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Dollar Slides for the First Time in Four Days as Traders Await Risk Catalyst

Dollar Slides for the First Time in Four Days as Traders Await Risk Catalyst

2012-01-10 05:19:00
John Kicklighter, Chief Strategist
Share:
  • Dollar Slides for the First Time in Four Days as Traders Await Risk Catalyst
  • Euro Proves Policy Promises Enough to Offset Italian Yield Reality…for Now
  • Swiss Franc: Does Hildebrand’s Resignation Mean Anything for EURCHF?
  • British Pound Shirks Housing and Sales Data for EU Focus
  • Australian Dollar Ready to Fall on Rate Outlook When Risk Troubles Align
  • Canadian Dollar Weathers Drop in Sales Outlook, Rebound in Lending Expectations
  • Gold Price and Volume Floundering as Investors Await Clear Trend

Dollar Slides for the First Time in Four Days as Traders Await Risk Catalyst

The beginning of the New Trading year is an exciting time mostly because antsy traders expect liquidity to fill back out and the markets to easily fall back into new trends. If we had a clear bearing on the health of the global economy and financial markets, this would be an easy transition. However, the fundamental contest between a necessary, market-wide deleveraging on risk and policy officials’ constant efforts to hold back the tide with intervention and manipulation. For those trading the dollar (especially with a bullish view through a bearish risk outlook), this unnatural battle is frustrating. It can be said that nowadays those in the FX, equities, rates and commodities markets are trading the whims of policymakers than they are the actual fundamentals. This may seem abhorrent to those purists (it should); but as traders we need to account for this unnatural influence so that we can remain in the game.

While the greenback may be able to overcome this curb on risk aversion against the most fundamentally troubled currency (the euro); elsewhere, it is suffering for the interference. The existing carry found on the investment / commodity currencies offers a modest return against the artificial stability – the term ‘picking up pennies in front of a steamroller’ comes to mind. However, more interesting is the currencies underperformance against its fellow safe havens. Both the Swiss franc and Japanese yen have standing threats of intervention (to lower their value); yet both are lower through the start of the week. Furthermore, from a yield perspective, the dollar holds a significant advantage over its safe haven alternatives in the money and bond market. However, at these levels, you won’t find much in the way of carry interest. More important for the US currency when wholesale risk trends aren’t guiding the way is identifying who is buying. Though we see Treasuries are still very well bid, Fed data over the past few weeks has shown a steady decline in foreign interest. Five consecutive weeks of selling of US government debt by foreign sources (interest in the sovereign debt is a good gauge of risk-sterilized currency interest) is a clear negative. And, while the Fed seems more than happy to pick up the slack through its Operation Twist initiative – that is itself a dollar negative.

Moving forward, we shouldn’t expect central bankers and policymakers to simply give up on their stimulus efforts. Then again, encouraging a buildup in speculative positioning against the backdrop of an impending slump in global growth and freezing credit markets is even less likely. Therefore, we await catalysts. Unfortunately, there are few ‘scheduled’ indicators that can make the grade. From the US-side, the most pressing uncertainty is one that would be naturally bearish – the propensity for the Fed to step up the stimulus to answer a global crunch on the funding and capital markets. Therefore, a bullish drive is the responsibility of the Euro Zone and its spreading crisis. There is plenty to work with there (more on that below). However, to truly tap into the fear-potential value for the dollar, we need the crisis to definitively spread to the entire world.

Euro Proves Policy Promises Enough to Offset Italian Yield Reality…for Now

Hope is a powerful thing, and it is most often a good thing. Yet, as most traders know, it has no place in the markets. Nonetheless, that is exactly what European policy officials are gambling on to stabilize a situation that they have failed to manipulate through stimulus. Attempting to build on their consistently overwhelmed rescue efforts, German Chancellor Merkel and French President Sarkozy held a meeting in Berlin Monday after which it was suggested that the new budgetary rules that were discussed at last month’s Summit could be pushed through as early as the end of this month (from March). That is all well and good; but even if there is some agreement on this matter, it prevents future crises – it doesn’t answer the current issues. In the meantime, we see that the Italian benchmark 10-year yield is holding above 7 percent (with a more than 500 bp spread over its German counterpart) despite ECB buying. European banks are parking record amounts of capital with the central bank. Greece’s next tranche of aid was delayed to March. And, Germany’s recent government bond auction drew a negative yield (a first).

Swiss Franc: Does Hildebrand’s Resignation Mean Anything for EURCHF?

Playing out like a soap opera for FX traders: Swiss National Bank President Hildebrand tendered his resignation as the top monetary policy official over allegations that his wife placed currency trades with advanced knowledge of the EURCHF floor announcement. It seems this has further lead to speculation that Hildebrand’s exit will somehow lead to a change in the central bank’s policy. That is pushing it. His replacement (Jordan) is just as adamant about the policy and economic activity is at stake. However, euro outflows are always an unknown variable.

British Pound Shirks Housing and Sales Data for EU Focus

With the 10-year gilt yields bouncing just above their lowest levels on record, there are those that may make the argument that the sterling is a safe haven (the argument works for the dollar and Treasuries…). Certainly the pound is more stable relative to the Euro. That said, it is the most immediate bystander of the European crisis spreading outwards. Lower expectations for RICS and BRC-like data and focus on bigger trends.

Australian Dollar Ready to Fall on Rate Outlook When Risk Troubles Align

With each disappointment in economic data, the Australian dollar further succumbs to its negative rate forecast. Monday’s retail sales data and this morning’s Chinese trade figures add weight to the market’s certainty of a rate 25bp rate cut from the RBA in early February. This has certainly hit AUDNZD. Though, for those Aussie pairs with a risk-component (like AUDUSD); risk trends overwhelm rate expectations.

Canadian Dollar Weathers Drop in Sales Outlook, Rebound in Lending Expectations

The Canadian dollar has made for a steady advance since the Monday’s Asian session – but this wasn’t unique to this single currency. We can see the same performance playing out through high yield and safe haven currencies alike. That said, the first negative turn in the sales outlook of business leaders in two years and the least pessimistic, quarterly lending forecast in two is worth taking note of.

Gold Price and Volume Floundering as Investors Await Clear Trend

Neither price nor volume has shown anything remarkable for gold. Like the greenback, the precious metal’s fundamental play is in its role as an alternative to everything else. Where the dollar is the alternative to all its counterparts as a fiat; the metal is the alternative to currencies themselves. At the moment, however, we aren’t seeing the level of panic that would undermine the viability of the financial system.

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

BRC Sales Like-for-Like YoY (DEC)

0.4%

-1.6%

UK real-estate and retail markets remain challenged

0:01

GBP

RICS House Price Balance (DEC)

-19%

-17%

0:30

AUD

Building Approvals (MoM) (NOV)

6.0%

-10.7%

Construction sector data to influence RBA rate expectations ahead of Feb. 7 policy meeting

0:30

AUD

Building Approvals (YoY) (NOV)

-19.8%

-29.8%

7:30

EUR

Bank of France Business Sentiment (DEC)

95

95

7:45

EUR

French Manufacturing Production (MoM) (NOV)

-0.4%

0.0%

French production data to offer further insight into possibility of recession in Eurozone

7:45

EUR

French Manufacturing Production (YoY) (NOV)

-0.1%

2.6%

7:45

EUR

French Industrial Production (MoM) (NOV)

-0.2%

0.0%

7:45

EUR

French Industrial Production (YoY) (NOV)

-0.4%

1.8%

10:00

EUR

Greek Bond Auction of 182-day Bonds (euros)

1.25B

The Greek’s first tranche of aid from the newest bailout program was pushed back three months last week

12:30

USD

NFIB Small Business Optimism (DEC)

93.9

92

US sentiment gauges steadily improving since Summer 2011

13:15

CAD

Housing Starts (DEC)

185.5K

181.2K

Canadian housing starts fell in November

15:00

USD

JOLTS Job Openings (NOV)

-

3267

15:00

USD

IBD/TIPP Economic Optimism (JAN)

45

42.8

US sentiment gauges steadily improving since Summer 2011

15:00

USD

Wholesale Inventories (NOV)

0.5%

1.6%

Measure of wholesaler expectations for future sales; reflects US retail prospects

23:50

JPY

Official Reserve Assets (DEC)

-

$1304.8B

CNY

Trade Balance (USD) (DEC)

$8.8B

$14.53B

Export growth could continue to slow due to subdued global economic environment

CNY

Exports (YoY) (DEC)

13.4%

13.8%

CNY

Imports (YoY) (DEC)

18.0%

22.1%

GMT

Currency

Upcoming Events & Speeches

05:00

CAD

FSB/BoC’s Carney Holds Press Conference in Basel, Switzerland

14:00

EUR

EU’s Rehn Speaks on Euro Bonds to European Parliament Group

15:30

USD

Fed’s Williams Speaks on Economy in Vancouver, Washington

16:10

USD

Fed’s Pianalto Speaks on Labor Market in Ohio

18:00

USD

Fed’s George Speaks on Economic Outlook in Kansas City

18:30

JPY

BoJ’s Shirakawa Speaks in London

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

13.7000

1.8700

8.1622

7.7657

1.2963

Spot

6.8987

5.8259

6.0062

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

1.2935

1.5611

77.53

0.9631

1.0352

1.0387

0.7990

99.51

120.18

Resist. 2

1.2892

1.5572

77.37

0.9599

1.0324

1.0349

0.7961

99.16

119.83

Resist. 1

1.2849

1.5532

77.20

0.9567

1.0296

1.0311

0.7933

98.81

119.48

Spot

1.2763

1.5452

76.87

0.9503

1.0241

1.0236

0.7875

98.12

118.78

Support 1

1.2677

1.5372

76.54

0.9439

1.0186

1.0161

0.7817

97.43

118.09

Support 2

1.2634

1.5332

76.37

0.9407

1.0158

1.0123

0.7789

97.08

117.74

Support 3

1.2591

1.5293

76.21

0.9375

1.0130

1.0085

0.7760

96.73

117.39

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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