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FOREX: Dollar Stages a Late-Session Rally as Euro Trouble Compliments a Risk Reversal

FOREX: Dollar Stages a Late-Session Rally as Euro Trouble Compliments a Risk Reversal

2011-06-02 03:17:00
John Kicklighter, Chief Currency Strategist
Share:
  • Dollar Stages a Late-Session Rally as Euro Trouble Compliments a Risk Reversal
  • Euro: Greece Suffers Another Downgrade but Investors Saw it Coming
  • British Pound Slides as UK Growth Outlook Sours, BoE Fisher Talks Further QE
  • Canadian Dollar Loses all the Ground Gained with Interest Rate Speculation
  • New Zealand Dollar Closes its First Decline Against the Greenback in Six Days
  • Japanese Yen: What Does a Possible Vote of No Confidence for Kan Mean for Traders?
  • Gold Volatility Jumps but Dollar Rebound Keeps Metal from Advancing

Dollar Stages a Late-Session Rally as Euro Trouble Compliments a Risk Reversal

We are heading into the gravity of Friday’s nonfarm payrolls report; and the mere presence of this indicator has a history of distorting price action. This countdown requires taking a unique tack on fundamental and technical analysis that can render attractive setups inert and leverage otherwise mundane developments into some of the best trading opportunities. And given the price action we have seen through Wednesday’s close, the potential for volatility and perhaps even the beginning of new trends is dangerously high. Looking at activity levels across the capital and FX markets this past trading session, we had something of a disparate performance. Risk appetite started to rumble and flag in the London session and really began to topple before the New York session was online. Our favored benchmark for risk appetite trends – the S&P 500 –accelerated into a tumble that would eventually close its worst single-day decline (2.3 percent) since August 11th. Yet, despite the momentum behind one of the greenback’s favored catalysts, the currency’s own advance would be delayed for a number of hours.

Though the Dow Jones FXCM Dollar Index eventually put in for a strong close, the bullish run really didn’t catch traction until around mid-day during the US session. This disconnect can be largely ascribed to the market’s most liquid pair: EURUSD. Cautious optimism that European officials may be able to prevent a deeper financial crisis through Greece’s troubles (or at delay it for a little longer) has afforded the dollar’s primary catalyst a level of buoyancy. However, that artificial strength was broken with Moody’s downgrading Greece (more on that below); leading EURUSD to follow prevailing sentiment trends and allowing the dollar to thereby play its sometimes questionable safe haven role.

Risk trends began their tumble for the day after the release of two disappointing US indicators. The ADP employment change figure for May has shown itself to be a poor guide for the government’s NFPs release the follows; but the big miss in the 38,000 print was enough to unnerve investors and significantly reduce the consensus for Friday’s data. Considering the greater market risk is for an unwinding of risky positions given Euro-area troubles and the approaching expiration of the QE2 program; this data may have leveraged the volatility potential for the upcoming jobs data. In comparison, the ISM manufacturing activity survey for May adds another level to the growth/stimulus uncertainty. The weakest reading from the US economy’s primary driver in 20 months may rouse debate about the necessity of QE3. Some believe that expectations of an immediate stimulus program to replace the expiring facility is keeping US rates under pressure and the dollar on the short side of FX trades; but it is more likely that market participants are just hesitant to take profit on such a consistent trade. Just a matter of time.

Related:Discuss the Dollar in the DailyFX Forum, John’s Picks: AUDUSD, CADJPY and Other Breakout Opportunities Far from Sure-Bets

Euro: Greece Suffers Another Downgrade but Investors Saw it Coming

Through much of the European session, the euro was pushing forward. The pace of currency’s climb was certainly tame; but the bias was nonetheless clear. The prevailing fundamental discussion through this advance was the growing consensus amongst policy officials for Greece to pursue a rollover plan where bond holders of the nation’s expiring debt would willingly buy new issues for similar terms and a further maturity date. This is the legitimate alternative to the ‘restructuring’ or ‘reprofile’ options that have been floated recently. Yet, the confidence that this optimism would instill was broken with the unexpected downgrade of Greece’s sovereign credit rating from B1 to Caa1. For perspective, the rating agency noted that Caa1-rated entities have shown a 50 percent default rate over five years. There isn’t any major European event risk due in the final 48 hours of this week; so we will have to watch prevailing risk trends and the discussion surrounding the Greek-situation.

British Pound Slides as UK Growth Outlook Sours, BoE Fisher Talks Further QE

With considerable risk-based drivers and euro-specific catalysts, the sterling would be pulled in many directions against its liquid counterparts. However, the sterling generated its own volatility through the opening London hours. It may seem few UK-considerations can rouse the pound; but the balance of growth and austerity is still a major concern. Therein lies the dramatic reaction from the two-year low from the factory PMI.

Canadian Dollar Loses all the Ground Gained with Interest Rate Speculation

Just this past Tuesday, the Canadian dollar surged after the BoC used the term “eventually” when it was referring to the timing of the next rate hike. As ambiguous as that projection may be, FX traders took it to be a clear sign of hawkishness. However, the market may not be so apt to follow speculators. The 12-month rate forecast for the BoC has actually dropped 8 bps and Libor rates were unmoved – leaving little support.

New Zealand Dollar Closes its First Decline Against the Greenback in Six Days

The New Zealand dollar closed in the red against its US counterpart after posting a bullish run that consisted of 9 daily advances in 10 days. The selling pressure behind this reversal from record highs was unmistakably risk appetite trends. However, it was the dubious strength the kiwi displayed in the preceding weeks that has left the currency open to correction. If sentiment stalls, the New Zealand dollar could still drop.

Japanese Yen: What Does a Possible Vote of No Confidence for Kan Mean for Traders?

With the market making a concerted effort to unwind its risky positions, investors are also reversing their carry trades and bolstering the Japanese yen. This is a prolific trend; but we should still keep a close eye on the financial situation in Japan. Prime Minister Kan faces a possible vote of no-confidence which would require his resignation or re-election – pushing back any progress with getting the budget under control.

Gold Volatility Jumps but Dollar Rebound Keeps Metal from Advancing

The CBOE’s volatility index for gold futures showed its biggest daily jump in nearly a month through yesterday’s session; but the increased activity level did little to establish a clear trend for the metal. The strength for the dollar provided a bearish pressure for gold that was offset by the anti-currency sentiment that resulted from the Greek downgrade. On a side-note, silver took a clear and unmistakable tumble.

For Real Time Forex News, visit: http://www.dailyfx.com/real_time_news/

**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

1:30

AUD

Trade Balance (Australian dollar) (APR)

2100M

1740M

April surplus may rise more as ore hits record highs despite Chinese tightening

1:30

AUD

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

0.4%

-0.5%

Consumption may slow into summer

8:30

GBP

Purchasing Manager Index Construction (MAY)

53.5

53.3

May follow industrial PMI lower

12:00

USD

RBC Consumer Outlook Index (JUN)

42.9

May decline heading into summer months

12:30

USD

Unit Labor Costs (1Q F)

0.8%

1.0%

Preliminary labour market conditions ahead of tomorrow’s change in non-farm payrolls may prove indicative

12:30

USD

Initial Jobless Claims (MAY 28)

417K

424K

12:30

USD

Continuing Claims (MAY 21)

3675K

3690K

12:30

USD

Non-Farm Productivity (1Q F)

1.7%

1.6%

13:45

USD

Bloomberg Consumer Comfort (MAY 29)

-47

-48.4

May confidence show slight improvement

14:00

USD

Factory Orders (APR)

-1.0%

3.4%

Weaker demand to hit orders

14:30

USD

DOE U.S. Crude Oil Inventories (MAY 27)

-1600K

-15K

Gasoline and major energy inventories expected to decline as demand wanes into Summer, weak industrial outlook

14:30

USD

DOE Cushing OK Crude Inventory (MAY 27)

56K

14:30

USD

DOE U.S. Distillate Inventory (MAY 27)

-250K

-2040K

14:30

USD

DOE Gasoline Inventories (MAY 27)

900K

3794K

14:30

USD

DOE U.S. Refinery Utilization (MAY 27)

0.5%

3.1%

22:45

NZD

Building Permits (MoM) (APR)

0.5%

2.2%

May be leading indication of slowing NZ construction, similar to Australia

23:30

AUD

AiG Performance of Service Index (MAY)

51.5

May improve pending record company investment spending in Q1

GMT

Currency

Upcoming Events & Speeches

1:30

JPY

BOJ Board Member Nakamura to Speak in Nara City

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

1.4377

1.6362

80.92

0.8424

0.9745

1.0656

0.8185

116.34

132.40

Support 1

1.4000

1.6160

80.00

0.8400

0.9500

1.0400

0.7745

113.80

125.00

Support 2

1.3700

1.5750

75.00

0.8300

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

11.6610

1.5948

6.8242

7.7786

1.2362

Spot

6.2222

5.1857

5.4150

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

1.4495

1.6551

81.95

0.8611

0.9809

1.0787

0.8289

118.29

135.19

Resist 1

1.4436

1.6457

81.43

0.8518

0.9777

1.0722

0.8237

117.31

133.79

Pivot

1.4400

1.6401

81.06

0.8450

0.9722

1.0687

0.8208

116.74

132.98

Support 1

1.4341

1.6307

80.54

0.8357

0.9690

1.0622

0.8156

115.76

131.58

Support 2

1.4305

1.6251

80.17

0.8289

0.9635

1.0587

0.8127

115.19

130.76

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

1.4562

1.6523

81.81

0.8533

0.9838

1.0800

0.8299

118.08

134.11

Resist. 2

1.4516

1.6483

81.59

0.8505

0.9815

1.0764

0.8271

117.65

133.69

Resist. 1

1.4470

1.6442

81.37

0.8478

0.9792

1.0728

0.8242

117.21

133.26

Spot

1.4377

1.6362

80.92

0.8424

0.9745

1.0656

0.8185

116.34

132.40

Support 1

1.4284

1.6282

80.47

0.8370

0.9698

1.0584

0.8128

115.47

131.55

Support 2

1.4238

1.6241

80.25

0.8343

0.9675

1.0548

0.8099

115.03

131.12

Support 3

1.4192

1.6201

80.03

0.8315

0.9652

1.0512

0.8071

114.60

130.69

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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