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FOREX: Dollar Faces Disappointing Durable Goods Report but Traders More Concerned with the Nikkei

FOREX: Dollar Faces Disappointing Durable Goods Report but Traders More Concerned with the Nikkei

2011-05-26 03:19:00
John Kicklighter, Chief Currency Strategist
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  • Dollar Faces Disappointing Durable Goods Report but Traders More Concerned with the Nikkei
  • British Pound Rallies after GDP Figures Present Mixed Picture, BoE’s Sentance Warns
  • Euro Advances as the Financial Crisis Headline Rotation Slows
  • Japanese Yen Slides as Sentiment Weighs the Funding Currency, OECD Lowers GDP Forecasts
  • New Zealand Dollar Maintains its Bearings as Finance Minister Warns of Kiwi’s Dependency
  • Gold Doesn’t Correct on Risk, Euro Bounce Thanks to Dollar’s Troubles

Dollar Faces Disappointing Durable Goods Report but Traders More Concerned with the Nikkei

If we were to list the fundamental reasons the dollar should rise going forward, the list for active catalysts would prove relatively short. The fact that one of the currency’s most prolific boosters – risk appetite trends – has eased up from its decline this month has left the greenback exposed. In fact, our favored sentiment gauge in the S&P 500 Index put in for its first positive close in four trading days through Wednesday’s close. In turn, the modest advance would trigger a meaningful retracement in the Dow Jones FXCM US Dollar Index. Where Tuesday’s session would print a negative daily performance and the dollar was modestly lower through this past session’s close; we have seen the emergence of real selling pressure through the early hours of the Asian session. Having slipped below the closely watched 9,700 figure; the benchmark is now looking at its biggest decline since the recent bull wave began at the start of the month. Therefore, we are heading into the Active Asian and European sessions watching the progression of strength in the Japanese Nikkei 225 Index and later Germany’s DAX Index.

The capital markets are not rising out of a meaningful recovery in risk appetite. Rather, the weight of fear has simply eased off the investors’ shoulders somewhat. Looking off the docket first for catalysts, we note that the European financial situation didn’t spark fresh bouts of panic; nor was there a discernable concern that the Federal Reserve was on the cusp of withdrawing stimulus – a reality that will hit many speculatively-dependent assets hard. And, considering the significant levels that many risk-sensitive assets are facing (S&P 500 at 1,300, EURUSD at 1.4000); a firm push may be needed to move the greenback to its next phase. In the meantime, we did see a few interesting developments related to US fundamentals. On the topic of rates, Minneapolis Fed President Kocherlakota said he favored a favors a 50bp rate hike given his forecasts for GDP to average “around 3.0 percent” while core inflation holds below 2 percent this year. This would be market-moving if the market were not already fully acclimated to this particular central banker’s beliefs. As it stands the 12-month interest rate forecast for the Fed (using Credit Suisse overnight index swaps) stands at a meager 28 bps.

In other news, the US durable goods report for April delivered a significant disappointment with the biggest drop in orders in six months (3.6 percent). However, this data is naturally volatile from month to month; so its value as a market-mover is diminished. Far more interesting was the OECD’s revision for growth this year. The group revised its 2011 expectations up to 2.6 percent from 2.2 percent projected in November. This sets up our interest in the upcoming revision to 1Q GDP figures. The headline number could see a moderate adjustment; but it is the sector figures that are really open to change and speculation. That said, should we expect this data to generate a strong move from the greenback? Not unless the growth data feeds into underlying risk appetite trends (moves the S&P 500) or taps interest rate expectations.

Related:Discuss the Dollar in the DailyFX Forum, John’s Picks: GBPUSD Could Offer Short-term Setup if Resistance Holds

British Pound Rallies after GDP Figures Present Mixed Picture, BoE’s Sentance Warns

The British pound extended its rebound Wednesday on somewhat ambiguous fundamentals. A boost in momentum behind the buying sterling buying effort lines up nicely to the release of the release of the UK GDP figures. However, as a second reading of the data and given the disappointment in certain details; it is difficult to draw the confidence in this move. The headline growth reading offered a 0.5 percent quarterly improvement and 1.8 percent year-over-year improvement that we were originally presented. Yet, it was the details that were valuable here. From those areas that we generally consider to offer sustainable growth, the figures were disappointing. Personal consumption dropped 0.6 percent while investment dropped 4.4 percent through the period. That should set off a few alarms for medium-term growth prospects when we consider it was a 1.0 percent increase in growth and the biggest contribution to activity from net trade (1.7 percent points) on record that kept the underlying figure propped up. MPC member Andrew Sentance perhaps added a level of legitimacy to the bullish drive later on when he suggested rate hikes should be implemented now to avoid more dramatic efforts later down the line; but like Kocherlakota, the market is well aware of Sentance's position. If this is indeed a based on ethereal factors or mere risk appetite trends – the pound could soon lose its buoyancy.

Euro Advances as the Financial Crisis Headline Rotation Slows

One fundamental trend that makes perfect sense is the euro’s recent rebound. Why would the shared currency advance when so many problems exist? Because the market requires a fresh stream of new concerns to keep selling pressure in place. Until something really breaks (Greece is forced to restructure or something equivalent), we are running on blind speculation. That said, we do note that EC Commissioner Damanaki commented that Greece is at risk of losing its Union membership. Will officials start to officially treat this as an option?

Japanese Yen Slides as Sentiment Weighs the Funding Currency, OECD Lowers GDP Forecasts

That the devastating earthquake in Japan this past March will take a toll on the economy is a surprise to no one. Yet, official estimates of just how painful the impact will be can still catch investors off guard. In the OECD’s upgraded forecasts, the group lowered its 2011 GDP forecast from 0.8 percent growth to a 0.9 percent contraction. They further offered an official recommendation to keep monetary policy extremely loose.

New Zealand Dollar Maintains its Bearings as Finance Minister Warns of Kiwi’s Dependency

It is easy to assign the kiwi’s strength through Wednesday’s session to the progress in risk appetite trends; but that would not account for the relatively restrained effort for its Australian counterpart. For currency-specific event risk, Finance Minister English said the country is fully dependent on Asian demand and Australia’s health - a fragile reliance. This is borrowed strength and unlikely to outpace underlying risk trends.

Gold Doesn’t Correct on Risk, Euro Bounce Thanks to Dollar’s Troubles

We have grown used to seeing gold rise as risk appetite falters and the European financial crisis squeezes funds out of the euro and FX market altogether. However, we should not forget that the metal is also heavily dependent on the performance of the dollar. With the greenback steeped in its biggest decline since the month began, there is a new theme to watch. It seems most fundamental signs point to firm gold prices.

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ECONOMIC DATA

Next 24 Hours

GMT

Currency

Release

Survey

Previous

Comments

0:30

AUD

CBAHIA House Affordability (1Q)

53.5

Index may be benefited by weaker sector

1:30

AUD

Private Capital Expenditure (1Q)

2.7%

1.3%

Total quarter capital expected to gain from influx of foreign investments

6:00

GBP

Nationwide House Prices s.a. (MoM) (APR)

0.1%

-0.2%

May signal slow recovery of UK markets

6:00

EUR

German Import Price Index (YoY) (APR)

9.9%

11.3%

Expected lower import prices may be due to strong Euro, general slowdown in demand for foreign goods

6:00

EUR

German Import Price Index (MoM) (APR)

0.7%

1.1%

6:00

CHF

Trade Balance (Swiss franc) (APR)

1.0B

April trade surplus may unexpectedly rise due to weaker franc, drop due to increasing EU risk

6:00

CHF

Exports (MoM) (APR)

-4.8%

6:00

CHF

Imports (MoM) (APR)

1.3%

6:45

EUR

French Consumer Confidence Indicator (MAY)

84

83

Mixed confidence points to possible greater consumption, lower investment

8:00

EUR

Italian Business Confidence (MAY)

102.7

103

12:30

USD

Gross Domestic Product (Annualized) (1Q S)

2.2%

1.8%

Overall quarter GDP expected to grow even though April and last few months show weakness going into summer

12:30

USD

Personal Consumption (1Q S)

2.8%

2.7%

12:30

USD

Gross Domestic Product Price Index (1Q S)

1.9%

1.9%

12:30

USD

Core Personal Consumption Expense (QoQ) (1Q S)

1.5%

1.5%

12:30

USD

Initial Jobless Claims (MAY 21)

404K

409K

Minor trickle downwards may show summer hiring trend

12:30

USD

Continuing Claims (MAY 14)

3700K

3711K

13:45

USD

Bloomberg Consumer Comfort Index (MAY 22)

-47

-49.4

Higher index may point to more consumption

20:00

USD

RPX Composite 28 Day (YoY) (MAR)

-4.27%

Residential real estate index shows continue decline as housing still lags

20:00

USD

RPX Composite 28 Day Index (MAR 31)

178.63

23:01

GBP

GfK Consumer Confidence Survey (MAY)

-31

-31

Outlook may be dampened by stagflation

23:30

JPY

Tokyo Consumer Price Index (YoY) (MAY)

0.1%

-0.1%

City-only May data may show effects of continued BoJ injections, but limited by yen strength in trade

23:30

JPY

Tokyo CPI Ex-Fresh Food (YoY) (MAY)

0.2%

0.2%

23:30

JPY

Tokyo Consumer Price Index Ex Food (MAY)

0.1%

23:30

JPY

National Consumer Price Index (YoY) (APR)

0.3%

0.0%

Nationwide April number may show greatest gains in tandem with record BoJ and government cash support

23:30

JPY

National CPI Ex-Fresh Food (YoY) (APR)

0.6%

-0.1%

23:30

JPY

National Consumer Price Index Ex Food (APR)

-0.1%

23:50

JPY

Retail Trade s.a. (MoM) (APR)

2.6%

-7.6%

April retail trade expected to show improvement after devastating earthquake disruption in March

23:50

JPY

Large Retailers' Sales (APR)

-1.3%

-7.7%

23:50

JPY

Retail Trade (YoY) (APR)

-6.2%

-8.3%

GMT

Currency

Upcoming Events & Speeches

9:15

EUR

ECB's Ewald Nowotny Speaks on European Economy

9:20

EUR

ECB President Jean-Claude Trichet Speaks on European Economy

12:00

EUR

ECB's Lorenzo Bini Smaghi Speaks on Inflation

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

1.4095

1.6179

82.01

0.8801

0.9766

1.0553

0.7972

115.60

132.69

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

11.6892

1.5981

6.9806

7.7773

1.2475

Spot

6.3419

5.2905

5.5632

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

1.4201

1.6320

82.21

0.8771

0.9809

1.0647

0.8082

116.34

133.73

Resist 1

1.4148

1.6249

82.11

0.8786

0.9788

1.0600

0.8027

115.97

133.21

Pivot

1.4108

1.6259

81.99

0.8748

0.9772

1.0555

0.7997

115.68

133.29

Support 1

1.4055

1.6188

81.89

0.8763

0.9751

1.0508

0.7942

115.31

132.77

Support 2

1.4015

1.6198

81.77

0.8725

0.9735

1.0463

0.7912

115.02

132.85

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

1.4282

1.6343

82.93

0.8910

0.9865

1.0698

0.8083

117.43

134.63

Resist. 2

1.4235

1.6302

82.70

0.8883

0.9840

1.0662

0.8055

116.97

134.15

Resist. 1

1.4188

1.6261

82.47

0.8856

0.9816

1.0626

0.8028

116.52

133.66

Spot

1.4095

1.6179

82.01

0.8801

0.9766

1.0553

0.7972

115.60

132.69

Support 1

1.4002

1.6097

81.55

0.8746

0.9716

1.0480

0.7916

114.68

131.72

Support 2

1.3955

1.6056

81.32

0.8719

0.9692

1.0444

0.7889

114.23

131.24

Support 3

1.3908

1.6015

81.09

0.8692

0.9667

1.0408

0.7861

113.77

130.75

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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