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Dollar Slips as Risk Aversion Cools, NFPs are Pulling Us Forward

Dollar Slips as Risk Aversion Cools, NFPs are Pulling Us Forward

2011-08-04 00:22:00
John Kicklighter, Chief Strategist
Share:
  • Dollar Slips as Risk Aversion Cools, NFPs are Pulling Us Forward
  • Euro Puts in for a Modest Bounce Ahead of an Important ECB Decision
  • Swiss Franc Retracement and Volatility Tame Despite SNB Removing all the Stops
  • British Pound: What is More Market Moving, the Service Sector Report or BoE?
  • Australian Dollar Struggles to Leverage the Sentiment Rebound after Weak Data
  • New Zealand Finds a Reserved Boost from In-Line Employment Figures
  • Gold Still Pressing Higher Sentiment Stabilizes, Financial Panic Eases

Dollar Slips as Risk Aversion Cools, NFPs are Pulling Us Forward

Though the dollar showed limited progress as the risk aversion wave picked up through the opening 48 hours of the week (at least compared to the drive that we saw on more direct barometers like the S&P 500); the currency certainly suffered for the subsequent bounce in sentiment. The US currency has consistently lost its role as a safe haven over time; and the budget fiasco (along with its lasting implications for the country’s medium-term sovereign rating) has only exacerbated that divergence. The net effect: the benchmark S&P 500 index only recovered 0.2 percent through this past session after a 3 percent tumble. In contrast, the Dow Jones FXCM Dollar Index (ticker = USDollar) is down 0.3 percent after sparse 2 percent run. The fundamental take away from this disparity is that the there are very few things that can encourage the greenback at this point and keep the currency running.

Despite the dollar’s troubles with its risk appetite role; FX traders will keep their sights fixed on the tides in sentiment. If the positioning unwinding of the past week maintains its pace going forward, the fading reserve currency would very likely revive its role as the harbor from the storm because there are still few viable alternatives – not to mention significant carry (through stimulus) has been built through dollar shorts and it is generally severely oversold. However, there are lasting complications that will continue to break down the correlation. One of the most pressing issues at the moment is the possibility that the slowdown in the economy and the forced fiscal restraint on the US government will lead the Fed to pursue yet another wave of policy easing. This may or may not be easily labeled as ‘QE3’ (or quantitative easing); but the purpose behind the effort will nevertheless be the same. What’s more, the effectiveness would likely be equivalent as well. We note that after a brief capital market rally after the QE2 program was first discussed; the stock market has traced out a broad congestion/topping pattern and we have seen little relief through employment or lasting consumption trend. That won’t necessarily stop them from trying however. And, until the Fed Decision next week and the Jackson Hole Symposium a few weeks from now pass; this concern will continue to undermine the dollar.

In the meantime, any sustained drops in the capital markets and disappointing data that prevails will only heighten the confusion between risk aversion and stimulus. This past session, the ISM service sector report dropped to a 17-month low. What really counts though is Friday’s NFPs.

Related:Discuss the Dollar in the DailyFX Forum, John’s Picks: GBPUSD and EURCAD Offer Short-Term, Risk-Heavy Opportunity

Euro Puts in for a Modest Bounce Ahead of an Important ECB Decision

Looking at the economic listings over the second half of this week, the threat level is high; but the general number of scheduled releases is relatively small. In the coming 24 hour period, there are in fact very few. That said, the potential for extraordinary volatility for the euro is exception. That’s because we have the ECB rate decision on tap. The policy decision itself isn’t the primary focus – as the market and economists are unanimous in their expectations for the central bank to hold the benchmark rate at 1.50 percent. Rather, the real interest lies in President Trichet’s press conference 45 minutes after the announcement is made (at 12:30 GMT) where the market will try to extract any evidence that the central bank plans to move at the following meeting. If we recall at the last meeting, the ‘strong vigilance’ phrase that has become synonymous with an impending hike was left out; but ECB member Noyer used it to great effect last week. There may already be considerable interest behind a hawkish leaning priced into the market. If the group holds neutral, the euro could succumb to risk trends.

Swiss Franc Retracement and Volatility Tame Despite SNB Removing all the Stops

Recognizing that they were running out of options, the SNB decided to up its effort to put the breaks on the Swiss franc’s meteoric rise. Going beyond the wasted intervention effort; the central bank decided to lower its benchmark lending to ‘as close to zero’ as possible (0.00 to 0.25 percent), allow up to 80 billion francs in bank sight deposits, buy back SNB bills and stop repos all in the effort to flood the market. The effort was remarkable; but the result was the same. The franc’s retreated was quickly quelled. Between SNB flooding and risk aversion, the latter will win.

British Pound: What is More Market Moving, the Service Sector Report or BoE?

As usual, the typically volatility-inducing ECB rate decision will be preceded by the Bank of England’s own policy decision. In looking at the consensus forecast and swaps pricing; there is virtually no chance of a change in policy priced in. However, it is in such complacency that ‘black swan’ events occur. So while the service sector report this past session is probably more market moving, just be ready for further BoE easing.

Australian Dollar Struggles to Leverage the Sentiment Rebound after Weak Data

Risk appetite has found some relief this past session; but the Australian dollar has struggled to capitalize on the move. A high yield is only one component of a currency’s positioning on the risk spectrum; and too many factors have fallen apart for the Aussie dollar. The financial and economic exposure to a global and Chinese slowdown has been made all-too obvious after the disappointing retail sales and trade data.

New Zealand Finds a Reserved Boost from In-Line Employment Figures

For most other majors, the report of no change in employment would be a disappointment when the global economic outlook has taken a notable turn for the worst. Yet, for the New Zealand dollar it is yet another blip. Employment was unchanged trough 2Q and the jobless rate held at 6.5 percent. But, as long as New Zealand government bonds continue to offer a yield greater than its liquid counterparts, the kiwi remains buoyant.

Gold Still Pressing Higher Sentiment Stabilizes, Financial Panic Eases

Though there was a notable retracement in risk aversion and European yields / credit default swap rates eased this past session; gold still managed to put in for a new record high close. In the absence of the imminent sovereign debt crisis or a crunch on credit markets; the metal can fall back on the medium-term outlook for further US stimulus or a downgrade for the country.

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

10:00

EUR

German Factory Orders s.a. (MoM) (JUN)

-0.2%

1.8%

Fall expected, pending lower exports as the global recovery slows

10:00

EUR

German Factory Orders n.s.a. (YoY) (JUN)

6.8%

12.2%

11:00

GBP

BOE Asset Purchase Target

200B

200B

Widely expected to hold to prevent bank from hindering British growth

11:00

GBP

Bank of England Rate Decision

0.5%

0.5%

11:45

EUR

European Central Bank Rate Decision

1.5%

1.5%

Major event of the day – commentary will give traders better insight to the path of future hikes and peripheral problems

12:00

USD

RBC Consumer Outlook Index (AUG)

43.7

Has steadily climbed since early 2009

12:30

USD

Initial Jobless Claims (JUL 30)

405K

398K

Weekly report expected to report better, may give additional insight before Friday’s NFPs

12:30

USD

Continuing Claims (JUL 23)

3700K

3703K

13:45

USD

Bloomberg Consumer Comfort (JUL 31)

-47.5

-46.8

Index may record 3rd weekly drop

14:30

USD

EIA Natural Gas Storage Change (JUL 30)

43

Lower storage may be due to demand

23:50

JPY

Official Reserve Assets (JUL)

$1137.8B

Could increase on moderate yen selling

USD

ICSC Chain Store Sales YoY (JUL)

6.9%

Usually suggests path of retail sales

GBP

New Car Registrations (YoY) (JUL)

-6.2%

Steadily recovering since mid-2010

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

1.6600

86.00

0.8550

1.0275

1.1800

0.9020

118.00

146.05

Resist 1

1.5000

1.6475

81.50

0.8275

1.0000

1.1000

0.8750

113.50

140.00

Spot

1.4318

1.6422

76.93

0.7683

0.9618

1.0749

0.8626

110.15

126.34

Support 1

1.4000

1.5935

77.00

0.7600

0.9425

1.0400

0.7745

109.00

125.00

Support 2

1.3700

1.5750

76.25

0.7500

0.9055

1.0200

0.6850

106.00

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

1.8235

7.4025

7.8165

1.3650

Resist 2

7.5800

5.6625

6.1150

Resist 1

12.5000

1.7425

7.3500

7.8075

1.3250

Resist 1

6.5175

5.3100

5.7075

Spot

11.8213

1.6965

6.7326

7.7991

1.2061

Spot

6.3462

5.2022

5.3679

Support 1

11.5200

1.6500

6.5575

7.7490

1.2000

Support 1

6.0800

5.1050

5.3040

Support 2

11.4400

1.5725

6.4295

7.7450

1.1800

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

1.4470

1.6548

77.66

0.7872

0.9690

1.0845

0.8730

111.48

127.44

Resist 1

1.4394

1.6485

77.29

0.7777

0.9654

1.0797

0.8678

110.82

126.89

Pivot

1.4269

1.6368

77.04

0.7694

0.9611

1.0738

0.8627

109.94

126.08

Support 1

1.4193

1.6305

76.67

0.7599

0.9575

1.0690

0.8575

109.28

125.53

Support 2

1.4068

1.6188

76.42

0.7516

0.9532

1.0631

0.8524

108.40

124.73

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

1.6582

77.80

0.7796

0.9719

1.0900

0.8751

111.88

128.01

Resist. 2

1.4465

1.6542

77.58

0.7768

0.9694

1.0862

0.8720

111.45

127.59

Resist. 1

1.4416

1.6502

77.36

0.7740

0.9669

1.0825

0.8689

111.01

127.17

Spot

1.4318

1.6422

76.93

0.7683

0.9618

1.0749

0.8626

110.15

126.34

Support 1

1.4220

1.6342

76.50

0.7626

0.9567

1.0673

0.8563

109.29

125.50

Support 2

1.4171

1.6302

76.28

0.7598

0.9542

1.0636

0.8532

108.85

125.09

Support 3

1.4122

1.6262

76.06

0.7570

0.9517

1.0598

0.8501

108.42

124.67

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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