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Dollar Traders Won’t Wait Until Friday NFPs to Find Volatility, Trend

Dollar Traders Won’t Wait Until Friday NFPs to Find Volatility, Trend

2011-10-01 02:30:00
John Kicklighter, Chief Currency Strategist
Share:
  • Dollar Traders Won’t Wait Until Friday NFPs to Find Volatility, Trend
  • Euro: Is there Room for a Correction Amid Europe’s Financial Troubles, ECB Decision?
  • British Pound May have a Already Priced in a BoE Stimulus Move
  • Australian Dollar Has a Virtual Guarantee of Volatility Between the RBA and Risk
  • Swiss Franc: What Does the ECB Decision Mean for the Euro’s Primary Safe Haven
  • Canadian Dollar Collapses to End the Week, Major Event Risk Ahead
  • Gold Dangerously Quiet Ahead of Key a Fundamentally Dense Week

Dollar Traders Won’t Wait Until Friday NFPs to Find Volatility, Trend

Though it was an extremely choppy performance, the dollar did well this past week. The greenback advanced against all its major counterparts with the exception of the British pound despite the lack of a tangible drive in underlying investor sentiment and the necessary liquidity demand that defines the fundamental appeal of an otherwise wayward currency. Moving forward, there will be no lack of catalysts to stoke volatility behind this benchmark and every other risk-sensitive asset in the financial markets. In fact, the docket may be so dense that it is hard to establish a primary trend. The novice think the fundamental landscape is flat until we get to Friday’s Non-Farm Payrolls (NFPs); but the experienced trader knows that the bigger swings in volatility will come before the labor report. And, in all likelihood, the fundamental future of the dollar will be decided by the event risk that precedes this news trader-favored indicator.

Upon entering the new trading week, we need to be instantly on our toes. A sharp drop in risk trends and the euro to end this past week leverages the risk that the markets are reviving the bear run that had stalled in recent weeks. However, we should look for confirmation of conviction rather than trying to jump excitedly ahead of a move. This Friday represents the end of the week, month and quarter – an unusual mix. As such, we may be seeing the effects of position squaring that would not carry over into the new trading period. That said, the proximity of major support for the S&P 500 and EURUSD alongside the unstable fundamental backdrop leverages the threat that this is the real deal.

There are a number of concerns that we will need to keep in mind beyond the Monday make-or-break. First up is the persistence in the spread of the global financial crisis. This past week, we saw Morgan Stanley grace the headlines for the meteoric rise in its credit default premiums due to balance sheet exposures to European debt; but it is important to actively scan the entire US financial sector for trouble. If we were to rank the systemic threat level and imminence of crisis; the Bank of America is probably the most worrisome player. Whether conditions simply deteriorate in Europe or the contagion spreads to the US; the outcome will be the same for the US dollar – demand for liquidity and shelter from an infectious financial disaster will leverage the greenback’s liquidity / safe haven value.

As for the August payrolls, the forecast is for a 50,000 net addition to the labor market following a remarkable announcement of no change. Does this change the bearing on the US economy? No. Does it change the outlook for rates? No. Therefore, don’t expect much follow through.

Related: Discuss the Dollar in the DailyFX Forum, John’s Video: EURUSD and EURGBP Offer Immediate Trade Potential Next Week

Euro: Is there Room for a Correction Amid Europe’s Financial Troubles, ECB Decision?

After moving beyond Monday’s critical decision about whether EURUSD and EURGBP will collapse below 1.3400 and 0.8575 respectively; there will be plenty of fundamental landmines to keep things interesting. As with the NFPs, the ECB decision is easy to benchmark; but this particular event carries a lot more potential than the US data. The market is fully pricing in a 25bp rate cut; but recent commentary suggests officials are more interested in taking the unorthodox route by reactivating covered bond purchases. Regardless of the outcome, expectations are high; and the market has already priced in considerable change from the euro. There will be a reaction to President Trichet’s final policy meeting. There seems a latent belief that EFSF expansion approval can offer at least short term relief. Perhaps it can accomplish the same for the euro…

British Pound May have a Already Priced in a BoE Stimulus Move

The ECB isn’t the only bank that will be active next week. Its English counterpart is perhaps more noteworthy; because an expected announcement of additional bond purchases would represent the first action (not to mention official remarks) from the MPC in many months. Without room to cut the benchmark lending rate, market participants believe the Bank of England will take member Adam Posen’s long-standing advice and increase its bond purchases by 50 to 100 billion pounds. This is in all likelihood a first step and admission that conditions are weak.

Australian Dollar Has a Virtual Guarantee of Volatility Between the RBA and Risk

The most divisive of the central bank meetings next week is surprisingly the RBA’s gathering. The market is fairly certain on both the ECB and BoE’s approaches; but there is considerable uncertainty surrounding the Australian authority. Policy officials have offered little beyond a neutral lean in their policy stance in the last two statements; but the market is pricing in a cumulative 150 bps worth of cuts over the coming 12 months.

Swiss Franc: What Does the ECB Decision Mean for the Euro’s Primary Safe Haven

If we are concerned that the euro could potential dive into a steep selloff, we need to also consider what will happen with the Swiss franc. As the primary safe haven for Europeans, the franc will find a significant boost in demand should panic hit. Of course, the momentum here depends on a catalyst. If the euro is dropping due to rate expectations, EURCHF would likely hold. If it’s a revived crisis though, all bets are off on 1.20.

Canadian Dollar Collapses to End the Week, Major Event Risk Ahead

Though the focus was on the euro and S&P 500 through the close of this past week; the Canadian dollar would also mark a sharp plunge to close the week. In fact, USDCAD rallied to a more than one-year high while CADJPY dove to a 31-month low. Risk aversion certainly had more to do with this than the better-than-expected July GDP reading; so that is where our focus should be next week. That and the jobs figures.

Gold Dangerously Quiet Ahead of Key a Fundamentally Dense Week

Something is suspicious. Not the fact that gold is retracing as risk seems to rise (that makes sense when we come at it as a question of liquidity). The previous metal has seen its volatility contract, futures volume hit a month low and net speculative interest in COT figures hit levels not seen since mid-2009. Conditions are warping. This could be a sign that a serious crisis is building – one beyond gold’s safe haven palate.

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

(Sat)

CNY

PMI Manufacturing (SEP)

50.9

50.9

Chinese manufacturing nearing stalling

23:01

(Sun)

GBP

Lloyds Business Barometer (SEP)

-3

Has been dropping, though not as low as recession records

23:01

(Sun)

GBP

Hometrack Housing Survey (MoM) (SEP)

-0.1%

A further drop in housing prices provides more support for BoE doves

23:01

(Sun)

GBP

Hometrack Housing Survey (YoY) (SEP)

-3.7%

23:30

(Sun)

AUD

AiG Performance of Manufacturing Index (SEP)

43.3

Manufacturing capacity may shrink once again

23:50

(Sun)

JPY

Loans and Discounts Corporate YoY (AUG)

-1.6%

Slowing loans may prompt government action, if not Bank of Japan

23:50

(Sun)

JPY

Tankan Large Manufacturing (Q3)

2

-9

Tankan surveys show improvement in Q3, pulling upwards from Q2 weakness

23:50

(Sun)

JPY

Tankan Non Manufacturing (Q3)

2

-5

23:50

(Sun)

JPY

Tankan Large Manufacturing Outlook (Q3)

3

2

23:50

(Sun)

JPY

Tankan Non Manufacturing Outlook (Q3)

2

-2

23:50

(Sun)

JPY

Tankan Large All Industrial CapEx (Q3)

4.3%

4.2%

0:00

NZD

ANZ Commodity Price (SEP)

-1.2%

Commodity index may fall on lower prices

1:00

CNY

China Non-manufacturing PMI (SEP)

57.6

Services industry seen not as weak as manufacturing and industries

5:00

JPY

Vehicle Sales (YoY) (SEP)

-25.5%

Sales suffer on lower demand

7:15

CHF

Retail Sales (Real) (YoY) (AUG)

1.9%

Swiss retail may see improvement

7:30

CHF

PMI Manufacturing (SEP)

51.7

Swiss manufacturing could be buoyed by peg, Eurozone demand

7:45

EUR

Italian PMI Manufacturing (SEP)

47

Eurozone industries may further weaken as companies reduce investment spending

7:50

EUR

French PMI Manufacturing (SEP F)

47.3

7:55

EUR

German PMI Manufacturing (SEP F)

50

8:00

EUR

EU PMI Manufacturing (SEP F)

48.4

8:30

GBP

PMI Manufacturing (SEP)

49

British data seen weak on continued government austerity

14:00

USD

Construction Spending MoM (AUG)

-0.1%

-1.3%

Demand in southeast may help index

14:00

USD

ISM Manufacturing (SEP)

50.1

50.6

US manufacturing price could fall again, suggesting bank will keep rates lower

14:00

USD

ISM Prices Paid (SEP)

55.5

16:00

EUR

New Car Registrations (YoY) (SEP)

1.5%

New cards indicates consumer spending

17:00

EUR

Italian Budget Balance (SEP)

-6.9B

Italian government budgets slowly improving on austerity efforts

17:00

EUR

Italian Budget Balance (Year to date) (SEP)

-46.8B

21:00

USD

Total Vehicle Sales (SEP)

12.40M

12.10M

US vehicle sales expected stable

21:00

USD

Domestic Vehicle Sales (SEP)

9.80M

9.52M

23:50

JPY

Monetary Base (YoY) (SEP)

15.9%

Index growth may slow on tight liquidity

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

1.0550

1.0375

0.8750

106.50

123.00

Spot

1.3408

1.5617

77.07

0.9059

1.0448

0.9691

0.7632

103.34

120.37

Support 1

1.3385

1.5300

76.35

0.8500

1.0150

0.9600

0.7500

102.00

116.00

Support 2

1.3025

1.5180

75.50

0.7800

0.9950

0.9545

0.6850

100.00

114.00

CLASSIC SUPPORT AND RESISTANCE

EMERGING MARKETS & SCANDIES 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

13.8435

1.8577

8.0706

7.7845

1.3058

Spot

6.8429

5.5501

5.8480

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

1.3667

1.5738

77.62

0.9157

1.0537

0.9856

0.7753

105.07

121.77

Resist 1

1.3538

1.5678

77.35

0.9108

1.0493

0.9774

0.7693

104.20

121.07

Pivot

1.3471

1.5605

76.92

0.9037

1.0422

0.9727

0.7650

103.62

120.10

Support 1

1.3342

1.5545

76.65

0.8988

1.0378

0.9645

0.7590

102.75

119.40

Support 2

1.3275

1.5472

76.22

0.8917

1.0307

0.9598

0.7547

102.17

118.43

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

1.3634

1.5805

77.97

0.9220

1.0601

0.9886

0.7791

105.30

122.32

Resist. 2

1.3578

1.5758

77.74

0.9179

1.0563

0.9837

0.7751

104.81

121.83

Resist. 1

1.3521

1.5711

77.52

0.9139

1.0525

0.9788

0.7712

104.32

121.34

Spot

1.3408

1.5617

77.07

0.9059

1.0448

0.9691

0.7632

103.34

120.37

Support 1

1.3295

1.5523

76.62

0.8979

1.0371

0.9594

0.7552

102.36

119.40

Support 2

1.3238

1.5476

76.40

0.8939

1.0333

0.9545

0.7513

101.87

118.91

Support 3

1.3182

1.5429

76.17

0.8898

1.0295

0.9496

0.7473

101.38

118.42

v

---Written by: John Kicklighter, Senior Currency Strategist for DailyFX.com

To contact John, email jkicklighter@dailyfx.com. Follow me on twitter at http://www.twitter.com/JohnKicklighter

To be added to John’s email distribution list, send an email with the subject line “Distribution List” to jkicklighter@dailyfx.com.

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