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Dollar Traders Take in Global Financial Cues as QE3 Fodder

Dollar Traders Take in Global Financial Cues as QE3 Fodder

2011-09-06 00:06:00
John Kicklighter, Chief Currency Strategist
Share:
  • Dollar Traders Take in Global Financial Cues as QE3 Fodder
  • Euro Ready to Run with its Reemerging Financial Crisis
  • Australian Dollar: What Should we Expect from the RBA Decision?
  • British Pound Dives after Biggest Drop in Services in a Decade
  • Japanese Yen Advances as Thin Markets Don’t Prevent Risk Aversion
  • Swiss Franc Unfazed by Drop in Rate Outlook but Peg Threats Work
  • Gold Tops $1,900 Yet Again as Europe’s Finances, US Stimulus Loom

Dollar Traders Take in Global Financial Cues as QE3 Fodder

The US markets may have been offline Monday in observation of the Labor Day holiday; but the capital markets and US dollar wouldn’t hang back waiting for American traders to come back online. In stark contrast to the quiet stable markets we typically experiencing during extended holiday weekends for one of the major financial hubs; volatility was leveraged to an extreme in the absence of market depth. The European markets were especially active owing to the deepening financial crisis for the region – which is progressively spreading to its global counterparts. And, despite the lack of US participation in the day’s fundamental drives, S&P 500 futures dove to a 2.6 percent decline that matched the post-NFP selloff that defined Friday’s session; while the Dow Jones FXCM Dollar Index (ticker = USDollar) jumped 0.7 percent to a three-week high.

Looking at the catalysts for the otherwise truncated session, it was quiet clear that risk appetite trends (egged on the rapidly deteriorating European situation) were at the root of the remarkable volatility. Any meaningful move of capital away from Europe and its assets will largely redirect to the US. Further, the more aggressive the capital flight becomes, the more attractive the greenback becomes for its role as a safe haven – a position that will be fortified as the Euro itself loses ground in the alternative safe haven arena. However, we should not assume that it is a clear run for the benchmark. Far from it. The more engrained the risk aversion move becomes, the greater the probability that the Fed will pursue further easing – and the broader market is well-aware of that relationship. So, as EURUSD faces 1.40 after its first five-day decline since the beginning of January (we haven’t seen a six-day run since April of last year); the threat of QE3 will grow.

For the upcoming session, we should expect heavy volume and leveraged volatility. The spillover of European troubles combined with the echo of the last week’s disappointing NFPs and the first real chance to react to the news that the FHFA will be suing 17 major US banks for misleading the government and markets on mortgage-based products they sold before the financial crisis; will ensure a significant level of activity. However, that does not guarantee direction with momentum. Policymakers and officials have become more brazen in their efforts to prevent crises; so an effort to stamp out a selling panic is a concern markets will dwell on. In the meantime, we can look to the docket for potential additional signs of trouble. The ISM service sector report is a key gauge of economic activity in the US.

Related:Discuss the Dollar in the DailyFX Forum, John’s Video: European Financial Crisis Leverages EURUSD and S&P 500 Futures Decline

Euro Ready to Run with its Reemerging Financial Crisis

The European crisis seems to grow deeper rates with each week. The absence of US market participants proved painful for the Euro-area as the benchmark equity indexes for the region dropped more than 4 percent and government bond yields surged. What makes this truly disturbing is that there wasn’t one point of trouble for the markets to latch onto. There were multiple areas of concern. Heading the way, Greece saw its benchmark, two-year yield soar above 50 percent as a Wall Street Journal report quoted a senior IMF official saying it expected a hard default within six months’ time. In other news, the stalwart Germany was looking less euro-friendly after Chancellor Merkel’s party lost a regional election in its home town. Then there was the news that an Italian government official leaked expectations that the country would miss its 2011 and 2012 GDP projections. This all rounded out nicely as liquidity problems at the bank level tightened ever further.

Australian Dollar: What Should we Expect from the RBA Decision?

While there is considerable off-docket event risk playing out, the greatest scheduled threat over the coming 24 hours is the upcoming RBA rate decision. Since the August 2nd policy decision and statement, interest rate expectations have dropped sharply as expectations for growth, global financial conditions and China’s presence as a guardian angel faded. Currently, the 12 month forecast for Australian rates is pricing in 133 bps of cuts; and this decision will be used as a means to either confirm or banish these bearish projections. Confirmation would be the most volatile.

British Pound Dives after Biggest Drop in Services in a Decade

Where goes the European financial and economic trends, so to generally does the United Kingdom. Those are not good connections to have for an economy that is mired in austerity efforts. Reinforcing the economic trouble the UK faces, the past 24 hours saw the biggest drop in service sector activity in over a decade and a 0.6 percent drop in the BRC retail sales report. A ‘European’ crisis would include the UK.

Japanese Yen Advances as Thin Markets Don’t Prevent Risk Aversion

With capital markets selling off aggressively, there was only one direction for carry interest to flow – back to the funding currencies. That meant a significant boost for the Japanese yen. On the other hand, USDJPY would once again hold back from a meaningful move from its congestion. This stability is not easily held. We are waiting to see the limits of carry and where liquidity starts to overtake all other needs.

Swiss Franc Unfazed by Drop in Rate Outlook but Peg Threats Work

The European financial crisis is growing more prominent and each day. Now the contagion seems to have passed the sovereign space and enter the banking level, virtually guaranteeing a full crisis. And yet, EURCHF is holding back from declining. Why isn’t the safe haven gaining? Because the threat of an SNB peg is still in place. The central bank won’t act unless the market forces it; but forcing the move is a risky move.

Gold Tops $1,900 Yet Again as Europe’s Finances, US Stimulus Loom

It took a few weeks; but gold has fully retraced its losses from August 23rd to 25th. With a strong follow up to Friday’s aggressive advance, the precious metal once again topped the $1,900 level through futures. To keep this move going, we need to see the financial troubles grow to more global proportions – which is certainly occurring. However, as conditions really deteriorate, capital is needed; and gold could be liquidated.

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**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

Current Account Balance (Australian Dollar) (Q2)

-7100M

-10447M

Australian trade data expected to improve on commodities, New Zealand

1:30

AUD

Australia Net Exports of GDP (Q2)

0.1

-2.4

1:30

AUD

Investment Lending (JUL)

-4.4%

Australian credit expected to increase, though unlikely to spur more tightening as economy slows

1:30

AUD

Home Loans (MoM) (JUL)

1.5%

0.0%

1:30

AUD

Value of Loans (MoM) (JUL)

0.0%

4:30

AUD

Reserve Bank of Australia Rate Decision

4.75%

4.75%

Commentary expected to be dovish as sectors slow; bank may adopt wait-and-see approach again

7:00

CHF

Foreign Currency Reserves (AUG)

182.1B

Reserves may fall in on intervention action

7:15

CHF

Consumer Price Index (MoM) (AUG)

-0.2%

-0.8%

Small increase in Swiss prices not expected to lead to SNB tightening

7:15

CHF

Consumer Price Index (YoY) (AUG)

0.3%

0.5%

7:15

CHF

CPI - EU Harmonized (MoM) (AUG)

-0.8%

7:15

CHF

CPI - EU Harmonized (YoY) (AUG)

0.3%

9:00

EUR

Euro-Zone GDP s.a. (QoQ) (Q2 P)

0.2%

0.2%

Preliminary data for Eurozone productivity may reveal a slowdown in the European economy again

9:00

EUR

Euro-Zone GDP s.a. (YoY) (Q2 P)

1.7%

1.7%

9:00

EUR

Euro-Zone Household Consumption (QoQ) (Q2 P)

-0.1%

0.2%

9:00

EUR

Euro-Zone Gross Fixed Capital (QoQ) (Q2 P)

0.8%

1.9%

9:00

EUR

Euro-Zone Government Expenditure (QoQ) (Q2 P)

0.1%

0.5%

10:00

EUR

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

9.8%

9.5%

Highly correlated with German exports; gauges overseas demand

10:00

EUR

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

-1.5%

1.8%

14:00

USD

ISM Non-Manufacturing Composite (AUG)

51

52.7

Service prices expected to slow again

23:01

GBP

BRC Shop Price Index (YoY) (AUG)

2.8%

Retail prices could falter on demand

23:30

AUD

AiG Performance of Construction Index (AUG)

36.1

Weaker house prices may slow building

23:50

JPY

Official Reserve Assets (AUG)

$1150.9B

May increase on yen selling

GMT

Currency

Upcoming Events & Speeches

17:10

USD

Fed's Kocherlakota Speaks at University of Minnesota

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

1.4091

1.6101

76.88

0.7860

0.9910

1.0546

0.8315

108.33

123.77

Support 1

1.4000

1.5935

76.35

0.7500

0.9425

1.0350

0.7745

108.00

123.25

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

12.5238

1.7695

7.1185

7.7902

1.2082

Spot

6.4642

5.2861

5.4443

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

1.4283

1.6263

77.14

0.7957

0.9978

1.0728

0.8556

109.51

125.19

Resist 1

1.4187

1.6182

77.01

0.7908

0.9944

1.0637

0.8436

108.92

124.48

Pivot

1.4124

1.6122

76.85

0.7865

0.9899

1.0575

0.8364

108.53

124.01

Support 1

1.4028

1.6041

76.72

0.7816

0.9865

1.0484

0.8244

107.94

123.30

Support 2

1.3965

1.5981

76.56

0.7773

0.9820

1.0422

0.8172

107.55

122.82

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

1.4308

1.6289

77.76

0.8007

1.0027

1.0718

0.8459

110.15

125.56

Resist. 2

1.4254

1.6242

77.54

0.7970

0.9998

1.0675

0.8423

109.69

125.11

Resist. 1

1.4200

1.6195

77.32

0.7933

0.9969

1.0632

0.8387

109.24

124.66

Spot

1.4091

1.6101

76.88

0.7860

0.9910

1.0546

0.8315

108.33

123.77

Support 1

1.3982

1.6007

76.44

0.7787

0.9851

1.0460

0.8243

107.42

122.88

Support 2

1.3928

1.5960

76.22

0.7750

0.9822

1.0417

0.8207

106.97

122.43

Support 3

1.3874

1.5913

76.00

0.7713

0.9793

1.0374

0.8171

106.51

121.98

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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