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Dollar Carving out a Small, Unstable Range as Headlines Explode

Dollar Carving out a Small, Unstable Range as Headlines Explode

2011-12-20 05:57:00
John Kicklighter, Chief Currency Strategist
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  • Dollar Carving out a Small, Unstable Range as Headlines Explode
  • Euro Suspiciously Quiet as ECB’s Draghi Warns of Crisis, EU’s IMF Contribution Trimmed
  • Japanese Yen Wavers after North Korean News, Government Boosts Intervention Cache
  • British Pound Steady after Consumer Confidence Bounces from Record Low
  • New Zealand Dollar Sees Consumer and Business Confidence Tumble ahead of GDP Figures
  • Australian Dollar Bounces after RBA Minutes Show Limited Pressure in December Rate Cut
  • Gold: Will the ECB’s Liquidity Injection Boost the Alternative Store of Wealth?

Dollar Carving out a Small, Unstable Range as Headlines Explode

Under normal circumstances, the dollar’s slow start to this trading week would be perfectly logical. History shows us that the final weeks of the trading year are defined by tempered trends and volatility. However, we aren’t working with our standard scenario. The quiet that we are seeing now does more to unease than it does to pacify. And, generally, when the concern is volatility and uncertainty; the US dollar stands above its peers as the deep pool of liquidity that welcomes any traders that are scrambling for safe harbor from a sudden shock in thin markets. At this point in the game, it is very difficult to spark a swell in optimism with so many fundamental headwinds keeping speculative interests under wraps.

From price action, we can see just how exposed to a sudden surge the markets are. FX traders should take note of EURUSD – the most liquid currency pair in the market – which notched an anemic 68-pip range through Monday’s active trading session. For reference, that is the smallest span since October 28th and the fifth smallest for the entire year. Again, that would not be particularly remarkable for this time of the year if were not for headlines that crossed the wires through the period. Before the market’s opened, Asian investors were on a defensive footing with news that North Korean leader Kim Jong Il had died and left an already unstable country in a very volatile transition period. With the European session, the focus turned to the deepening EU financial crisis that is spreading towards the core. A holdover concern of Belgium’s downgrade from Friday melded with comments by ECB President Draghi’s warning of the ill-effects of making an exit from the Euro Zone and news that stimulus fund expansion votes were shot down. In the US, investors absorbed House Speak John Boehner’s warning that the House of Representatives would reject an extension of the pay-roll tax cut, while Blue Chip and to-big-to-fail financial player Bank of America saw its shares slide below $5.00 and to lows last seen during the last financial crisis.

Of course, all of these developments can be discounted by a market that is supported by balanced sentiment. Yet, as we have seen on countless occasions these past months; investor confidence is anything but stable. Instead, we are faced with a volatile condition where the market is keeping the ship steady in thinning markets. That is a recipe for disaster. Acting as an uneasy balance to the disappointing headlines are expectations that the ECB’s upcoming lending facility will offer some relief from the world’s immediate crisis. As we wait for the scales to tip, we should take note of Fed member Lacker’s reflections on his dissent to the recent foreign swap lines. If the central bank decides to withhold further stimulus as global market seize, it would curb money supply increases and boost risk aversion efforts – both dollar positive.

Euro Suspiciously Quiet as ECB’s Draghi Warns of Crisis, EU’s IMF Contribution Trimmed

Those that were taking note of the fundamental developments Monday should be very concerned with the exceptionally quiet trading for EURUSD and EURJPY (the latter of which traced out its smallest trading range since May of 2007). Sentiment was strained at the very open as investors had their first opportunity to react to Moody’s two-step downgrade of Belgium. What the market is really waiting for though is the possibility of a critical rate cut to one of the AAA-rated Euro Zone members or the EFSF itself. Should one of the top-rated countries fall to its fiscal and fundamental troubles, guarantees would come under pressure and the rescue program itself could be cut and be forced to pay higher rates to raise capital. This is the primary fear that holds over the market as we move forward, but that is an uncertain event. In the meantime, we there is misplaced hope that the ECB’s three-year liquidity program (which the ECB will take bids on tomorrow) will solve the market’s immediate problems. Liquidity does little to encourage European banks to lend or buy more sovereign bonds much less restore market confidence.

Japanese Yen Wavers after North Korean News, Government Boosts Intervention Cache

With news that North Korean leader Kim Jong Il had passed away, Japanese and South Korean markets dove. North Korea is considered unstable at the best of times, so this unprecedented event of uncertain succession for a nuclear power and economic pariah unnerves investors in the region. USDJPY offered a good sense of this concern with a marked advance for the disconnected US dollar. Not garnering the same press but similarly bearish was the news that the Ministry of Finance was raisings its limit to raise its intervention fund to 195 trillion yen.

British Pound Steady after Consumer Confidence Bounces from Record Low

A bounce in sentiment is always encourage except when it is a rebound from record lows while the broader economy is heading towards a possible recession. The Nationwide Consumer Confidence survey unexpectedly rose to a 40 reading; but sterling traders couldn’t help but recall warnings of negative GDP. BoE member Fisher didn’t’ help when he suggested the EU crisis was a greater risk to the UK than inflation.

New Zealand Dollar Sees Consumer and Business Confidence Tumble ahead of GDP Figures

We had a remarkable round of event risk for the New Zealand dollar through the opening hours of the trading week. A strong rise in service sector activity couldn’t compensate for the 4Q consumer sentiment and December business confidence surveys. In the end, risk trends carries the day for this high-yield currency. Nevertheless, we should take these statistics into consideration as we approach the 4Q GDP reading.

Australian Dollar Bounces after RBA Minutes Show Limited Pressure in December Rate Cut

The RBA’s last rate decision came as quite the surprise to many traders; and given the central bank’s minutes, it should have. Despite the move to cut the benchmark rate on December 6th, the policy authority saw no “strong need” to ease policy on domestic growth prospects. This cuts the possibility of a quick follow up on the dovish regime significantly. However, it doesn’t overwhelm the influence of underlying risk trends…

Gold: Will the ECB’s Liquidity Injection Boost the Alternative Store of Wealth?

The market’s reaction to the ECB three-year lending program this week is unclear. However, for gold, the impact seems pretty consistent regardless of the outcome. A stimulus effort diminishes the value of the second largest reserve currency, reduces the need to liquidate pricey safe haven positions to raise funds and even a boost in risk appetite could play to the metal’s ‘cheap’ bearings.

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

0:01

GBP

GfK Consumer Confidence Survey (DEC)

-32

-31

Expected only moderately lower as expectations for BoE to help economy stronger

0:01

GBP

Nationwide Consumer Confidence (NOV)

36

36

4:30

JPY

All Industry Activity Index (MoM) (OCT)

1.0%

-0.9%

Industries fluctuating

7:00

EUR

German GfK Consumer Confidence Survey (NOV)

5.5

5.6

German confidence still lower

7:00

CHF

Trade Balance (Swiss franc) (NOV)

2.00B

2.16B

Exports may fall further as strong franc combines with weaker overall demand

7:00

CHF

Exports (MoM) (NOV)

1.3%

7:00

CHF

Imports (MoM) (NOV)

1.4%

9:00

EUR

German IFO - Business Climate (DEC)

106

106.6

IFO surveys expected to fall slower than previous as governments try to fight crisis

9:00

EUR

German IFO - Current Assessment (DEC)

116

116.7

9:00

EUR

German IFO – Expectations (DEC)

97

97.3

11:00

GBP

CBI Reported Sales (DEC)

-12

-19

Retail sales seen to recover in winter shopping season

12:00

CAD

Consumer Price Index (NOV)

120.8

Canadian inflation seen stable, not expected to move BoC decision in either way

12:00

CAD

Consumer Price Index (MoM) (NOV)

0.1%

0.2%

12:00

CAD

Consumer Price Index (YoY) (NOV)

2.9%

2.9%

12:00

CAD

BoC Consumer Price Index Core (MoM) (NOV)

0.2%

0.3%

12:00

CAD

BoC Consumer Price Index Core (YoY) (NOV)

2.2%

2.1%

13:30

USD

Housing Starts (NOV)

635K

628K

US construction expected to be slightly weaker on a month-to-month basis, though overall still recovering

13:30

USD

Housing Starts (MoM) (NOV)

1.1%

-0.3%

13:30

USD

Building Permits (NOV)

635K

644K

13:30

USD

Building Permits (MoM) (NOV)

-1.4%

9.3%

21:45

NZD

Current Account Balance (Q3)

-3.775B

-0.921B

Third quarter account balance expected to be lower on buying

21:45

NZD

Current Account Deficit-GDP Ratio (Q3)

-3.9%

-3.7%

21:45

NZD

Net Migration s.a. (NOV)

-650

Points to domestic economic health

23:30

AUD

Westpac Leading Index (MoM) (OCT)

-0.3%

May be helped by lower rates

23:50

JPY

Merchandise Trade Balance Total (NOV)

-¥484.7B

-¥280.2B

Japanese trade expected to weaken again on persistent yen and unwilling government

23:50

JPY

Adjusted Merchandise Trade Balance (NOV)

-¥305.7B

-¥457.9B

23:50

JPY

Merchandise Trade Exports (YoY) (NOV)

-4.3

-3.8

23:50

JPY

Merchandise Trade Imports (YoY) (NOV)

8.3

17.9

GMT

Currency

Upcoming Events & Speeches

14:30

EUR

ECB Calls for Bids in 3-Year Lending Facility

14:30

EUR

ECB Calls for Bids in 3-Month Lending Facility

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

13.8979

1.9052

8.3970

7.7845

1.3080

Spot

6.9260

5.7186

5.9456

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

1.3193

1.5672

78.76

0.9516

1.0509

1.0054

0.7671

102.87

122.41

Resist. 2

1.3144

1.5629

78.58

0.9480

1.0477

1.0013

0.7640

102.51

122.05

Resist. 1

1.3095

1.5586

78.40

0.9445

1.0445

0.9972

0.7609

102.15

121.68

Spot

1.2998

1.5500

78.04

0.9374

1.0381

0.9891

0.7547

101.43

120.96

Support 1

1.2901

1.5414

77.68

0.9303

1.0317

0.9810

0.7485

100.71

120.23

Support 2

1.2852

1.5371

77.50

0.9268

1.0285

0.9769

0.7454

100.35

119.86

Support 3

1.2803

1.5328

77.32

0.9232

1.0253

0.9728

0.7423

99.99

119.50

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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