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Dollar Rallies, S&P 500 Drops Ahead of NFPs and Holiday Weekend

Dollar Rallies, S&P 500 Drops Ahead of NFPs and Holiday Weekend

2011-09-02 01:40:00
John Kicklighter, Chief Currency Strategist
Share:
  • Dollar Rallies, S&P 500 Drops Ahead of NFPs and Holiday Weekend
  • Euro Quietly Responding to Growing Financial Instability
  • British Pound Pulled Down by Euro Zone Troubles, Weak Factory Activity
  • Swiss Franc: FX Market Shows that Growth Isn’t Necessary for a Rally
  • Australian Dollar Rises as Dour Risk Expectations Ease, RBA Next Week
  • Japanese Yen Unfazed by Report Showing Growth Impact of High Currency
  • Gold Congestion Suspicious with Smallest Range and Lightest Trading in Two Weeks

Dollar Rallies, S&P 500 Drops Ahead of NFPs and Holiday Weekend

It’s that time of the month. We are heading into the first Friday of the September and that means we have the US nonfarm payrolls (NFPs) release on deck. However, this is not the typical release set up for the typical reaction. Over the previous months, we have spelled out the particular angle with which we need to approach this particular data – a disappointment didn’t hurt the dollar through relative growth terms, rather it boosted the currency’s safe haven status. And, while this is generally still the ‘new normal’ that we should expect for the labor data, this particular report falls under additional considerations that make it even more difficult to approach. That being said, when the consequences of an event or data are as complicated or confused as this one threatens to be, the impact is often for a lot of volatility but limited direction.

Heading into the well-publicized event risk, we should take into consideration prevailing market conditions. The Dow Jones FXCM Dollar Index (ticker = USDollar) rallied through this past session but retraced most of its progress immediately after hitting 9,500 (keeping us well within the well-worn, three-week range). For risk trends, the S&P 500 spent Thursday retracing the modest gains it had established over the previous session (and pulling us back from the top of a three-week rising trend channel). This reflects a general lack of conviction in developing strong trends behind either the greenback or risk trends - be they bullish or bearish. That is an appropriate approach considering we are heading into the final session of the week (we only really have three or four liquid hours to react to the data). What’s more, Monday is the Labor Day Holiday which will keep the US markets offline Monday and encourage an early exit for many of the larger players.

Background conditions aside, the data will have a unique impact on the markets. We already know that this data plays more to risk appetite than it does relative growth (a strong NFP figure generally has weighed the dollar as a safe haven currency); but that approach has changed after the FOMC minutes and Chairman Bernanke’s commentary over the past week. Investors are growing increasingly convinced that the Fed will boost its stimulus effort come September 21st when they are scheduled to release their policy decision. That said, a round of exceptionally bad data before this meeting leverages the speculation that a possible QE3 will be passed (though it is unlikely that they will pursue an outright purchase program and it is equally dubious that they will pay greater attention to a single economic update over the larger trend).

Related:Discuss the Dollar in the DailyFX Forum, John’s Video: EURUSD Hits Its Target, Should We Reenter for NFPs?

Euro Quietly Responding to Growing Financial Instability

Current market conditions are misleading. The withdrawal of volatility has diminished trends and tempered the seeming importance of fundamental developments. However, it is important to stay abreast of the financial troubles facing the Euro Zone. In the past session, Spain ran a less-than-successful bond auction. The country raised 3.62 billion euros (short of the 4 billion max) of five year bonds at a 4.489 yield percent and with 1.76 bid-to-cover. That yield is better than July’s 4.871 percent; but that is likely an outcome doctored by the ECB’s aggressive buying in the secondary this past week. To add to that concern, demand was weaker than July’s auction and it was reported that the central bank was buying Italian bonds during the session. In other news, FT reported that IMF and European officials are arguing over assessments of the region’s banking sector health. The IMF has suggested that losses amongst the regions banks have not fully accounted for sovereign and regional exposure and troubles. They have suggested the capital base could be as much as 200 billion euros lower. This fits the IASB argument.

British Pound Pulled Down by Euro Zone Troubles, Weak Factory Activity

The pound is slowly taking control of its own destiny; but the currency has yet to find a serious fundamental driver that can overwhelm the larger fundamental trends out in the market. While we wait for the stimulus debate to really heat up in the UK (we have the BoE decision next week); we note that the past trading session reported the worst reading for manufacturing activity in two years. This adds to the MPC member Posen’s argument for more bond purchases. Realistically, though, we need to monitor the sterling’s exposure to the EU’s ongoing financial troubles.

Swiss Franc: FX Market Shows that Growth Isn’t Necessary for a Rally

The Swiss franc advanced strongly for a second day despite a disappointing outcome for GDP. There was the possibility that a weak growth reading could curb the appetite for the safe haven; but the 2.3 percent read doesn’t set off alarms. In the meantime, the one percent-plus declines in US equities and fresh headlines of European financial troubles boost the demand for safety.

Australian Dollar Rises as Dour Risk Expectations Ease, RBA Next Week

Though underlying risk appetite trends are the key to guiding carry flows; the Australian dollar is similarly influenced by its own interest rate expectations. And, that is where the currency found much of its negative pressure recently – the sharp drop in rate forecasts. In the past few weeks, however, we have seen the 12 month forecast rise from 154 bps of expected cuts to 115 bps. Let’s see what the RBA says next week.

Japanese Yen Unfazed by Report Showing Growth Impact of High Currency

Another round of big Japanese data has passed with nary a blink form the yen. On the docket, we had the second quarter Capital Spending data which printed a remarkable miss in a 7.8 percent decline (against expectation of 1 percent expansion). This was the biggest drop from this indicator since the final reading of 2007 and is a direct reflection of the yen’s negative impact on the economy. And yet, the market doesn’t care.

Gold Congestion Suspicious with Smallest Range and Lightest Trading in Two Weeks

It’s quiet. Too quiet for gold. The metal has the unique ability to maintain a high level of activity thanks to its separation from risk appetite trends and the back-and-forth between whose country has better growth and financial conditions. The smallest range on gold since August 17th and lowest volume since the 15th may seem reasonable given the upcoming holiday weekend; but it is unusual even when this is taken into account.

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

8:30

GBP

Purchasing Manager Index Construction (AUG)

53.2

53.5

Weakness may be due to lower residential

9:00

EUR

Euro-Zone Producer Price Index (MoM) (JUL)

0.5%

0.0%

July PPI may not drive expectations for higher rates as recovery still weak

9:00

EUR

Euro-Zone Producer Price Index (YoY) (JUL)

6.1%

5.9%

12:30

USD

Change in Non-farm Payrolls (AUG)

75K

117K

August NFPs still points to weakening US labor market, slowdown in recovery

12:30

USD

Change in Private Payrolls (AUG)

105K

154K

12:30

USD

Change in Manufacturing Payrolls (AUG)

0K

24K

12:30

USD

Unemployment Rate (AUG)

9.1%

9.1%

12:30

USD

Avg Hourly Earnings (YoY) (AUG)

2.2%

2.3%

Secondary labor market data shows slower growth of wages, indicating that inflation is still not yet a problem in the US

12:30

USD

Avg Hourly Earnings (MoM)(AUG)

0.2%

0.4%

12:30

USD

Avg Weekly Hours All Employees (AUG)

34.3

34.3

12:30

USD

Change in Household Survey Employment (AUG)

-38

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

0.8560

1.0275

1.0750

0.9020

118.00

146.05

Resist 1

1.5000

1.6600

81.50

0.8275

1.0000

1.0800

0.8750

113.50

140.00

Spot

1.4270

1.6176

76.82

0.7945

0.9756

1.0746

0.8512

109.62

124.26

Support 1

1.4000

1.5935

76.35

0.7500

0.9425

1.0350

0.7745

109.00

124.00

Support 2

1.3700

1.5750

75.50

0.7000

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

12.3119

1.7222

7.0042

7.7828

1.2044

Spot

6.3996

5.2207

5.3986

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

1.4453

1.6319

77.54

0.8148

0.9823

1.0828

0.8577

111.45

125.81

Resist 1

1.4362

1.6247

77.18

0.8046

0.9790

1.0787

0.8545

110.54

125.04

Pivot

1.4294

1.6190

76.88

0.7987

0.9763

1.0724

0.8509

110.03

124.59

Support 1

1.4203

1.6118

76.52

0.7885

0.9730

1.0683

0.8477

109.12

123.81

Support 2

1.4135

1.6061

76.22

0.7826

0.9703

1.0620

0.8441

108.61

123.36

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

1.4463

1.6351

77.70

0.8077

0.9861

1.0906

0.8649

111.31

125.93

Resist. 2

1.4415

1.6307

77.48

0.8044

0.9835

1.0866

0.8614

110.89

125.51

Resist. 1

1.4366

1.6264

77.26

0.8011

0.9809

1.0826

0.8580

110.46

125.10

Spot

1.4270

1.6176

76.82

0.7945

0.9756

1.0746

0.8512

109.62

124.26

Support 1

1.4174

1.6088

76.38

0.7879

0.9703

1.0666

0.8444

108.78

123.43

Support 2

1.4125

1.6045

76.16

0.7846

0.9677

1.0626

0.8410

108.35

123.01

Support 3

1.4077

1.6001

75.94

0.7813

0.9651

1.0586

0.8375

107.93

122.60

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

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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