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Dollar: The Threat of QE3 Grows the Closer the Dollar is to a Rally

Dollar: The Threat of QE3 Grows the Closer the Dollar is to a Rally

2011-09-07 23:30:00
John Kicklighter, Chief Currency Strategist
Share:
  • Dollar: The Threat of QE3 Grows the Closer the Dollar is to a Rally
  • Euro Offered Breathing Room but Risks Still Prevalent, ECB Just Ahead
  • British Pound May be Pricing in a Dovish BoE Shift
  • Australian Dollar Faces a Third Session of Significant Event Risk
  • Japanese Yen Unfazed by BoJ’s Hold, No SNB Follow Up Here
  • Canadian Dollar Firms after BoC Keeps Rates, Still a Slight Hawkish Lean
  • Gold Suffers Another 3 Percent Drop as Europe Crisis Eases

Dollar: The Threat of QE3 Grows the Closer the Dollar is to a Rally

The dollar was on the cusp of a much larger bull run; but confidence in the move simply dried up before that next critical step could be taken. This hesitation makes perfect sense when we consider the fundamental and underlying market conditions that define the current lack of conviction. For those looking at the day-to-day action, the markets look extraordinarily active and prone to both strong trends and aggressive reversals. However, when we look at the bigger picture for capital and FX markets, we are shown a different picture – congestion. For the S&P 500 (our favored sentiment gauge), remarkable swings through the past month fit the bill for volatility; but the extreme level of activity fits within a broader, rising trend channel that has developed since the benchmark posted its low back on August 9th. The range is far more blatant for EURUSD. The most liquid currency pair has maintained its holding pattern above 1.40 since March. For EURUSD, the extent of this congestion was helped along by unique, offsetting fundamental catalysts (the European financial situation versus the inflation of US monetary stimulus); but these conflicting signals are certainly spilling over to the broader markets.

After six days of decline (the longest string of losses since April of 2010), it looked like EURUSD was ready to overtake that 1.40 figure Wednesday. Yet, the self-imposed boundaries held. The first sign of strain came from risk trends. With equities and speculative commodities on the rise, the (questionable) safe haven dollar would struggle against the berated euro (much less higher-yielding or more fundamentally sound alternatives). From the docket, there wasn’t a particular US release that would rally the bulls; but the improved outlook for the European markets (more on that below) certainly offered relief where the market has recently felt a lot of pressure. Beyond the break for global financial strain, we would also come back to the reality that there is little interest in buying the dollar for its own fundamental appeal. Every time the dollar is on the verge of a serious run, investors will start to consider the risk that the Fed will announce QE3 or some stimulus expansion come September 21st.

Ensuring that the stimulus consideration is fresh in mind, Chicago Fed President Charles Evans voiced clear support for the central bank’s dovish tack. Reflecting a dour view of current conditions, Evans said conditions now were “not much different” than what they were back in 2008. What really struck the market though was his suggestion that the Fed needed to act “aggressively” to reduce joblessness - which could be interpreted as a call for QE3. We will see what Chairman Bernanke has to say in the upcoming session when he discusses the economy.

Related:Discuss the Dollar in the DailyFX Forum, John’s Video: EURUSD Ends a 6-Day Tumble on Flimsy Confidence, ECB Decision Ahead

Euro Offered Breathing Room but Risks Still Prevalent, ECB Just Ahead

Once again, our view of underlying market conditions could be very different for the euro depending on whether we were looking at a short-term or higher time-frame picture. The euro, the German DAX equities index and Italian bonds all advanced Wednesday; but that pickup fits within a much larger bearish slide. That is the same relationship we find in the fundamentals. Looking at the headlines for the day, there were many updates that ease the throttle back on an immediate financial crunch for the region; but none of those changes offer a lasting improvement. Among the notable announcements, we saw the German constitutional court rule Greece’s bailout legal, Italian and Spanish senates approve budget legislature, and news that Greece was taking additional austerity measures. None of these necessarily improves, only prevents. In the upcoming session, we will focus on the ECB. While it is unlikely they will change course at this meeting, they can signal a later dovish move.

British Pound May be Pricing in a Dovish BoE Shift

Between the ECB and BoE, the former has greater reason to preempt its own economic and financial troubles and take a more accommodative stance on monetary policy. However, the MPC is more likely to actually make the transition. In a statement this past session, Chancellor of the Exchequer Osborne said that his 5-year budget reduction program had opened the way for the central bank to pursue “monetary activism” to keep rates low. Will Governor King heed the politician’s call? The sterling has dropped sharply recently, so the market may expect something.

Australian Dollar Faces a Third Session of Significant Event Risk

There is a period approximately once a quarter when the Australian dollar is loaded for event risk through nearly an entire week. This happens to be that week. After the RBA rate decision, 2Q GDP release and Governor Steven’s statement; we now come to the August employment figures. So far this week, everything has been hawkish; yet rate expectations remain anchored. We’ll see if this data can loosen the bearish hold.

Japanese Yen Unfazed by BoJ’s Hold, No SNB Follow Up Here

Though there was little chance that it would happen, the potential ramifications that the Bank of Japan could follow in the SNB’s footsteps and adopt a radical monetary policy approach meant the threat could not be ignored. However, the Japanese central bank held its benchmark as well as its asset purchase and loan programs. This does not mean the threat of constant intervention is completely gone; but it buys time.

Canadian Dollar Firms after BoC Keeps Rates, Still a Slight Hawkish Lean

Of the five central bank rate decisions this week, the Bank of Canada’s meeting held the least potential. That’s because the market sees it as a neutral event – and neutral it would ultimately be. Bank head Carney announced the rate would be held steady; but his approach to that hold (that there was less reason to hike rather than greater pressure to ease) gives this event an inherent, hawkish lean.

Gold Suffers Another 3 Percent Drop as Europe Crisis Eases

Gold suffered its third three-percent plus drop in as many weeks. For reference, this was the third biggest decline for the precious metal since July 1st, 2010. Volatility is common at these heights; and increased activity means moderate improvements in sentiment for the European financial crisis (or any other headline) will reflect in large swings. Yet, just as surely as Europe’s troubles aren’t over, neither is gold’s run.

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

1:30

AUD

Employment Change (AUG)

10K

-0.1K

Australian labor expected to improve mildly after last month’s unexpected shrink

1:30

AUD

Unemployment Rate (AUG)

5.1%

5.1%

1:30

AUD

Full Time Employment Change (AUG)

-22.2K

1:30

AUD

Part Time Employment Change (AUG)

22.1K

1:30

AUD

Participation Rate (AUG)

65.6%

65.6%

4:30

JPY

Bankruptcies (YoY) (AUG)

1.4%

Bankruptcies may increase on slow credit

5:00

JPY

Eco Watchers Survey: Current (AUG)

52.6

Japanese leading indices recovering after March

5:00

JPY

Eco Watchers Survey: Outlook (AUG)

48.5

5:30

EUR

French Non-Farm Payrolls (QoQ) (Q2 F)

0.4%

0.4%

French labor expected stagnant

5:45

CHF

Unemployment Rate (AUG)

2.8%

2.8%

Swiss labor markets expected flat, unlikely to prompt monetary change

5:45

CHF

Unemployment Rate s.a. (AUG)

3.0%

3.0%

6:00

EUR

German Exports s.a. (MoM) (JUL)

0.5%

-1.2%

Germany exports weakening in some parts on lower Eurozone demand as recovery slows

6:00

EUR

German Imports s.a. (MoM) (JUL)

0.3%

0.3%

6:00

EUR

German Current Account (euros) (JUL)

10.0B

11.9B

6:00

EUR

German Trade Balance (euros) (JUL)

11.5B

12.7B

6:30

EUR

Bank of France Business Sentiment (AUG)

97

98

Sentiment moderately dropping

6:45

EUR

French Trade Balance (euros) (JUL)

-5900M

-5598M

May be weaker on weaker exports

11:00

GBP

BOE Asset Purchase Target

200B

200B

Bank of England minutes will reveal more insight on current, future view of British economy

11:00

GBP

Bank of England Rate Decision

0.50%

0.50%

11:45

EUR

European Central Bank Rate Decision

1.50%

1.50%

Commentary will drive price action; Trichet may slow pace of rate increases as German economy falters, Greek fears rise

12:30

CAD

Building Permits (MoM) (JUL)

-1.5%

2.1%

Canadian construction sector showing greater demand, lower permits as buyers reduce excess on markets

12:30

CAD

New Housing Price Index (MoM) (JUL)

0.3%

0.3%

12:30

CAD

New Housing Price Index (YoY) (JUL)

2.5%

2.1%

12:30

CAD

International Merchandise Trade (CAD) (JUL)

-1.00B

-1.56B

Trade balance recovering lower imports

12:30

USD

Trade Balance (JUL)

-$51.0B

-$53.1B

Improvement may be due to less imports

12:30

USD

Initial Jobless Claims (SEP 2)

410K

409K

Weekly labor figures showing some improvement despite disastrous NFPs

12:30

USD

Continuing Claims (AUG 27)

3700K

3735K

13:45

USD

Bloomberg Consumer Comfort (SEP 4)

-49.1

Bloomberg survey steadily dropping

19:00

USD

Consumer Credit (JUL)

$6.000B

$15.532B

Slowdown in credit may prompt additional FOMC/Fed actions

GMT

Currency

Upcoming Events & Speeches

17:00

USD

Fed's Bernanke Speaks to Economics Club in 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

0.9050

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

1.4095

1.5978

77.32

0.8577

0.9858

1.0643

0.8308

108.97

123.53

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

12.4513

1.7581

7.1279

7.7952

1.2079

Spot

6.3700

5.2841

5.3853

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

1.4236

1.6100

78.01

0.8668

0.9933

1.0758

0.8389

109.59

124.24

Resist 1

1.4165

1.6039

77.66

0.8623

0.9896

1.0700

0.8349

109.28

123.88

Pivot

1.4079

1.5979

77.37

0.8581

0.9873

1.0592

0.8285

108.78

123.54

Support 1

1.4008

1.5918

77.02

0.8536

0.9836

1.0534

0.8245

108.47

123.19

Support 2

1.3922

1.5858

76.73

0.8494

0.9813

1.0426

0.8181

107.97

122.85

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

1.4311

1.6184

78.20

0.8715

0.9971

1.0817

0.8453

110.82

125.35

Resist. 2

1.4257

1.6133

77.98

0.8681

0.9943

1.0774

0.8417

110.36

124.89

Resist. 1

1.4203

1.6081

77.76

0.8646

0.9915

1.0730

0.8380

109.89

124.44

Spot

1.4095

1.5978

77.32

0.8577

0.9858

1.0643

0.8308

108.97

123.53

Support 1

1.3987

1.5875

76.88

0.8508

0.9801

1.0556

0.8236

108.05

122.62

Support 2

1.3933

1.5823

76.66

0.8473

0.9773

1.0512

0.8199

107.58

122.17

Support 3

1.3879

1.5772

76.44

0.8439

0.9745

1.0469

0.8163

107.12

121.72

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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