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Dollar and Risk Grow Increasingly Volatile as Jackson Hole Approaches

Dollar and Risk Grow Increasingly Volatile as Jackson Hole Approaches

2011-08-25 02:48:00
John Kicklighter, Chief Strategist
Share:
  • Dollar and Risk Grow Increasingly Volatile as Jackson Hole Approaches
  • Euro Financial Situation Perhaps the Greatest Loser with No QE3
  • Japanese Yen Starting to Retreat – Is Intervention Finally Successful?
  • Gold Extends its Incredible Reversal But don’t Load Up a Bearish Position Yet
  • British Pound Slips after Better than Expected Sentiment Read
  • Canadian Dollar Struggles for Ground as Rate Outlook Jumps, Oil Eases
  • New Zealand Dollar Little Moved after Retail Sales Prove Buoyant

Dollar and Risk Grow Increasingly Volatile as Jackson Hole Approaches

We are one day closer to Friday’s Jackson Hole Symposium and the market’s reaction to Fed Chairman Ben Bernanke’s reflections on further stimulus. As the countdown continues, market participants grow increasingly anxious to see what tack investor sentiment and capital markets take in the weeks ahead. Naturally, this angst is showing through exactly as expected through our risk trend standard bearers and the US dollar. On the market surface, we see price action further falling into its consolidation. Reflecting investors’ uncertainty, the S&P 500 put in for a hearty intraday swing – the fact that the day ended higher will mean little should bulls find themselves without additional central bank support at the end of the week. For the Dow Jones FXCM Dollar Index (ticker = USDollar), we were left with yet another swing within the two week-long congestion between 9,510 and 9,410. Again, the fact that this was a bullish swing (against equities) means little given the risk ahead.

If we only had price action alone to go on, we could assume that there is fear of what lies ahead – but that would only be a presumption. However, we can tap the fears and expectations from the market through other fundamental channels. Perhaps the best reflection of trouble brewing under the surface is the pickup in default insurance premiums and overnight funds. Credit default swaps (CDS) are used primarily to protect against losses in what are typically long-only investors or exposures. Despite the remarkable and recent downgrade, US sovereign CDS rates have actually retreated recently (though they are still clearly trending higher since late 2009). This is perhaps testament to the safe haven status of the US dollar and US Treasury as uncertainty builds. In contrast, bank level fear is clearly picking up. Rumors that certain banks are facing liquidity troubles which could quickly turn into full-blown crisis are relatively consistent. Translated into demand for protection in CDS products, we note that a corporate wide index has jumped to its highest level since the Flash Crash / European crisis period back in the first half of 2010. Liquidity is the next step in the equation – something that will not be seriously leveraged until it is absolutely essential. Therefore, overnight Libor rates are slowly edging higher awaiting clarity on whether return or liquidity are more vital.

In the meantime, scheduled event risk is merely a distraction. The docket through the previous session held a lackluster showing from durable goods figures (reflecting the sector that was largely responsible for the US recovery from its worst recession in modern times) and a 0.6 percent contraction in 2Q home prices. Given this data’s influence was lacking, it is appropriate that the coming 24 hours only holds the initial jobless claims figures for the week ending August 20th – labor trends are important; but they don’t fit into the current stimulus discussion.

Related: Discuss the Dollar in the DailyFX Forum, John’s Video: EURUSD and USDCAD are Jackson Hole Trade Candidates, Watch Gold

Euro Financial Situation Perhaps the Greatest Loser with No QE3

The same troubles that the dollar faces – the euro’s situation is magnitudes larger. Though the QE3 debate surrounding the Jackson Hole gathering later this week is distinctly sourced for the US; the fallout has greater implications for the global financial markets. Should speculators who have grown used to moral hazard end up disappointed, they will in turn show withdrawal from risk wherever it may be – and there is certainly risk in the Euro Zone. Now we are working on three fronts with Europe. On one approach, we have a renewed concern in the ongoing bailout regime with Greek 2 year yields (above 44 percent) reflecting severe concern that continued support will soon fall apart. Next, we have bank-level problems with EU corporate CDS measures at record highs. And finally, a growing threat, a slowdown in economic activity.

Japanese Yen Starting to Retreat – Is Intervention Finally Successful?

It was only 8 to 12 hours late; but it seemed the Japanese yen was finally falling after Moody’s announced it was downgrading the country and the government was adopting a $100 billion program along with rules to expose speculators in the FX market. Does intervention work? Well, if this is the outcome for such a tremendous effort of market manipulation, it is fair to say that it was far from successful.

Gold Extends its Incredible Reversal But don’t Load Up a Bearish Position Yet

Following up on a remarkable 3.7 percent plunge Tuesday, gold would mark a 3.8 percent tumble the very next session. This is an extreme level of volatility for the metal (so much so that futures margins were hiked over 20 percent); but it is fitting given the preceding surge. Given this asset’s role as an anti-fiat, it can easily regain its footing. Yet, in the meantime, we need to watch out for the effects of margin calls.

British Pound Slips after Better than Expected Sentiment Read

A link to Europe’s hardship and deteriorating interest rate outlook is keeping the pound under pressure; but that wasn’t necessarily the active catalyst for the sterling’s slip this past session. Neither was event risk that influential. The slip in the Nationwide consumer confidence index doesn’t really play to the most pressing themes for this currency; but it does fold into the low trend / high volatility scenario.

Canadian Dollar Struggles for Ground as Rate Outlook Jumps, Oil Eases

The Canadian dollar has recently found support from a jump in interest rate expectations (though those aren’t likely to last) and pressure from easing oil prices. However, the market is really interested in the fundamental connection between Canada and its largest trading partner – the US. That makes USDCAD one of the most intriguing pairs come Friday as it specifically isolates the stimulus discussion.

New Zealand Dollar Little Moved after Retail Sales Prove Buoyant

The kiwi dollar is reflecting on its economic health and more aptly driving through its interest rate expectations. That said, the 0.9 percent increase in 2Q retail sales should bolster both aspects of the currency. However, the modest increase in rate potential this offers doesn’t offset the underlying current in risk trends. And, at the moment, those are severely muddled.

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

18:45

NZD

Retail Sales Ex Inflation (QoQ) (2Q)

0.9%

Domestic consumption and inflation figures will add to the rate outlook

18:45

NZD

Food Prices (MoM) (JUL)

1.4%

19:01

GBP

Nationwide Consumer Confidence (JUL)

45

51

Consumer sentiment has tumbled in Europe, the UK looks to see if it will suffer as well

19:50

JPY

Japan Buying Foreign Bonds (Yen) (AUG 19)

-350.5B

With risk trends building and Japan recently downgraded, we will see capital repatriated to fortify JGBs while foreign interest drops off

19:50

JPY

Japan Buying Foreign Stocks (Yen) (AUG 19)

139.0B

19:50

JPY

Foreign Buying Japan Bonds (Yen) (AUG 19)

217.6B

19:50

JPY

Foreign Buying Japan Stocks (Yen) (AUG 19)

-400.9B

21:00

AUD

CBAHIA House Affordability (2Q)

55.7

Another indicator to gauge the progress of a possible crisis for the Australian economy

2:00

EUR

German GfK Consumer Confidence Survey (SEP)

5.1

5.4

After the poor showing from the Euro Zone confidence figure earlier this week, expectations won’t be set high

5:00

CHF

ZEW Survey (Expectations) (AUG)

-58.9

Though capital is flowing from Europe into Switzerland, investor sentiment isn’t likely showing that same level of confidence

6:00

GBP

CBI Reported Sales (AUG)

-10

-5

Retail sales activity expected to take a significant turn for the worst as the austerity bite sets in

8:30

USD

Initial Jobless Claims (AUG 20)

405K

408K

Much will be made out of these frequent employment figures; but they will do little to change the larger trend

8:30

USD

Continuing Claims (AUG 13)

3700K

3702K

9:45

USD

Bloomberg Consumer Comfort Index (AUG 21)

-48.3

This short-term confidence indicator is useful in reflecting recent developments – like expectations for QE3

12:00

EUR

French Total Jobseekers Change (JUL)

0.0

33.6

For an economy that is slowing and financial system that is starting to show the flu, an indicator like this shows us what is happening from the ground level

12:00

EUR

French Total Jobseekers (JUL)

2720.4

2720.4

GMT

Currency

Upcoming Events & Speeches

--:--

GBP

BoE's Martin Weale Speaks on U.K. 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

1.6745

86.00

0.8275

1.0275

1.0800

0.9020

118.00

146.05

Resist 1

1.5000

1.6600

81.50

0.8000

1.0000

1.0645

0.8750

113.50

140.00

Spot

1.4423

1.6380

76.98

0.7956

0.9871

1.0468

0.8278

111.03

126.10

Support 1

1.4000

1.5935

76.35

0.7000

0.9425

1.0400

0.7745

109.00

124.00

Support 2

1.3700

1.5750

75.50

0.6800

0.9055

0.9925

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

1.8000

7.3500

7.8075

1.3250

Resist 1

6.5175

5.3100

5.7075

Spot

12.4467

1.7852

7.2552

7.7953

1.2061

Spot

6.3289

5.1653

5.4326

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

1.4529

1.6595

77.45

0.8017

0.9938

1.0569

0.8401

111.78

127.32

Resist 1

1.4476

1.6487

77.21

0.7986

0.9905

1.0518

0.8339

111.40

126.71

Pivot

1.4429

1.6427

76.85

0.7931

0.9872

1.0483

0.8301

110.78

126.16

Support 1

1.4376

1.6319

76.61

0.7900

0.9839

1.0432

0.8239

110.40

125.55

Support 2

1.4329

1.6259

76.25

0.7845

0.9806

1.0397

0.8201

109.78

125.00

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

1.4627

1.6561

77.89

0.8086

0.9983

1.0639

0.8422

112.86

127.91

Resist. 2

1.4576

1.6516

77.66

0.8054

0.9955

1.0596

0.8386

112.40

127.45

Resist. 1

1.4525

1.6471

77.43

0.8021

0.9927

1.0553

0.8350

111.94

127.00

Spot

1.4423

1.6380

76.98

0.7956

0.9871

1.0468

0.8278

111.03

126.10

Support 1

1.4321

1.6289

76.53

0.7891

0.9815

1.0383

0.8206

110.12

125.20

Support 2

1.4270

1.6244

76.30

0.7858

0.9787

1.0340

0.8170

109.66

124.75

Support 3

1.4219

1.6199

76.07

0.7826

0.9759

1.0297

0.8134

109.20

124.30

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

Follow John on twitter at http://www.twitter.com/JohnKicklighter

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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