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Dollar Sees Extreme Volatility as Risk Trends Warp

Dollar Sees Extreme Volatility as Risk Trends Warp

2011-09-07 03:55:00
John Kicklighter, Chief Currency Strategist
Share:
  • Dollar Sees Extreme Volatility as Risk Trends Warp
  • Swiss Franc: Where to Now after the SNB’s Puts in its Floor
  • Euro Shows a Mixed Day Against All But the Franc
  • Australian Dollar Rallies after RBA’s Stevens Talks Stability, GDP Impresses
  • British Pound Ties to Europe Pull Sterling Lower, Monetary Policy to Follow?
  • Japanese Yen: Will Officials Attempt to Copy the SNB?
  • Gold Sees a Safe Haven Competitor Drop Out yet the Metal Falls…

Dollar Sees Extreme Volatility as Risk Trends Warp

Was risk appetite stronger or weaker through this past session? This is just as difficult a question to answer from a technical perspective as it is a fundamental question. For the US dollar, we know the benchmark currency must rely on its position as a liquidity provider (an extreme version of risk aversion) to really gain the market’s attention. For those whose idea of fundamental is to simply look at the economic docket, Wednesday’s developments were relatively encouraging. On the economic docket, there was the unexpected improvement in the ISM’s service sector report for August which rose to a 53.3 reading. Given this particular sector accounts for approximately three-quarters of the country’s output and the S&P 500 began a session-long advance starting shortly after the data’s release, it could be considered a straight forward sentiment booster. That wouldn’t be necessarily wrong; but it is very short-sighted and prevents us from seeing the trend beyond Wednesday.

The trouble with investor / consumer / policymaker sentiment runs deeper than one reading on one sector of the US economy can account for. In fact, there is little dispute over the direction for the US economy through the medium-term future; so the suggestion that this particular indicator (edging up from its lowest reading since February 2010) can change the global outlook is well-beyond reason. Looking at the Dow Jones FXCM Dollar Index (ticker = USDollar), we see a more realistic reflection on sentiment. The extreme safe haven currency rallied through the close and it maintained its advance despite the climb from equities and the positive data.

Ultimately, sentiment remains negative. The prospects for the global economy and financial markets are dim. However, the measures for risk appetite / risk aversion have been sent a shock. We have seen the role of safe haven and high yielding assets wax and wane over the past few months; and Tuesday’s top headline marked another significant change in the safe haven spectrum. News that the SNB was pulling out all the stops on its currency (more on that below) dropped it out of the safe haven race. As a result, the US dollar has less competition in the safety arena. The greenback is improving its standing not by its own doing but by defacto via a lack of alternatives. That said, we need to keep on top of the spread of the ‘European’ financial troubles and balance it against the possibility of QE3 – a constant headwind for the dollar.

Related:Discuss the Dollar in the DailyFX Forum, John’s Video: Will the SNB Turn EURCHF and Will Risk Trend Push EURUSD Through 1.40?

Swiss Franc: Where to Now after the SNB’s Puts in its Floor

The SNB caught me off guard with its announcement that it would target a floor of 1.20 on EURCHF. Given the significant cost such a move would engender, it seemed likely that the central bank would hold off and see whether sentiment conditions and the situation in Europe would improve enough to negate the need for action on Switzerland’s part. However, President Hildebrand and company telegraphed their expectations and moved preemptively. It is important to recognize that this is not technically a peg as it set’s a floor on the pair; but it doesn’t include inhibitors for appreciation (officials would prefer EURCHF rally). Yet, will the franc collapse after this move? Not necessarily. This certainly kills any speculative effort to drive this particular pair lower; and it arguably curbs its role as a safe haven in the broader FX sense (manipulation and volatility do that to a currency). On the other hand, a floor of 1.20 doesn’t dissuade a natural transfer of capital looking simply for harbor from the Euro Zone’s troubles. If the financial health of the Euro-area continues to fall apart, the franc is still an attractive alternative. To truly undermine the appeal of the franc, policy officials need to reduce Switzerland’s appeal as a sound banking economy.

Euro Shows a Mixed Day Against All But the Franc

Aside from EURCHF (which dropped a remarkable 8 percent); the euro posted a mixed session through Wednesday. A block to speculative capital flows out of the Euro-area into Switzerland is a significant plug for this beleaguered currency; but it doesn’t really bolster its own appeal or even its relative value. Looking at Greek 2-year government yields, they hit a fresh record high 52.3 percent as German Chancellor Merkel said the country wouldn’t receive its September tranche if it didn’t meet targets. Further, ECB deposit holdings reportedly surged to 166 billion euros.

Australian Dollar Rallies after RBA’s Stevens Talks Stability, GDP Impresses

The interest rate outlook for the RBA is still hovering around 116 bps worth of cuts over the next 12 months; but that forecast is looking increasingly overblown. In the past 24 hours we have seen the central bank hold its benchmark rate, Governor Stevens has said it was good to keep policy stable in volatile times and the 2Q GDP figures unexpectedly rise. Does this sound like evidence of 75 bps of cuts by December?

British Pound Ties to Europe Pull Sterling Lower, Monetary Policy to Follow?

Following the same track as EURUSD, GBPUSD gave up an early rally Wednesday to stumble into a 200-point plus decline through the close. The connections between the Euro-group and the UK economies means financial troubles will easily spill over to the geographically proximate country. However, these same tangible effects will encourage the BoE to contemplate policy easing against its own austere backdrop.

Japanese Yen: Will Officials Attempt to Copy the SNB?

Will the Bank of Japan copy the SNB and adopt a peg. This is a reasonable question after a major central bank took an incredible monetary policy step. However, after Finance Minister Azumi suggested a call to the G7 to voice a common belief that excess yen gains were bad for the economy, the first steps seem clear. For the second largest economy to adopt a peg, the term ‘currency wars’ will certainly be used.

Gold Sees a Safe Haven Competitor Drop Out yet the Metal Falls…

The US dollar is only attractive when liquidity is absolutely needed, the Japanese yen is a funding currency and now the Swiss franc is being heavily manipulated. Alternatives to gold’s safe haven status are beyond flimsy. And yet, with the SNB news this past session, gold still retreated. We need to remember that the metal isn’t an accepted form of payment and it is a very expensive investment…

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ECONOMIC DATA

Next 24 Hours

GMT

Currency

Release

Survey

Previous

Comments

0:00

NZD

QV House Prices (YoY) (AUG)

-0.4%

Falling house prices may dampen rates

1:30

AUD

Gross Domestic Product (QoQ) (Q2)

1.0%

-1.2%

Australian productivity may grow slower on a longer term basis as rates constrict investment spending

1:30

AUD

Gross Domestic Product (YoY) (Q2)

0.6%

1.0%

5:00

JPY

Coincident Index (JUL P)

108.8

108.8

Japanese economy gauges could improve on domestic demand

5:00

JPY

Leading Index (JUL P)

105.9

103.2

6:30

AUD

Foreign Reserves (Australian dollar) (AUG)

A$40.7B

Slowly decreasing on outflow

8:30

GBP

Industrial Production (MoM) (JUL)

0.2%

0.0%

British industries expected to continue weakening on lower demand, slower recovery

8:30

GBP

Industrial Production (YoY) (JUL)

-0.4%

-0.3%

8:30

GBP

Manufacturing Production (MoM) (JUL)

0.0%

-0.4%

8:30

GBP

Manufacturing Production (YoY) (JUL)

1.9%

2.1%

10:00

EUR

German Industrial Production n.s.a. (YoY) (JUL)

6.7%

6.7%

Germany industrial data points to a mild recovery, though overall economy still weak

10:00

EUR

German Industrial Production s.a. (MoM) (JUL)

0.5%

-1.1%

11:00

USD

MBA Mortgage Applications (SEP 2)

-9.6%

More could point to housing recovery

13:00

CAD

Bank of Canada Rate Decision

1.0%

1.0%

The Bank is expected to hold onto its rates despite rising inflation pressures on weaker domestic economy; commentary will guide price action

14:00

CAD

Ivey Purchasing Managers Index (AUG)

52.2

45.4

Higher expected price indexes suggesting inflation concerns

14:00

CAD

Ivey Purchasing Managers Index s.a. (AUG)

52.3

46.8

14:00

USD

JOLTs Job Openings (JUL)

3109

Labor market data could drop again

22:45

NZD

Value of All Buildings s.a. (Q2)

-6.3

May suggest slowing construction sector

22:45

NZD

Manufacturing Activity (Q2)

2.9%

NZ manufacturing expected to weaken due to lower domestic and overseas demand

22:45

NZD

Manufacturing Activity Volume s.a. (QoQ) (Q2)

1.9%

23:50

JPY

Bank Lending Banks ex-Trust (AUG)

-0.6%

Slower bank lending could point to a slower recovery

23:50

JPY

Bank Lending incl Trusts (YoY) (AUG)

-0.5%

23:50

JPY

Current Account Total (Yen) (JUL)

1175.8B

526.9B

Japanese trade balance showing improvement again, pointing to possibly continued foreign demand despite record yen

23:50

JPY

Adjusted Current Account Total (Yen) (JUL)

990.8B

922.8B

23:50

JPY

Current Account Balance (YoY) (JUL)

-32.5%

-50.2%

23:50

JPY

Trade Balance - BOP Basis (Yen) (JUL)

149.1B

131.5B

23:50

JPY

Machine Orders (MoM) (JUL)

-4.2%

7.7%

Domestic machine orders showing some slowdown

23:50

JPY

Machine Orders (YoY) (JUL)

8.3%

17.9%

GBP

New Car Registrations (YoY) (AUG)

-3.5%

Major purchases could slow

JPY

Bank of Japan Rate Decision

0.1%

0.1%

Commentary will drive action, though PM Noda’s selection could influence central bank to ease lending, help recovery

GMT

Currency

Upcoming Events & Speeches

15:15

USD

Fed's Evans Speaks in London

18:00

USD

Fed Releases Beige Book Economic Survey

20:00

USD

Fed's Williams Speaks to Seattle Rotary Club

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

0.9050

1.0275

1.0750

0.9020

118.00

146.05

Resist 1

1.5000

1.6600

81.50

0.8840

1.0000

1.0800

0.8750

113.50

140.00

Spot

1.3982

1.5936

77.67

0.8619

0.9916

1.0488

0.8207

108.60

123.78

Support 1

1.4000

1.5935

76.35

0.7800

0.9425

1.0350

0.7745

108.00

123.25

Support 2

1.3700

1.5750

75.50

0.7500

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

12.5313

1.7634

7.1982

7.7934

1.2118

Spot

6.4744

5.3270

5.4136

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

1.4383

1.6299

78.33

0.9148

1.0017

1.0677

0.8449

110.91

125.99

Resist 1

1.4183

1.6118

78.00

0.8884

0.9966

1.0583

0.8328

109.75

124.88

Pivot

1.4077

1.6019

77.36

0.8362

0.9916

1.0532

0.8267

108.80

123.97

Support 1

1.3877

1.5838

77.03

0.8098

0.9865

1.0438

0.8146

107.64

122.87

Support 2

1.3771

1.5739

76.39

0.7576

0.9815

1.0387

0.8085

106.69

121.96

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

1.4208

1.6142

78.56

0.8765

1.0034

1.0666

0.8355

110.45

125.60

Resist. 2

1.4151

1.6091

78.33

0.8729

1.0005

1.0622

0.8318

109.99

125.15

Resist. 1

1.4095

1.6039

78.11

0.8692

0.9975

1.0577

0.8281

109.53

124.69

Spot

1.3982

1.5936

77.67

0.8619

0.9916

1.0488

0.8207

108.60

123.78

Support 1

1.3869

1.5833

77.23

0.8546

0.9857

1.0399

0.8133

107.67

122.87

Support 2

1.3813

1.5781

77.01

0.8509

0.9827

1.0354

0.8096

107.21

122.41

Support 3

1.3756

1.5730

76.78

0.8473

0.9798

1.0310

0.8059

106.75

121.95

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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