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Dollar Coils Like a Spring Ahead of the Long-Awaited Fed Decision

Dollar Coils Like a Spring Ahead of the Long-Awaited Fed Decision

2011-09-17 04:55:00
John Kicklighter, Chief Currency Strategist
Share:
  • Dollar Coils Like a Spring Ahead of the Long-Awaited Fed Decision
  • Euro: Traders Won’t be able to Ignore the Crisis for Much Longer
  • British Pound Looks for Clarity on Direction from the BoE with Minutes
  • Australian Dollar: Will Markets Care that RBA Minutes Curb Rate Cut Forecasts?
  • New Zealand Dollar Faces Reality in 2Q GDP Reading
  • Japanese Yen: Are Policy Officials Looking to Rouse a Coordinated Intervention?
  • Gold Puts in for its First Back-to-Back Weekly Decline in Three Months

Dollar Coils Like a Spring Ahead of the Long-Awaited Fed Decision

The short-sighted would say that risk appetite trends improved this past week; and therefore the safe-haven US dollar would lose ground. That would seem a logical explanation given pullback from the Dow Jones FXCM Dollar Index (ticker = USDollar) and the weekly-long climb from the S&P 500. However, that is tacking on a fundamental explanation to price action rather than reflecting on the true drive behind the markets. If we zoom out and look at the bigger picture of the benchmark equities index and the reserve currency we note something very interesting – that both have corrected much larger preceding trends and moved back within broader ranges. This is a shift towards consolidation and retrenchment rather than a true change of trend. That makes sense when we assess the fundamental landscape for the coming week. With the long-awaited FOMC rate decision scheduled for Wednesday (18:15 GMT to be precise) the market will finally find some clarity on the future.

For those that do not understand why the Fed rate decision is market-moving (much less trend defining), I defer you to the impact the previous rounds of support had over the capital and FX markets. Back in 2008/2009, we were introduced to the TARP and TALF programs amongst others that many believe are responsible for pulling us out of the worst financial crisis since the Great Depression. Then the $600 billion Treasury purchasing program that was speculated upon August and September of last year (coined ‘QE2’) jump started a strong rally for equities. A vow by the central bank to purchase assets on the open market is an early warning by a clumsy market participant that they intend to buy in – allowing other, more flexible traders to front-run their entry. There are those that say this effort boosts growth and stabilizes financial conditions going forward; but we should concern ourselves with the first round impact and then assess from there.

Given the impact this particular event could have over price action; every market and every currency could be influenced. A broad rescue could even help forestall further deterioration in the European Union. Therefore, in the lead up to this affair, we should more traders stepping to the sideline and/or squaring positions. This will naturally translate into leveraged volatility and an inability to establish larger trends. For possible outcomes, the market is most likely pricing in an effort by the Fed to change the composition of its balance sheet (buying longer-dated assets) in order to further reduce the outlook for its rates. That said, an outright buying effort (QE3) or no change would catch the masses off guard.

Related:Discuss the Dollar in the DailyFX Forum, John’s Video:S&P 500 and Dollar Return to Congestion for a Strong Fed Reaction

Euro: Traders Won’t be able to Ignore the Crisis for Much Longer

Is the European financial and economic situation genuinely improving? If we were to refer to the currency’s performance this past week, it would seem so. Yet, that doesn’t tell the whole story. While the euro was able to advance through the period against most of its counterparts; this move was less of a rally and more accurately a retracement. As we have seen for a little while now, the markets are growing more accustomed to seeing the troubles of the Euro-area playing out – and yet they do not immediately hit traders accounts. This leads to a complacency that overlooks developments like the failed effort to reduce dollar swap costs with Thursday’s coordinated intervention to extend unlimited three-month dollar loans; the warning from Greece’s finance minister that the economy is heading for its fourth year of recession; or that participation in the Greek bond swap is well short at 75 percent. This unawareness can exist for now; but such quiet won’t last for much longer.

British Pound Looks for Clarity on Direction from the BoE with Minutes

The Bank of England rate decisions are more frustrating than they are illuminating for traders. When the policy authority doesn’t change its approach, they offer no guidance or reasoning. However, we know that things are changing in the background. The two hawkish holdouts recently dropped their dissent while the loudest dove in the group (Adam Posen) has doubled his expectations for further stimulus. We will see if the majority is starting to shift more to the dovish extreme. If so, we could see the pound join the Aussie dollar for rate cut expectations.

Australian Dollar: Will Markets Care that RBA Minutes Curb Rate Cut Forecasts?

Unlike with the British Pound, it is difficult to see where the negative rate expectations for the Australian dollar come from. It is reason perhaps to price in perhaps a quarter point or half point cut in for the coming year; but projecting 140 bps of cuts over 12 months is outside the sentiment and data that we have seen to this point. We are very likely to see the RBA minutes will confirm this fact; but will the Aussie bears care?

New Zealand Dollar Faces Reality in 2Q GDP Reading

There isn’t much in the way of big-ticket event risk scheduled for release over the coming week for the majors; but the New Zealand dollar will certainly deliver. The last of the majors to release its quarterly GDP report, the market is projecting a 0.5 percent pace of growth in the previous quarter which will be heavily influenced by the rebuilding effort. Yet, what happens if this reading falls short with rates expectations elevated?

Japanese Yen: Are Policy Officials Looking to Rouse a Coordinated Intervention?

We have seen the SNB put a floor under EURCHF and the five largest developed central banks make a coordinated effort to open up unlimited swap lines to European banks for US dollars. Policy authorities are increasingly pulling out the stops to stabilize financial conditions; and you have to think that Japan is thinking about the same thing. Despite threats, USDJPY is still just off record lows. We’ll watch for BoJ moves.

Gold Puts in for its First Back-to-Back Weekly Decline in Three Months

In a relatively reserved move (speaking to a settling of volatility), gold managed a second consecutive weekly decline. This was the first back to back decline since the period ending July 1st. This settling reflects exactly the same conditions as the US Dollar and equities markets – a retrenchment before the Fed’s stimulus announcement. In other words, this is an unsteady calm.

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

22:00

NZD

Westpac NZ Consumer Confidence (Q3)

112

New Zealand index could lead future rates

22:30

NZD

Performance Services Index (AUG)

54.5

Tertiary industries only mildly growing

23:01

GBP

Rightmove House Prices (MoM) (SEP)

-2.1%

Lower house prices gives more support for BoE rate doves

23:01

GBP

Rightmove House Prices (YoY) (SEP)

-0.3%

9:00

EUR

Euro-Zone Construction Output s.a. (MoM) (JUL)

-1.8%

Construction continues to decline on drying up of capital, investment

9:00

EUR

Euro-Zone Construction Output w.d.a. (YoY) (JUL)

-11.3%

14:00

USD

NAHB Housing Market Index (SEP)

15

US market still seen as weak

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

1.4193

1.6215

76.78

0.7888

0.9839

1.0650

0.8473

108.97

124.49

Support 1

1.4000

1.5935

76.35

0.7500

0.9425

1.0350

0.7745

109.00

124.00

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

12.4149

1.7522

7.0738

7.7892

1.2046

Spot

6.3965

5.2483

5.4031

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

1.4326

1.6296

77.19

0.8104

0.9906

1.0778

0.8595

110.27

125.04

Resist 1

1.4259

1.6255

76.98

0.7996

0.9873

1.0714

0.8534

109.62

124.77

Pivot

1.4222

1.6214

76.77

0.7854

0.9813

1.0670

0.8485

109.24

124.48

Support 1

1.4155

1.6173

76.56

0.7746

0.9780

1.0606

0.8424

108.59

124.20

Support 2

1.4118

1.6132

76.35

0.7604

0.9720

1.0562

0.8375

108.21

123.91

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

1.4393

1.6392

77.65

0.8030

0.9949

1.0814

0.8613

110.70

126.19

Resist. 2

1.4343

1.6348

77.43

0.7994

0.9922

1.0773

0.8578

110.27

125.77

Resist. 1

1.4293

1.6304

77.22

0.7959

0.9894

1.0732

0.8543

109.83

125.34

Spot

1.4193

1.6215

76.78

0.7888

0.9839

1.0650

0.8473

108.97

124.49

Support 1

1.4093

1.6126

76.34

0.7817

0.9784

1.0568

0.8403

108.11

123.64

Support 2

1.4043

1.6082

76.13

0.7782

0.9756

1.0527

0.8368

107.67

123.22

Support 3

1.3993

1.6038

75.91

0.7746

0.9729

1.0486

0.8333

107.24

122.79

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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