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Dollar Jumps to Five Month High and Promptly Stalls

Dollar Jumps to Five Month High and Promptly Stalls

2011-09-13 02:39:00
John Kicklighter, Chief Currency Strategist
Share:
  • Dollar Jumps to Five Month High and Promptly Stalls
  • Euro Fundamental Outlook Deteriorating at an Accelerated Pace
  • British Pound Keeps its Connection to the EU, Looks to CPI
  • Swiss Franc Won’t Separate from 1.20 Against the Euro
  • New Zealand Dollar: Will the RBNZ Decision put back 50bps?
  • Australian Dollar Continues Slide Despite Risk Recovery
  • Gold Maintains Amplified Volatility, Struggles for Direction

Dollar Jumps to Five Month High and Promptly Stalls

Expectations that momentum would hold over from the previous week and financial headlines were keeping the fires stoked over the weekend led many to believe the capital markets would open to a massacre Monday. In turn, the subsequent appeal for liquidity-at-any-price would give the dollar another boost. As it happens, the week opened to with this fear at the front of investors’ minds – leading to notable gaps on capital and FX markets alike. However, panic never really gained traction; and the session was instead riddled with reversals and volatility. For the Dow Jones FXCM Dollar Index (ticker = USDollar), the opening drive led to a clean break above well-worn resistance to trade at five month highs. That said, the gap higher was about the extent of the day’s positive performance as the Index immediately lost momentum.

We can certainly assign some responsibility for this failed rally to the dollar’s own fundamental backdrop. With the Fed rate decision scheduled for release next Wednesday, the concern that another attempt at stimulus (whether it be QE3 or new Operation Twist) will send the currency reeling reins in the crowd from building a significant position one way or the other. On the other hand, we could still see the greenback make a serious move between then and now if there were a heavy enough fundamental shift. A wholesale demand for liquidity would be the most substantial driver for the dollar that we could muster at the moment – and that roughly translates into an acute move towards risk aversion. All the components were in place for just such a performance to start the week (European troubles were leveraged, market commentators were mapping out the spillover connections to US and Asian markets); but sentiment instead found an unexpected floor. For our favored benchmark for risk appetite – the S&P 500 – an opening drop to three-week began its reversal mid-day in New York. Ultimately, this reversal reminds us of both the high level of volatility and lack of direction for the broader markets. These conditions will remain until a few key hurdles are passed.

In the meantime, we were regaled by very different views from two Fed officials with very different takes on the state of the world and best path for monetary policy going forward. Playing to the doves, St Louis Fed President Bullard took the dovish tack with his comment that currency policy was “appropriately calibrated”. Dallas Fed President Fisher on the other hand said the economy has “somewhat flatlined” but the Fed could not “carry the load alone” in reference to helping the economy.

Related:Discuss the Dollar in the DailyFX Forum, John’s Video: Financial Fears Hit a New High but EURUSD and the S&P 500 Rebound

Euro Fundamental Outlook Deteriorating at an Accelerated Pace

There was a laundry list of disappointing updates to come out of the Euro-area over the past 72 hours; and yet, the currency would still manage to recover most (if not all) of its lost ground against its largest counterparts. The trouble began during the weekend when a Bloomberg report quoted unnamed sources when it said Moody’s credit rating agency could downgrade France’s three largest banks (Societe Generale, BNP Paribas and Credit Agricole) as early as this week. From there, an op-ed piece written by the German Economy Minister called on the EU to have an option for an orderly insolvency ready should Greece fail to pull itself back from the abyss. Moving closer to the core, Italy faced a drop in demand and higher rates at an auction of three-month and one-year government bonds. Further reflecting the market’s interest in the spread of the sovereign financial troubles, rumors that China was considering buying Italian debt offered a very brief rally (which was quickly retraced). Another sign of building trouble, deposits at the ECB hit 182 billion euros – the highest level in over a year. All of these doubts are still there…

British Pound Keeps its Connection to the EU, Looks to CPI

Bigger picture, indicators like the RICS House Price Balance report (the August reading met expectations of a negative 23 percent reading) are simply not influential enough to develop a trend for the sterling unless they play into the bigger theme. That said, a bigger driver for the currency is whether the BoE will eventually balance the government’s austerity effort with another round of stimulus. The debate over this possibility will be further refined by the CPI readings for August due in the upcoming session. Should the headline number tick higher, cut calls will ease.

Swiss Franc Won’t Separate from 1.20 Against the Euro

Risk appetite trends and the euro recovered as the Monday session wore on Monday; but EURCHF wouldn’t budge from its natural attraction to the SNB-defined 1.20 floor. While we see swings in sentiment (through rational and irrational shifts), the outlook for the Euro-region isn’t changing. The deterioration carries on; and a need for a safe haven grows. A possible feeder: Greek deposits dropped a seventh month in July.

New Zealand Dollar: Will the RBNZ Decision put back 50bps?

The RBNZ rate decision isn’t due until Wednesday evening / Thursday morning; but speculation about the event’s outcome will certainly carry influence into the lead up to the event. Looking at rate expectations, the market is still expecting the RBNZ to put back the 50bps its cut after the Christchurch earthquake. Yet, analysts see no scope for a hike this time around. In reality, this hike could be in jeopardy altogether this year.

Australian Dollar Continues Slide Despite Risk Recovery

Scheduled event risk was present through Monday’s session; but the influence of the trade figures simply doesn’t compute when we consider FX traders are tuned into rate expectations and risk appetite trends. In the 12-month rate outlook, we see the market is now pricing in a 141 bps of rate cuts and it further fully expects at least a 25 bps rate cut at its next meeting. This is almost certainly overblown.

Gold Maintains Amplified Volatility, Struggles for Direction

Conditions were normal for gold. It just so happens, that ‘normal’ for the precious metal is exceptional volatility and a lack of direction. Until the European financial situation takes another pitch lower and/or the US stimulus position is confirmed, there is too much uncertainty to allow for a steady trend to develop. In the meantime, this is still an attractive (yet dangerous) market for the short-term trader.

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

JPY

Japan Manpower Survey (Q4)

8

Japanese labor markets may improve

1:30

AUD

NAB Business Confidence (AUG)

2

Business confidence could be helped by lower Chinese CPI, possibly less tightening by China and Australia

1:30

AUD

NAB Business Conditions (AUG)

-1

4:01

AUD

Australia Manpower Survey (Q4)

17.0%

Expected to be buoyed by basic materials sectors

4:01

NZD

New Zealand Manpower Survey (Q4)

17.0%

5:30

EUR

French CPI - EU Harmonized (MoM) (AUG)

0.3%

-0.5%

French prices expected to grow moderately, though unlikely to be market moving as European concerns shift back to Greece

5:30

EUR

French CPI - EU Harmonized (YoY) (AUG)

2.2%

2.1%

5:30

EUR

French CPI (MoM) (AUG)

0.3%

-0.4%

5:30

EUR

French CPI (YoY) (AUG)

2.0%

1.9%

5:30

EUR

French CPI Ex Tobacco Index (AUG)

121.94

6:45

EUR

French Current Account (euros) (AUG)

-3.4B

French trade deficit growing moderately

8:30

GBP

Visible Trade Balance Non EU GBP Millions (JUL)

-5450

-5718

Trade balance with Europe may gauge health of trading partners

8:30

GBP

Visible Trade Balance GBP Millions (JUL)

-8500

-8873

8:30

GBP

Visible Trade Balance Total GBP Millions (JUL)

-4200

-4496

8:30

GBP

DCLG UK House Prices (YoY) (JUL)

-1.2%

-2.0%

Housing supply still seen as low

8:30

GBP

CPI (MoM) (AUG)

0.6%

0.0%

Prices expected to increase again, though BoE may be slow to act to prevent hindering economic recovery, European protection

8:30

GBP

CPI (YoY) (AUG)

4.5%

4.4%

8:30

GBP

Core CPI (YoY) (AUG)

3.0%

3.1%

8:30

GBP

Retail Price Index (AUG)

235.9

234.7

Retail prices may lead direction of consumer prices in future reports

8:30

GBP

Retail Price Index (MoM) (AUG)

0.6%

-0.2%

8:30

GBP

Retail Price Index (YoY) (AUG)

5.1%

5.0%

8:30

GBP

RPI Ex Mort Int.Payments (YoY) (AUG)

5.2%

5.00

11:30

USD

NFIB Small Business Optimism (AUG)

88.4

89.9

Could decline on faltering economy

12:30

USD

Import Price Index (MoM) (AUG)

-0.8%

0.3%

Decline in prices may be due to less overall demand

12:30

USD

Import Price Index (YoY) (AUG)

12.5%

14.0%

14:00

USD

IBD/TIPP Economic Optimism (SEP)

37.5

35.8

May grow on new government jobs plan

18:00

USD

Monthly Budget Statement (AUG)

-$132.0B

-$90.5B

Deficit continues to widen

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

1.4500

1.6745

86.00

0.9050

1.0275

1.0750

0.9020

113.50

146.05

Resist 1

1.4000

1.6600

81.50

0.8840

1.0000

1.0800

0.8750

110.00

140.00

Spot

1.3593

1.5812

77.35

0.8855

0.9963

1.0285

0.8179

105.15

122.32

Support 1

1.3500

1.5700

76.35

0.7800

0.9425

1.0200

0.7745

104.00

121.00

Support 2

1.2900

1.5350

75.50

0.7500

0.9055

0.9925

0.6850

100.00

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

12.9158

1.7943

7.4652

7.8031

1.2377

Spot

6.7443

5.4787

5.6705

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

1.3793

1.5965

78.18

0.8988

1.0062

1.0562

0.8320

107.18

124.73

Resist 1

1.3693

1.5888

77.77

0.8922

1.0013

1.0423

0.8250

106.17

123.52

Pivot

1.3594

1.5831

77.26

0.8861

0.9977

1.0340

0.8184

105.03

122.41

Support 1

1.3494

1.5754

76.85

0.8795

0.9928

1.0201

0.8114

104.02

121.20

Support 2

1.3395

1.5697

76.34

0.8734

0.9892

1.0118

0.8048

102.88

120.09

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

1.3828

1.6022

78.28

0.9012

1.0083

1.0467

0.8331

107.25

124.43

Resist. 2

1.3769

1.5970

78.05

0.8973

1.0053

1.0421

0.8293

106.73

123.90

Resist. 1

1.3710

1.5917

77.82

0.8933

1.0023

1.0376

0.8255

106.20

123.37

Spot

1.3593

1.5812

77.35

0.8855

0.9963

1.0285

0.8179

105.15

122.32

Support 1

1.3476

1.5707

76.88

0.8777

0.9903

1.0194

0.8103

104.10

121.26

Support 2

1.3417

1.5654

76.65

0.8737

0.9873

1.0149

0.8065

103.57

120.73

Support 3

1.3358

1.5602

76.42

0.8698

0.9843

1.0103

0.8027

103.05

120.20

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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