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Dollar Looks for Crisis to Fuel its Biggest Weekly Rally in 16 Months

Dollar Looks for Crisis to Fuel its Biggest Weekly Rally in 16 Months

2011-09-24 02:40:00
John Kicklighter, Chief Currency Strategist
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  • Dollar Looks for Crisis to Fuel its Biggest Weekly Rally in 16 Months
  • Euro Officials May Have Nothing Left to Offer, Currency Traders Smell Blood
  • British Pound Finds a Temporary Boost but Headwinds are Picking Up
  • Swiss Franc Starting to Perk Up as Fear Competes with SNB’s Warning
  • Australian Dollar Remains Synced to Risk Trend but Rate Forecast Could Warp
  • Canadian Dollar Looks to Growth, Commodities and Rates for Direction
  • Gold Collapses Under Need for Cash, Margin Hikes

Dollar Looks for Crisis to Fuel its Biggest Weekly Rally in 16 Months

The dollar put in for a remarkable performance this past week – and there is little wonder why when we look at the contrasting health of the broader capital markets and the dread seen in the financial headlines. At its very foundation, the US currency is an option of last resort when conditions are falling apart. Note that this is not the same thing as a shift in investor sentiment, where risk aversion encourages us to unwind risky exposure and sit out volatility in a comparatively lower yielding asset. No, the dollar flourishes when there is no consideration for return but only fear that capital will be lost. To keep the currency’s advance intact (much less to encourage further progress), the global markets must remain off kilter and panic needs to set in. Can we say that blind fear is in charge of the markets now? Are investors cutting exposure at all costs for fear that credit lines will freeze? We have taken a few steps in this direction; but we have yet to see the negative feedback loop engage.

For a technical perspective of the where these big fundamental themes stand, we can refer to our favored benchmarks. For sentiment, the S&P 500 suffered its biggest two-day loss in years; and yet the benchmark has not reengaged the bear trend that swept up the markets at the end of July and lost steam within two weeks. Yet, we are coming much closer to a self-sustained market collapse as evidenced by the Dow Jones FXCM Dollar Index (ticker = USDollar) after it broke to seven month highs after months of basing. This run is made all the more impressive in that the weekly rally that drove us to these heights was the biggest we have seen since the opening Week of May back in 2010. An excellent confirmation of the sentiment this mix would suggest is gold’s incredible tumble. The metal closed out its worst daily loss since December 1st, 2008. As a natural safe haven, the fact that investors were exiting a key store of wealth speaks to the extremes the market is facing. It isn’t a safe haven that market participants are looking for, its cash / liquidity.

The transition we have witnessed last week to put the capital markets into a technical bear market and shift sentiment to a dominant negative state suggests that we have seen critical shift in trend. However, reversals are rarely ‘V’-shaped –from either a fundamental or technical perspective. There are very frequently short-lived corrections as factions of the market shift capital at key levels (and often times in heavy bear markets, policy officials act to curb panic through manipulation). At this stage in the game, we are at high risk of just such pull backs. Officials recognize the threat and the similarities to 2008; and they have attempted to shower the market with reassurances (though both the ECB and G20 offered little). What’s more, the coming week’s docket doesn’t have scheduled events to stoke a common reaction.

Related:Discuss the Dollar in the DailyFX Forum, John’s Video:Should We Expect a Stock Crash and Blowout Dollar Rally Monday?

Euro Officials May Have Nothing Left to Offer, Currency Traders Smell Blood

Months ago, Greece was heading towards an inevitable default and the Euro-area’s financial health was deteriorating; but the market was willing to overlook the trouble in order to focus on short-term trade opportunities. This stood so long as policy officials were willing to prop up the regional economy and markets to prevent large losses for those that invest in Europe. However, investors have suffered massive losses; and it is increasingly clear that the financial troubles are too great for officials to hold back. More importantly, it looks like others are pulling their capital out; and the last out loses the most. We’ll look for more temporary stop gaps; but a loss of market liquidity would be fatal for Greece.

British Pound Finds a Temporary Boost but Headwinds are Picking Up

The British pound bounced Friday; but it was unlikely due to any fundamental developments unique to the region. Gilt yields edged higher on the session alongside the pickup in US government rates; but this is more of a ‘reprieve’ than new direction. The interest rate outlook is permanently marred and now sterling traders are expecting additional stimulus at the beginning of October. These bond purchases may be vital as Chancellor Osborne recently said the deficit reduction program could weather an economic slowdown – perhaps, but not if the BOE doesn’t help out…

Swiss Franc Starting to Perk Up as Fear Competes with SNB’s Warning

There is an unlimited amount of money waiting to keep EURCHF above 1.20000; but that doesn’t mean the pair can’t pull back to that level while other Swissie-based pairs can recoup lost ground for the safe haven. As the European crisis deepens, safe appeal will be less speculative and more desperate with EURCHF. And, for other crosses; the franc still comes with a history of safety – and that’s what matters in panics.

Australian Dollar Remains Synced to Risk Trend but Rate Forecast Could Warp

Market sentiment is in firm command of the Australian dollar. With risk aversion hitting extreme levels and the need for capital pulling on carry trades, the Aussie currency will naturally find itself under pressure. However, we should keep the commodity dollar’s own influence in mind. With nearly 150bps of cuts expected, there is a lot of good will that could be given should that outlook improve – enough to offset risk aversion?

Canadian Dollar Looks to Growth, Commodities and Rates for Direction

The Canadian dollar is one of those currencies that seem to straddle two worlds. It takes qualities from the investment currencies and it is also presumed to be somewhat stable. This is due to its commodity production and ties to the US. Yet, this isn’t a permanent benefit. Should forecasts sour, growth slow (we July GDP due) or financial troubles arise; the loonie will suddenly look very expensive.

Gold Collapses Under Need for Cash, Margin Hikes

Not only was Friday’s 4.8 percent collapse the biggest percentage loss for gold in nearly 34 months; but the $83.32 slide was the biggest notional loss on record. When you need cash to cover your margin calls or revive your account; the previous metal is just another asset that can be liquidated. Another driver to note, the CBOE announced a 21 percent hike in gold futures margins. Another non-ideal safe haven.

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**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

(Sun)

CNY

Leading Index (AUG)

102.25

Index could recover on laxing of tightening

21:45

(Sun)

NZD

Trade Balance (New Zealand dollars) (AUG)

129M

New Zealand exports will be the most important report to also gauge strength of Australian, Chinese economies

21:45

(Sun)

NZD

Exports (New Zealand dollars) (AUG)

3.72B

21:45

(Sun)

NZD

Imports (New Zealand dollars) (AUG)

3.59B

22:45

(Sun)

NZD

Balance (YTD) (New Zealand dollars) (AUG)

1314

8:00

EUR

German IFO - Business Climate (SEP)

108.7

IFO surveys could sink lower as EU officials in deadlock over Greek aid

8:00

EUR

German IFO - Current Assessment (SEP)

118.1

8:00

EUR

German IFO – Expectations (SEP)

100.1

8:00

EUR

Italian Consumer Confidence Index s.a. (SEP)

100.3

Under-100 reading will be first since March 2009

12:30

USD

Chicago Fed Nat Activity Index (AUG)

-0.06

Midwestern economy expected to slow

14:00

USD

New Home Sales (AUG)

295K

298K

New home sales may fall once again as drive to safety saps real estate buying

14:00

USD

New Home Sales (MoM) (AUG)

-1.0%

-0.7%

14:30

USD

Dallas Fed Manufacturing Activity (SEP)

-11.4

Southern manufacturing may weaken

16:00

EUR

French Total Jobseekers Change (AUG)

36.1

French employment figures may continue to weaken, though not expected to move markets

16:00

EUR

French Total Jobseekers (AUG)

2756.5

23:50

JPY

Corporate Service Price (YoY) (AUG)

-0.5%

Tertiary prices to fall on weak demand

Next 24 Hours

GMT

Currency

Upcoming Events & Speeches

12:30

USD

Fed's Raskin Speaks on Loan Servicing in Washington

13:30

USD

Fed's Bullard Speaks in New York

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

1.3487

1.5433

76.80

0.9053

1.0313

0.9749

0.7742

103.58

118.52

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

13.6587

1.8410

8.2971

7.8028

1.2987

Spot

6.9196

5.5180

5.8554

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

1.3639

1.5573

77.23

0.9140

1.0420

0.9960

0.7957

104.49

119.64

Resist 1

1.3563

1.5503

77.02

0.9097

1.0366

0.9854

0.7849

104.04

119.08

Pivot

1.3491

1.5418

76.58

0.9046

1.0296

0.9762

0.7787

103.14

118.00

Support 1

1.3415

1.5348

76.37

0.9003

1.0242

0.9656

0.7679

102.69

117.44

Support 2

1.3343

1.5263

75.93

0.8952

1.0172

0.9564

0.7617

101.79

116.35

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

1.3734

1.5653

77.79

0.9231

1.0473

0.9952

0.7909

105.75

120.70

Resist. 2

1.3672

1.5598

77.54

0.9186

1.0433

0.9901

0.7868

105.21

120.16

Resist. 1

1.3610

1.5543

77.29

0.9142

1.0393

0.9851

0.7826

104.67

119.61

Spot

1.3487

1.5433

76.80

0.9053

1.0313

0.9749

0.7742

103.58

118.52

Support 1

1.3364

1.5323

76.31

0.8964

1.0233

0.9647

0.7658

102.49

117.43

Support 2

1.3302

1.5268

76.06

0.8920

1.0193

0.9597

0.7616

101.95

116.88

Support 3

1.3240

1.5213

75.81

0.8875

1.0153

0.9546

0.7575

101.41

116.34

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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