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Dollar Tumbles as Risk Takes Off on Low Volume, High Hopes

Dollar Tumbles as Risk Takes Off on Low Volume, High Hopes

2011-12-21 04:06:00
John Kicklighter, Chief Currency Strategist
Share:
  • Dollar Tumbles as Risk Takes Off on Low Volume, High Hopes
  • Euro Advances Only Against Funding Currencies On ECB Liquidity Dump
  • New Zealand Dollar Restrained with Rally ahead of 3Q GDP
  • British Pound on the Verge a Break Higher with BoE Minutes, ECB Money Ahead
  • Japanese Yen Turning Dangerously Quiet - An Opportunity for the BoJ?
  • Canadian Dollar Rallies Alongside Gold, Inflation and Sales Figures Add Economics
  • Gold Rebound Takes Shape as the ECB Devalues Euro, Risk Rebounds

Dollar Tumbles as Risk Takes Off on Low Volume, High Hopes

The dollar took a tremendous hit Tuesday as risk-sensitive assets rallied with unexpected gusto. The volatility of this past session does not necessarily surprise; but the consistency in the steady build of risky exposure certainly does. We are in the gravity of the year-end, holiday trading period when the capital markets thin out as participants balance the book and step back to await the return of liquidity in the New Year. Yet, as is plainly evident now, fear and the chance of speculation are keeping the fires burning right up to the end. However, uncertainty still works to keep a significant segment of the market on the sideline (further encouraged when year-end volatility is taken into account). As such a lack of participation should naturally lead us to doubt the development of lasting trends – that is unless something fundamentally extraordinary occurs to lines all the remaining participants up on the same side of the market or draw capital in the wings back into the fold.

As it stands now, the persistence of a lasting bull trend in speculative buildup is questionable when we look at the lackluster volume figures on the S&P 500 stock index (my favored benchmark for risk appetite). Turnover for the index measured 742 million shares – in line with the monthly average and unusually sedate for such an impressive surge in price. If we look for the fundamental basis for this drive, there was little on tap that would spark the kind of optimism such a drive would imply. What clearly stands out though was speculation of the global market’s most recent stimulus effort: the ECB’s Long-Term Repo Operation (LTRO). This program is meant to provide liquidity to European banks that are facing a wave of maturing debt over the coming year and rising short-term market rate, but there are likely end objectives for encouraging financial institutions to purchase more government debt while banks could take advantage of an easy carry trade. There is generally a positive speculative influence from stimulus efforts. What truly matters, however, is the market’s confidence over the coming 24 hours. When the central bank announces the amount of funds drawn from the unlimited, three-year (and three-month) facility; the masses will have to decide whether this is encouraging for promoting stability or a concerning indication of just how strained the European banking system truly is (and perhaps that liquidity doesn’t answer the long-term issues with a broader economic slowdown and sovereign debt collapse).

As a safe haven and liquidity currency, the dollar’s reaction to the resultant sentiment should be pretty straightforward. Looking away from the heavy influence of underlying risk trends for a moment; we should also account for the greenback’s own fundamental health. We’ll ignore the housing starts volatility and instead take note of the $35 billion auction of 5 year debt. Record low rates (0.88 percent) and a 50.6 percent take from foreign interest (the highest in 16 months) show strong demand for Treasuries and thereby dollar.

Euro Advances Only Against Funding Currencies On ECB Liquidity Dump

The ECB’s call for bids on the three-year LTRO program stole the headlines Tuesday; but this was a buy the rumor event. We won’t know what the actual allocation to the Euro-area’s banks will be until the central bank reports the allocations in the upcoming session (scheduled for 10:15 GMT). There is heavy debate (with strong cases on both sides) over whether this liquidity injection will offer lasting help to the region’s troubled financial markets. Being ‘right’ in this case does not matter for traders. If we are looking for the market impact of this event, we should watch whether this program is met with optimism or pessimism. Yet, we should recognize that these are not very conducive conditions to follow through and you don’t often see a buy-the-rumor / buy-the-news event unless there is something unexpectedly encourage (which would be difficult from this event). Meanwhile, Fitch warned the EFSF ‘AAA’ rating rested with France and put French, Italian and Spanish banks on watch.

New Zealand Dollar Restrained with Rally ahead of 3Q GDP

The kiwi dollar advanced alongside its Australian and Canadian counterparts Tuesday. Anything with a high yield or distinct investment aspect to it was lifted – and the New Zealand currency was no exception. In the upcoming session, traders should keep a close eye on the 3Q GDP reading scheduled for release. An expected jump in activity through the quarter could further support its effort to level of field with the Aussie.

British Pound on the Verge a Break Higher with BoE Minutes, ECB Money Ahead

The GfK consumer sentiment survey released early this Asian session kept optimism for the UK at a three-year low. That is a fundamental reminder of what the economic conditions facing the economy are (there is still a concerning probability of a recession). However, the economic prospects for the pound could easily be overlooked in the upcoming session as the market measures the EU’s health after the ECB LTRO.

Japanese Yen Turning Dangerously Quiet - An Opportunity for the BoJ?

USDJPY has a habit of working its way into an exceptionally small range and then post an expectedly dramatic break. This pair indeed has found its way into a narrow band of price action as market participants weigh flimsy real rates (point to JPY) and the need for liquidity (point to USD). The BoJ could take advantage of this. Though they kept policy untouched this morning, intervention is leveraged in thin markets…

Canadian Dollar Rallies Alongside Gold, Inflation and Sales Figures Add Economics

The Canadian yield may not compete with its Australian and New Zealand (even its European) counterparts; but it is still a premium to its US counterpart. Furthermore, Canada has investment potential through commodity production and export. Risk trends continue to dominate this scene; but we should pay attention to this correlation. CPI data this past session helps maintain rates; and retail sales ahead defines growth.

Gold Rebound Takes Shape as the ECB Devalues Euro, Risk Rebounds

Gold is slowly retracing its steep losses through the first half of this month. With the ECB’s liquidity infusion suppressing the Euro banks’ need to liquidate assets (including gold) to raise capital and a rebound in risk appetite sending traders on the hut for cheap assets, the precious metal is finding a bid. Maintaining this push higher depends upon the level of liquidity in the market. If the market needs funds, gold will take a hit.

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

NZD

Credit Card Spending (YoY) (NOV)

7.9%

Retail spending may taper off of peak from October’s Rugby World Cup boost

2:00

NZD

Credit Card Spending SA MoM (NOV)

2.6%

7:00

EUR

German Import Price Index (MoM) (NOV)

-0.3%

Slower import prices showing commodities price dropping

7:00

EUR

German Import Price Index (YoY)

5.3%

6.8%

8:00

CHF

Money Supply M3 (YoY)

8.2%

Remaining under 10%

9:00

EUR

Italian GDP s.a. and w.d.a. (QoQ) (Q3 F)

-0.2%

0.3%

Final Q3 GDP may indicate that Italy is entering a recession on a quarter basis

9:00

EUR

Italian GDP s.a. and w.d.a. (YoY) (Q3 F)

0.4%

0.8%

9:30

GBP

Public Finances (PSNCR) (Pounds) (NOV)

10.3

-0.6B

British public spending expected to jump on new measures post-austerity

9:30

GBP

PSNB ex Interventions (NOV)

19.7B

6.5B

9:30

GBP

Public Sector Net Borrowing (Pounds) (NOV)

16.6B

3.4B

12:00

USD

MBA Mortgage Applications (DEC 16)

4.1%

Housing demand still slow

13:30

CAD

Retail Sales (MoM) (OCT)

0.5%

1.0%

Moderate retail sales growth not raising too many concerns in Canadian economy

13:30

CAD

Retail Sales Less Autos (MoM) (OCT)

0.3%

0.5%

15:00

USD

Existing Home Sales (MoM) (NOV)

2.6%

1.4%

Rise in existing sales may spill over to new construction

15:00

USD

Existing Home Sales (NOV)

5.09M

4.97M

15:00

EUR

Euro-Zone Consumer Confidence (DEC A)

-21

-20.4

Advance number showing additional pressures

21:45

NZD

GDP (QoQ) (Q3)

0.6%

0.1%

Q3 GDP may rise as Christchurch recovery fully factored in

21:45

NZD

GDP (YoY) (Q3)

2.2%

1.5%

GMT

Currency

Upcoming Events & Speeches

3:16

JPY

Bank of Japan Rate Decision

9:30

GBP

Bank of England Minutes

10:15

EUR

ECB Announces Allotment in 3-Year Lending Facility

10:15

EUR

ECB Announces Allotment 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 & 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

13.7794

1.8841

8.2170

7.7835

1.2977

Spot

6.8689

5.6846

5.9013

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

1.3271

1.5834

78.57

0.9458

1.0428

1.0237

0.7820

103.23

123.29

Resist. 2

1.3223

1.5790

78.40

0.9423

1.0397

1.0196

0.7789

102.87

122.94

Resist. 1

1.3174

1.5746

78.22

0.9388

1.0366

1.0156

0.7758

102.52

122.60

Spot

1.3077

1.5658

77.86

0.9318

1.0304

1.0074

0.7695

101.81

121.91

Support 1

1.2980

1.5570

77.50

0.9248

1.0242

0.9992

0.7632

101.10

121.21

Support 2

1.2931

1.5526

77.32

0.9213

1.0211

0.9952

0.7601

100.75

120.87

Support 3

1.2883

1.5482

77.15

0.9178

1.0180

0.9911

0.7570

100.39

120.52

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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