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Dollar Traders Itch for a Reversal but Heavy Risk Aversion Needed

Dollar Traders Itch for a Reversal but Heavy Risk Aversion Needed

2011-10-29 03:35:00
John Kicklighter, Chief Currency Strategist
Share:
  • Dollar Traders Itch for a Reversal but Heavy Risk Aversion Needed
  • Australian Dollar Promises to be a Top Market Mover with RBA Decision
  • Euro has Won Breathing Room but Italy Trouble and ECB Meeting Keep Pressure
  • Canadian Dollar Suspect on Rates and Risk Faces GDP and Employment Data
  • British Pound will Put its Own Fundamental Bias against the EU Litmus Test
  • Japanese Yen Attraction to Record Highs Demands Heavier Policy Artillery
  • Gold Finishes out its Best Week Since January 2009

Dollar Traders Itch for a Reversal but Heavy Risk Aversion Needed

Finally a sigh of relief for the greenback – not from a meaningful rebound, but simply finding some peace in the quiet of the weekend. From its abrupt October 4th reversal, the Dow Jones FXCM Dollar Index (ticker = USDollar) has dropped four consecutive weeks and 6.6 percent. We are still on track to seeing this dollar gauge’s worst monthly performance on records going back to January 1999. Fundamentally, the momentum behind the currency’s dramatic tumble is certainly excessive; but its bearings are fitting, especially when we look at its role in the speculative hierarchy. Referring to its relative performance through the week, we note that the dollar’s worst showing was against the high-yielding Australian and New Zealand currency’s; while the Japanese yen and British pound came out with the most reserved gains. This suggests risk appetite was the culprit in the dollar’s tumble, not underlying economic developments. And, that is the same track we will follow next week.

There are quite a few fundamental catalysts to account for through the coming period of trading; but our primary concern remains the health of market-wide investor sentiment. Though the 3Q GDP data that was released this past Thursday reported the fastest pace of expansion from the world’s largest economy since the fourth quarter of 2009; the outlook for sustained expansion is low. Furthermore, an encouraging read for economic activity actually weighs the US dollar as a safe haven for tumultuous financial markets by promoting a sense of stability and thereby leveraging the pursuit of higher yields. As usual, we will use the S&P 500 as our reference for risk appetite. Though there was a jump in volume Thursday, conviction in the October rally remains circumspect. Looking for catalysts that could curb (and possibly reverse) the appetite for risk, soured optimism for the EU’s bailout effort is a prominent threat. The G20 meeting hosted by French President Sarkozy could contain updates; but most of the headlines will probably be off the record until the official November 8th meeting where hammering out details is on the agenda.

In the meantime, we need to be sensitive to the ebb and flow of risk appetite through cross-market correlations and the focus of financial headlines. Given the relative position of key risk players like the US equities index, AUDUSD and EURUSD; the market may already find itself over extended. A quiet drift through the opening 24-48 hours is the most probable scenario without an unforeseen development with market-wide sentiment implications. The first big-ticket catalyst for global speculators is Wednesday’s FOMC meeting. While the Fed won’t likely change policy further; we will find a review of Operation Twist’s influence and Chairman Bernanke is scheduled to sit in on his quarterly press conference. Depending on how things develop through the week, Friday’s NFPs could also act as a driver if risk is already ‘on the mind’.

Related: Discuss the Dollar in the DailyFX Forum, John’s Video: Risk Appetite Trends Will be Punctuated by EU Crisis, FOMC, RBA, NFPs

Australian Dollar Promises to be a Top Market Mover with RBA Decision

There is a swath of key fundamental event risk scheduled for next week; but arguably, the greatest market-moving potential resides with the RBA rate decision scheduled for Monday evening / Tuesday morning. The tension on this particular event and currency are tremendous. Through October, the Aussie currency has rallied 10.5 percent against the US dollar and 5.2 percent against the euro and Canadian dollar. This universal performance has been helped along by an easing of expectations for the RBA to cut rates over the coming year. Yet, both the market and economists predict the next meeting will come with a quarter-point reduction for the benchmark to 4.50 percent. If risk appetite is still running hot, such an outcome may amount to just a bump. However, if risk trends let up or fall; the market will Aussie dollar will likely tumble.

Euro has Won Breathing Room but Italy Trouble and ECB Meeting Keep Pressure

We are still waiting on many of the details to the European Union’s ‘grand and comprehensive’ most recent rescue program; but we probably won’t see anything official over the coming week. Underlying currents of investor confidence will likely forestall or expedite the recognition that there are too many holes in this effort to be a long-term fix. In the meantime, we should watch the ECB rate decision closely. No change is the prevailing scenario; but there is an outlying risk that the group cuts to supplement the stabilization effort. This would catch the market off guard.

Canadian Dollar Suspect on Rates and Risk Faces GDP and Employment Data

The view of Canadian dollar fundamentals is warping. Though still considered an investment currency; this title is being held in place by the buoyant risk trends. If market-wide sentiment itself stalled, would traders treat the loonie the same way? The BoC has laid out a disturbing outlook for growth and monetary policy. That should leverage the importance of August GDP and October employment numbers next week.

British Pound will Put its Own Fundamental Bias against the EU Litmus Test

The sterling is sharing in the relief the Euro-area has found by mounting another rescue effort to solve its financial troubles. However, relief is not strength. With the Bank of England pursuing a course of stimulus; the pound is facing a significant pressure to its yield. To really undermine the currency, a descent into recession would hammer the currency. The consensus for Tuesday’s 3Q GDP reading is 0.3 percent growth.

Japanese Yen Attraction to Record Highs Demands Heavier Policy Artillery

If policy officials weren’t desperate before, they are now. We have seen one-off interventions, coordinated manipulation, ever-larger stimulus efforts and now even the promise of cross boarder investment into the EFSF (doubling as a sentiment booster) fall on deaf ears. With the yen pressing record lows, officials are nearly out of viable options (fixing global risk isn’t one of them). The SNB’s path is looking more attractive.

Gold Finishes out its Best Week Since January 2009

Despite a clear rebound in risk appetite and a temporary fix to the European region’s financial pain, gold managed to end the week up 6.2 percent (the biggest rally since the week ending January 23, 2009). And, to offset speculation that this is a reflection of a weak dollar, the metal rallied again all the major currencies. This is a fundamental signal itself: that a speculative rally doesn’t equate to true and lasting confidence.

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

21:45

(Sun)

NZD

Building Permits (MoM) (SEP)

12.5%

Could see final growth on earthquake recovery

23:15

(Sun)

JPY

Nomura/JMMA Manufacturing PMI (OCT)

49.3

Japanese manufacturing in shrinking

23:30

(Sun)

AUD

RPData-Rismark House Px Raw (SEP)

-0.1%

Australian house prices could lead dovish RBA commentary

23:30

(Sun)

AUD

RPData-Rismark House Px s.a. (SEP)

-0.4%

0:01

GBP

Lloyds Business Barometer (OCT)

7

Could gain on BoE’s efforts to inject liquidity

0:01

GBP

Hometrack Housing Survey (MoM) (OCT)

-0.1%

Housing surveys used by BoE to gauge health of housing market

0:01

GBP

Hometrack Housing Survey (YoY) (OCT)

-3.5%

0:30

AUD

Private Sector Credit (MoM) (SEP)

0.2%

Credit continues to languish as bank rates restrictive

0:30

AUD

Private Sector Credit (YoY)(SEP)

3.0%

2:00

NZD

Money Supply M3 (YoY) (SEP)

5.5%

Additional growth at this pace may hasten bank’s rate cut reversal

5:00

JPY

Construction Orders (YoY) (SEP)

9.3%

Construction continues to grow as rebuilding continues

5:00

JPY

Annualized Housing Starts (SEP)

0.934M

5:00

JPY

Housing Starts (YoY) (SEP)

14.0%

7:45

EUR

French Producer Prices (YoY) (SEP)

6.3%

French PPI YoY showing continued gain, most likely powered by raw material costs

7:45

EUR

French Producer Prices (MoM) (SEP)

0.0%

9:00

EUR

Italian Unemployment Rate s.a. (SEP P)

7.9%

Unemployment stuck at high levels

9:30

GBP

Net Consumer Credit (SEP)

0.5B

Difference between September and coming October data may show effects of BoE’s asset purchase on lending

9:30

GBP

Net Lending Sec. on Dwellings (SEP)

0.6B

9:30

GBP

Mortgage Approvals (SEP)

52.4K

9:30

GBP

M4 Money Supply (MoM) (SEP)

-0.2%

Not major worry for BoE as current policy avoids restricting growth

9:30

GBP

M4 Money Supply (YoY) (SEP)

-0.6%

9:30

GBP

M4 Ex OFCs 3M Annualised (SEP)

2.3%

10:00

EUR

Italian CPI (NIC incl. tobacco) (MoM) (OCT P)

0.0%

Italian preliminary inflation data not expected to move markets as focus remains on debt crisis

10:00

EUR

Italian CPI - EU Harmonized (MoM) (OCT P)

2.0%

10:00

EUR

Italian CPI (NIC incl. tobacco) (YoY) (SEP)

3.0%

10:00

EUR

Italian CPI - EU Harmonized (YoY) (SEP)

3.6%

10:00

EUR

Euro-Zone Unemployment Rate(OCT P)

10.0%

Rate has been stagnating

10:00

EUR

Euro-Zone CPI Estimate (YoY) (OCT P)

3.0%

ECB may notice higher inflation estimate, though new Draghi bank could have different management

11:00

EUR

Italian Producer Price Index (YoY) (SEP)

4.8%

Producer prices also relatively stable

11:00

EUR

Italian Producer Price Index (MoM) (SEP)

0.1%

12:30

CAD

Industrial Product Price (MoM) (SEP)

0.5%

Canadian PPI may drop due to decline in raw materials prices

12:30

CAD

Raw Materials Price Index (MoM) (SEP)

-3.2%

12:30

CAD

Gross Domestic Product (YoY) (SEP)

2.3%

Productivity largely hinges on US demand; September could show slower rate of growth

12:30

CAD

Gross Domestic Product (MoM) (SEP)

0.3%

13:45

USD

Chicago Purchasing Manager (OCT)

60.4

Corporations in these regions could show continued weakness

14:00

USD

NAPM-Milwaukee (OCT)

55.4

14:30

USD

Dallas Fed Manufacturing Activity (OCT)

-14.4

21:45

NZD

Average Hourly Earnings (QoQ) (Q3)

1.2%

New Zealand labor earnings increasing at moderate rate, would not in itself prompt RBNZ tightening

21:45

NZD

Private Wages ex Overtime (QoQ) (Q3)

0.5%

21:45

NZD

Labor Cost Private Sector (QoQ) (Q3)

0.5%

22:30

AUD

AiG Performance of Manufacturing Index (OCT)

42.3

Manufacturing could weaken

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

1.4550

1.6445

81.50

0.9300

1.0675

1.1080

0.9020

112.00

126.50

Resist 1

1.4250

1.6100

77.75

0.9150

1.0675

1.0770

0.8750

108.00

123.00

Spot

1.4150

1.6120

75.75

0.8621

0.9933

1.0716

0.8228

107.19

122.12

Support 1

1.3950

1.5900

75.50

0.8500

0.9950

1.0400

0.7500

102.00

116.00

Support 2

1.3675

1.5700

74.00

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

13.0313

1.7438

7.7225

7.7626

1.2419

Spot

6.3805

5.2595

5.4329

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

1.4229

1.6195

76.13

0.8680

1.0008

1.0777

0.8289

108.19

122.65

Resist 1

1.4189

1.6158

75.94

0.8650

0.9970

1.0747

0.8259

107.69

122.38

Pivot

1.4162

1.6114

75.81

0.8623

0.9933

1.0701

0.8212

107.39

122.11

Support 1

1.4122

1.6077

75.62

0.8593

0.9895

1.0671

0.8182

106.89

121.85

Support 2

1.4095

1.6033

75.49

0.8566

0.9858

1.0625

0.8135

106.59

121.58

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

1.4348

1.6281

76.56

0.8751

1.0052

1.0882

0.8360

108.86

123.69

Resist. 2

1.4299

1.6241

76.36

0.8719

1.0022

1.0841

0.8327

108.44

123.29

Resist. 1

1.4249

1.6200

76.15

0.8686

0.9993

1.0799

0.8294

108.02

122.90

Spot

1.4150

1.6120

75.75

0.8621

0.9933

1.0716

0.8228

107.19

122.12

Support 1

1.4051

1.6040

75.35

0.8556

0.9873

1.0633

0.8162

106.36

121.33

Support 2

1.4001

1.5999

75.14

0.8523

0.9844

1.0591

0.8129

105.94

120.94

Support 3

1.3952

1.5959

74.94

0.8491

0.9814

1.0550

0.8096

105.52

120.55

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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