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Dollar Wins Critical Break Against Euro, Other Crosses to Follow?

Dollar Wins Critical Break Against Euro, Other Crosses to Follow?

2011-10-04 02:14:00
John Kicklighter, Chief Currency Strategist
Share:
  • Dollar Wins Critical Break Against Euro, Other Crosses to Follow?
  • Euro Tumbles as Greek Situation Nears Unsalvageable, Dexia Troubles Bloom
  • Australian Dollar Ready for a Volatile Reaction to RBA Decision
  • British Pound Stumbles Alongside Euro, Won’t Wait for BoE
  • Swiss Franc Appreciating after SNB Release of Bailout Costs
  • Japanese Yen: Are There Fundamentals Other than Intervention?
  • Gold Wins its Highest Close in a Week, But Tame Expectations

Dollar Wins Critical Break Against Euro, Other Crosses to Follows?

The US Dollar surged Monday under the kind of schadenfreude that only the world’s most liquid currency can appropriately appreciate. With worrying financial headlines crossing the wires throughout the weekend and into Monday’s session, it should come as little surprise that risk appetite would falter and leverage the greenback’s unique safe haven role. At first blush, this could be labeled the standard, ‘risk aversion’ move. However, when we take a look across the financial markets, we can see that the collapse ran deeper than a mere shift to safe havens. Not only did benchmarks for sentiment like the S&P 500, AUDJPY and EURUSD falter; but we would further see evidence that the market was starting to gasp for liquidity. In turn, traders and investors would return to the benchmarks that they know could weather another financial crunch: the US dollar and Treasuries. Reflecting this surge in demand, the Dow Jones FXCM Dollar Index (ticker = USDollar) easily cleared, the 10,000 figure to close at its highest level since January 20th while the 10-year Treasury Note’s yield dropped to its lowest level since the final day of 2008.

The critical question from here is whether the fear is amplified going forward. As we well know, the dollar is not a simple safe haven currency; but rather a stability provider during the most troubled of times. On this point, there should be ample level of caution. As a simple gauge of risk appetite trends; we can point to the critical, bearish break on the S&P 500. The key equities index closed below the 1,100 figure for the first time since September 8th of last year. That move is as conclusive as EURUSD’s headline-worthy move below 1.34 (the 50 mid-point of the 2010 to 2011 advance). However, just as the index falls short of defining the greenback’s position on sentiment; so too does this most liquid pair fall outside of the mark when representing the dollar. Considering the world’s current fundamental and financial headwinds are originating from the Euro-area; the pair’s tumble could be more a factor of counterpart weakness than dollar strength. On some level, this distinction doesn’t matter; but to sustain a trend, it absolutely does.

To keep the dollar moving and to further build momentum; the broader market needs to come to believe that the US currency and government debt is the only reliable option for harboring capital. That can be accomplished if financial troubles continue to escalate – and that is exactly what we are starting to see. While Dexia is at the top of the panic list at the moment (more on that below); we see that credit default swaps for Bank of American and Morgan Stanley are at record and three-year highs respectively. Furthermore, we see in volatility indicators, credit spreads and other measures of financial strain that liquidity is beginning to evaporate. Should a bank succumb to these conditions, we have a true crisis.

Related:Discuss the Dollar in the DailyFX Forum, John’s Video:EURUSD and S&P 500 Take a Major Step to Revive Bear Trends

Euro Tumbles as Greek Situation Nears Unsalvageable, Dexia Troubles Bloom

Whether you approach it from a technical or fundamental perspective, the euro marked a critical break through Monday’s session. With EURUSD closing just below the 1.3400 level through Friday, it was clear the world’s second most liquid currency was under significant pressure. Global investors have grown exceptionally concerned over the financial health of the region’s banking sector and the EU members. Both found fresh headlines to stir concern to start this week. Over the weekend, Greece approved an additional 6.6 billion euro austerity package; but said it would fall short of its 2012 deficit target of 7.6 percent of GDP. More immediate to liquidity, we would also see strains in the European banking sector freeze up. Dexia in particular was facing trouble with Moody’s placing the firm on downgrade watch. CDS are just off record highs.

Australian Dollar Ready for a Volatile Reaction to RBA Decision

Over the coming 24 hours, the top scheduled event risk is – without question – the RBA rate decision. The market has backed off on its predictions that there will be a 25 bp cut at this meeting (it is now at 25 percent versus a near certainty two weeks ago); but the 12 month forecast is still exceptionally dovish/bearish. The projected 143 bp of cuts seen over the coming 12 months is excessive given the restrained shift from the policy authority. Yet, will the market read cautious words as confirmation of their extreme position or a moderating influence?

British Pound Stumbles Alongside Euro, Won’t Wait for BoE

Expectations for the Thursday’s BoE rate decision are high. It is highly likely that the central bank expands its stimulus effort and puts the sterling on par with US and European efforts. That said, the market is a little more concerned with more ambiguous scenarios. The UK Treasury recently suggested it has plans to purchase billions in bonds of small and medium-size companies – a possibly late buffer to the Euro crisis spread?

Swiss Franc Appreciating after SNB Release of Bailout Costs

Over the weekend, the SNB released its balance sheet for August; and the results were not encouraging. Though the EURCHF floor wasn’t officially in play that month, the central bank would still report an increase in its foreign currency holdings from 189 billion to 281 bln francs. It was an expensive venture before it even started. That doesn’t turn any tides when the question is Europeans looking for regional safety though.

Japanese Yen: Are There Fundamentals Other than Intervention?

There are two primary concerns when it comes to the Japanese yen: the direction of risk appetite trends (as it feeds into carry positioning) and the threat of intervention. These are constant concerns. However, there are other factors that we should consider as well, such as the weak 2Q business sector health gauge and lack of support Prime Minister Noda has for his proposed tax hike. Consider the long-term issues as well.

Gold Wins its Highest Close in a Week, But Tame Expectations

Risk aversion was flipped on; so it should make sense that gold was up Monday – right? Not so fast. While the precious metal was up on the day; the alternative store of wealth was rallying alongside the US dollar – an unusual situation. The deciding factor here was the concern that an unstable euro was sending capital outside the fiat realm. Yet, if we get into liquidity concerns, the commodity will lose its drive.

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

0:30

AUD

Trade Balance (AUD) (AUG)

2000M

1826M

Surplus increase may be due to less imports as domestic economy weakens

0:30

AUD

Building Approvals (MoM) (AUG)

1.0%

1.0%

Steady MoM increase in approvals could point to flattening demand

0:30

AUD

Building Approvals (YoY) (AUG)

-15.1%

-15.0%

1:30

JPY

Labor Cash Earnings (YoY) (AUG)

-0.2%

Decline may prompt additional pressure on Noda administration/BoJ

3:30

AUD

Reserve Bank of Australia Rate Decision

4.75%

4.75%

Main data of Asian session; AUD commentary will suggest direction of future hikes; remains wait-and-see

5:30

AUD

RBA Commodity Price Index (SEP)

113.3

Sharp commodities fall may show on SDR index

5:30

AUD

RBA Commodity Index SDR (YoY) (SEP)

25.2%

8:30

GBP

Purchasing Manager Index Construction (SEP)

51.6

52.6

Construction expected to near stalling

9:00

EUR

Euro-Zone Producer Price Index (MoM) (AUG)

-0.2%

0.5%

Major data of Euro session: decrease may put rate hawks at bay as economy falters

9:00

EUR

Euro-Zone Producer Price Index (YoY) (AUG)

5.8%

6.1%

14:00

USD

Factory Orders (AUG)

0.0%

2.4%

Expected to be reflection of durables

22:30

AUD

AiG Performance of Service Index (SEP)

52.1

Tertiary economy may weaken into Autumn months

23:01

GBP

BRC Shop Price Index (YoY) (SEP)

2.7%

Shop prices continue to rise despite weaker economy

GBP

Halifax Plc House Prices s.a. (MoM) (SEP)

-2.1%

-1.2%

Mixed data may not result in BoE tightening, could result in additional stimulus for the UK

GBP

Halifax House Price (3MoY) (SEP)

0.2%

-2.6%

GMT

Currency

Upcoming Events & Speeches

14:00

USD

Fed Chairman Bernanke to Testify Before JEC

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

1.3232

1.5482

76.66

0.9176

1.0491

0.9601

0.7574

101.44

118.69

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 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

13.9509

1.8848

8.2248

7.7880

1.3156

Spot

6.9071

5.6245

5.8948

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

1.3468

1.5661

77.57

0.9273

1.0581

0.9775

0.7694

104.04

121.15

Resist 1

1.3350

1.5571

77.12

0.9225

1.0536

0.9688

0.7634

102.74

119.92

Pivot

1.3271

1.5508

76.81

0.9151

1.0484

0.9614

0.7583

101.93

119.14

Support 1

1.3153

1.5418

76.36

0.9103

1.0439

0.9527

0.7523

100.63

117.91

Support 2

1.3074

1.5355

76.05

0.9029

1.0387

0.9453

0.7472

99.82

117.13

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

1.3463

1.5674

77.55

0.9345

1.0647

0.9800

0.7736

103.40

120.64

Resist. 2

1.3405

1.5626

77.33

0.9303

1.0608

0.9750

0.7695

102.91

120.15

Resist. 1

1.3347

1.5578

77.10

0.9261

1.0569

0.9701

0.7655

102.42

119.66

Spot

1.3232

1.5482

76.66

0.9176

1.0491

0.9601

0.7574

101.44

118.69

Support 1

1.3117

1.5386

76.22

0.9091

1.0413

0.9501

0.7493

100.46

117.72

Support 2

1.3059

1.5338

75.99

0.9049

1.0374

0.9452

0.7453

99.97

117.23

Support 3

1.3001

1.5290

75.77

0.9007

1.0335

0.9402

0.7412

99.48

116.74

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.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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