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Dollar Finishes out its Worst Weekly Performance Since March 2009

Dollar Finishes out its Worst Weekly Performance Since March 2009

2011-10-15 03:54:00
John Kicklighter, Chief Currency Strategist
Share:
  • Dollar Finishes out its Worst Weekly Performance Since March 2009
  • Euro: How Long can Relief Substitute Genuine Strength?
  • British Pound Lagging Euro Counterpart as Recession Marches Closer
  • Australian Dollar Looks for Continued Support from China to Offset Global Troubles
  • Japanese Yen Volatility Starting to Slowly Pick Up from Multi-Decade Lows
  • Canadian Dollar Traders May Look more Closely at Rates Next Week
  • Gold Eagerly Awaits Lack of Conviction from G20, European Officials

Dollar Finishes out its Worst Weekly Performance Since March 2009

There was no silver lining in the dollar’s performance this past week. Behind the greenback’s hefty selling pressure against most of its benchmark counterparts, we were reminded of a fundamental reality: we need a real, fundamental reason to hold the US currency – much less bid it higher. So, where did the strength through August and September come from? The spread of the European crisis was enough to stoke fears surrounding the stability of the global financial market and leverage demand for liquidity. At the same time, the euro’s own troubles stirred the need for an alternative currency that can supply comparable market depth. However, through the past week, we have seen fear retreat and the euro recover some of its lost ground. Sentiment hasn’t turned higher; rather, it has stabilized. And, when conditions are level, the high requirements for attractive interest naturally weighs the dollar lower.

Following the line of thought to the dollar’s bullish performance up until the beginning of October; we know what needs to happen for the currency to regain its foot and what conditions will keep the reversal on track. Looking ahead to Monday, the Dow Jones FXCM Dollar Index (ticker = USDollar) will be coming off a 2.6 percent weekly decline – its biggest drop since the capital markets instigated their post-Subprime crisis reversal back in the first quarter of 2009. Similarly, we note that EURUSD posted its biggest rally since March 2009, AUDUSD back to February 2009 and the S&P 500 back in July 2009. Furthermore, each ended Friday off near the very extreme of their respective anti-dollar trends. That said, the correction from extreme dollar positioning and low volume in this risk-positive move suggest momentum behind price will start flagging soon.

For fundamental catalysts to risk trends and the dollar next week, the first concern is the G20 developments over that we see over the weekend. Preliminary headlines from the meeting suggest the US has rejected calls to double the size of the IMF to boost its ability to support the Euro-Zone. Perhaps this will remind market participants that the Euro financial crisis will not have a clean or happy conclusion; but few are naïve enough to believe this is a possibility to begin with. Considering the tumult in the region, Europe’s capital and credit markets pose the greatest risk to global stability and thereby offer the greatest hope for a dollar rally. There is a decent possibility that its troubles make a clean jump to the US; and 3Q earnings exacerbate the issue. Monday starts with Wells Fargo and Citigroup with many other important institutions scheduled to report later in the week. It is also worth taking note of the Chinese 3Q GPD figures which will benchmark the US release on the 27th.

Related: Discuss the Dollar in the DailyFX Forum, John’s Video: Will the EURUSD, AUDUSD, S&P 500 Rally Continue Next Week?

Euro: How Long can Relief Substitute Genuine Strength?

The headlines from Europe continued to paint a dour picture of fundamental health. Following on the downgrade of a series of major banks by Fitch Thursday, Standard & Poor’s cut BNP Paribas’ rating and further lowered the capital measures of France’s five largest banks. Furthermore, a FT article suggested private investor Greek debt holders (carrying an estimated 34.6 percent or 126 billion of the total exposure) would not take a haircut greater than the 21 percent initially agreed to back at the July bailout agreement. That said, the euro was still buoyant as Merkel and Sarkozy’s vow of a grand plan at the end of the month and the empty hope in obtaining the 17th vote to expand the EFSF carried over. These efforts merely buy time on open-ended promises; but the market has proven itself pacified by quiet periods in the past.

British Pound Lagging Euro Counterpart as Recession Marches Closer

Where the Euro managed a 3.8 percent advance against the benchmark dollar this past week, the sterling would only gain 1.7 percent. Where does the overhead come into play? The euro is one of the most fundamentally troubled currencies in the market; and that makes it exceptionally volatile. In contrast, the pound is at risk of catching the cold while it faces a clear problem as austerity leads to stimulus and possible recession. In the week ahead, the BoE minutes, inflation and retail sales releases will give a good overview of the UK’s domestic picture.

Australian Dollar Looks for Continued Support from China to Offset Global Troubles

The Australian dollar was the best performing major this past week with a top performance of a 6.1 percent rally against the yen and its worst showing against the kiwi dollar still notching a 1.2 percent advance. Risk appetite has certainly helped alongside a marked improvement in rate expectations. Strong trade figures with China added another level to the run; and for that reason Chinese 3Q GDP should be watched closely.

Japanese Yen Volatility Starting to Slowly Pick Up from Multi-Decade Lows

The Japanese yen is coming off extremely quiet trading conditions. We have seen recently the smallest daily trading range since New Year’s day 2010, the most reserved weekly breadth since December 1994 and the most inactive month (September) since May 1988. This is exceptional; and will not likely last long. And, when we reverse from extremes, speculative interest typically comes along with it.

Canadian Dollar Traders May Look more Closely at Rates Next Week

Despite its modest yield and its inherent links to a troubled United States, the Canadian dollar is still playing the role of investment currency. This helped drive USDCAD to its biggest slide since the period through July 1st; but if there is one carry currency that eases off the rally before the others it will likely be the loonie. Next week, inflation and capital flows figures will remind us that Canadian currency is not the Australian dollar.

Gold Eagerly Awaits Lack of Conviction from G20, European Officials

Initial reports that the US has rebuffed the idea of expanding the IMF’s coffers at the G-20 meeting will bode well for gold. Though it may not turn investors away from the euro and back towards alternative currencies; it will certainly undermine confidence in financial assets given their value on government guarantees. Like the dollar, risk aversion is the catalyst here. We should watch liquidity, bond yields and CDS.

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

21:30

(Sun)

NZD

Performance Services Index (SEP)

53.9

Services index treading water as sector slows

23:01

(Sun)

GBP

Rightmove House Prices (MoM) (OCT)

0.7%

House gauges watched by the BoE not expected to change bank policy

23:01

(Sun)

GBP

Rightmove House Prices (YoY) (OCT)

1.5%

0:00

AUD

Consumer Inflation Expectation (OCT)

2.8%

Inflation expectation previous remains above the bank’s target 2.5%

0:30

AUD

New Motor Vehicle Sales (MoM) (SEP)

3.3%

New motor sales used as an indicator of consumer confidence, continues to grow in Australia

0:30

AUD

New Motor Vehicle Sales (YoY) (SEP)

4.4%

4:30

JPY

Industrial Production (MoM) (AUG F)

0.8%

Slowing industries not prompting additional government or bank support

4:30

JPY

Industrial Production (YoY) (AUG F)

0.6%

4:30

JPY

Capacity Utilization (MoM) (AUG F)

0.6%

12:30

CAD

Int’l Securities Transactions (AUG)

11.78B

Demand for Canadian stocks falling

12:30

USD

Empire Manufacturing (OCT)

-4.50

-8.82

US manufacturing indices expected to moderately improve, signaling a possible turnaround

13:15

USD

Industrial Production (SEP)

0.2%

0.2%

13:15

USD

Capacity Utilization (SEP)

77.5%

77.4%

14:30

CAD

Business Outlook Future Sales (Q3)

20.00

Canadian retail and investment data could show a weaker Q3

14:30

CAD

BoC Senior Loan Officer Survey (Q3)

-49.6

GMT

Currency

Upcoming Events & Speeches

0:30

AUD

RBA October Minutes

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

1.6100

86.00

0.9400

1.0785

1.0750

0.9020

112.00

126.50

Resist 1

1.3900

1.5925

81.50

0.9250

1.0675

1.0375

0.8750

108.00

123.00

Spot

1.3877

1.5810

77.22

0.8929

1.0110

1.0340

0.8051

107.16

122.09

Support 1

1.3150

1.5700

76.35

0.8500

0.9950

0.9400

0.7500

102.00

116.00

Support 2

1.3025

1.5525

75.50

0.7800

0.9750

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

13.2569

1.8316

7.8375

7.7776

1.2644

Spot

6.5972

5.3657

5.5643

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

1.4002

1.5926

77.79

0.9054

1.0279

1.0474

0.8148

108.59

123.55

Resist 1

1.3939

1.5868

77.50

0.8991

1.0194

1.0407

0.8099

107.87

122.82

Pivot

1.3832

1.5795

77.17

0.8948

1.0151

1.0276

0.8005

106.74

121.89

Support 1

1.3769

1.5737

76.88

0.8885

1.0066

1.0209

0.7956

106.02

121.16

Support 2

1.3662

1.5664

76.55

0.8842

1.0023

1.0078

0.7862

104.89

120.23

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

1.4085

1.5992

78.00

0.9077

1.0239

1.0521

0.8196

108.95

123.79

Resist. 2

1.4033

1.5946

77.81

0.9040

1.0207

1.0476

0.8160

108.50

123.36

Resist. 1

1.3981

1.5901

77.61

0.9003

1.0175

1.0430

0.8124

108.06

122.94

Spot

1.3877

1.5810

77.22

0.8929

1.0110

1.0340

0.8051

107.16

122.09

Support 1

1.3773

1.5719

76.83

0.8855

1.0045

1.0250

0.7978

106.26

121.24

Support 2

1.3721

1.5674

76.63

0.8818

1.0013

1.0204

0.7942

105.82

120.82

Support 3

1.3669

1.5628

76.44

0.8781

0.9981

1.0159

0.7906

105.37

120.39

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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