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Dollar Puts in for its First Real Advance in 10 Days - Sustainable?

Dollar Puts in for its First Real Advance in 10 Days - Sustainable?

2011-10-18 03:48:00
John Kicklighter, Chief Currency Strategist
Share:
  • Dollar Puts in for its First Real Advance in 10 Days - Sustainable?
  • Euro Weekend Troubles Hardly New, Outlook Still Mixed
  • British Pound Faces Inflation Data, A Tempered Number Could Bring More Stimulus
  • Australian Dollar Finds No Support from RBA Minutes or Chinese GDP Figures
  • Japanese Yen: How Real is the Threat of a Plan to Rein in the Currency Next Week?
  • Canadian Dollar Tumbles on Risk, 3Q Business Health Survey
  • Gold Puts in for a Notable Reserved Performance on Risk Aversion Day

Dollar Puts in for its First Real Advance in 10 Days - Sustainable?

The US dollar managed its first serious advance in 10 trading days Monday. It shouldn’t surprise that this bullish performance coincided with the S&P 500’s first substantial down day in the same amount of time. Regardless of what the catalyst is, the greenback is playing the role of liquidity provider when risk aversion hits a high note. Yet, for those that want to determine whether this tentative turn is the return to a dominant bear trend on investor sentiment or a necessary (but temporary) pullback before the climb resume; the source of this correction is important. The first thing to ascertain though is that this was a serious move. We can confirm the market influence of this opening drive through the impressive correlations it has drawn across various FX pairs and beyond to different asset classes. With high-yield currencies, equities, speculative commodities and bond yields all taking a sharp turn lower; it is a safe assumption that this move has roots.

However, correlation and volatility speak to an underlying drive in the heat of the moment. For a consistent move based on conviction in capital flows, we look to conviction and fundamental consistency. A very real concern for those that are jumping on the bear wagon was the lack of volume to support the bearish turn. Whether we look at the S&P 500 index (or its futures), Euro futures, oil futures or any of the other key speculative assets; the volume behind their risk-aversion move was disturbingly light. Considering the bullish drive over the past two weeks has chugged along on diminished interest; we would expect the return to a dominant trend would come with more participation as bears jump back in and the opportunistic, short-term bulls quickly bail. Another concern is that this correction is based upon the ongoing Euro troubles. If that is the case, then the drive will almost certainly lose momentum. While the G20 has given the region a deadline and German officials have expressed doubt about organizing an effort by then (more on that below) it is hardly a new or particularly illuminating development.

To really embrace risk aversion and return the dollar to the advance it took to in September; the market needs to truly undermine confidence in the financial system. European-region financial stress certainly keeps the pressure on but it isn’t adding anything particularly new at the moment. Earnings could be another consideration. The aggressive decline for equities Monday (and a subsequent booster for the dollar) began shortly after the release of the Citigroup and Wells Fargo 3Q earnings figures. Both were pained reports when we move beyond the clever accounting adjustments. To raise the stakes substantially, Goldman Sachs and Bank of America are scheduled to announce their numbers.

Related:Discuss the Dollar in the DailyFX Forum, John’s Video:Is this a True EURUSD, AUDUSD Bear Trend or Temporary Correction?

Euro Weekend Troubles Hardly New, Outlook Still Mixed

European officials are having trouble agreeing to a path to stabilize the region…so what else is new? Over the weekend, the G20 acknowledged interest in the EU’s efforts to stabilize its financial markets to prevent a global crisis that would rekindle the 2008 market collapse (a situation that never really dissipated – rather it was temporarily buried in stimulus). Both Germany’s Chancellor Merkel and Finance Minister Schaeuble remarked that calls for a solution to the region’s troubles within a week’s time was not possible. Officials have failed to encourage the IMF to double its funds, win support for bank recapitalization and are meeting significant resistance by private parties holding Greek debt to take deeper writedowns than the 21 percent agreed to in July. Something ultimately needs to give; and it could always be the euro that cracks.

British Pound Faces Inflation Data, A Tempered Number Could Bring More Stimulus

The sterling followed its European and risk lines Monday; but it would only tally a loss on the session against its US and Japanese counterparts. This performance tells us the currency is further from the risk-spectrum extreme and the Euro-region crisis. However, the pound won’t be able to keep buoyancy against all odds. We are reminded that the BoE is actively pursuing stimulus while government austerity is pushing the economy closer to recession. We will read CPI data in the upcoming London session; and any rise will cause problems, any pullback will invite stimulus.

Australian Dollar Finds No Support from RBA Minutes or Chinese GDP Figures

The Australian dollar was hit hard through the opening 24 hours with the sharp deterioration in risk trends. In the early trading hours Tuesday, the pain increased with RBA minutes that stated policy officials considered the inflation outlook “less concerning” – adding dovish weight to an already heavy forecast for rate cuts. Further, Australia’s biggest trade partner – China – reported a sharper than expected cooling in 3Q GDP.

Japanese Yen: How Real is the Threat of a Plan to Rein in the Currency Next Week?

Policy officials early Monday announced that a plan was in the works to fight the rise of the yen. Yet, details were lacking. Rather than take this to mean a floor will be put into place by the Bank of Japan; this warning is seen as a sign that officials will expand upon the measures suggested a short-time ago. Though, increasingly credit lines to facilitate Japanese foreign purchases and avoiding a speculation tax won’t be effective.

Canadian Dollar Tumbles on Risk, 3Q Business Health Survey

Though pure fundamentalists are constantly befuddled by it, the Canadian dollar is still treated as an investment currency on the same level as its Aussie or kiwi counterparts; so the sharp drop in risk trends led to a big drop from the loonie. Adding a more fundamentally-palatable component to this move, a 3Q business activity survey reported its worst reading since the start of 2009 with a sharp drop in its forecast.

Gold Puts in for a Notable Reserved Performance on Risk Aversion Day

On a strong risk aversion day for the capital markets; we would at the least expect a little volatility from gold. However, the precious metal would not rouse from its tightening congestion pattern. And adding insult to injury, it actually closed lower on the day. What do we make of this? This is another consideration for skepticism and the lack of conviction in a risk aversion or liquidity demand move.

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

2:00

CNY

Real GDP YTD (YoY) (3Q)

9.5%

9.6%

Chinese productivity expected to be hit by lower exports as the global recovery slows

2:00

CNY

Real GDP (QoQ) (3Q)

2.2%

2:00

CNY

Real GDP (YoY) (3Q)

9.3%

9.5%

2:00

CNY

Industrial Production YTD (YoY) (SEP)

14.1%

14.2%

Secondary economic data shows gradual slowing of production pace, may delay any further tightening

2:00

CNY

Industrial Production (YoY) (SEP)

13.4%

13.5%

2:00

CNY

Fixed Assets Inv Excl. Rural YTD (YoY) (SEP)

24.8%

25.0%

2:00

CNY

Retail Sales YTD (YoY) (SEP)

16.9%

16.9%

2:00

CNY

Retail Sales (YoY) (SEP)

17.0%

17.0%

5:30

JPY

Nationwide Department Store Sales (YoY) (SEP)

-2.9%

Retail sales may continue to fall, pressuring government for additional support

5:30

JPY

Tokyo Department Store Sales (YoY) (SEP)

-1.7%

6:00

JPY

Machine Tool Orders (YoY) (SEP F)

20.3%

Final September revision remains high

6:00

EUR

EU 25 New Car Registrations (SEP)

7.7%

Gauges consumer sentiment

8:30

GBP

Consumer Price Index (MoM) (SEP)

0.4%

0.6%

Expected elevated inflation rate puts increased pressure on Bank, though QE may continue as the British economy slows

8:30

GBP

Consumer Price Index (YoY) (SEP)

4.9%

4.5%

8:30

GBP

Core Consumer Price Index (YoY) (SEP)

3.2%

3.1%

8:30

GBP

Retail Price Index (SEP)

237.6

236.1

Mild increase in retail prices could be used by bank to keep additional easing

8:30

GBP

Retail Price Index (MoM) (SEP)

0.5%

0.6%

8:30

GBP

Retail Price Index (YoY) (SEP)

5.4%

5.2%

8:30

GBP

Retail Price Index Ex Mort Int.Payments (YoY)(SEP)

5.5%

5.3%

9:00

EUR

German ZEW Survey (Econ Sentiment) (OCT)

-45

-43.3

Surveys expected to show effects of peripheral fear

9:00

EUR

German ZEW Survey (Current Situation) (OCT)

40

43.6

9:00

EUR

Euro-Zone ZEW Survey (Econ Sentiment) (OCT)

-44.6

9:00

EUR

Italian Current Account (euros) (AUG)

1663M

May decrease as debt rises

12:30

USD

PPI Ex Food & Energy (MoM) (SEP)

0.1%

0.1%

Expected lower PPI could show first signs of US economy slowing

12:30

USD

Producer Price Index (YoY) (SEP)

6.4%

6.5%

12:30

USD

PPI Ex Food & Energy (YoY) (SEP)

2.4%

2.5%

12:30

USD

Producer Price Index (MoM) (SEP)

0.2%

0.0%

13:00

USD

Net Long-term TIC Flows (AUG)

$9.5B

Demand for US debt may slow as Operation Twist lowers long term yield

13:00

USD

Total Net TIC Flows (AUG)

-$51.8B

14:00

USD

NAHB Housing Market Index (OCT)

15

14

Housing market may improve

23:30

AUD

Westpac Leading Index (MoM) (AUG)

0.5%

Leading index still sluggish

GMT

Currency

Upcoming Events & Speeches

0:30

AUD

RBA October Minutes

12:15

USD

Fed's Rosengren Gives Welcome Remarks at Boston Fed Conference

16:30

USD

Fed's Bernanke Speaks in Boston

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

1.3815

1.6375

95.05

1.0600

1.0922

0.9850

0.7635

127.60

146.05

Resist 1

1.3500

1.5965

89.00

1.0460

1.0750

0.9335

0.7440

120.00

140.00

Spot

1.2689

1.5348

84.17

1.0145

1.0645

0.8927

0.6993

106.80

129.19

Support 1

1.2500

1.5125

83.00

1.0130

0.9950

0.8100

0.6850

103.80

125.00

Support 2

1.2150

1.5000

80.00

0.9960

0.9700

0.7835

0.6585

100.00

119.00

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

14.4500

1.8025

8.7915

7.8165

1.4945

Resist 2

7.7500

5.7800

6.2750

Resist 1

13.8500

1.6755

8.3675

7.8075

1.4655

Resist 1

7.5800

5.5400

6.1150

Spot

13.2224

1.5265

7.3782

7.7795

1.3549

Spot

7.3810

5.8669

6.2930

Support 1

12.0500

1.4500

7.1615

7.7490

1.3440

Support 1

1.1650

5.3000

5.8000

Support 2

11.7200

1.3665

6.6950

7.7450

1.3000

Support 2

7.0000

5.1000

5.6000

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

1.2698

1.5364

84.22

1.0162

1.0664

0.8950

0.7014

106.91

129.32

Resist 1

1.2694

1.5356

84.20

1.0154

1.0655

0.8938

0.7003

106.86

129.25

Pivot

1.2686

1.5349

84.17

1.0147

1.0647

0.8920

0.6992

106.77

129.19

Support 1

1.2682

1.5341

84.15

1.0139

1.0638

0.8908

0.6981

106.72

129.12

Support 2

1.2674

1.5334

84.12

1.0132

1.0630

0.8890

0.6970

106.63

129.06

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

1.2858

1.5539

85.26

1.0277

1.0782

0.9061

0.7103

108.60

131.40

Resist. 2

1.2816

1.5491

84.99

1.0244

1.0748

0.9027

0.7075

108.15

130.85

Resist. 1

1.2773

1.5443

84.72

1.0211

1.0714

0.8994

0.7048

107.70

130.30

Spot

1.2689

1.5348

84.17

1.0145

1.0645

0.8927

0.6993

106.80

129.19

Support 1

1.2605

1.5253

83.62

1.0079

1.0576

0.8860

0.6938

105.90

128.08

Support 2

1.2562

1.5205

83.35

1.0046

1.0542

0.8827

0.6911

105.45

127.53

Support 3

1.2520

1.5157

83.08

1.0013

1.0508

0.8793

0.6883

105.00

126.98

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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