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Australian Dollar Slides after RBA Rate Cut but Risk Trends Critical

Australian Dollar Slides after RBA Rate Cut but Risk Trends Critical

2011-11-01 04:50:00
John Kicklighter, Chief Currency Strategist
Share:
  • Dollar: Finally a Reason to Buy the Greenback, But for How Long?
  • Euro Tumbles as Confidence in Bailout Already Starting to Unwind
  • Australian Dollar Slides after RBA Rate Cut but Risk Trends Critical
  • Japanese Yen Volatility Will be a Consistent Threat after Massive Intervention
  • British Pound will Make its Own Waves as the Market Readies for 3Q GDP
  • Canadian Dollar: This is What Happens When Important Data Comes Inline
  • Gold Retraces Alongside Risk Trends: What Gives?

Dollar: Finally a Reason to Buy the Greenback, But for How Long?

It wouldn’t exactly turn the Dow Jones FXCM Dollar Index into the green for October’s close; but the greenback rally through Monday was nevertheless the biggest single-day advance since August 4th (in the midst of the biggest risk sell off since the height of the 2008 financial crisis). The currency’s performance to start this week was not happenstance. We were presented with the right fundamentals and the underlying current was strong enough to sync a heavy shift in capital positioning across the various asset classes. It is not easy to drive the markets all on the same sentiment-based bearing, particularly when it is a counter-trend move; so we know this was not a move to be taken lightly.

As most of us know by now, there are very few reasons for the market to be encouraged enough to buy the US dollar. However, Monday’s drive played directly to the currency’s primary (only?) appealing characteristic under current market conditions: fear over the stability of financial markets. With no hope of a competitive yield from the US until at least mid-2013 and the Fed pursuing an extreme expansionary monetary policy, there is no way the dollar can compete on the ‘return’ ledger. Instead, the greenback falls back on its unrivaled liquidity as the ultimate safe-haven bearing. Many novice and experienced traders look for volatility to develop with a specific and consistent trend; but the mere fact that activity is elevated means there is greater risk - and therefore safety is at a premium.

As long as the threat of a major swell in volatility is high, the dollar will gain traction. It just so happens that the fear is stronger than greed between the sentiment extremes. That means that aggressive unwinding of risky positions typically draws more volatility and thereby the bigger risk-based move. For gauges of this sentiment lean, we’ll see if the S&P 500, EURUSD and AUDUSD pull deeper reversals. This will be facilitated or hampered by considerations like the unraveling of the EU bailout effort, the FOMC rate decision, the ECB rate decision and perhaps even indicators like the ISM manufacturing report tomorrow. That said, there is a chance that Monday’s risk aversion move was partly due to month-end mutual fund flows. If that is the case, we could see a quick bounce Tuesday and a risk aversion move will be difficult to achieve.

Related:Discuss the Dollar in the DailyFX Forum, John’s Video: Trading the RBA Rate Decision, Japanese Intervention, EU Financial Fears

Euro Tumbles as Confidence in Bailout Already Starting to Unwind

It seems the bigger the hurdle that European officials overcome; the quicker their progress is reversed. It was just last week that EU officials found agreement on three critical points that they and the market had agreed where critical to the immediate stability of the region’s economy and market: leveraging the EFSF program, recapitalize important banks and securing a deeper haircut for Greece’s private debt exposure. Of course, the funding for the first iteration of the bailout program was never secured and policymakers left the banks at the mercy of a market confidence vote with a suspiciously low-ball capital requirement; but at least the 50 percent cut in obligations to private bond holders was definitive. Or was it? Monday we learned that Greek Prime Minister Papandreou was calling for a referendum so Greek’s could vote on whether they want to pursue the bailout path. Given the lack of support for this position and the fact that the economy is falling into its fourth year of recession, this could be essentially setting the countdown to Greece’s exit from the EU. There is as yet no explicit time frame on a vote though.

Australian Dollar Slides after RBA Rate Cut but Risk Trends Critical

As expected by both the markets (pricing in an 85 percent probability) and economists (16 of 27 polled by Bloomberg); the Reserve Bank of Australia cut its benchmark lending rate by 25 basis points to 4.50 percent. This was the first move from the central bank in a year (they hiked last November) and the first cut since April 2009. This is a remarkable shift in fundamental bearing for a currency that is primarily prized for its high yield (which is both a component of and complementary to its relative financial and economic stability). The immediate reaction was remarkable; but follow through is more difficult to come by. The RBA statement suggesting inflation would close in to target certainly helps by feeding expectations of future cuts; but what really matters is risk trends. If Monday’s hard risk hit continues, the Aussie will tumble.

Japanese Yen Volatility Will be a Consistent Threat after Massive Intervention

To his credit Japanese Finance Minister Azumi warned us that he would act should exchange rates grow to extreme. So, early Monday morning the government moved to intervene directly on behalf of the yen; and the impact was incredible. There are no details as too the size of this effort; but it was said to be a record. What really matters though is the follow up. Once again, all we hear is talk, and now we see retracement.

British Pound will Make its Own Waves as the Market Readies for 3Q GDP

In the upcoming trading day, there are a range of notable indicators; but scheduled top event risk honors go to the first reading of 3Q UK GDP. This is another situation where the market has a bias. However, this time, the outlook is for mild optimism with 0.3 percent expansion which contradicts the larger risk aversion threat and the underlying fear that austerity is ushering in a recession for the UK. This is one to watch.

Canadian Dollar: This is What Happens When Important Data Comes Inline

With the market caught up in fears that the European rescue was falling apart and the buildup in intervention efforts at the government level; there was little attention paid to standard indicators. The Canadian August GDP reading offered a modestly-better-than-expected reading of 0.3 percent growth while the annual figure held at 2.4 percent. This offers no guidance to the BoC’s dovish stance; so market influence is limited.

Gold Retraces Alongside Risk Trends: What Gives?

Gold is the ultimate safe haven: or at least that is how many paint the commodity. In reality, there is nuance to this precious metal that places it in an unusual position in the capital market hierarchy. It is certainly a good alternative to manipulated fiat currencies and bonds; but it is an expensive investment. If cash-on-hand is at a premium, gold will be pushed lower as surely as the S&P 500 in troubled financial conditions.

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

ANZ Commodity Price (OCT)

-1.3%

Continued decline in October dragging

0:30

AUD

House Price Index (QoQ) (Q3)

-1.5%

-0.1%

Further decline of house prices puts pressure on construction, supports rate cut

0:30

AUD

House Price Index (YoY) (Q3)

-1.8%

-1.9%

1:00

CNY

PMI Manufacturing (OCT)

51.8

51.2

Manufacturing index expected to recover slightly as government relaxes tightening, though still vigilant

1:30

JPY

Labor Cash Earnings (YoY) (SEP)

-0.4%

-0.4%

Earnings continue to decline

2:30

CNY

HSBC Manufacturing PMI (OCT)

49.9

Expected to follow official data

3:30

AUD

Reserve Bank of Australia Rate Decision

4.50%

4.75%

Major data of Asian session: although a majority of analysts expected a cut at this meeting, pressure is building on the bank to lower rates as recovery slows, European troubles continue

5:00

JPY

Vehicle Sales (YoY) (OCT)

1.7%

Sales weak as domestic demand slow

5:30

AUD

RBA Commodity Price Index (OCT)

115.4

October commodity prices may slow as overall prices fall due to economic uncertainty

5:30

AUD

RBA Commodity Index SDR (YoY) (OCT)

26.6%

7:00

GBP

Nationwide House Prices n.s.a. (YoY) (OCT)

0.5%

-0.3%

Survey used by the Bank of England to gauge market may see moderate longer term gains

7:00

GBP

Nationwide House Prices s.a. (MoM) (OCT)

0.0%

0.1%

8:15

CHF

Retail Sales (Real) (YoY) (SEP)

-1.9%

Swiss prices on retail and wholesale side still expected weaker, though additional SNB easing may not be warranted

8:30

CHF

SVME- PMI (OCT)

47.7

48.2

8:45

EUR

Italian PMI Manufacturing (OCT)

47.2

48.3

Lower purchasing prices in all three surveys may relax ECB’s position as tightening may not be immediately needed

8:55

EUR

German PMI Manufacturing (OCT F)

48.9

48.9

9:00

EUR

Euro-Zone PMI Manufacturing (OCT F)

47.3

47.3

9:30

GBP

Gross Domestic Product (QoQ) (Q3 A)

0.3%

0.1%

Year-over-year productivity still weak, may further BoE purchases

9:30

GBP

Gross Domestic Product (YoY)( Q3 A)

0.4%

0.6%

9:30

GBP

Index of Services (MoM) (AUG)

0.0%

0.2%

British services sector expected to grow slower

9:30

GBP

Index of Services (3Mo3M) (AUG)

0.5%

0.9%

9:30

GBP

PMI Manufacturing (OCT)

50

51.1

Purchasing prices may fall on demand

14:00

USD

Construction Spending (MoM) (SEP)

0.3%

1.4%

US construction still weak

14:00

USD

ISM Manufacturing (OCT)

52

51.6

Manufacturing prices expected to climb slightly, though price stability not yet a concern

14:00

USD

ISM Prices Paid (OCT)

55

56

21:00

USD

Total Vehicle Sales (OCT)

13.20M

13.04M

Large good purchases expected to increase, but most likely seasonal

21:00

USD

Domestic Vehicle Sales (OCT)

10.30M

10.17M

23:50

JPY

Monetary Base (YoY) (OCT)

16.7%

Monetary base may stay constant as BoJ refuses additional easing

GBP

BoE Housing Equity Withdrawal (Q2)

-6.0B

-5.8B

Lower data show ambivalence about borrowing, credit short

JPY

Official Reserve Assets (OCT)

$1200.6B

Assets continue to increase

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

131.00

Resist 1

1.4250

1.6100

77.75

0.9150

1.0675

1.0770

0.8750

109.35

128.30

Spot

1.3853

1.6092

78.17

0.8774

0.9960

1.0555

0.8092

108.29

125.79

Support 1

1.3950

1.5900

75.50

0.8500

0.9950

1.0400

0.7500

105.00

122.35

Support 2

1.3675

1.5700

74.00

0.7800

0.9750

1.0100

0.6850

102.00

116.00

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

13.3110

1.7683

7.9279

7.7689

1.2547

Spot

6.5037

5.3714

5.5621

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

1.4284

1.6277

81.87

0.8889

1.0083

1.0804

0.8296

113.86

130.75

Resist 1

1.4069

1.6184

80.02

0.8832

1.0022

1.0680

0.8194

111.08

128.27

Pivot

1.3955

1.6075

77.68

0.8721

0.9966

1.0593

0.8136

108.81

124.83

Support 1

1.3740

1.5982

75.83

0.8664

0.9905

1.0469

0.8034

106.03

122.35

Support 2

1.3626

1.5873

73.49

0.8553

0.9849

1.0382

0.7976

103.76

118.91

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

1.4055

1.6254

78.98

0.8910

1.0079

1.0726

0.8227

110.00

127.43

Resist. 2

1.4004

1.6214

78.78

0.8876

1.0049

1.0683

0.8193

109.57

127.02

Resist. 1

1.3954

1.6173

78.57

0.8842

1.0019

1.0640

0.8159

109.15

126.61

Spot

1.3853

1.6092

78.17

0.8774

0.9960

1.0555

0.8092

108.29

125.79

Support 1

1.3752

1.6011

77.77

0.8706

0.9901

1.0470

0.8025

107.43

124.97

Support 2

1.3702

1.5970

77.56

0.8672

0.9871

1.0427

0.7991

107.01

124.56

Support 3

1.3651

1.5930

77.36

0.8638

0.9841

1.0384

0.7957

106.58

124.15

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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