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Dollar Posts its First Decline This Week, Fear Keeps it Elevated

Dollar Posts its First Decline This Week, Fear Keeps it Elevated

2011-12-16 02:54:00
John Kicklighter, Chief Currency Strategist
Share:
  • Dollar Posts its First Decline This Week, Fear Keeps it Elevated
  • Euro Flirting with Disaster as Help Receding, Market Awaits Downgrades
  • Swiss Franc: Don’t Expect the Franc to Continue Rally after SNB Hold
  • British Pound May Ultimately Suffer for EU Rescue Spat
  • Canadian Dollar Held back by Oil Tumble, Record Low Yields
  • Japanese Yen Weathers Tankan, EU Crisis Repercussions Loom
  • Gold Finally Bleeds Selling Momentum, Liquidation Over?

Dollar Posts its First Decline This Week, Fear Keeps it Elevated

As expected the dollar’s impressive bull run this week has tempered its pace just before having to make a serious decision on a much larger trend. Not at all surprising, the same hesitance was seen from the S&P 500 Index and other sentiment-based assets that are on the cusp of open-range bear trends. Rather than looking immediately to price, we should consider the health of momentum and volatility. Rather than see an immediate reversal in the underlying sentiment trend, the markets have shown a sense of consolidation. With both the Dow Jones FXCM Dollar Index and benchmark stock index tracing out their smallest daily ranges in over a week, we are starting to see activity that fits the mold of conviction that currently exists in the broader markets. If we look volume figures on the S&P 500 or EURUSD futures, we find volume figures slip back into the steady deteriorating trend of turnover over the past three months.

There is considerable risk to the global financial markets (a boon to the safe haven dollar) moving forward, but how likely is it that we see credit markets freeze and rapid deleveraging hit the market in the next two or three weeks? That is the question the masses are struggling with now. Fear of unforeseen risk is heavy but so too are the expectations for seasonality effects. Historically, the capital markets throttle down in this period as trading books are balanced and many market participants check out for the end of the year. At this point, it is clear that traders will have to at least keep an eye on this market and be ready to act. The risk is made even more apparent when we consider the uneven performance in capital markets between Europe and the US. The S&P 500 is off 3 percent for the year while its German equivalent (choosing the safest economy in the region) is down 17 percent. This divergence highlights the crux of the problem: the risk of the EU’s financial troubles turning into a global crisis is far from being fully priced in. And, it is these fundamental mispricings that lead to big market shifts.

Policy officials recognize that stable market is 99 percent perception and confidence; which is why New York Fed President Dudley played down the Fed’s swap lines this past session. The central banker said the US has a “range of tools” at its disposal to ensure liquidity, but he currently sees no sign that US banks are facing funding issues. The credit lines the Fed has opened to other regions like the EU, he suggested, are merely to help Europe. Furthermore, he did not expect they would provide any additional support. The central banks director of international finance seems to be a little more grounded in reality though when he said financial stress is clearly spreading to the US. The risk is that a development that can’t be ‘spun’ with optimism passes the wires. Clearly Fitch’s downgrade on 9 global banks isn’t enough, but something is.

Euro Flirting with Disaster as Help Receding, Market Awaits Downgrades

The reassuring voices from the European government are starting to quiet as markets themselves stabilize. Yet, this is probably not the time to ease up on verbal support. Over the past week, we have seen the market punch holes in the EU’s newest comprehensive rescue, the ECB shoot down an outright asset purchasing program and Fed Chairman Ben Bernanke tell Congress that there are no plans to offer further support to the EU or European banks. In the meantime, the Spanish bond auction this past session can further find an encouraging interpretation. The 4.02 percent yield on the 5-year note was a significant drop from the previous 5.28 percent draw (suggesting lower concern), but these rates are still extraordinary on a historical basis and the acceptance of twice the capital initially planned reads like fear of future market issues. It seems we await a catalyst to tip the scales of sentiment. A downgrade could do just that. France in particular is a concern after recent, heavy protesting.

Swiss Franc: Don’t Expect the Franc to Continue Rally after SNB Hold

The Swiss National Bank went for the more conservative approach at its policy meeting. Instead of taking the next step to support growth, the policy authority decided to keep the ceiling on the franc at 1.20 euros. It is easy to forecast the outcome of an increase the EURCHF exchange rate target; but less clear how a hold would play out. Clearly, there was considerable pressure on the currency leveled by the concern that the SNB could raise the floor; because the absence of this manipulation led to a sharp rally. However, that does not prevent future changes.

British Pound May Ultimately Suffer for EU Rescue Spat

There is a very public quarrel that has broken out between the UK and French authorities. ECB member Noyer (also head of the French central bank) parried growing concerns of an impending downgrade for France into a statement that the UK should be cut. The ire has arisen from Prime Minister Cameron’s decision to not agree to last week’s EU proposals. Yet, a spill over crisis for the Euro Zone will hit likely hit the UK first.

Canadian Dollar Held back by Oil Tumble, Record Low Yields

It is sometimes difficult to reconcile the Canadian dollar’s role as an investment currency. With a benchmark yield that is at a significant discount to its Australian and New Zealand counterparts, the loonie seems out of place. This is especially true now with market rates for all these countries are tumbling (the Canadian 10-year yield hit a recent record low) and Canadian’s trade namesake (oil) has also collapsed this week.

Japanese Yen Weathers Tankan, EU Crisis Repercussions Loom

The quarterly Tankan figures are an important gauge for business sector activity in Japan; but standard economic updates from the country seem to fall on deaf ears for FX traders. An extremely low yield and country flush with cash provides it that luxury. If we want to see the yen come to life, we should look for European troubles to spark wholesale risk aversion (to Japan) or outright intervention.

Gold Finally Bleeds Selling Momentum, Liquidation Over?

Having tumbled aggressively over the past three consecutive trading days, gold has crashed through multiple levels of general support. However, the further this decline extends the more committed market participants have to be in a major bear trend. That is difficult given the recent stall in risk trends and gold’s role as an alternative to government-backed assets. However, in a pinch; gold converts to dollars easily.

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**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

7:45

EUR

French Own-Company Production Outlook (DEC)

-6

French surveys showing continued concern for European debt crisis on the economy

7:45

EUR

French Business Confidence Indicator (DEC)

93

95

7:45

EUR

French Production Outlook Indicator (DEC)

-35

10:00

EUR

Euro-Zone Labor Costs (YoY) (3Q)

3.6%

Rising costs may not warrant tightening

10:00

EUR

Italian Current Account (euros) (OCT)

-3530M

Deficit expected to widen

10:00

EUR

Euro-Zone Trade Balance s.a. (euros) (OCT)

0.5B

2.1B

Eurozone trade balance may reflect faster falling exports than imports on industry weakness

10:00

EUR

Euro-Zone Trade Balance (euros) (OCT)

1.0B

2.9B

13:30

CAD

International Securities Transactions (CAD) (OCT)

7.25B

7.35B

Demand for Canadian securities remains robust

13:30

USD

CPI Ex Food & Energy (MoM) (NOV)

0.1%

0.1%

Non-core inflation remains high, could warrant FOMC tightening if economy continues to improve

13:30

USD

CPI n.s.a. (NOV)

226.2

226.421

13:30

USD

CPI Core Index s.a. (NOV)

226.444

13:30

USD

CPI (MoM) (NOV)

0.1%

-0.1%

13:30

USD

CPI (YoY) (NOV)

3.5%

3.5%

13:30

USD

CPI Ex Food & Energy (YoY) (NOV)

2.1%

2.1%

GMT

Currency

Upcoming Events & Speeches

8:00

EUR

Draghi, King, Bini Smaghi, Visco, Regling at Rome Conference

16:15

USD

Fed's Evans Speaks on Econometric Policy Tools in Italy

17:00

USD

Fed's Fisher Speaks on Economy in Austin

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

13.8952

1.8776

8.4188

7.7813

1.3088

Spot

6.9744

5.7081

5.9916

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

1.3228

1.5697

78.65

0.9553

1.0482

1.0091

0.7661

102.99

122.38

Resist. 2

1.3176

1.5651

78.47

0.9515

1.0449

1.0047

0.7628

102.61

122.00

Resist. 1

1.3124

1.5606

78.28

0.9477

1.0415

1.0004

0.7594

102.22

121.63

Spot

1.3021

1.5515

77.91

0.9401

1.0349

0.9916

0.7528

101.45

120.88

Support 1

1.2918

1.5424

77.54

0.9325

1.0283

0.9828

0.7462

100.68

120.13

Support 2

1.2866

1.5379

77.35

0.9287

1.0249

0.9785

0.7428

100.29

119.75

Support 3

1.2814

1.5333

77.17

0.9249

1.0216

0.9741

0.7395

99.91

119.38

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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