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Dollar Marks its Strongest Two-Day Rally Since October 27th, 2008

Dollar Marks its Strongest Two-Day Rally Since October 27th, 2008

2011-09-23 03:00:00
John Kicklighter, Chief Currency Strategist
Share:
  • Dollar Marks its Strongest Two-Day Rally Since October 27th, 2008
  • Euro Officials Desperate to Avert Crisis, Are Rumors of Help True?
  • British Pound Drug Lower by European Exposure as Rates Cast Sterling Adrift
  • Japanese Yen: With South Korea Joining the Intervention Game, Is Japan Closer?
  • Australian Dollar Sees Expectations of October Cut Ease but Not 12 Month Outlook
  • Canadian Dollar Tumbles as Risk, Commodities, Retail Data Weighs
  • Gold On the Verge of True Bear Trend as Margin Calls Boost Liquidity Need

Dollar Marks its Strongest Two-Day Rally Since October 27th, 2008

As long as there isn’t a market-wide revival in investor optimism (highly unlikely), the US dollar looks like it is going to close out an impressive performance for the week. The greenback does moderately well when sentiment is under pressure; but the currency truly shines when panicked money managers and individual traders don’t have time consider exploding risk against tepid returns. When the needle shifts to fear, liquidity is the primary appeal; and the dollar is once again prized as the favored reserve and the primary fiat exchange for goods. Those are the conditions we are currently facing. While not yet at conditions comparable to the 2008 financial crisis, we can certainly make allusions to the begins of that catastrophe. In fact, the Dow Jones FXCM Dollar Index (ticker = USDollar) can make a direct connection with its back-to-back, one percent-plus daily rallies. That is the best performance for the benchmark since the Friday/Monday rallies on October 24th and 27th, 2008.

Since the Federal Open Market Committee (FOMC) announced it was no longer pursuing an expansive monetary policy regime, market participants have come to the realization that the world’s largest source of support in the past decade has left them to fend for themselves. This will certainly open the veins to spread the financial crisis that has ran rampant in Europe (and is arguably incubating in the US and China); and more than likely it will accelerate the process. Clear evidence of this happening can be seen in the US financial headlines. Speculation was gaining traction that a number of American banks are facing heavy potential losses through exposure to troubled European banks and quickly depreciating financial assets. Perhaps one of the most volatile rumors was concern that Morgan Stanley (a company that is otherwise responsibly positioned for derivatives and housing holdings) was at high risk for its exposure to French banks – marking a significant deterioration in the outlook for Europe’s troubles. While this may be pure conjecture, the fact that liquidity is drying up and lending costs are swelling is unmistakable. Beyond that, we can also see shares of Bank of America, Citigroup, Morgan Stanley and others are plummeting.

That said, this fire needs fuel to grow and consume. In the final 24 hours of the week, we don’t have much in the way of major scheduled event risk. And, though there is a good probability that there are additional threats that come to light from Europe, North America or Asia; the extent of the recent decline and proximity to the weekend will likely encourage some level of stability (unless things really fall apart). Furthermore, we have heard initial comments out of the G-20 meeting in the early Asian session that warn of a sweeping effort to prevent a repeat of the troubles back in 2008. Never mind that the pledge for a “strong and coordinated” response is vague and thereby lacking merit; in temporary lulls for sentiment and volatility, such statements play to the prevailing trend. Though, this does nothing to change the primary trend or real troubles.

Related:Discuss the Dollar in the DailyFX Forum, John’s Picks:Beware Temporary EURUSD and S&P 500 Correction, Dominant Trend Bearish

Euro Officials Desperate to Avert Crisis, Are Rumors of Help True?

The euro’s situation is a clear reflection of the broader sentiment that is prevailing. From a purely fundamental perspective, the advanced Euro Zone PMI Composite reading for September (a good leading indicator for economic activity) turned negative with a reading below 50 (49.2) for the first time since July of 2009. From a financial market perspective, we note that sovereign and corporate credit default swaps continue to advance to multi-year or record highs; while liquidity measures are signaling their worst reading since 2008. Yet, there are few foot holds for hope. Financial Times has cited unnamed officials as saying the EU would soon recapitalize 16 banks. Another direct-to-the-point rumor was that the Fed could lower the cost on its FX swap lines for European banks. Positive conjecture at this juncture though needs quick follow up.

British Pound Drug Lower by European Exposure as Rates Cast Sterling Adrift

The British pound has always been tethered to the health of the Euro-area; but previously, the currency could deviate under the auspices that it was set apart through stable rates and effective austerity. We have seen in the past two weeks that both points are failing to offer safe haven going forward. With the BoE likely to boost its bond program the week after next and austerity biting growth, it looks more like a shared problem.

Japanese Yen: With South Korea Joining the Intervention Game, Is Japan Closer?

Despite the proximity to record highs, policy officials’ constant threats and severe fundamental issues of its own; the Japanese yen refuses to turn. For Japanese officials, the currency’s performance against all major currencies is a problem; but it is USDJPY that they are most concerned with. What can they do? Well, South Korea just recently upped its FX intervention game and we know the SNB’s move…

Australian Dollar Sees Expectations of October Cut Ease but Not 12 Month Outlook

Negative interest rate expectations have improved modestly for the Australian dollar – but not nearly enough to give the currency enough relief to offset the risk aversion run. Currently, the probability for a 25bp rate cut at the next RBA meeting is at 46 percent (markedly reduced from the past week); but the 12-month forecast has swelled back to 150bp – this even after another RBA member says the outlook is overdone.

Canadian Dollar Tumbles as Risk, Commodities, Retail Data Weighs

Though many currencies have been pummeled this past week, the Canadian dollar is under remarkable pressure. This seems somewhat unusual given its restricted exposure to financial risk, the relative steady domestic performance and the hold on interest rates. Yet, this past session’s 0.6 percent drop in retail sales is yet another thing to remind us that Canada is not immune and is still near multi-year highs.

Gold On the Verge of True Bear Trend as Margin Calls Boost Liquidity Need

Risk is collapsing on itself and yet the favored safe haven of the past year is falling. What gives? Gold is certainly appealing when there is a need for wealth preservation and confidence in fiat currencies is sliding. Yet, when we are looking for absolute liquidity – gold doesn’t measure up. Furthermore, when capital markets are tripping margin calls; the need for cash rises and gold is a good source for capital.

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

0:00

AUD

Conference Board Leading Index (JUL)

-0.8%

May continue decline on global slowdown

1:35

CNY

MNI September Flash Business Sentiment Survey

55.4

Chinese index could improve on slower inflation, possibly less tightening

6:45

EUR

French Wages (QoQ) (Q2 F)

0.6%

0.6%

Final revision unlikely to move market

6:45

EUR

French Consumer Confidence Indicator (SEP)

83

86

French confidence indicators expected lower across the board though ECB adamant on not providing stimulus

6:45

EUR

French Own-Company Production Outlook (SEP)

8

6:45

EUR

French Production Outlook Indicator (SEP)

3

6:45

EUR

French Business Confidence Indicator (SEP)

100

105

8:00

EUR

Italian Retail Sales s.a. (MoM) (JUL)

0.3%

-0.2%

July retail sales could show some improvement, though focus remains on Greece

8:00

EUR

Italian Retail Sales (YoY) (JUL)

-1.2%

8:30

GBP

BBA Loans for House Purchase (AUG)

33250

33417

British housing market expected weaker again as loans demand drops

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

1.4050

1.5900

86.00

0.9400

1.0675

1.0750

0.9020

112.00

126.50

Resist 1

1.3900

1.5775

81.50

0.9250

1.0300

1.0375

0.8750

106.50

123.00

Spot

1.3457

1.5349

76.27

0.9083

1.0297

0.9711

0.7771

102.64

117.07

Support 1

1.3385

1.5300

76.35

0.8500

0.9950

0.9700

0.7745

102.00

116.00

Support 2

1.3025

1.5180

75.50

0.7800

0.9750

0.9545

0.6850

100.00

114.00

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

16.5000

2.0000

8.5800

7.8165

1.3650

Resist 2

7.5800

5.6625

6.1150

Resist 1

14.3200

1.9000

8.1025

7.8075

1.3250

Resist 1

6.5175

5.3100

5.7075

Spot

13.9549

1.8446

8.2751

7.8002

1.3107

Spot

6.9049

5.5319

5.8484

Support 1

12.6000

1.6500

6.5575

7.7490

1.2000

Support 1

6.0800

5.1050

5.3040

Support 2

11.5200

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

1.3697

1.5591

77.31

0.9288

1.0546

1.0205

0.8175

105.24

119.88

Resist 1

1.3577

1.5470

76.79

0.9185

1.0421

0.9958

0.7973

103.94

118.48

Pivot

1.3481

1.5399

76.45

0.9081

1.0237

0.9833

0.7863

103.08

117.72

Support 1

1.3361

1.5278

75.93

0.8978

1.0112

0.9586

0.7661

101.78

116.32

Support 2

1.3265

1.5207

75.59

0.8874

0.9928

0.9461

0.7551

100.92

115.57

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

1.3703

1.5565

77.25

0.9261

1.0455

0.9908

0.7935

104.76

119.19

Resist. 2

1.3641

1.5511

77.00

0.9217

1.0415

0.9859

0.7894

104.23

118.66

Resist. 1

1.3580

1.5457

76.76

0.9172

1.0376

0.9810

0.7853

103.70

118.13

Spot

1.3457

1.5349

76.27

0.9083

1.0297

0.9711

0.7771

102.64

117.07

Support 1

1.3334

1.5241

75.78

0.8994

1.0218

0.9612

0.7689

101.58

116.01

Support 2

1.3273

1.5187

75.54

0.8949

1.0179

0.9563

0.7648

101.05

115.48

Support 3

1.3211

1.5133

75.29

0.8905

1.0139

0.9514

0.7607

100.52

114.95

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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