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Dollar Carves its Smallest Range in Six Weeks as Major Risk Ahead

Dollar Carves its Smallest Range in Six Weeks as Major Risk Ahead

2011-12-07 04:34:00
John Kicklighter, Chief Currency Strategist
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  • Dollar Carves its Smallest Range in Six Weeks as Major Risk Ahead
  • Euro: Officials Try to Counter Elevated Crisis Risk, Solution Dubious
  • Australian Dollar RBA Cut and GDP Reactions Dampened by Risk Trends
  • Canadian Dollar Posts Risk-Curbed Rally on BoC Rate Hold
  • British Pound Traders Unnerved by BoE’s Preemptive Liquidity Program
  • Swiss Franc Temporarily Drops after CPI Miss, SNB Announces Reserves
  • Gold Mounts Impressive Recovery alongside Risk Trends on Anemic Volume

Dollar Carves its Smallest Range in Six Weeks as Major Risk Ahead

The financial markets put in for a notable, intraday swing in sentiment Tuesday; but this shift in outlook wouldn’t translate into sustainable conviction. Both the US dollar and capital markets are cutting anemic ranges against the backdrop of a loaded fundamental docket. Assigning this lack of activity to seasonal effects wouldn’t only be incorrect – it would be dangerous. Assuming the quiet conditions are related to year-end wind down would lead us to a passive, short-term and less flexible trading approach. That would be the exact opposite of the approach we should actual take – treating the quiet markets as an omen of a sudden and aggressive surge in volatility that can be initiated by the announcement of the Euro Zone’s plans to halt the spread of a building crisis. Given the threat level of event risk moving forward alongside the slow deterioration of structural market conditions and economic activity; the next week-and-a-half are exposed to exceptional risk.

If we were approaching this from a derivatives approach – we would say that implied risk is ‘cheap’. In other words, market price and volatility outlook measures are not fully compensating for fundamental-derived market waves ahead. Taking stock of the current market pace, we find the Dow Jones FXCM Dollar Index closed out its smallest daily range (49 points) since October 28th. The 94-pip daily span on EURUSD was a similar six-week low (representing the Thanksgiving holiday hangover) and the sixth smallest range in the past six months. And, representing specifically the demand for liquidity quality, USDJPY trekked only 22 pips to represent the sixth quietest, regular trading day in five years. This isn’t just an FX lull either. The average daily range over the past four active trading days for the S&P 500 Index was less than 16 points (the greatest lack of drive since July 26th) while the ‘fear’ indicator in the VIX hovers just above its three month low.

As the saying goes, “it’s quiet….too quiet”. Measuring the possible repercussions from the EU Summit later this week, it is very likely that either a substantial and immediate threat to global financing will be temporarily removed or the hesitation in broad risk unwinding will disappear. Either scenario invites at least a short-term trend as it would finally align speculative positioning. In the meantime, there were no substantive US-based indicators released this past 24 hours and no plans for big releases over the coming 24 hours. Worth monitoring though are credit market and liquidity measures at the Fed and market level. There is unlikely to be a definable point where the financial crisis spreads from the EU to US.

Related:Discuss the Dollar in the DailyFX Forum

Euro: Officials Try to Counter Elevated Crisis Risk, Solution Dubious

The risk for the European financial markets and collective economy going forward is dangerously high. There is no true precedence for the policy choices that lay ahead for officials; and that uncertainty means investors cannot readily discount the various scenarios. Standard & Poor’s raised another hurdle for a successful response to the region’s troubles when it put 15 Euro Zone members on downgrade watch; and just to make sure that the market could connect the dots on the trouble this entailed: the group has further warned that the EFSF is at risk of as much as a two-step downgrade should one of its top rated guarantors fall under the sovereign ax. From a practical stand point this would mean higher rates for raising capital – something the bailout initiative can’t afford. Perhaps trying to counter these troubles with an equally massive effort, rumors circulated through this past session that the EU was contemplating lifting or removing the cap on the 500 billion euro bailout program or perhaps; while FT quoted sources who said a second bailout program idea was being floated. Tempting, if they could actually fund the first program…

Australian Dollar RBA Cut and GDP Reactions Dampened by Risk Trends

The Australian wires have been on fire over the past few days. Tuesday morning brought us the RBA rate cute with a sell off that carried surprising consistency given the anchored risk backdrop. In the end, though, the hold on sentiment trends would pull the Aussie back up. The same containment was present on the 3Q GDP figures. The quarterly figure bested expectations with a 1.0 percent pick up; yet it was still a cooler pace than the previous period. Given the central bank’s concerns for activity going forward, this slowing trend will likely stick.

Canadian Dollar Posts Risk-Curbed Rally on BoC Rate Hold

Is the Canadian dollar the ideal safe haven? The AAA-rated country was able to avoid much of the 2008 financial shock and the economic slump was far smaller than its US counterpart. The BoC’s statement alongside its rate hold seems to stir up similar sentiments with the note that growth was better than expected. That said, their general sentiment is for global economic and financial troubles to lap at Canadian shores.

British Pound Traders Unnerved by BoE’s Preemptive Liquidity Program

Aside from the BRC shop price inflation indicator, there wasn’t much in the way of scheduled event risk for the British pound this past session. More interesting though is the Bank of England taking action to match its fear that the EU crisis will spill over to the UK financial system. The bank announced an Extended Collateral Term Repo Facility. The group said there are no liquidity issues now; but this is a preemptive program.

Swiss Franc Temporarily Drops after CPI Miss, SNB Announces Reserves

Consumer prices are contracting at the fast pace since October 2009 in Switzerland according to the 0.5 percent year-over-year CPI figures this past session. If rates in Switzerland weren’t already essentially zero, something could be done. However, the real issues isn’t retail prices but rather exchange rate. To that point, EURCHF is still holding below 1.2500 and FX reserves have slid from 245 to 229 billion francs in November.

Gold Mounts Impressive Recovery alongside Risk Trends on Anemic Volume

Given the high, recent correlation between gold and risk trend; the intraday bounce in sentiment Tuesday carried the precious metal up from a substantial decline. Volume for gold futures over the past three trading days has averaged an anemic 124,000 contracts. This alongside the quiet capital markets undercuts the argument that the unusual relationship is a factor of market-wide liquidity issues.

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

0:30

AUD

Gross Domestic Product (QoQ) (Q3)

1.2%

1.2%

Sharp rise in GDP shows Australia is weathering global, China slowdown

0:30

AUD

Gross Domestic Product (YoY) (Q3)

2.3%

1.4%

5:00

JPY

Coincident Index (OCT P)

90.3

89

Both indices show some improvement, though call for more government action strong

5:00

JPY

Leading Index (OCT P)

91.5

91.5

6:45

CHF

Unemployment Rate (NOV)

3.1%

2.9%

Labor figures may not have as much sway on SNB as inflation

6:45

CHF

Unemployment Rate s.a. (NOV)

3.1%

3.0%

9:30

GBP

Industrial Production (MoM) (OCT)

-0.3%

0.0%

British industries expected to face further headwinds, though scope for additional easing by the BoE limited

9:30

GBP

Industrial Production (YoY) (OCT)

-0.7%

-0.7%

9:30

GBP

Manufacturing Production (MoM) (OCT)

-0.3%

0.2%

9:30

GBP

Manufacturing Production (YoY) (OCT)

1.4%

2.0%

11:00

EUR

German Indus Prod n.s.a. and w.d.a. (YoY) (OCT)

3.5%

5.4%

German industrial production expected to weaken again, suggests more ECB easing

11:00

EUR

German Industrial Production s.a. (MoM) (OCT)

0.3%

-2.7%

15:00

GBP

NIESR Gross Domestic Product Estimate (NOV)

0.5%

Estimate will point to stagnant British economy

20:00

USD

Consumer Credit (OCT)

$7.000B

$7.386B

Credit still tight despite swaps

20:00

NZD

Reserve Bank of New Zealand Rate Decision

2.50%

2.50%

RBNZ may delay reversal of rate cut into middle of next year as another global slowdown conflicts with tighter monetary policy

21:45

NZD

Manufacturing Activity (Q3)

2.1%

New Zealand industries seen stagnant

21:45

NZD

Manufacturing Activity Volume s.a. (QoQ) (Q3)

-0.7%

23:00

NZD

QV House Prices (YoY) (NOV)

1.2%

NZ houses growing moderately

GMT

Currency

Upcoming Events & Speeches

8:15

EUR

ECB Calls for Bids in 3-Month Dollar Tender

10:00

EUR

ECB Announces Allotment in 3-Month Dollar Tender

SUPPORT AND RESISTANCE LEVELS

To see updated SUPPORT AND RESISTANCE LEVELS for the Majors, visit Technical Analysis Portal

To see updated PIVOT POINT LEVELS for the Majors and Crosses, visit our Pivot Point Table

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

9.2080

7.8165

1.3650

Resist 2

7.5800

5.6625

6.1150

Resist 1

14.3200

1.9000

8.5800

7.8075

1.3250

Resist 1

6.5175

5.3100

5.7075

Spot

13.4653

1.8344

8.0280

7.7717

1.2838

Spot

6.7345

5.5466

5.7550

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 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

1.3611

1.5783

78.48

0.9415

1.0222

1.0417

0.7933

105.88

122.79

Resist. 2

1.3559

1.5737

78.29

0.9377

1.0191

1.0372

0.7899

105.46

122.40

Resist. 1

1.3507

1.5691

78.10

0.9339

1.0159

1.0328

0.7865

105.03

122.01

Spot

1.3403

1.5599

77.72

0.9263

1.0097

1.0239

0.7797

104.17

121.23

Support 1

1.3299

1.5507

77.34

0.9187

1.0035

1.0150

0.7729

103.31

120.45

Support 2

1.3247

1.5461

77.15

0.9149

1.0003

1.0106

0.7695

102.88

120.05

Support 3

1.3195

1.5415

76.96

0.9111

0.9972

1.0061

0.7661

102.46

119.66

v

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--- 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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