency from multi-year lows? The former scenario is sustainable while the latter is will have an exceptionally short half life. Taking stock of the dollar’s performance through the opening trading day of the week, the Dow Jones FXCM Dollar Index finally over took the 9,700 figure after six days of congestion to mark highs last seen seven weeks ago. Across the majors, the dollar’s strength was unmistakable. Against its primary counterparts (the euro and pound), the currency advanced to levels not seen in many weeks. For the commodity-based pairings, its gains were sharp. Yet, the most remarkable outcome would come from USDJPY and USDCHF which showed advance despite risk-confusion.

It isn’t difficult to identify the source of dollar-strength for pairs like EURUSD (euro troubles) or AUDUSD (a strong risk aversion effort that worked its way up from the S&P 500. However, the progress against the yen (a superior funding currency) and franc (a better safe haven) give reason to hold out for a more bullish outlook. Unfortunately, aside from Hoenig’s commentary, we don’t have much to work with Tuesday.

Related:Discuss the Dollar in the DailyFX Forum, John’s Video: AUDUSD Top Trade Opportunity for the Day, Same Rules Apply for EURUSD

Euro Troubles Deepen, What Will It Take to Seriously Concern the Market?

Little surprise in how the Euro opened the new trading week. The fundamental troubles we ended off last week on were further exacerbated by additional headlines over the weekend. That said, these new issues do not signal an end the shared monetary union as we know it – indeed if were to call each significant event and headline the signal for collapse; we would have gone horse by the warnings that the sky is falling. We have to remember that in the past year we have seen the introduction of historic financial support regimes, expansion of those programs, conflict on ongoing support, downgrades, necessitated bailouts, rounds of ECB liquidity pumping and threats of withdrawal from the Union by certain members amongst other issues. Through it all, the euro has held relatively firm and even recovered a significant percentage of its lost ground. This is not to mean that the currency can weather all storms – or that it will even survive the existing issues in its current form. Yet, we need to trade what the market and not what we think it should say.

With that consideration in mind, we see the financial hole the region is digging itself into is burrowing past the point that we can reasonably expect creditors and debtors to hold their positions long enough for robust growth to take hold and make everything alright again. Taking stock of the fundamental troubles that have reared over the past few active trading days, we can see the trouble clearly began this past Friday. While we typically refer the EU’s recent troubles as an issue for the periphery, there are clearly carry over troubles for the core that cannot be ignored. Standard & Poor’s downgraded outlook for Italy (in reference to reserved growth expectations and a lack of confidence in the fiscal convictions from the government) acts to remind international investors that can’t simply expect unfettered returns on troubles members with stability from the core. Fitch’s three-step downgrade for Greece to B+ was the attention-grabber. We have become used to the disturbingly consistent drop in confidence surrounding this economy; but eventually, the market will heed the warnings and ignore officials’ vows that all is okay.

Ensuring that fears over Greece would not simply recede quietly, the new trading week would bring the headline that officials believe the next traunche of aid would be delayed. Fitch made an important distinction in reference to this possibility with its recent downgrade: that such a move would constitute a technical default in their book. I am of the same mind. In the meantime, the Greece cabinet has endorsed a plan to claw back nearly 6 billion euros through budget cuts and asset sales. At some point, the slashing expenditures will severely stunt growth and asset sales will find a skeptical market for value. Brushing aside the downgrade of France’s largest banking sector and the lowered credit outlook for Belgium for a second; the outcome of the Spanish regional elections over the weekend is another significant concern. After last regional election, it was brought to light that debt loads were dramatically understated. There could certainly be a widespread repeat of this with the People’s Party winning 38 percent of the vote. If Spain comes under the same pressure as Greece or Portugal, few will float hopes of a clean recovery.

British Pound Stumbles Against the Greenback as Traders Doubt BoE Dale’s Pull

When the euro is under significant pressure; there is a strong European pull to drag the sterling down with it. Yet, sterling is likely to be trading under its own power through the near future. On the potential bullish side, we note that BoE Chief Economist Dale voiced his preference to reaction to inflation in commentary; but minority voice may not sync with the upcoming financing status figures.

Australian Dollar Follows Risk Trends Down, Exporters Fear a 1.16 by September

As traders we have a vested interest in the strength or weakness of currencies; but we shouldn’t forget the influence that it has on economic counterparts. We point your attention to the CBA’s survey of medium-term exporters and exports which reflected clear expectations for higher rates later in the year. According to the data, exporters expect AUDUSD to top 1.16 by September. That’s a long move from current spot.

Swiss Franc No Longer the Clean Safe Haven it was Treated as Three Months Ago

Three months ago, the franc was easily outpacing the US dollar on safe-haven moves as the currency fell back on its historic role. Yet, this month, that strength seems to be under scrutiny. Not too long ago, the market was treating the Swissie as a proxy for the euro as economic, financial and monetary policy efforts are generally mirrored between the two. Are the masses coming to remember that connection once again?

Gold Rallies on Dollar’s Troubles and Euro’s Troubles Alike

The dollar is often quoted in dollars so that a significant rally from the greenback leads to an inverse tumble for the metal. However, when the fear lies in fiat currencies in general; a move away from the Euro due to financial fears sometimes make more sense when funneled to gold.

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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

3:00

NZD

RBNZ 2-Year Inflation Expectation (2Q)

2.6%

Strong NZD and current bank view on economy may dampen expectations

6:00

EUR

German GDP s.a. (QoQ) (1Q F)

1.5%

1.5%

German consumption expected to stay stable as government spending lower

6:00

EUR

German GDP w.d.a. (YoY) (1Q F)

4.9%

4.9%

6:00

EUR

German GDP n.s.a. (YoY) (1Q F)

5.2%

5.2%

6:00

EUR

German Capital Investment (1Q)

3.3%

-1.1%

Dropoff in government spending combined with increase in overall investment and consumption may point to recovery phase in store for German economy

6:00

EUR

German Private Consumption (1Q)

0.5%

0.2%

6:00

EUR

German Construction Investment (1Q)

7.1%

-3.9%

6:00

EUR

German Domestic Demand (1Q)

1.3%

-0.4%

6:00

EUR

German Government Spending (1Q)

0.2%

0.6%

6:00

EUR

German Exports (1Q)

2.0%

2.5%

Exports hurt probably due to stronger EUR; may hurt manufacturing sector

6:00

EUR

German Imports (1Q)

1.7%

0.9%

6:45

EUR

French Own-Company Prod Outlook (MAY)

19

19

French business confidence most likely lower due to weaker German economy, orders

6:45

EUR

French Production Outlook Indicator (MAY)

20

6:45

EUR

French Business Confidence Indicator (MAY)

109

110

8:00

EUR

German IFO - Expectations (MAY)

107

107.7

Expectations expected to be dampened by peripheral risk, summer season

8:00

EUR

German IFO - Business Climate (MAY)

113.7

114.2

8:00

EUR

German IFO - Current Assessment (MAY)

120.7

121

8:30

GBP

Public Finances (PSNCR) (Pounds) (APR)

2.5B

24.8B

Public finance drop continues to show effects of government austerity

8:30

GBP

Public Sector Net Borrowing (Pounds)(APR)

4.4B

16.4B

8:30

GBP

PSNB ex Interventions (Pounds)(APR)

6.5B

18.6B

9:00

EUR

Euro-Zone Indus New Orders s.a. (MoM) (MAR)

-1.1%

0.5%

March industrial orders may confirm effects of strong Euro, slowdown

9:00

EUR

Euro-Zone Indus New Orders (YoY) (MAR)

12.9%

21.5%

10:00

GBP

CBI Reported Sales (MAY) (APR)

11

21

Retail dropped from Dec 2010 high of 56

14:00

USD

New Home Sales (APR)

300K

300K

Slowdown in US construction may be first signal of slowing down before summer months

14:00

USD

New Home Sales (MoM) (APR)

0.0%

11.1%

14:00

USD

Richmond Fed Manufacturing Index (MAY)

9

10

Eastern industries expected to weaken

23:50

JPY

Adj Merchandise Trade Balance (Yen) (APR)

-695.9B

96.3B

April trade balance may confirm large jump in imports as Japan rebuilds. Strong yen may be contributing to a lower amount than expected.

23:50

JPY

Merchandise Trade Exports (YoY) (APR)

-12.7

-2.3

23:50

JPY

Merchandise Trade Imports (YoY) (APR)

12.8

11.9

23:50

JPY

Merchandise Trade Balance Total (Yen) (APR)

-703.7

189.4

GMT

Currency

Upcoming Events & Speeches

JPY

Cabinet Office Economic Report

0:10

USD

Fed's James Bullard Speaks on U.S. Economy

6:00

USD

Fed's Eric Rosengren Speaks on Financial Stability

13:50

USD

Fed's Hoenig, Plosser Speak on U.S. Housing Market

17:20

USD

Fed's James Bullard Speaks on U.S. Economy

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

117.60

146.05

Resist 1

1.5000

1.6600

86.00

0.8900

1.0000

1.1000

0.8215

117.24

140.00

Spot

1.4053

1.6110

81.90

0.8831

0.9774

1.0518

0.7910

115.10

131.95

Support 1

1.4000

1.6160

80.00

0.8600

0.9500

1.0400

0.7745

113.80

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

11.7395

1.6043

7.0178

7.7778

1.2495

Spot

6.3615

5.3060

5.5948

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

1.4234

1.6297

82.46

0.8905

0.9857

1.0729

0.8008

116.63

133.72

Resist 1

1.4143

1.6203

82.18

0.8868

0.9815

1.0624

0.7959

115.87

132.83

Pivot

1.4057

1.6146

81.75

0.8812

0.9770

1.0551

0.7909

114.87

132.06

Support 1

1.3966

1.6052

81.47

0.8775

0.9728

1.0446

0.7860

114.11

131.17

Support 2

1.3880

1.5995

81.04

0.8719

0.9683

1.0373

0.7810

113.11

130.40

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

1.4243

1.6275

82.83

0.8942

0.9873

1.0666

0.8021

116.93

133.93

Resist. 2

1.4195

1.6234

82.60

0.8914

0.9848

1.0629

0.7993

116.47

133.43

Resist. 1

1.4148

1.6193

82.37

0.8886

0.9824

1.0592

0.7966

116.02

132.94

Spot

1.4053

1.6110

81.90

0.8831

0.9774

1.0518

0.7910

115.10

131.95

Support 1

1.3958

1.6027

81.43

0.8776

0.9724

1.0444

0.7854

114.18

130.97

Support 2

1.3911

1.5986

81.20

0.8748

0.9700

1.0407

0.7827

113.73

130.47

Support 3

1.3863

1.5945

80.97

0.8720

0.9675

1.0370

0.7799

113.27

129.98

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

The information contained herein is derived from sources we believe to be reliable, but of which we have not independently verified. Forex Capital Markets, L.L.C.® assumes no responsibility for errors, inaccuracies or omissions in these materials, nor shall it be liable for damages arising out of any person’s reliance upon this information. Forex Capital Markets, L.L.C.® does not warrant the accuracy or completeness of the information, text, graphics, links or other items contained within these materials. Forex Capital Markets, L.L.C.® shall not be liable for any special, indirect, incidental, or consequential damages, including without limitation losses, lost revenues, or lost profits that may result from these materials. Opinions and estimates constitute our judgment and are subject to change without notice. Past performance is not indicative of future results.

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