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Dollar Traders Sense Fear as the European Crisis Swells

Dollar Traders Sense Fear as the European Crisis Swells

2011-10-08 03:27:00
John Kicklighter, Chief Currency Strategist
Share:
  • Dollar Traders Sense Fear as the European Crisis Swells
  • Euro Reaction to Italian, Spanish Downgrades Not Complete
  • British Pound Shows Little Reaction to Moody’s Downgrade on 12 UK Banks
  • Canadian Dollar Can’t Hold on to Employment Data Rally as Risk Turns
  • Japanese Yen: BoJ Officials Keep Policy In Place, Intervention Call Rising
  • Australian Dollar Looks to Risk Trends, Employment Data for Guidance
  • Gold Lacks Progress Despite Euro Fears as Volume Hits July Low

Dollar Traders Sense Fear as the European Crisis Swells

The dollar managed a remarkable recovery Friday; but the drive wasn’t strong enough to unwind the losses the currency incurred across its most liquid counterparts throughout the past week. Referring to the Dow Jones FXCM Dollar Index (ticker = USDollar); the greenback ended the week in the red after four consecutive days of decline that drug the benchmark back below the critical 10,000 level that it managed to overtake Monday for the first time since February. The most aggressive decline in nearly two months is a dramatic way to end the week; but we should put recent volatility into context with the larger trend. Despite the series of declines from this index, the Dollar is still in a six-week bull trend that is six percent up from the end of August. In the coming week, the market will decide whether we are in a serious reversal or temporary hiccup.

Setting the scene for the speculative bearings next week, we need to first establish what cues the market will take for trading the dollar. It is worth referencing the reaction to the NFPs that were just released to establish what is truly important to the greenback and underlying sentiment trends. After the Labor Department reported that a better-than-expected 103,000 jobs were added last month and the flat August reading was revised up to a net 57,000 position increase; EURUSD rallied 80 points and the S&P 500 opened flat. We could blame the lack of follow through on the 9.1 percent unemployment reading, the abnormal effect of an ended strike or the rise in underemployment (to 16.5 percent); but the truth is that the data simply does not hold much sway over investor sentiment. The general slowdown in the global economy and the Fed’s dedication to keeping rates at ground level until mid-2013 set the tone.

What does this tell us about the dollar going forward? We can establish that the dominant trend behind risk appetite is bearish; and the currency will maintain its connections to sentiment. That being the case, we need to look for the most volatile fundamental threats going forward that could spur wholesale risk aversion. At the very forefront is the spread of the European financial crisis. The downgrades and threat of further downgrades for the region (more on that below) highlight a clear escalation of an already prevailing fear. Yet, as we grow accustomed to the negative headlines, it will be important to see escalation of this largely localized trouble to a global threat with clear implications for the world’s financial markets (tangible losses) to keep demand for the liquidity haven stoked.

Related: Discuss the Dollar in the DailyFX Forum, John’s Video: European Downgrades Carry More Weight than NFPs for EURUSD Trend

Euro Reaction to Italian, Spanish Downgrades Not Complete

Though it was after the European session close on a Friday, the euro managed its biggest intraday selloff of the week after a series of credit downgrades were announced. The headlines began flashing just after noon during the New York session when Fitch Ratings announced it had cut the credit rating for Italy to ‘A+’ and set the outlook to ‘negative’. Though this country has been under intense scrutiny by the market for its susceptibility to the Euro-area crisis; the market absorbed the news well considering Moody’s had already lowered the rate earlier in the week. However, a quick follow up with a two-notch downgrade to Spain (far more vulnerable to the sovereign crisis) and warnings that Portugal may be cut to Junk and Belgium could see its own level lowered owing largely to its exposure to Dexia. This round of news is set against infighting over the Greek bailout and banking-level liquidity troubles. The euro will certainly face these threats for the foreseeable future.

British Pound Shows Little Reaction to Moody’s Downgrade on 12 UK Banks

The British pound performed remarkably well through the first half of Friday’s session despite Moody’s decision to downgrade 12 UK banks. Amongst those under the axe were Royal Bank of Scotland, Llyods and Nationwide. The reason for the cut according to the rating agency was that in the event that the financial markets lock up in the country, they believed the British government was less likely to offer support. This seems unlikely and too hasty an assessment. With rates, growth and austerity factored in; the sterling is now looking at the euro crisis bridge.

Canadian Dollar Can’t Hold on to Employment Data Rally as Risk Turns

Where there is skepticism surrounding the US employment statistics; the Canadian data can be read as a genuine booster for economy and currency. According Stats Canada, the economy added 60,900 jobs (four times the consensus) while the jobless rate unexpectedly dropped to a 7.1 percent low last seen in December. This strength after the data was clear; but risk aversion retraced the entire advance. Priorities are clear.

Japanese Yen: BoJ Officials Keep Policy In Place, Intervention Call Rising

There were latent hopes that the Bank of Japan would use its monetary policy meeting as a forum for additional easing or intervention. Alas, the group maintained its rate (0.10 percent), the asset purchase program (15 trillion yen) and credit program (35 trillion yen). BoJ Governor Shirakawa remarked that investors are treating the yen as a safe haven. So, what should we expect as the Euro crisis spreads?

Australian Dollar Looks to Risk Trends, Employment Data for Guidance

Like most other currencies in the FX market, the Aussie dollar followed risk trends through Friday’s session – both with the post-NFP rally and subsequent European downgrade sell off. We should expect the currency to follow the same lines next week. As for the jobs data; this can tweak the sensitive to risk trends. Should the data deteriorate, bad news for risk trends will be even more potent.

Gold Lacks Progress Despite Euro Fears as Volume Hits July Low

Despite all the volatility in capital markets and the remarkable developments on the fundamental side of things; gold managed to work its way deeper into congestion this past week. This indecision and the lowest level of volume since July 26th speaks to a market that is particularly prone to a sudden return of conviction. Should risk aversion pick up in intensity, the liquidity run will take charge of the commodity.

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**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

2:30

(Sat)

CNY

China HSBC Services PMI (SEP)

50.6

HSBC’s own PMI may follow official

23:00

(Sun)

GBP

Lloyds Employment Confidence (SEP)

-66

British labor market continues to show weakness as recover unhinges

(Sun)

NZD

REINZ Housing Price Index (SEP)

3223.7

New Zealand housing prices may be capped by stronger Kiwi

(Sun)

NZD

REINZ Housing Price Index MoM% (SEP)

0.5%

(Sun)

NZD

REINZ House Sales YoY% (SEP)

21.1%

0:30

AUD

ANZ Job Advertisements (MoM) (SEP)

-0.6%

Recent correlations with labor weak

6:00

EUR

German Exports SA (MoM) (AUG)

-1.9%

Driver of German economy may follow previous industrial data weaker

6:00

EUR

German Imports SA (MoM) (AUG)

-0.5%

6:00

EUR

German Current Account (EUR) (AUG)

7.5B

6:00

EUR

German Trade Balance (AUG)

10.4B

6:30

EUR

Bank of France Bus. Sentiment (SEP)

98

Sentiment continues to trend weaker

6:45

EUR

French Industrial Production (MoM) (AUG)

1.5%

French manufacturing and industries growing at a slower pace due to weaker domestic and foreign demand

6:45

EUR

French Industrial Production (YoY) (AUG)

3.7%

6:45

EUR

French Manufacturing Production (MoM) (AUG)

1.4%

6:45

EUR

French Manufacturing Production (YoY) (AUG)

4.2%

8:00

EUR

Italian Industrial Production sa (MoM) (AUG)

-0.7%

Italian industries continue to suffer under weak economy

8:00

EUR

Italian Industrial Production wda(YoY) (AUG)

-1.6%

8:00

EUR

Italian Industrial Production nsa(YoY) (AUG)

-4.6%

8:30

EUR

Eurozone Sentix Investor Confidence (OCT)

-15.4

Sentix index showing peripheral fears

9:45

NZD

NZ Card Spending - Retail MoM (SEP)

-0.7%

Card spending data expected to lead overall retail data

9:45

NZD

NZ Card Spending - Total MoM (SEP)

-0.5%

23:01

GBP

BRC Sales Like-For-Like YoY (SEP)

-0.6%

Store inflation index may weaken

23:01

GBP

RICS House Price Balance (SEP)

-23%

British real estate continues downtrend

23:50

JPY

Current Account Total (AUG)

990.2B

Japanese trade data could show moderate improvement, though government actions continue to be in focus

23:50

JPY

Adjusted Current Account Total (AUG)

752.5B

23:50

JPY

Current Account Balance YOY% (AUG)

-42.4

23:50

JPY

Trade Balance - BOP Basis (AUG)

123.3B

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

1.0785

1.0750

0.9020

112.00

126.50

Resist 1

1.3900

1.5775

81.50

0.9250

1.0675

1.0375

0.8750

106.50

123.00

Spot

1.3389

1.5553

76.85

0.9261

1.0381

0.9791

0.7715

102.90

119.53

Support 1

1.3150

1.5300

76.35

0.8500

1.0150

0.9400

0.7500

102.00

116.00

Support 2

1.3025

1.5180

75.50

0.7800

0.9950

0.9125

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

13.4507

1.8508

7.9272

7.7817

1.2955

Spot

6.7972

5.5601

5.8256

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

1.3589

1.5764

77.10

0.9363

1.0529

0.9950

0.7852

104.37

121.00

Resist 1

1.3489

1.5658

76.98

0.9312

1.0455

0.9871

0.7784

103.63

120.27

Pivot

1.3425

1.5541

76.78

0.9229

1.0345

0.9799

0.7729

103.13

119.26

Support 1

1.3325

1.5435

76.66

0.9178

1.0271

0.9720

0.7661

102.39

118.53

Support 2

1.3261

1.5318

76.46

0.9095

1.0161

0.9648

0.7606

101.89

117.53

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

1.3601

1.5741

77.65

0.9419

1.0524

0.9969

0.7860

104.69

121.26

Resist. 2

1.3548

1.5694

77.45

0.9380

1.0488

0.9924

0.7824

104.24

120.83

Resist. 1

1.3495

1.5647

77.25

0.9340

1.0452

0.9880

0.7788

103.80

120.40

Spot

1.3389

1.5553

76.85

0.9261

1.0381

0.9791

0.7715

102.90

119.53

Support 1

1.3283

1.5459

76.45

0.9182

1.0310

0.9702

0.7642

102.00

118.66

Support 2

1.3230

1.5412

76.25

0.9142

1.0274

0.9658

0.7606

101.56

118.23

Support 3

1.3177

1.5365

76.05

0.9103

1.0238

0.9613

0.7570

101.11

117.80

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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