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Dollar Can’t Fall into Year-End Peace with Crisis Fires Smoldering

Dollar Can’t Fall into Year-End Peace with Crisis Fires Smoldering

2011-12-10 07:34:00
John Kicklighter, Chief Currency Strategist
Share:
  • Dollar Can’t Fall into Year-End Peace with Crisis Fires Smoldering
  • Euro Traders May be More Confused than Confident, Clarity Next Week
  • Swiss Franc: Will the SNB Use its Official Meeting to Hike its EURCHF Floor?
  • British Pound to be Driven by Jobs, Inflation, Sentiment and EU Spill Over
  • Australian Dollar will Ignore Data to Leverage its Rate Forecast in Risk Tides
  • Japanese Yen a Quiet but Clear Fat Tail Risk for FX Traders
  • Gold’s $50 Range More a Risk than a Stabilizer Going Forward

Dollar Can’t Fall into Year-End Peace with Crisis Fires Smoldering

Whether we look at the Dow Jones FXCM Dollar Index or the EURUSD, the greenback ended this past week virtually unchanged. On a larger scale, this performance isn’t necessarily discouraging as the currency is riding off the bullish performance it managed to forge through November – and against a much more buoyant S&P 500. We can point to indicators, the payroll tax debate in Congress, forecasts for relative growth and any other number of fundamental considerations as the catalysts for the dollar’s performance; but that would merely distract us. It is clear, given the correlation to benchmark investor sentiment and credit health measures that the currency’s role as a liquidity haven against the backdrop of financial tremors is determining both its bearing and trend intensity. Typically, we would expect the final three weeks of the trading year to fully drain the markets and kill any hope of serious swings; but these are not normal conditions. The very stability of the financial markets has shown signs of trouble; and preservation of capital will always draw traders back into the market.

Through the final 24 hours of this past trading week, the dollar saw a carryover rally from Thursday stall and reverse as the masses refused to commit to a sustainable trend. Just as a tentative risk appetite drive through Thursday failed to gain traction in ahead of the EU Summit the following day; the risk aversion push through the subsequent session would reflect the lack of consensus in the convoluted policy efforts from the European policymakers in response to their building crisis. Furthermore, the retracement would rouse additional support for the few, true optimists that still inhabit the market from the US confidence report. The University of Michigan sentiment report for December unexpectedly jumped to a six-month high (67.7) – seemingly contradicting the economic slowdown and European crisis spread that has infected market opinion as of late. However, this indicator’s influence (as well as most of the data next week) will have more than a passing influence.

To assess the dollar’s headings, we need to follow the direction and intensity of sentiment shifts. To make that a less ambiguous task, we can refer to the S&P 500 Index and Euro-based three-month Libor / overnight index swap spread. The equity benchmark gives us a straightforward consensus of risk appetite (course and momentum). The libor-swap spreads is a measure of financial stress at the bank level – and we chose Europe as that is the center of the world’s current crisis. Should confidence in the EU bailout falter next week, the capital markets will suddenly look riskier and financial firms horde more capital rather than keep credit flowing. In that scenario, the dollar and Treasuries look mighty good.

Related:Discuss the Dollar in the DailyFX Forum, Special Report: What is the Number One Mistake Forex Traders Make?

Euro Traders May be More Confused than Confident, Clarity Next Week

It’s not a distinction that should necessarily be cherished; but the euro has the greatest potential influence over the global capital and financial markets. With both the EU Summit and ECB decision behind us; we can make a full assessment of this latest endeavor to steer the region away from disaster. Overall, this effort ranks amongst the lowest of the five conclusive bailout programs. Between the central bank and EU’s policies, nothing measures up to the current crisis or particular surprises. From the gathering of Prime Ministers, we are left with a vow to come up with measures to reinforce debt caps, develop automatic adjustment mechanisms when they are broken and further funding down the line (read more about the specifics in this week’s Euro fundamental forecast). Investors were likely confused and hesitant to act before it was clear whether the crowd would be pacified or not. Skepticism is very strong and financial conditions very week; so tranquility should not be expected.

Swiss Franc: Will the SNB Use its Official Meeting to Hike its EURCHF Floor?

We don’t usually expect anything from the quarterly SNB policy gatherings unless the ECB is on the move with policy (there is considerable correlation between the two). In fact, the Euro authority is cutting; but its Swiss counterpart already has rates stationed at record lows. What makes this a real issue is that the SNB is trying to prevent capital inflows and the EU crisis is simply not improving. The risk of further flight-to-safety flows continues to grow; so policymakers may take this opportunity to step up their fight by lifting the EURCHF floor from 1.20 to 1.25.

British Pound to be Driven by Jobs, Inflation, Sentiment and EU Spill Over

Should there be conflicting fundamental catalysts for the sterling’s affections this week; it will always be the UK’s economic and financial ties to the European Union that will win out control. That said, we wait to see if the fog of confusion surrounding the EU rescue lifts and opens the door to a clear sentiment push. In the meantime, keep an eye on jobs, inflation, confidence and sales data – all good for short-term volatility.

Australian Dollar will Ignore Data to Leverage its Rate Forecast in Risk Tides

With the tension behind risk trends exceptionally high after the EU/ECB efforts failed to generate immediate relief or fear; Aussie traders should remain on their toes. Any strong runs in risk-positive capital trends will lift the commodity currency; but the reaction will be dampened just as bearish developments will be amplified. The distortion is in the diminishing yield for the carry currency.

Japanese Yen a Quiet but Clear Fat Tail Risk for FX Traders

When do the black swan events occur – when we least expect them. For FX traders, the expectation for an unprecedented intervention on behalf of the yen may be there; but the suspense and therefore attentiveness is not. With USDJPY stubbornly tracing out a wide range; many market participants are moving on. Yet, with financial conditions deteriorating and the sting of time bringing no relief, the threat of action grows.

Gold’s $50 Range More a Risk than a Stabilizer Going Forward

Gold has recently settled into a $50 dollar range; but that should not offer us piece of mind. It should instead put us on watch for a breakout. Passive markets against the disorder of bailouts and credit troubles is an idiosyncrasy that does not last for long. The question is whether gold will break to meet risk or sentiment settles alongside the metal. I would not expect these deep fundamental ruts to improve quickly…

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

(Sat)

CNY

Trade Balance (USD) (NOV)

$15.00B

$17.03B

Exports expected to drag as global demand drops; imports decline could be due to more cautious consumption

(Sat)

CNY

Exports YoY% (NOV)

10.4%

15.9%

(Sat)

CNY

Imports YoY% (NOV)

18.6%

28.7%

(Sun)

NZD

REINZ Housing Price Index (NOV)

3268.5

New Zealand consumer real estate remain relatively strong, could support rate hold

(Sun)

NZD

REINZ Housing Price Index MoM% (NOV)

-0.3%

(Sun)

NZD

REINZ House Sales YoY% (NOV)

28.3%

(Sun)

CNY

New Yuan Loans (NOV)

550.0B

586.8B

Loans expected to fall as China tightens; may pivot on a surprise rate cut last week

(Sun)

CNY

Money Supply - M0 (YoY) (NOV)

11.9%

(Sun)

CNY

Money Supply - M1 (YoY) (NOV)

8.6%

8.4%

(Sun)

CNY

Money Supply - M2 (YoY) (NOV)

12.8%

12.9%

(Sun)

NZD

Westpac NZ Consumer Confidence (Q4)

112

Holding as domestic resilient

0:30

AUD

Home Loans MoM (OCT)

2.2%

Australian housing sector still growing, suggests that sector will be helped if RBA continues easing

0:30

AUD

Investment Lending (OCT)

1.9%

0:30

AUD

Owner-Occupied Home Loan Value MoM (OCT)

0.7%

0:30

AUD

Trade Balance (OCT)

2564M

Could decline, reflecting demand drop in October

5:00

JPY

Consumer Confidence (NOV)

38.6

Continues to drop as government economic reforms slow to enact

6:00

JPY

Machine Tool Orders (YoY) (NOV P)

26.0%

Preliminary data could suggest slower, but growing orders

7:45

EUR

France Current Account (EURO) (OCT)

-4.0B

French trade still weak

7:45

EUR

France Wages (QoQ) (Q3 F)

0.4%

Labor market stagnant

19:00

USD

Monthly Budget Statement (NOV)

-$154.0B

-$98.5B

Expected higher gap in deficit most likely due to seasonal social service spending

21:45

NZD

Food Prices (MoM) (NOV)

-1.3%

Food inflation may fall again

23:50

JPY

Tertiary Industry Index (MoM) (OCT)

-0.7%

Japanese services sector seen in danger of shrinking again

GMT

Currency

Upcoming Events & Speeches

23:01

EUR

Germany Q1 Manpower Employment Outlook

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 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

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

13.5846

1.8431

8.0982

7.7821

1.2914

Spot

6.7308

5.5582

5.7503

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

1.3590

1.5843

78.32

0.9393

1.0313

1.0393

0.7889

105.44

123.00

Resist. 2

1.3537

1.5797

78.13

0.9355

1.0281

1.0349

0.7855

105.01

122.60

Resist. 1

1.3484

1.5751

77.93

0.9316

1.0248

1.0305

0.7822

104.58

122.21

Spot

1.3377

1.5660

77.54

0.9239

1.0183

1.0216

0.7754

103.73

121.42

Support 1

1.3270

1.5569

77.15

0.9162

1.0118

1.0127

0.7686

102.88

120.63

Support 2

1.3217

1.5523

76.95

0.9123

1.0085

1.0083

0.7653

102.45

120.24

Support 3

1.3164

1.5477

76.76

0.9085

1.0053

1.0039

0.7619

102.02

119.84

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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