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Dollar Facing a Severe Contrast as Holiday Liquidity Meets Crisis

Dollar Facing a Severe Contrast as Holiday Liquidity Meets Crisis

2011-09-03 03:40:00
John Kicklighter, Chief Currency Strategist
Share:
  • Dollar Facing a Severe Contrast as Holiday Liquidity Meets Crisis
  • Euro at Risk of Collapse as Greece, Banking Troubles Grow
  • British Pound: Will the BoE Finally be Proactive with Building Trouble?
  • Swiss Franc Retreats Mid-Rally Despite Steadfast Risk Aversion Drive
  • Australian Dollar Faces Serious Volatility as Sentiment, RBA Waver
  • Canadian Dollar: The US Dollar Ties Don’t Look So Good Now
  • Gold Quickly Rallying Back to 1,900 as Financial Conditions Crumble

Dollar Facing a Severe Contrast as Holiday Liquidity Meets Crisis

Though the US markets are offline to start the week this coming Monday in observation of the Labor Day holiday, we shouldn’t tune out for the dollar and FX markets. In fact, a pinch on liquidity could leverage a heated fundamental backdrop and generate tremendous volatility across the spectrum. A deterioration in risk appetite trends and underlying financial conditions was already taking place through the end of this past trading week. For the benchmark S&P 500, this would translate into the biggest daily drop in over two weeks; while the greenback revived its safe haven status with the Dow Jones FXCM Dollar Index (ticker = USDollar) advancing for the fourth consecutive session (the best run for the currency since late June – though its pace is still lacking).

We could easily blame this late-in-the-week selloff in risky assets on the August nonfarm payrolls (NFPs). The zero print caught nearly everyone off guard (only three economists of the 86 polled by Bloomberg expected a negative reading); and you can’t argue with the immediate reaction from equities and the dollar. However, we know the influence this indicator holds over the market has dropped off significantly in 2011 – meaning the follow through has been severely curtailed. Employment figures simply don’t carry the stand alone influence to alter interest rate or growth expectations like they used to. There is next to no chance that the Federal Reserve will be altering the benchmark lending rate after making the pledge to maintain exceptionally low rates through ‘mid-2013’ and the gradual slowing in economic activity won’t be meaningfully curbed nor hastened by a one-off payrolls report. On the other hand, it is interesting to note that the dollar still took to an advance (after a brief slip after the report) while speculation is still buzzing that the central bank could pursue further quantitative easing in September. This could reflect a general skepticism that an outright QE3 could be entertained and that ‘flexible’ stimulus simply won’t pack the punch previous iterations have.

The more disturbing headline Friday – and the one that promise to carry a lot of weight next week – was the news that the Federal Housing Finance Authority (FHFA) had filed suit against 17 banks for misleading Freddie Mac and Fannie Mae on the soundness of mortgage-backed securities they had sold the groups. Already facing the prospect of a slowdown in growth and spillover of financial strain from Europe, this development threatens to pitch the US banking system back into a crisis state – something we were leaning towards already.

Related:Discuss the Dollar in the DailyFX Forum, John’s Picks:Euro Faces a Revived Greek Crisis, Dollar a Renewed Bank Crisis

Euro at Risk of Collapse as Greece, Banking Troubles Grow

The euro was able to take a breather through much of August as the US dollar drew most of the negative headlines. Yet, this distraction diminished this past week and will likely be fully replaced with European troubles going forward. There are two, immediate threats that euro traders should keep abreast of: the collapse of the doomed effort to rescue Greece and the maturation of a broader financial crisis for the Euro-region. The second 109 billion euro bailout program developed for Greece back in July is already facing serious headwind as Finland threatens to withdrawal its support without additional collateral guarantees. If Finland is extended such favorable terms, others will demand the same; and the program will fall apart. It is only a matter of time until there is no more maneuvering room. The other concern is a withdrawal of capital and crunch in rates for European banks. The IMF and IASB have already warned that the region’s banks haven’t fully accounted for their risk; so Greece’s future carries more weight than just for sovereigns. What about the ECB? Look for any dovish leanings that match bond purchases.

British Pound: Will the BoE Finally be Proactive with Building Trouble?

There are a number of central bank rate decisions due over the coming week; and all of them have some level of dovish potential. For the Bank of England meeting, a shift in tone from this otherwise quiet policy group would be the tipping point for a serious reversal in sentiment behind the sterling. Over the past months, the sterling has played been stuck in neutral – moving wherever its counterparts nudged it. However, should the austerity bite finally push the BoE to join the US and Europe with additional stimulus, the pound will join a dour club without safe haven status.

Swiss Franc Retreats Mid-Rally Despite Steadfast Risk Aversion Drive

For all intents and purposes, the Swiss franc carried through a remarkable rally through the end of this past week. Yet, why did the currency pullback through the US session when risk aversion was building strength? Market participants will be nervous about carry the franc back towards record highs with the SNB a constant threat for buying euros or even for the dreaded peg announcement. Would you fight the SNB?

Australian Dollar Faces Serious Volatility as Sentiment, RBA Waver

The Australian dollar is already on the move with swings in risk appetite trends picking up; but that activity could be significantly leveraged going forward. Underlying risk trends will define the general direction of the Aussie currency (should financial crisis kick up, the comm bloc currency will tumble); but we should also watch its own place on the risk scale. The RBA decision could unwind all of the recent rate forecast recovery.

Canadian Dollar: The US Dollar Ties Don’t Look So Good Now

Canada’s economic docket is stacked next week. The action starts on Wednesday with the Bank of Canada rate decision. Though no change is expected, the policy group has grown increasingly dovish in their language over the months. Given the state of the global market conditions, they could start to give a time frame for a shift. Other volatility-inducing notables include employment change, the Ivey survey and trade figures.

Gold Quickly Rallying Back to 1,900 as Financial Conditions Crumble

That didn’t last long. Gold may have suffered its biggest drop in years just a few weeks ago; but the metal has nearly fully retraced those losses through the end of this past week. Friday’s aggressive rally played to the breakout expected between extremely tight trading and building fundamental troubles. With Greece, European markets and US banks starting to crowd the headlines; gold will remain attractive.

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

1:00

(Sat)

CNY

China Non-manufacturing PMI (AUG)

59.6

Services PMI may recover with manufacturing PMI

23:01

(Sun)

GBP

Lloyds Employment Confidence (AUG)

-53

Confidence level still at 6 month lows

23:30

(Sun)

AUD

AiG Performance of Service Index (AUG)

48.8

Contraction of service index may be due to lower demand in industry

0:30

AUD

TD Securities Inflation (MoM) (AUG)

0.3%

Inflation expectation has dropped from highs, indicating less need for rate hikes

0:30

AUD

TD Securities Inflation (YoY) (AUG)

3.2%

1:30

AUD

Company Operating Profit (QoQ) (Q2)

-2.0%

Australian corporate data experiencing weakness since Q3 2010 peak

1:30

AUD

Inventories (Q2)

0.4%

1:30

AUD

ANZ Job Advertisements (MoM) (AUG)

-0.7%

May indicate health of labor market

2:30

CNY

China HSBC Services PMI (AUG)

53.5

Survey should follow actual report

7:45

EUR

Italian PMI Services (AUG)

48.6

European nation PMIs expected weaker on slower global recovery, domestic demand

7:50

EUR

French PMI Services (AUG F)

56.1

7:55

EUR

German PMI Services (AUG F)

50.4

8:00

EUR

Euro-Zone PMI Composite (AUG F)

51.1

8:00

EUR

Euro-Zone PMI Services(AUG F)

51.5

8:30

GBP

PMI Services (AUG)

55.4

8:30

EUR

Euro-Zone Sentix Investor Confidence (SEP)

-13.5

Confidence index dropping moderately

8:30

GBP

Official Reserves (Changes) (AUG)

$2082M

Official reserves stagnating at current level

9:00

EUR

Euro-Zone Retail Sales (MoM) (JUL)

0.7%

Revised lower retail sales points to relaxed spending, less rate hike pressure

9:00

EUR

Euro-Zone Retail Sales (YoY) (JUL)

-0.6%

23:01

GBP

BRC Sales Like-For-Like (YoY) (AUG)

0.6%

British retail sales also expected weaker

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

1.4193

1.6215

76.78

0.7888

0.9839

1.0650

0.8473

108.97

124.49

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

12.4149

1.7522

7.0738

7.7892

1.2046

Spot

6.3965

5.2483

5.4031

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

1.4326

1.6296

77.19

0.8104

0.9906

1.0778

0.8595

110.27

125.04

Resist 1

1.4259

1.6255

76.98

0.7996

0.9873

1.0714

0.8534

109.62

124.77

Pivot

1.4222

1.6214

76.77

0.7854

0.9813

1.0670

0.8485

109.24

124.48

Support 1

1.4155

1.6173

76.56

0.7746

0.9780

1.0606

0.8424

108.59

124.20

Support 2

1.4118

1.6132

76.35

0.7604

0.9720

1.0562

0.8375

108.21

123.91

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

1.4393

1.6392

77.65

0.8030

0.9949

1.0814

0.8613

110.70

126.19

Resist. 2

1.4343

1.6348

77.43

0.7994

0.9922

1.0773

0.8578

110.27

125.77

Resist. 1

1.4293

1.6304

77.22

0.7959

0.9894

1.0732

0.8543

109.83

125.34

Spot

1.4193

1.6215

76.78

0.7888

0.9839

1.0650

0.8473

108.97

124.49

Support 1

1.4093

1.6126

76.34

0.7817

0.9784

1.0568

0.8403

108.11

123.64

Support 2

1.4043

1.6082

76.13

0.7782

0.9756

1.0527

0.8368

107.67

123.22

Support 3

1.3993

1.6038

75.91

0.7746

0.9729

1.0486

0.8333

107.24

122.79

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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