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Dollar Tapped into the Risk Trends the Evolve from the EU Summit

Dollar Tapped into the Risk Trends the Evolve from the EU Summit

2011-10-26 03:06:00
John Kicklighter, Chief Currency Strategist
Share:
  • Dollar Tapped into the Risk Trends the Evolve from the EU Summit
  • Euro Traders Ready for another Grand Plan from the EU
  • Australian Dollar Tumbles after Core Inflation Unexpectedly Slows
  • Canadian Dollar Losing its Investment Status after BoC Downgrade
  • New Zealand Dollar Ready for RBNZ Rate Decision
  • Japanese Yen Unfazed by Rumor that BoJ Planning Intervention Efforts
  • Gold Rallying on Volume as all Roads Lead Away from Financial Assets

Dollar Tapped into the Risk Trends the Evolve from the EU Summit

We have entered the gravitational pull of this week’s top event risk: the European Union’s crisis summit. The influence of this particular driver reaches far beyond the euro and European assets. Underlying risk appetite itself is likely to garner its ultimate direction for at least a short time from whatever occurs here. And, when market-wide sentiment trends are moving with a purpose, they frequently carry the greenback along with it. The aggressive bull run from the S&P 500 and corresponding tumble for the Dow Jones FXCM Dollar Index (ticker = USDollar) through October was clearly influenced by the market’s balance of risk and reward. After tested a low point in optimism not seen in over a year; market participants quickly backed off their bearish positions. While the larger fundamental concerns (slowing growth, a spreading European debt crisis, a slump in global yields, etc) where all still in place; there wasn’t an tangible next step to turn the market onto the next phase of its bear trend.

With the subsequent recovery in speculative assets and retreat from the greenback, it may seem that the confidence has returned. However, until fundamentals truly improve; this is little more than a relief rally. That said, the climb doesn’t necessarily have to end abruptly tomorrow just because we are coming to meaningful event risk. Many consider Tuesday’s pullback from EURUSD and equities alongside a jump in volume a definitive sign of trend reversal; but more than likely, it is position squaring by a one-sided market ahead of substantial volatility. Assessing the scene heading into the European summit it is reasonable to assume that the market has priced in significant accommodation for a rescue program. The question is: how much is expected? Skepticism that they will solve the underlying troubles of the region is very low; but they can perhaps offer means for stemming the tide. The initial reaction will be defined by details that tell us whether the agreed upon program goes beyond or falls short of what was expected. It is very likely that the euro will extend its relief rally temporarily – as usually happens after the announcements of these new bailout packages; but reality will kick in more quickly than previously. A euro jump, though, does not guarantee a risk rally. Though the Euro-area crisis has been a key weight and its relief has helped the rebound; it doesn’t translate to growth and returns.

Though the European newswires will be responsible for much of the dollar’s activity through Wednesday’s session; it is important to take a look beyond immediate headlines and volatility to look at the fundamental trend that we will inevitably come back to. This past session, we learned that the October Consumer Confidence survey dropped to a May 2009 low with current conditions and jobs figures dragging new lows. Coming up we have durable goods and new home sales, followed by 3Q GDP Thursday. None of it points to an immediate economic recovery.

Related: Discuss the Dollar in the DailyFX Forum, John’s Video: EURUSD and S&P 500 Primed for Volatility, Breakouts Post EU Summit

Euro Traders Ready for another Grand Plan from the EU

What does the EU summit mean to an FX trader? There are two considerations with this event risk: the short-term and long-term impact. Through the immediate reaction, we will see whether the collective expectations that the market projected in the price of the euro were off. Meeting expectations or besting them would most likely encourage a quick follow through. Falling short would not be good given the progress of the past month. In contrast, the long-term influence here will be clouded with overcast. There are three key points in this discussion which policy officials have highlighted: leveraging the EFSF; encouraging private parties to take a 50-60 percent haircut on Greek debt; and recapitalizing banks. It is hard enough meeting all these objectives; and yet, most realize these efforts still won’t be able to stave off a crisis spread for long.

Australian Dollar Tumbles after Core Inflation Unexpectedly Slows

After the hearty reaction from the Canadian dollar to its own central bank announcement, the market was alert to a heavy impact to the Australian CPI data. Indeed, the Aussie dollar took a dive after the core inflation figure unexpectedly dropped to a 2.3 percent annual pace (though the headline figure met at 3.5 percent). Swaps quickly reflected the dovish influence by showing a near certainty of a 25 bps cut from the RBA next month. If risk wasn’t in limbo, it may have been a bigger drop. We need to ask though: “do you really think the RBA will cut?”

Canadian Dollar Losing its Investment Status after BoC Downgrade

Why did the Canadian dollar collapse after the Bank of Canada hold its benchmark rates? While the central bank didn’t lower its benchmark rate; it did lower its growth and inflation forecasts. The group reduced its 2011 GDP from 2.8 to 2.1 percent and 2012 forecast from 2.6 to 1.9 percent. In reality, a rate at 1.00 percent does little to attract speculative interest; but expecting a slowdown and financial vulnerability invites fear.

New Zealand Dollar Ready for RBNZ Rate Decision

The New Zealand dollar’s reaction to the third quarter inflation data Tuesday morning was something of a surprise. Though price pressures were easing; it was a pullback from a 21-year high and RBNZ Governor Bollard voiced his intentions to stand pat. Yet, if this is the sensitivity of the market to rate developments for the kiwi; the upcoming rate decision can certainly be held out for volatility – especially after the EU impact.

Japanese Yen Unfazed by Rumor that BoJ Planning Intervention Efforts

Finance Minister Azumi has one again vowed a strong reaction to speculatively-driven moves in the Japanese yen exchange rate; but the market has grown quite the immunity for blustering. However, the Bank of Japan may actually turn to action. According to a Nikkei report, central bankers are expected to discuss an expansion of asset purchases, long-term JGB buying and other possibilities at its meeting on Thursday.

Gold Rallying on Volume as all Roads Lead Away from Financial Assets

With the correction in risk-sensitive assets Tuesday (and the heavy volume that accompanied it), it is fair to suggest that there was a significant effort to square speculative exposure. That same assessment isn’t appropriate for gold. Not only did the metal post its biggest rally in months; but it did so on heavy volume (not a balancing move). Whether stimulus is increased or the crisis seen spreading, it turns capital to gold.

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

0:00

NZD

NBNZ Activity Outlook (OCT)

35.4

Bank index could lead overall risk sentiment in New Zealand

0:00

NZD

NBNZ Business Confidence (OCT)

30.3

0:30

AUD

CPI (QoQ) (Q3)

0.6%

0.9%

Major Asian session data: Inflation mixed, although RBA rhetoric has been pointing to rate as restrictive, opens door to possible rate cut as China, domestic economy slows

0:30

AUD

CPI (YoY) (Q3)

3.5%

3.6%

0:30

AUD

CPI RBA Trimmed Mean (QoQ) (Q3)

0.6%

0.7%

0:30

AUD

CPI RBA Trimmed Mean (YoY) (Q3)

2.7%

2.5%

0:30

AUD

CPI RBA Weighted Median (QoQ) (Q3)

0.6%

0.5%

0:30

AUD

CPI RBA Weighted Median (YoY) (Q3)

2.7%

2.6%

6:45

EUR

French Business Survey Overall Demand (OCT)

16

European confidence surveys continue to slide lower

8:00

EUR

Italian Business Confidence (OCT)

94

94.5

10:00

GBP

CBI Trends Total Orders (OCT)

-7

-9

CBI survey of major British businesses may see a welcomed rise as the BoE expands asset purchases

10:00

GBP

CBI Trends Selling Prices (OCT)

13

10:00

GBP

CBI Business Optimism (OCT)

-16

11:00

USD

MBA Mortgage Applications (OCT 21)

-14.9%

Weekly report gauges housing market

12:30

USD

Durable Goods Orders (SEP)

-0.9%

-0.1%

Expected relatively large decline in orders for future products may puncture optimism in the US, could lead to additional easing if persists

12:30

USD

Durables Ex Transportation (SEP)

0.4%

-0.1%

12:30

USD

Cap Goods Orders Nondef Ex Air (SEP)

0.3%

1.1%

12:30

USD

Cap Goods Ship Nondef Ex Air (SEP)

2.8%

13:00

CAD

Teranet/National Bank HPI (MoM) (AUG)

1.3%

House price index seen to be helped higher by foreign buyers

13:00

CAD

Teranet/National Bank HPI (YoY) (AUG)

5.3%

13:00

CAD

Teranet/National Bank HP Index (AUG)

146.51

14:00

USD

New Home Sales (SEP)

300K

295K

Moderate turning point still doesn’t point to sustainability

14:00

USD

New Home Sales (MoM) (SEP)

1.7%

-2.3%

14:30

USD

DOE U.S. Crude Oil Inventories (OCT 21)

-4729K

Weekly crude levels gauges corporate expectations for the economy

14:30

USD

DOE Cushing OK Crude Inventory (OCT 21)

471K

14:30

USD

DOE U.S. Distillate Inventory (OCT 21)

-4266K

14:30

USD

DOE U.S. Gasoline Inventories (OCT 21)

-3324K

16:00

EUR

French Total Jobseekers Change (SEP)

23.5

-2

French employment data takes a backseat once again as debt crisis continues onwards

16:00

EUR

French Total Jobseekers (SEP)

2754.5k

20:00

NZD

Reserve Bank of New Zealand Rate Decision

2.50%

2.50%

With slowing global economy, date the bank will reverse its post-earthquake rate cut being delayed further

21:45

NZD

Trade Balance (New Zealand dollars) (SEP)

-440M

-641M

NZ exports still expected to grow, most likely from Australian trade as China continues to slow down

21:45

NZD

Exports (New Zealand dollars) (SEP)

3.51B

3.44B

21:45

NZD

Imports (New Zealand dollars) (SEP)

3.90B

4.08B

21:45

NZD

Balance (YTD) (New Zealand dollars) (SEP)

1065

1084

23:50

JPY

Retail Trade (YoY) (SEP)

-0.1%

-2.6%

Japanese retail trade expected not as weak as previous; once again may prompt government action

23:50

JPY

Retail Trade s.a. (MoM) (SEP)

-0.5%

-1.7%

23:50

JPY

Large Retailers' Sales (SEP)

-2.5%

-2.6%

GMT

Currency

Upcoming Events & Speeches

8:00

EUR

ECB Publishes its Bank Lending Survey

14:30

CAD

Monetary Policy Report

16:00

EUR

EU Leaders Meet for Debt Summit

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

1.3918

1.6011

75.91

0.8787

1.0141

1.0458

0.7971

105.65

121.55

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 & 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

13.4729

1.7779

7.9010

7.7736

1.2624

Spot

6.5529

5.3490

5.5303

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

1.4020

1.6084

76.54

0.8876

1.0337

1.0551

0.8134

106.81

122.61

Resist 1

1.3969

1.6048

76.23

0.8831

1.0239

1.0504

0.8053

106.23

122.08

Pivot

1.3909

1.6002

75.98

0.8802

1.0115

1.0451

0.7997

105.75

121.51

Support 1

1.3858

1.5966

75.67

0.8757

1.0017

1.0404

0.7916

105.17

120.98

Support 2

1.3798

1.5920

75.42

0.8728

0.9893

1.0351

0.7860

104.69

120.41

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

1.4131

1.6192

76.74

0.8933

1.0274

1.0639

0.8113

107.50

123.31

Resist. 2

1.4078

1.6147

76.53

0.8896

1.0240

1.0593

0.8078

107.03

122.87

Resist. 1

1.4024

1.6101

76.33

0.8860

1.0207

1.0548

0.8042

106.57

122.43

Spot

1.3918

1.6011

75.91

0.8787

1.0141

1.0458

0.7971

105.65

121.55

Support 1

1.3812

1.5921

75.49

0.8714

1.0075

1.0368

0.7900

104.73

120.66

Support 2

1.3758

1.5875

75.29

0.8678

1.0042

1.0323

0.7864

104.27

120.22

Support 3

1.3705

1.5830

75.08

0.8641

1.0008

1.0277

0.7829

103.80

119.78

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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