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Dollar Maintains Chop, Tempers Trend as Fed Countdown Continues

Dollar Maintains Chop, Tempers Trend as Fed Countdown Continues

2011-09-15 05:39:00
John Kicklighter, Chief Currency Strategist
Share:
  • Dollar Maintains Chop, Tempers Trend as Fed Countdown Continues
  • Euro Unresponsive to Tangible Fundamental Trouble, Headlines Defuse
  • New Zealand Dollar Edges Lower after RBNZ Holds Rates, Reflects on SNB
  • British Pound Passes Over Jobless Claims Increase, Two Year High in Unemployment
  • Swiss Franc: What Should We Expect from the SNB Post Target
  • Australian Dollar Under Intense Pressure with Rate Forecast at February 2009 Low
  • Gold Angling for a Major Breakout as Congestion Builds Pressure

Dollar Maintains Chop, Tempers Trend as Fed Countdown Continues

The tangible influence of underlying fundamental fears are waning; and the market is naturally backing off the volatility that had defined August as one of the most active months since the global financial crisis. This doesn’t mean that risk has evaporated however. Far from it in fact. Yet, until one of those major threats that have been exploited by the financial media starts to have a serious impact on market conditions; we will see panicked volatility ease back. For the US dollar, this will begin as a turn to congestion – just like any other currency or assets. However, as a currency that finds most of its appeal in the absolute need for liquidity (a reflection of extreme of risk aversion); this lack of fear could translate into a bearish retracement. Of course, with the uncertainty surrounding next week’s Fed decision; the intensity of any reversals will be naturally curbed. And so, we find the greenback is itself a good indicator for the health of the financial markets themselves (with a negative correlation).

Separating direction from activity level; we should take a look at the market’s favored volatility measures. The stock-based VIX Index (perhaps the most common reading) has turned to congestion after its early August surge and is now near the bottom of its five-week range at 34.6 percent. For the currency market, the one-week implied volatility reading for EURUSD has retraced sharply from its 18-month high 20 percent reading (it is now 16.3 percent) that coincided with the pair’s low from last week. As a barometer of liquidity / extreme sentiment, this settling in activity levels has left the Dow Jones FXCM Dollar Index (ticker = USDollar) high and dry. The Index has established a range this past week between 9.800 and 9,720. This congestion itself is at the very upper extreme of its range. For now, this is hesitation; but the more familiar stability becomes, the more likely it is that the dollar will transition to a retracement back into its larger congestion pattern.

What could reasonable prevent a retracement? Event risk can add an element of uncertainty and short-term volatility; but it simply doesn’t carry the necessary weight to push us to the extremes we need to maintain a bullish drive behind the greenback. Through this past session, we noted that the August retail sales and producer price index figures stagnated – curbing growth and inflation expectations. Yet, that does little to actively diminish degrade global sentiment; and it further boosts the potential for a QE3 or Operation Twist announcement from the Fed next week. To genuinely leverage the dollar in the face of a policy decision, we need utter collapse in civility. The best chance there is European finances.

Related:Discuss the Dollar in the DailyFX Forum, John’s Video:As Markets Dismiss Headlines, EURUSD Volatility and Collapse Curbed

Euro Unresponsive to Tangible Fundamental Trouble, Headlines Defuse

If we were to go by headlines alone, the euro would have been sent on another tumble. However, market participants are quickly growing acclimated to reading discouraging headlines about the Euro-region. They want to see how this is effecting their pocketbook before they take further rash decisions on positions that could be pricey to unwind. A hardening to disappointing news means that the market is now a little more resistant to tangible developments. Notable events this past session include Moody’s downgrade of Societe Generale and Credit Agricole, a report that two banks needed to borrow $575 million through the ECB swap lines due to a lack of access to dollar credit lines and news that Austria failed to approve the expanded EFSF program. These are tangible developments that the market is willing to weather until they see something more influential. That is a dangerous complacency given we also see banks access to credit market is near 2008 levels.

New Zealand Dollar Edges Lower after RBNZ Holds Rates, Reflects on SNB

Interest rate expectations heading into the RBNZ rate decision were universally neutral. Both economists and markets were pricing in no change for the 2.50 percent benchmark lending rate; and that is what Governor Bollard delivered. However, there is still a level of speculation surrounding this event as the market is trying to project the eventual change in policy. The central banker did say that a hike was inevitable – keeping expectations of that 50bp hike in place. However, his reflections on the SNB floor on EURCHF gave a direct contrast.

British Pound Passes Over Jobless Claims Increase, Two Year High in Unemployment

The British pound isn’t putting up much of a fight to control its own fate. Without a clear bearing on the path for monetary policy (the balance of power seems to be falling further in favor of MPC member Posen towards additional bond purchases); the EU crisis is too strong. In the meantime, the sixth monthly increase in jobless claims through August (20,300) and the highest level of jobless in two years adds stimulus calls.

Swiss Franc: What Should We Expect from the SNB Post Target

The SNB has already pulled out all the stops with monetary policy. In addition to putting a floor under EURCHF, the central bank lowered its benchmark rate to essentially zero, increased sight deposits and flooding the market with francs. So what more can they do at their monetary policy meeting? The next step we will look for is a time frame for current policy and the possibility of reversing former steps to isolate the floor.

Australian Dollar Under Intense Pressure with Rate Forecast at February 2009 Low

When it comes to interest rate expectations, value is measured in interest rates and interest rate expectations. The Australian dollar has the former; but the latter is a severe weight on a currency that is also dealing with struggling risk appetite trends. Despite stable fundamental readings and a hawkish lean from the RBA, the 12-month outlook for rate cuts is now the largest it’s been since February 2009.

Gold Angling for a Major Breakout as Congestion Builds Pressure

With risk appetite settling as the European crisis struggles for progress and the US ticks down to the Fed’s stimulus announcement, the currency / inflation / risk hedge in gold has found a tenuous balance. Volatility has eased back and price action has turned to definable congestion. Yet, with the fundamentals deteriorating in the background, it is highly likely that this period of calm ends with a strong breakout.

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

New Motor Vehicle Sales (MoM) (AUG)

8.6%

Vehicle sales may indicate level of consumer confidence currently

1:30

AUD

New Motor Vehicle Sales (YoY) (AUG)

0.9%

1:30

AUD

RBA Foreign Exchange Transaction (AUD) (AUG)

605M

Dropped since June 2009 peak

7:15

CHF

Industrial Production (QoQ) (Q2)

3.0%

-9.2%

Q2 overall industrial production expected to be resilient, though weakening

7:15

CHF

Industrial Production (YoY) (Q2)

2.7%

5.0%

7:30

CHF

Swiss National Bank Rate Decision

0.0%

0.0%

Will be kept to protect domestic economy

8:00

EUR

ECB Publishes Sept. Monthly Report

Report will shed light on current views of the bank on the economy and continuing debt crisis

8:00

EUR

Italian CPI (NIC incl. tobacco) (MoM) (AUG F)

0.3%

0.3%

Final revisions of Italian inflation not expected to shift markets

8:00

EUR

Italian CPI (NIC incl. tobacco) (YoY) (AUG F)

2.8%

2.8%

8:00

EUR

Italian CPI - EU Harmonized (MoM) (AUG F)

0.3%

0.3%

8:00

EUR

Italian CPI - EU Harmonized (YoY) (AUG F)

2.2%

2.2%

8:30

GBP

Retail Sales (MoM) (AUG)

-0.2%

0.2%

British retail sales expected to decline, furthering dovish sentiment by central bank

8:30

GBP

Retail Sales (YoY) (AUG)

-0.2%

-0.2%

8:30

GBP

Retail Sales w/Auto Fuel (MoM) (AUG)

-0.3%

0.2%

8:30

GBP

Retail Sales w/Auto Fuel (YoY) (AUG)

-0.1%

0.0%

9:00

EUR

Euro-Zone CPI - Core (YoY) (AUG)

1.2%

1.2%

Unchanged inflation could keep ECB to raising rates too soon

9:00

EUR

Euro-Zone CPI (MoM) (AUG)

0.2%

-0.6%

9:00

EUR

Euro-Zone CPI (YoY) (AUG)

2.5%

2.5%

9:00

EUR

Euro-Zone Employment (QoQ) (Q2)

0.1%

Unemployment may increase due to continued austerity in Italy, low demand

9:00

EUR

Euro-Zone Employment (YoY) (Q2)

0.1%

9:00

EUR

Italian Current Account (euros) (JUL)

-4252M

Italian trade deficit could widen again

12:30

CAD

Manufacturing Shipments (MoM) (JUL)

1.5%

-1.5%

July figures expected to increase

12:30

USD

Current Account Balance (Q2)

-$122.9B

-$119.3B

US accounts could fall again

12:30

USD

CPI (MoM) (AUG)

0.2%

0.5%

Core CPI expected to increase moderately, although FOMC rate decisions unlikely to be budged

12:30

USD

CPI Ex Food & Energy (MoM) (AUG)

0.2%

0.2%

12:30

USD

CPI (YoY) (AUG)

3.6%

3.6%

12:30

USD

CPI Ex Food & Energy (YoY) (AUG)

1.9%

1.8%

12:30

USD

CPI Core Index s.a. (AUG)

225.463

12:30

USD

CPI n.s.a. (AUG)

226.267

225.922

12:30

USD

Initial Jobless Claims (SEP 9)

411K

414K

Weekly data could slow small blip of improvement

12:30

USD

Continuing Claims (SEP 3)

3705K

3717K

13:15

USD

Industrial Production (AUG)

0.1%

0.9%

US manufacturing data indicates slower nationwide, though eastern industries could grow

13:15

USD

Capacity Utilization (AUG)

77.5%

77.5%

12:30

USD

Empire Manufacturing (SEP)

-4

-7.72

13:45

USD

Bloomberg Economic Expectations (SEP)

-34

Consumer data steadily falling to post-recession lows

13:45

USD

Bloomberg Consumer Comfort (SEP)

-49.3

14:00

USD

Philadelphia Fed. (SEP)

-15

-30.7

Eastern US economy could improve

14:30

USD

EIA Natural Gas Storage Change (SEP 9)

64

Household use starting to increase

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

1.3754

1.5776

76.65

0.8758

0.9894

1.0264

0.8201

105.43

120.93

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

12.9379

1.7771

7.3940

7.8006

1.2445

Spot

6.6983

5.4149

5.6542

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

1.3895

1.5874

77.24

0.8905

0.9987

1.0464

0.8327

106.23

121.94

Resist 1

1.3824

1.5825

76.94

0.8832

0.9941

1.0364

0.8264

105.83

121.44

Pivot

1.3708

1.5766

76.78

0.8780

0.9893

1.0271

0.8203

105.19

121.07

Support 1

1.3637

1.5717

76.48

0.8707

0.9847

1.0171

0.8140

104.79

120.57

Support 2

1.3521

1.5658

76.32

0.8655

0.9799

1.0078

0.8079

104.15

120.21

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

1.3979

1.5979

77.57

0.8907

1.0009

1.0445

0.8354

107.41

122.90

Resist. 2

1.3922

1.5928

77.34

0.8869

0.9980

1.0400

0.8316

106.92

122.41

Resist. 1

1.3866

1.5877

77.11

0.8832

0.9952

1.0354

0.8277

106.42

121.92

Spot

1.3754

1.5776

76.65

0.8758

0.9894

1.0264

0.8201

105.43

120.93

Support 1

1.3642

1.5675

76.19

0.8684

0.9836

1.0174

0.8125

104.44

119.94

Support 2

1.3586

1.5624

75.96

0.8647

0.9808

1.0128

0.8086

103.94

119.45

Support 3

1.3529

1.5573

75.73

0.8609

0.9779

1.0083

0.8048

103.45

118.96

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

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