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Dollar Extends Longest Tumble in a Year, Conviction Still Lacking

Dollar Extends Longest Tumble in a Year, Conviction Still Lacking

2011-10-25 01:54:00
John Kicklighter, Chief Currency Strategist
Share:
  • Dollar Extends Longest Tumble in a Year, Conviction Still Lacking
  • Euro Struggles but Doesn’t Falter Under Unflattering Growth, Bailout News
  • Canadian Dollar Traders Ready for BoC Decision with USDCAD Just Above Parity
  • British Pound Maintains its Bearings Despite BoE Weale’s Warning of Recession
  • New Zealand Dollar Slides after 3Q CPI Data Eases More Aggressively Than Expected
  • Australian Dollar Follows S&P 500 with Critical Break; but Follow Through Struggling
  • Gold: One of the Few Advances that Can Continue if Early Expectations Fall Apart

Dollar Extends Longest Tumble in a Year, Conviction Still Lacking

The markets left us with a cliff hanger Friday as the S&P 500 overtook resistance and EURUSD positioned itself for a meaningful bullish break of its own. As speculators take up the reins for a new trading week, we see that risk appetite has maintained its bullish bias. Yet we are still lacking for the kind of conviction that would normally be associated with the development of a new trend. Besides the fundamental headwinds that keep risk under a fragile peace and tell us that rates of return will be anemic well into 2012; perhaps the most disturbing disconnect in the capital market’s advance is the lack of volume. The development of a new trend should theoretically draw significant, new participation in that naturally accelerates and maintains the drive. However, when we check volume on S&P 500 or Australian dollar futures; we notice that participation has actually decreased as price action increases. This isn’t a technical divergence, it’s a fundamental one.

Nevertheless, despite the questionable confidence behind the rally in risky assets and selloff for the US dollar; we witnessed more assets taking part in the move. On the capital market side, crude posted a remarkable rally to two-and-a-half month highs as US equities extended its breakout for a second month. For FX players, AUDUSD forged an indisputable break above 1.0400 while EURUSD, NZDUSD and USDCAD won restrained anti-dollar / risk positive progress of their own. As traders, we should not fight the prevailing winds; but skepticism is healthy when fundamentals and speculative positioning offer up reason to doubt follow through. We trade these convictions when the market confirms that it is ready to answer the same reality. Looking for those catalysts that offer tangible progress on risk trends; our focus is still set on the European financial crisis. No tangible relief has been found on the subject; but the possibility that the EU Summit (more on that below) can offer some kind of definitive plan by Wednesday prevents traders from taking a substantial position against this correction.

In the meantime, we should continue to monitor the dollar’s own fundamental strength – as a safe haven and future yield currency. A couple of Fed officials offered up their opinions on the matter. New York Fed President Dudley spoke to general capital market risk when he stated that investors can’t easily determine a firm’s exposure. This speaks to a reality where accounting helps cover losses and economic conditions aren’t clearly reflected against cost cutting efforts. More tailored to the dollar’s unnatural depreciation through money supply inflation; Dallas Fed President Fisher voiced his usually hawkish view when he said monetary policy could be reaching its limits and that he would be hard pressed to vote for more easing. And, while this offered directly contrasts Daniel Tarullo’s calls QE3 (an appeal that contributed to the positive risk breakout); the response carried limited influence. This illustrates the importance of respecting the prevailing trend, even if you don’t believe in it.

Related:Discuss the Dollar in the DailyFX Forum, John’s Video:Scenarios - EURUSD Lags, AUDUSD Rallies, EURJPY Offers Scalping

Euro Struggles but Doesn’t Falter Under Unflattering Growth, Bailout News

German Chancellor Angela Merkel lived up to her vow at the end of last week: EU officials wouldn’t have a definitive plan of action to attack market fear by the end of the weekend. Through Sunday’s summit, there were suggestions and conjecture as to what policy officials’ could pursue; but the most important points were still under debate. While the EU continues its call for 50 to 60 percent write down on private holdings of Greek debt, the Institute of International Finance (representing 450 of the world’s largest institutions) said it was only ready to except 40 percent. Just as concerning, Merkel has to convince Parliament of further help. Set this conflict against Euro Zone PMI data that suggests the region may already be tipping into recession and heavy demand to hold capital at the ECB; and it is easy to breed doubt for this currency.

Canadian Dollar Traders Ready for BoC Decision with USDCAD Just Above Parity

The Canadian dollar has certainly benefited from the stubborn risk-appetite climb; but its performance has clearly lagged its more yield-intense counterparts. With USDCAD hovering just above parity (1.0000), we are met with fundamental conflict. On one side, we have risk trends. And, on the other, we have the BoC rate decision. The policy authority has maintained a dovish tone. Will they threaten action on this view?

British Pound Maintains its Bearings Despite BoE Weale’s Warning of Recession

The risk of a UK recession has increased and it wouldn’t be surprising to see the country post a contraction in GPD through the current quarter. Those were the observations of BoE Member Martin Weale; and yet, GBPUSD extended its remarkable bullish breakout Monday. That said, we didn’t see the same progress in other sterling crosses. The cable is poorly positioned to lead the pack; and that sets a high risk of reversal.

New Zealand Dollar Slides after 3Q CPI Data Eases More Aggressively Than Expected

Not long ago, RBNZ Governor Alan Bollard said that there was little scope to ease monetary policy as the rebuilding effort in Christchurch would boost both inflation and spending. This inherently curbs the threat of rate cuts for the kiwi; but it doesn’t lead the central bank to consider rate hikes. The 3Q CPI data reminded traders of this fact when the annual figure cooled from its two-decade high to a 4.6 percent pace.

Australian Dollar Follows S&P 500 with Critical Break; but Follow Through Struggling

With risk appetite extending its climb from Friday’s ‘QE3 / Euro-bailout’talk, AUDUSD was pushed into its own bullish break above 1.0400. The Australian dollar is another currency that is depending on the market to pick up some conviction to support its appetite for yield. Yet here, the currency has a little more of a buffer to fight a quick correction as the dovish rate outlook eases. The CPI data due Wednesday will further this.

Gold: One of the Few Advances that Can Continue if Early Expectations Fall Apart

While we have some impressive bullish runs from the S&P 500 and AUDUSD; gold has only put up a tame advance of its own. Traders looking for action are quickly shifting their focus; but we shouldn’t turn away so quickly. First of all, this is an interesting fundamental development itself – a safe haven advancing alongside risk. More importantly, it is a good alternative view play. Should fear swell, its buoyancy will turn to a rally.

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

5:00

JPY

Small Business Confidence (OCT)

47.2

Index has continued to fall, may prompt government action

6:00

EUR

German GfK Consumer Confidence Survey (NOV)

5.1

5.2

Consumer spending indicators all expected weaker as recovery becomes unhinged

6:00

CHF

UBS Consumption Indicator (SEP)

0.79

6:45

EUR

French Consumer Confidence Indicator (OCT)

78

80

8:00

EUR

Italian Retail Sales s.a. (MoM) (AUG)

-0.1%

-0.1%

Still declining Italian retail sales showing unwilling consumers

8:00

EUR

Italian Retail Sales (YoY) (AUG)

-2.3%

-2.4%

8:30

GBP

BBA Loans for House Purchase (SEP)

36000

35226

Increased loans may be due to continued easy monetary policy

8:30

GBP

Current Account (Pounds) (Q2)

-9.0B

-9.4B

Deficit sees small shrinkage as demand for exports drop

9:00

EUR

Italian Consumer Confidence Index s.a. (OCT)

97.6

98.5

Index continues to drop

12:30

CAD

Retail Sales (MoM) (AUG)

0.3%

-0.6%

Reaction to retail numbers may be relatively muted as traders await the rate decision later

12:30

CAD

Retail Sales Less Autos (MoM) (AUG)

0.4%

0.0%

13:00

CAD

Bank of Canada Rate Decision

1.00%

1.00%

Major event of the day: commentary will continue to carry movement as inflation still growing, though demand for Canadian goods visibly dropping

13:00

USD

S&P/CS 20 City s.a. (MoM) (AUG)

0.4%

0.1%

Housing price indices showing improvement; August numbers may show moderate recovery in residential housing market

13:00

USD

S&P/Case-Shiller Composite-20 (YoY) (AUG)

-3.6%

-4.11%

13:00

USD

S&P/Case-Shiller Home Price Index (AUG)

142.77

14:00

USD

House Price Index (MoM) (AUG)

0.2%

0.8%

14:00

USD

Consumer Confidence (OCT)

46.5

45.4

Moderate gain expected; US consumers have lower confidence entering winter than last year

14:00

USD

Richmond Fed Manufacturing Index (OCT)

-1

-6

Eastern manufacturing may recover

23:50

JPY

Corporate Service Price (YoY) (SEP)

-0.4%

-0.4%

Services sector still weakening

GMT

Currency

Upcoming Events & Speeches

CAD

Fisher Carstens Speak at Cities Forum in Toronto

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

1.6445

86.00

0.9400

1.0785

1.1080

0.9020

112.00

126.50

Resist 1

1.3925

1.6035

81.50

0.9250

1.0675

1.0770

0.8750

108.00

123.00

Spot

1.3924

1.5979

76.05

0.8812

1.0048

1.0467

0.8071

105.90

121.52

Support 1

1.3150

1.5900

76.00

0.8500

0.9950

1.0400

0.7500

102.00

116.00

Support 2

1.3025

1.5700

75.50

0.7800

0.9750

1.0100

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

13.3817

1.8023

7.8808

7.7766

1.2638

Spot

6.5465

5.3472

5.5254

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

1.4036

1.6070

76.68

0.8913

1.0140

1.0615

0.8167

107.16

122.65

Resist 1

1.3980

1.6025

76.36

0.8863

1.0094

1.0541

0.8119

106.53

122.09

Pivot

1.3901

1.5962

76.18

0.8827

1.0058

1.0427

0.8062

105.84

121.54

Support 1

1.3845

1.5917

75.86

0.8777

1.0012

1.0353

0.8014

105.21

120.98

Support 2

1.3766

1.5854

75.68

0.8741

0.9976

1.0239

0.7957

104.52

120.43

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

1.4142

1.6163

76.87

0.8962

1.0178

1.0657

0.8222

107.79

123.35

Resist. 2

1.4087

1.6117

76.66

0.8924

1.0146

1.0609

0.8184

107.32

122.90

Resist. 1

1.4033

1.6071

76.46

0.8887

1.0113

1.0562

0.8147

106.84

122.44

Spot

1.3924

1.5979

76.05

0.8812

1.0048

1.0467

0.8071

105.90

121.52

Support 1

1.3815

1.5887

75.64

0.8737

0.9983

1.0372

0.7995

104.96

120.61

Support 2

1.3761

1.5841

75.44

0.8700

0.9950

1.0325

0.7958

104.48

120.15

Support 3

1.3706

1.5795

75.23

0.8662

0.9918

1.0277

0.7920

104.01

119.69

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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