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Dollar Slides a Second Day in Calm Waters, What are the Catalysts?

Dollar Slides a Second Day in Calm Waters, What are the Catalysts?

2012-01-11 04:39:00
John Kicklighter, Chief Strategist
Share:
  • Dollar Slides a Second Day in Calm Waters, What are the Catalysts?
  • Euro Inches Higher Despite Warnings of Downgrades, Capital Outflow, Greek Trouble
  • British Pound: Would More Stimulus or a Recession Hurt More?
  • Japanese Yen Rises Because it is the Best of the Worst According to Shirakawa
  • Australian versus New Zealand Dollar for Top Speculative Spot
  • Swiss Franc Hesitates at 1.21 Versus Euro, SNB Still Feared
  • Gold Closes at a Four-Week High As Liquidity Demand Yields to Stimulus Expectations

Dollar Slides a Second Day in Calm Waters, What are the Catalysts?

We shouldn’t be surprised by the current lack of a prevailing fundamental and capital flow trend; but there is certainly room for annoyance. We are moving deeper into the new trading year and the economic and financial clouds are no longer on the horizon but are directly over our heads. Yet, underlying sentiment remains anchored. What’s more, in this coasting, there is a latent build up in riskier positioning that eats away at the Dow Jones FXCM Dollar’s pressure on 12-month highs around 10,100. In the drift, the desperation for bigger swings naturally builds and there is a tendency to jump in on any hiccup in price action that could possibly sate the appetite for volatility. However, we need to avoid this emotional lapse. Traders take advantage of market conditions and probabilities – they don’t fight them.

From a trading perspective, these market conditions merit shorter-term setups or conversely strategies with a much larger time frame (and therefore accommodation for wider stops). Daily swings are still there; but they are presently dampened by the lack of a backbone fundamental trend. Despite the greenback’s elevation with the DJ-FXCM Dollar Index and against the euro; the underlying sentiment trend is one of ‘risk on’. Furthermore, correlations across various asset classes with a risk-sensibility (equities, commodities, Treasuries, corporate bonds, etc) are easing. Both of these factors are a side effect of quiet markets. This won’t last for long however. We need to consider the prospects for a return of both bullish and bearish risk scenarios. The support for a swell in optimism and drive to take on more risk is difficult to reconcile against just a dour economic and financial outlook. Yet it can be fed in short bursts through stimulus and manipulation (a common sight nowadays). That said, holding back the flood of any wholesale deleveraging would be futile. All told, the bearish view carries more fuel, but we need a catalyst.

Given the vague threat/promise of more Fed stimulus, another ECB or Euro Zone rescue effort, redirection of Asian capital (China’s market regulator announced its intention to drive capital towards domestic equities) and ‘stabilizing’ intervention by the BoJ or SNB; it is hard to map out the catalyst that sparks risk aversion - and thereby boosts the dollar. A clear spread of the financial crisis and belief that limitations on rescue efforts have been reached would be the most effective, trend support. In the meantime, we keep an eye on small changes like the minutes of the Fed’s November and December discount rate meeting. The Kansas City Fed voted for a hike to the discount window rate while Boston voted for a cut. Disagreement builds the case for inaction. In the meantime, we can see in the background that there is still a demand for safety with the record demand for this past session’s 3-year Treasury auction (contrasting the five-week trend of foreign groups selling government debt).

Euro Inches Higher Despite Warnings of Downgrades, Capital Outflow, Greek Trouble

Though hardly a definitive trend, the euro managed to inch slightly higher for the second day this week Tuesday. These small tide changes have more to do with uncertainty of speculative bearing than genuine confidence. In fact, as risk trends work themselves out; the Euro’s fundamental backdrop continued to deteriorate. For those that breathed a little sigh of relief when Fitch said it was unlikely that France would lose its AAA-status this year, the point was missed. France is not in question. Italy is. On the subject of the third largest Euro Zone member, the same rating agency suggested there was a significant chance of a downgrade and that Italy was the greatest risk to the spread of crisis in the region. This isn’t an encouraging assessment when the country’s 10-year sovereign yield holds painfully above 7 percent despite ECB buying. In other news, the 6-month bond auction by Greece drew slightly lower yields (4.9 percent) on 1.6625 billion euros. That doesn’t compensate for the update to deposit outflows from Greek banks. For the upcoming session, keep an eye on the Federal Statistics office’s 2011 GDP reading.

British Pound: Would More Stimulus or a Recession Hurt More?

The British Chamber of Commerce released a dour outlook for the UK in the previous session. Echoing the concerns of central bankers, the group warned of a contraction in GDP sometime in the first half of the year. At the same time, they projected a 50 billion sterling increase in BoE bond purchases – though they suggested it wouldn’t stave off a recession. Can central bank stimulus fend off an economic slump leveraged by austerity? Not likely. The global nature of current issues and the UK’s sensitivity to the Euro-area put the pound at high risk of decline.

Japanese Yen Rises Because it is the Best of the Worst According to Shirakawa

What is the yen’s appeal? Unwinding carry boosts the funding currency. As the second largest economy in the world and have a tremendous amount of capital makes Japan a good regional safe haven. Yet, is that enough to drive the currency consistently to fresh record highs? No. BoJ Governor Shirakawa’s answer to this conundrum: the yen is the best of the worst. Even that view may miss the mark through…

Australian versus New Zealand Dollar for Top Speculative Spot

One of the more difficult aspects of trading in the FX market at the moment is the choppy backdrop for risk trends. That makes for difficulty trading the traditional Aussie and kiwi-crosses. However, when we pit the Australian dollar against the New Zealand dollar; we see real fundamentals and extract the flippancy of sentiment. AUDNZD may be finally coming to terms with the drop in RBA rate forecasts.

Swiss Franc Hesitates at 1.21 Versus Euro, SNB Still Feared

Fear that the exit of former SNB President Hildebrand didn’t seem to catch. It is very unlikely that incoming head Thomas Jordan will alter the central bank’s fight to keep the EURCHF 1.2000-floor firmly in place. We are still over 100-pips away from this hard floor, but simply approaching the threshold will prove difficult. Consider, there is a greater threat of a raised floor (though low) than this pair falling below 1.20000.

Gold Closes at a Four-Week High As Liquidity Demand Yields to Stimulus Expectations

It was hardly an incredible move; but gold nevertheless showed more conviction in its bullish drive than any other risk-based move Tuesday. Rising on tame futures volume, the metal closed at four-week highs. A tempered volatility in the transfer of speculative capital actually benefits this pricy asset – especially when we are contemplating further central bank stimulus, economic trouble and deficit growth in the meantime.

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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

0:01

GBP

BRC Shop Price Index YoY (DEC)

2.0%

Could follow overall trend of slowing inflation after price pressures peaked in Fall 2011

0:30

AUD

Job vacancies (NOV)

3.3%

5:00

JPY

Coincident Index CI (NOV P)

90.3

91.4

Could show weakness as economy expected to slow significantly from robust growth in 3Q 2011

5:00

JPY

Leading Index CI (NOV P)

92.9

92.0

8:00

EUR

German Budget Balance-GDP Ratio (2011)

-4.3%

8:00

EUR

German Real GDP Growth (2011)

3.0%

3.6%

9:00

EUR

Italian Deficit to GDP (YTD) (3Q)

5.3%

Italy seeks to balance budget by 2013

9:30

GBP

Visible Trade Balance (GBP millions) (NOV)

-8400

-7557

Possible recession in Eurozone to take a toll on overall UK trade balance

9:30

GBP

Trade Balance non-EU (GBP millions) (NOV)

-5000

-4554

9:30

GBP

Total Trade Balance (GBP millions) (NOV)

-2400

-1552

12:00

USD

MBA Mortgage Applications (JAN 6)

-4.1%

19:00

USD

Fed’s Beige Book

Could reveal further signs of US recovery

23:50

JPY

Bank Lending Ex-Trusts (YoY) (DEC)

0.2%

23:50

JPY

Bank Lending Incl. Trusts (YoY) (DEC)

0.2%

23:50

JPY

Current Account Total (Yen) (NOV)

248.4B

562.4B

Japanese export sector has been under pressure from global uncertainty and strong Yen

23:50

JPY

Adjusted Current Account Total (Yen) (NOV)

446.0B

518.6B

23:50

JPY

Current Account Total (YoY%) (NOV)

-74.2%

-62.4%

23:50

JPY

Trade Balance – BOP Basis (Yen) (NOV)

-599.4B

-206.1B

1/11-1/15

CNY

Foreign Exchange Reserves (DEC)

$3200B

$3201.7B

GMT

Currency

Upcoming Events & Speeches

12:00

EUR

Germany’s Merkel Meets with Italy’s Monti in Berlin

13:40

USD

Fed’s Evans Speaks on Economy in Illinois

14:00

USD

Fed’s Lockhart Speaks on Economy in Atlanta

17:00

EUR

EU’s Van Rompuy Speaks in Brussels

17:30

USD

Fed’s Plosser Speaks on Economy in Rochester, New York

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

13.6274

1.8680

8.1075

7.7663

1.2883

Spot

6.8886

5.8143

5.9885

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

1.2958

1.5645

77.45

0.9609

1.0264

1.0469

0.8051

99.56

120.24

Resist. 2

1.2916

1.5605

77.29

0.9578

1.0238

1.0433

0.8024

99.23

119.92

Resist. 1

1.2874

1.5565

77.13

0.9547

1.0212

1.0397

0.7996

98.90

119.60

Spot

1.2790

1.5486

76.81

0.9485

1.0159

1.0325

0.7941

98.24

118.95

Support 1

1.2706

1.5407

76.49

0.9423

1.0106

1.0253

0.7886

97.58

118.31

Support 2

1.2664

1.5367

76.33

0.9392

1.0080

1.0217

0.7858

97.25

117.98

Support 3

1.2622

1.5327

76.17

0.9361

1.0054

1.0181

0.7831

96.92

117.66

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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