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FOREX: Dollar Extends its Decline, Tumbling US Yields Makes a Risk Appetite Move Critical

FOREX: Dollar Extends its Decline, Tumbling US Yields Makes a Risk Appetite Move Critical

2011-05-27 04:34:00
Research, Research Team
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  • Dollar Extends its Decline, Tumbling US Yields Makes a Risk Appetite Move Critical
  • Euro Can’t Curb the Selling Pressure as EU’s Juncker Warns Greece May Miss Aid Traunche
  • British Pound Taking Advantage of Weak Primary Counterparts, Firm Sentiment
  • Japanese Yen Rallies Despite Stable Risk Trends, Helped by Inflation Figures
  • New Zealand Dollar Leverages Rumors of Chinese Investment, Rate Expectations to Gains
  • Swiss Franc Rallies Well after the IMF Suggests the SNB Should Raise Rates Soon
  • Gold Slides a Second Day as Investors Show Contentedness in FX Rates

Dollar Extends its Decline, Tumbling US Yields Makes a Risk Appetite Move Critical

Already struggling to fund a fundamental spark to revive its bullish efforts, the dollar will find it even more difficult to jump start a meaningful rally through the final trading day this week. Heading into the final 24 hours of trade for the period, the market will be winding down for the liquidity lull; and the market-holiday on Monday (Memorial Day) will further curb expectations of active markets after the break. For the dollar itself, absence of the bulk of US bank liquidity will play its own factor thinning out activity; but there is a second round effect to consider. Given the currency’s direct connection to risk appetite trends (a tumble in investor sentiment is one of the few things that can offer the greenback a meaningful boost), a ‘dark’ US session on Monday will significantly dampen any efforts to throttle global trends and thereby the dollar. Looking at the early trading hours of the today’s session, we see that the Dow Jones FXCM Dollar Index is slipping below two-week support at 9,600 while Asian equities show restrained gains for the market to carry through subsequent sessions.

Going forward, risk appetite is one of the few catalysts that can reasonably rally the dollar in the near-term. In the absence of the safe-haven demand, the market will judge the greenback for its return potential – and in these terms, the currency simply cannot compete. Looking at rates, we have seen the 2-year Treasury rate tumble for seven consecutive weeks to its lowest level in six months (now at 0.488 percent) while the one-week Libor rate is just off a recent record low of 0.164 percent. Not only do US rates offer very little return; they are actively retreating. This does little for the risk/reward balance of this pair. The fix on this side of the scales is speculation of stimulus withdrawal and the eventual rate hike. In Friday’s session we don’t have any meaningful monetary policy speeches scheduled. That June QE2 expiration looks far away.

As for data, Thursday’s docket brought recap indicators. The first quarter GDP reading was a revision. The initial figures typically come with the biggest divergences from forecasts and therefore are the most market-moving. The headline statistics showed growth was in line with the initial estimates of a 1.8 percent growth - and below the 2.2 percent positive revision projected. From the breakdown, there was reason for concern. Personal consumption was weaker than initially estimated at 2.2 percent expansion through the period; and if we excluding inventories’ contribution, the world’s largest economy didn’t crack the 1.0 percent growth level. The upcoming listings are similar reserved for impact. The April personal income and spending figures are notable for the US consumer; but ultimately lack impact.

Related:Discuss the Dollar in the DailyFX Forum, John’s Picks: Fading Short-term Swells a More Timely Endeavor than Big Breaks - EURUSD

Euro Can’t Curb the Selling Pressure as EU’s Juncker Warns Greece May Miss Aid Traunche

The euro has won notable progress against its benchmark US counterpart; but its strength hasn’t really spread beyond this most liquid pair. Against the Japanese yen and the Swiss franc – two other safe haven currencies – the euro was sharply lower into the early Friday session. The isolated strength of EURUSD can therefore be associated to the dollar. Looking at the fundamental health of the euro, we don’t have to look far to identify the trouble. The top headline for the Euro session was head of the EU Finance Ministers Juncker’s suggestion that Greece may not receive its next traunche of its financial assistance from the IMF next month as group awaits 12 month refinancing guarantees. In the meantime, Spain is reportedly looking for a six-month extension on guarantees for 80 billion euros in bank bonds. Considering the Chief Executive of the EFSF said he expects ‘clear interest’ from China at the next 3 to 5 billion euro auction to fund Portugal’s aid and it was unable to nudge the euro higher; the market’s view has been clearly set. In the upcoming session look for German CPI, Euro Zone money supply and sentiment surveys.

British Pound Taking Advantage of Weak Primary Counterparts, Firm Sentiment

The pound was showing significant strength across the spectrum Thursday. Looking for fundamental catalysts for this move, the GfK consumer sentiment survey report for May (printing at -21 against expectations of -31) was a notable pick up; but late to the game and generally lacking for influence. Perhaps more notable for the ‘rate game’ was the YouGov survey of inflation 12-month rate expectations jumping to 3.4 percent.

Japanese Yen Rallies Despite Stable Risk Trends, Helped by Inflation Figures

The Japanese yen was generally following the path of risk trends (accept where the dollar was concerned). A synchronized decline followed the slow advance of US shares into the climb for the Asian market. For data, the session brought inflation and retail trade figures that notably better than expected. That said, a 0.1 percent contraction in core national prices and 1.9 percent drop in large sales is hardly a strong catalyst.

New Zealand Dollar Leverages Rumors of Chinese Investment, Rate Expectations to Gains

Aside from the Swiss franc’s remarkable (and so far inexplicable) rally through the Asian session, the New Zealand dollar stands out as the best performer overall through the past 24 hours. This strength can be partially attributed to yields and yield expectations. However, suggestions that China’s Investment Corporation will set aside NZ$6 billion (1.5 percent of its FX reserves) to invest in New Zealand.

Swiss Franc Rallies Well after the IMF Suggests the SNB Should Raise Rates Soon

Everyone has an opinion; but it is those that have some level of influence over policy who can turn suggestion into price action. That said, the IMF suggested the Swiss National Bank should raise rates soon and avoid further easing given inflation and financial strength. Yet, this does not explain why the franc rallied across the board by approximately 100 points across the board. Capital flows in a light session is likely the culprit.

Gold Slides a Second Day as Investors Show Contentedness in FX Rates

Looking beyond the normal gold/dollar relationship, we saw that the precious metal was lower against euro, pounds and Australian dollars through the day. There is a modest bounce into the early Friday session; but this strength doesn’t make up for the previous few trading sessions. With the market showing favor for FX yields, the need for a currency alternative wanes. That said, this is still a weak rise in currency appetite.

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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

1:35

CNY

MNI Business Condition Survey (MAY)

69.28

Both have recently fallen as PBoC prevents economy from overheating

2:00

CNY

Industrial Profits (YTD) (YoY) (APR)

32%

6:00

GBP

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

0.1%

-0.2%

Major indicators of UK residential house market show slight recovery

6:00

GBP

Nationwide House Prices n.s.a. (YoY) (MAY)

-1.7%

-1.3%

8:00

EUR

Euro-Zone M3 s.a. (3M) (APR)

2.3%

2.0%

Higher money supply despite higher rates point to debt liabilities

8:00

EUR

Euro-Zone M3 s.a. (YoY) (APR)

2.4%

2.3%

8:00

EUR

Italian Hourly Wages (MoM) (APR)

0.2%

0.2%

First of EU wage growth data expected flat

8:00

EUR

Italian Hourly Wages (YoY) (APR)

2.0%

2.0%

9:00

EUR

Euro-Zone Economic Confidence (MAY)

105.7

106.2

May confidence levels continue to fall, may be due to going into summer months, but because of peripheral risks

9:00

EUR

Euro-Zone Business Climate Indicator (MAY)

1.2

1.28

9:00

EUR

Euro-Zone Consumer Confidence (MAY F)

-9.7

9:00

EUR

Euro-Zone Industrial Confidence (MAY)

5.3

5.8

9:00

EUR

Euro-Zone Services Confidence (MAY)

10

10.4

9:30

CHF

KOF Swiss Leading Indicator (MAY)

2.22

2.29

May be hurt by CHF strength, low exports

12:30

USD

Personal Income (APR)

0.4%

0.5%

Indicator going into May months suggests consumer spending still has long way before fully recovering

12:30

USD

Personal Spending (APR)

0.5%

0.6%

12:30

USD

Personal Consumption Exp Core (MoM) (APR)

0.2%

0.1%

Personal consumption expands nominally, but may be too soon to indicate rate hike

12:30

USD

Personal Consumption Exp Core (YoY) (APR)

1.0%

0.9%

12:30

USD

Personal Consumption Exp Deflator (YoY) (APR)

1.8%

13:55

USD

U. of Michigan Confidence (MAY F)

72.4

72.4

Has fallen from recent high of 78

14:00

USD

Pending Home Sales (MoM) (APR)

-1.0%

5.1%

Bad April data continues to show turn in real estate after March reports

14:00

USD

Pending Home Sales (YoY) (APR)

-11.5%

EUR

German CPI - EU Harmonised (MoM) (MAY P)

0.1%

0.3%

Major event of the day – YoY inflation expected lower, coupled with existing EU problems may prompt Trichet to delay price stability

EUR

German CPI - EU Harmonised (YoY) (MAY P)

2.7%

2.7%

EUR

German Consumer Price Index (MoM) (MAY P)

0.0%

0.2%

EUR

German Consumer Price Index (YoY) (MAY P)

2.3%

2.4%

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

1.4129

1.6385

81.33

0.8662

0.9787

1.0630

0.8105

114.91

133.27

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

11.6746

1.6030

6.9572

7.7829

1.2436

Spot

6.2971

5.2770

5.4981

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

1.4274

1.6479

82.46

0.8765

0.9846

1.0727

0.8224

117.16

134.40

Resist 1

1.4201

1.6432

81.89

0.8713

0.9816

1.0679

0.8164

116.04

133.83

Pivot

1.4135

1.6350

81.53

0.8682

0.9787

1.0594

0.8066

115.25

133.24

Support 1

1.4062

1.6303

80.96

0.8630

0.9757

1.0546

0.8006

114.13

132.67

Support 2

1.3996

1.6221

80.60

0.8599

0.9728

1.0461

0.7908

113.34

132.07

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

1.4322

1.6550

82.23

0.8773

0.9885

1.0776

0.8217

116.74

135.16

Resist. 2

1.4274

1.6509

82.01

0.8745

0.9861

1.0739

0.8189

116.28

134.68

Resist. 1

1.4226

1.6467

81.78

0.8717

0.9836

1.0703

0.8161

115.82

134.21

Spot

1.4129

1.6385

81.33

0.8662

0.9787

1.0630

0.8105

114.91

133.27

Support 1

1.4032

1.6303

80.88

0.8607

0.9738

1.0557

0.8049

114.00

132.32

Support 2

1.3984

1.6261

80.65

0.8579

0.9713

1.0521

0.8021

113.54

131.85

Support 3

1.3936

1.6220

80.43

0.8551

0.9689

1.0484

0.7993

113.08

131.37

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

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