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Dollar Rallies on Risk Aversion and then on Fed Policy Hold

Dollar Rallies on Risk Aversion and then on Fed Policy Hold

2011-12-13 22:38:00
John Kicklighter, Chief Currency Strategist
Share:
  • Dollar Rallies on Risk Aversion and then on Fed Policy Hold
  • Euro Traders Find Little Solace in EFSF Bond Auction, Concern with Greece
  • British Pound Gauges EU Troubles, Stubborn Inflation, Jobs Report Ahead
  • Swiss Franc Continues Drop Against US and Japanese Counterparts
  • Australian Dollar Rate Outlook Cools Modestly Just as Sentiment Sours
  • Japanese Yen Enjoys Sharp Rally Against Euro, More Restrained Elsewhere
  • Gold Breaks Another Key Support Level as the FOMC Supports Dollar Safe Haven

Dollar Rallies on Risk Aversion and then on Fed Policy Hold

The US dollar is coming very close to setting new highs for the year just as surely as investor sentiment looks to be at risk of a serious collapse. The fundamentally-including recognize the inverse relationship between the two is attributed to the underlying currents in risk trends; but for the greenback to truly catalyze a lasting bull trend, we need a genuine fear to seize global investors to leverage its position as safe harbor. The ‘risk-off’ push and subsequent bearish reaction to the FOMC rate decision we found in the previous session simply does not measure up to that heady requirement for a market-wide deleveraging that would promote dollar liquidity. For those that need to see that represented in price action, we see that the Dow Jones FXCM Dollar Index (ticker = USDollar) is still contained below the early-October and late-November swing highs. From the purely sentiment side, the S&P 500 futures have returned to their frequented support at 1,225/1,220 support (oft resistance).

Though we await the seismic shift in speculative positioning that could chock off credit and capital markets and in turn leverage the world’s presiding reserve currency; there was plenty of volatility for the dollar this past session. The bullish swell began in the early hours of the US session as the headlines made reference to new troubles in the Euro Zone that threaten already questionable promises that were made last week (more on that below). A reflection of the strong demand that the dollar is still finding comes from the Treasury’s auction of $24 billion in 10-year debt today. Despite the country’s ballooning deficit and the flood of dollar-based assets that are already out on the market, the level of demand was 3.52 times the supply and the yield clocked in at 2.02 percent. For historical reference that is the second highest ‘bid-to-cover’ and second lowest yield on record. Furthermore, we can see in the numbers a strong foreign demand for the world’s-preferred safe haven with indirect bids representing 61.9 percent of the entire auction (another second highest on record statistic). Add that to the aggressive use on the Fed swap lines with the ECB and BoJ; and we can see the flow of capital to the US is picking up.

One of the few things that can truly bolster sentiment trends and interfere with the dollar’s ability to represent an ideal safe haven (though this is debatable) is the policy stance of the Federal Reserve. Exceptional stimulus lowers rates which encourages loans and leverage. It also floods the market with dollars. So net, it is a positive for risk trends and negative for the greenback’s store of value. This is where the market’s interest in the FOMC decision today was based. There was speculation on both sides of the speculative coin with a call for growth to encourage a change away from the ‘exceptional low rates until at least mid-2013’ language as well as those expecting more favorable reflections on MBS purchases. Neither would take place. However, from the dollar’s rally and S&P 500 drop; we can tell the hold on stimulus was more influential.

Euro Traders Find Little Solace in EFSF Bond Auction, Concern with Greece

As the market grows increasingly skeptical of the Euro Zone’s and euro’s futures, it becomes far easier to find news of negative developments and quick updates on deterioration in indicators of economic and financial performance (I’ll let contrarians interpret that as they will). This past session was no different. There were a few optimists that would have found the silver lining in the EFSF, Spanish and Greek debt auctions – in that they were generally able to raise the full amount expected. However, the rates that they are receiving from the market are not sustainable. The EFSF sale of 1.97 billion euros in three-month debt is still the exception (at 0.22 percent it is low); but the fact that it has to raise such short-dated bills is in itself discouraging. In the meantime, it was reported Greece’s deficit rose year-to-date 5 percent to 20.5 billion euros and the IMF projected a 6 percent drop in GDP for the year. A failed Greek bailout and near-term EU AAA-rating downgrades are high risk threats.

British Pound Gauges EU Troubles, Stubborn Inflation, Jobs Report Ahead

It is difficult to find a clear bearing on the sterling. For the euro and US dollar, the scenario is clouded by their respective sides of the building financial crisis and the world’s affinity for stimulus; but the pound finds itself trying to buffer its blow back risk from the EU (not very successfully) and keep the ship upright as the government keeps pace on austerity while growth slows. We follow the path with the labor figures due ahead.

Swiss Franc Continues Drop Against US and Japanese Counterparts

Against high-risk currencies, it is difficult to gauge the Swiss franc’s position as a safe haven currency. However, when we look at USDCHF or CHFJPY, it offers a rather straightforward test on safe haven positioning. The franc posted notable declines against both the dollar and yen this past session as risk trends stumbled. Whether this is a lasting shift or simply a prelude to the SNB decision on Thursday remains to be seen.

Australian Dollar Rate Outlook Cools Modestly Just as Sentiment Sours

As the interest rate outlook deteriorates for the Australian cash rate, the Aussie dollar loses a critical buffer to market-wide risk aversion. However, as that pressure eases, buoyancy is preserved. We note this morning that the market has backed off on its call for a 25 bp rate cut at the next RBA meeting (42 percent from 100 percent a week ago); but the 12-month forecast still calls for 123 bps of easing.

Japanese Yen Enjoys Sharp Rally Against Euro, More Restrained Elsewhere

There was little doubt as to the risk aversion drive that gained momentum through the US session; but you wouldn’t know it from the Japanese yen. Traditionally, this currency offers the most aggressive gains when risk sours; but its performance really only stood out against the euro. Against the commodity currencies it was more restrained and the yen lost ground against the dollar. The proximity of extreme highs is weighing.

Gold Breaks Another Key Support Level as the FOMC Supports Dollar Safe Haven

We already had a remarkable bearish break earlier this week from gold to start the week; but the selling momentum didn’t stop there. Over the past two sessions, the metal is down 4.7 percent and trades at near, two-month lows. Though ETF holdings build to record highs and gold still represents a safe haven; the Fed’s hold diminishes the need for an alternative asset and central bank’s need to raise cash however they can.

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

2:00

CNY

Conference Board China Leading Index (OCT)

160.2

Index higher on easing hopes

2:00

NZD

Non Resident Bond Holdings (NOV)

61.4%

Holders cutting bond holdings on overall risk despite resilient New Zealand economy

8:15

CHF

Producer & Import Prices (MoM) (NOV)

-0.3%

-0.2%

Continued deflation could prompt additional SNB easing

8:15

CHF

Producer & Import Prices (YoY) (NOV)

-1.9%

-1.8%

9:30

GBP

Claimant Count Rate (NOV)

5.1%

5.0%

British labor market expected to weaken again despite additional asset purchases

9:30

GBP

Jobless Claims Change (NOV)

13.7K

5.3K

9:30

GBP

Average Weekly Earnings 3M/YoY (OCT)

2.0%

2.3%

9:30

GBP

Weekly Earnings exBonus 3M/YoY (OCT)

1.7%

1.7%

9:30

GBP

ILO Unemployment Rate (3M) (OCT)

8.3%

8.3%

13:30

CAD

Leading Indicators (MoM) (NOV)

0.4%

0.2%

Canadian indicators mixed, despite expectations for strength as US economy stronger

13:30

CAD

Manufacturing Sales (MoM) (OCT)

-0.6%

2.6%

13:30

USD

Import Price Index (MoM) (NOV)

1.0%

-0.6%

Import prices continue to grow on more expensive commodities

13:30

USD

Import Price Index (YoY) (NOV)

10.1%

11.0%

21:30

NZD

Business NZ Perf of Manuf Index (NOV)

46.5

NZ manufacturing still shrinking

23:30

AUD

Consumer Inflation Expectation (DEC)

2.5%

Expectation still below cash rate

23:50

JPY

Tankan Large Manufacturers Index (4Q)

-2

2

Bank of Japan’s Tankan survey expected to point lower again, especially for large manufacturers hit by the strength of the yen. Domestic aid more likely than direct intervention.

23:50

JPY

Tankan Non-Manufacturing Index (4Q)

1

1

23:50

JPY

Tankan Large Manufacturers Outlook (4Q)

-3

4

23:50

JPY

Tankan Non-Manufacturing Outlook (4Q)

1

1

23:50

JPY

Tankan Large All Industry Capex (4Q)

2.5%

3.0%

CNY

Actual FDI (YoY)

8.8%

Drop in investments pointing to slowing global economy

GMT

Currency

Upcoming Events & Speeches

13:30

USD

Fed's Lockhart Speaks about Midtown Atlanta

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

13.8802

1.8823

8.3587

7.7793

1.3056

Spot

6.9876

5.7061

5.9391

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

1.3242

1.5657

78.75

0.9625

1.0477

1.0180

0.7694

103.26

122.23

Resist. 2

1.3189

1.5611

78.56

0.9584

1.0443

1.0136

0.7661

102.85

121.84

Resist. 1

1.3137

1.5566

78.37

0.9544

1.0410

1.0091

0.7627

102.44

121.45

Spot

1.3031

1.5475

77.99

0.9464

1.0342

1.0002

0.7560

101.62

120.68

Support 1

1.2925

1.5384

77.61

0.9384

1.0274

0.9913

0.7493

100.80

119.91

Support 2

1.2873

1.5339

77.42

0.9344

1.0241

0.9868

0.7459

100.39

119.52

Support 3

1.2820

1.5293

77.23

0.9303

1.0207

0.9824

0.7426

99.98

119.14

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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