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Dollar Gains Traction as ECB Lets Risk Trends Down, Now NFPs…

Dollar Gains Traction as ECB Lets Risk Trends Down, Now NFPs…

2012-07-06 05:09:00
John Kicklighter, Chief Strategist
Share:
  • Dollar Gains Traction as ECB Lets Risk Trends Down, Now NFPs
  • Euro Tumbles after ECB Lowers Return Potential, Offers No Stimulus
  • British Pound Falls More on ECB Decision than BoE Stimulus
  • Swiss Franc: EURCHF Tests 1.20 after European Authorities Expand Support
  • Canadian Dollar Watching Risk Trends, Local Labor Data
  • Australian Dollar: Chinese Easing Stabilizes Carry Currency
  • Gold Traders Disappointed ECB Doesn’t Offer Stimulus

Dollar Gains Traction as ECB Lets Risk Trends Down, Now NFPs

The US Dollar Index rose for a second consecutive session Thursday, though this climb is still lacking for conviction (traders would use the word ‘momentum’). Taking a look at the fundamental backdrop, general risk trends tell the story. While the S&P 500 slid over the same session – boosting the greenback’s safe haven appeal – the slip follows a string of consecutive advances and did little to pull us back from a two-month high. That said, the market’s ability to hold out hope for another round of supranatural support financial support is quickly drying up. With the ECB passing up the opportunity to fortify the questionable programs trumpeted at the EU Summit, the reality of extremely low rates of return and growing threat of volatility has grown significantly brighter. Perhaps most worrisome of all for risk trends, policy authorities may be signaling their limits with a collective trend away from outright stimulus and toned-down scope of those programs actually pursued. If the markets recognize this as the bounds of the support net (despite assurances that they have ‘more options’), genuine risk-reward may soon return.

Looking ahead, there are few scheduled events that market participants can mark as an opportunity for policy authorities to bolster the markets and thereby hold out for. Instead, we have cold, hard event risk that will be judged with less support from stimulus hopes. This shift to a more practical fundamental view will begin with Friday’s NFPs. After the better-than-expected reading from ADP payrolls (176,000) and the ISM service sector survey’s employment component this past session, the consensus for the official BLS number has been raised to 100,000. That wouldn’t be enough to lift growth expectations, and it is becoming clear that there is a high tolerance at the Fed for a miss here. If hope for QE3 fades in the face of weakening labor trends (a component of overall growth), risk will falter quickly…and the dollar will be ready to rally. In fact, if it weren’t for the unexpected rate cut from the People’s Bank of China (still unusual enough to stir interest), we may have already been there.

Euro Tumbles after ECB Lowers Return Potential, Offers No Stimulus

Almost immediately after EU officials announced the sweeping programs and changes to rescue efforts last Friday, doubt rolled over the euro and capital markets. Over the past few years, we have seen promises of comprehensive reform and permanent plans for stability fall apart far too many times in the Euro Zone. And so, neither euro nor risk trends have followed through on the optimism that full faith would otherwise have provided. Then again, neither has cynicism opened the door for wholesale deleveraging of ‘risky assets’ and transfer of funds to safe havens. Perhaps there was hold out for the ECB to provide some validity to the policymakers’ efforts or at least by some time for the implementation of programs that sorely lacked for detail. Whatever the case, the central bank made it clear that it would not cater to the juggling.

There were two aspects to the rate decision this past session that would truly draw traders’ attention: what would be done to the benchmark rate and whether additional stimulus measures would be taken to fortify financial stability (and thereby speculative interests). The critical consideration to this event was the non-standard policy measures (reactivating the SMP bond purchase program, offering another LTRO, etc) as that would provide a sense of stability the euro and a firebreak in the risk of a spreading financial crisis. Yet, not stimulus was announced. Against that knowledge, a rate cut (to 0.75 percent) offers little stability potential and is seen merely as a cut to the currency’s ‘return’ potential.

British Pound Falls More on ECB Decision than BoE Stimulus

The Bank of England’s June policy decision – at which they barely avoided an increase to QE – set the stage for this week’s meeting. As expected, the group decided to increase their gilts purchases by 50 billion sterling to bring the program up to 375 billion. Yet, this is neither significantly detrimental nor encouraging to the pound. The stimulus effort by the BoE is still relatively small (compared to the Fed and ECB) and it would ultimately do little to prevent the spread of the EU crisis across the English Channel. We saw cable fell more on the ECB than BoE.

Swiss Franc: EURCHF Tests 1.20 after European Authorities Expand Support

Academically, any effort to fortify stability for the euro should have discouraged safe haven flows heading for Swiss bank accounts. That wasn’t the case, however, this past session. Instead of boost the euro, the news of the ECB rate cut and hold on stimulus measures sent EURCHF diving below 1.2000 (on the bid) – only the second time this has happened in 9 months. Negative rates on Swiss government bonds and vows by the European Union don’t seem to be offering much help in the SNB’s fight to keep the franc from appreciating. What to do…

Canadian Dollar Watching Risk Trends, Local Labor Data

Though the market will be fully tuned into the US nonfarm payrolls data Friday morning in New York, loonie traders should follow in the Canadian labor data as well. The preoccupation with the NFPs (through market activity and a viable fundamental connection through trade) could very well dampen an inline Canadian data report, but a big divergence from the consensus (calling for only 5,000 jobs added) could easily stir its own interest amongst the crosses or leverage a shared drive from the US dollar. It requires some conditionality, but the potential is there.

Australian Dollar: Chinese Easing Stabilizes Carry Currency

With the dollar rising and US equities easing back Thursday, we would expect the top carry currency to have been under pressure as well. As the preferred carry currency, the Aussie dollar certainly follows risk trends’ lead, but there was a distraction in the form of a Chinese rate cut. The second move to ease the benchmark rate in China in a month (and before that, not since 2008), it is clear that Australia’s biggest trade partner is trying to support growth. Yet, as remarkable as China’s move is, it hasn’t shown a permanent impact on risk trends or the Aussie’s potential.

Gold Traders Disappointed ECB Doesn’t Offer Stimulus

Given that we usually price gold in dollars, the concept of the metal’s safe haven status should also be questioned. Indeed, a drop in equities and carry would translate into a decline for gold Thursday. This could be attributed to the dollar winning out as a safe haven. Yet, gold isn’t able to compete because we didn’t tap into its true harbor of wealth value – as an alternative to manipulated currency and debt.

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**For a full list of upcoming event risk and past releases, go towww.dailyfx.com/calendar

ECONOMIC DATA

Next 24 Hours

GMT

Currency

Release

Survey

Previous

Comments

23:30

AUD

AiG Performance of Construction Index (JUN)

34.7

RBA states housing market is subdued.

5:00

JPY

Leading Index (MAY P)

95.0

95.6

Moderating slightly, off of a yearlong up trend.

5:00

JPY

Coincident Index (MAY P)

95.7

96.9

6:45

EUR

French Central Government Balance (euros) (MAY)

-66.0B

-59.9B

EU Fiscal Pact calls for balanced budget

6:45

EUR

French Trade Balance (euros) (MAY)

-5500M

-5801M

Running a deficit since May 2004.

7:00

CHF

Foreign Currency Reserves (JUN)

303.8B

At a 10 year high.

7:15

CHF

Consumer Price Index (MoM) (JUN)

-0.2%

0.0%

CPI is approaching 2009 deflationary levels. Long periods of deflation may lead to lower levels of lending and slower economic growth.

7:15

CHF

Consumer Price Index (YoY) (JUN)

-1.0%

-1.0%

7:15

CHF

Consumer Price Index - EU Harmonised (MoM) (JUN)

-0.2%

7:15

CHF

Consumer Price Index - EU Harmonised (YoY) (JUN)

-1.1%

8:30

GBP

Producer Price Index Input n.s.a. (YoY) (JUN)

-2.2%

0.1%

Input prices declined last month while out pricing increased; setting up the potential for higher corporate profits or high labor wages.

8:30

GBP

Producer Price Index Output n.s.a. (YoY) (JUN)

2.4%

2.8%

8:30

GBP

Producer Price Index Output Core n.s.a. (MoM) (JUN)

0.0%

0.0%

8:30

GBP

Producer Price Index Output Core n.s.a. (YoY) (JUN)

2.0%

2.1%

10:00

EUR

German Industrial Production s.a. (MoM) (MAY)

0.1%

-2.2%

Declining since the beginning of the euro-zone crisis.

10:00

EUR

German Industrial Production n.s.a. and w.d.a. (YoY) (MAY)

-1.2%

-0.7%

12:30

CAD

Net Change in Employment (JUN)

5.0K

7.7K

Lower oil prices, oil being Canada’s large export, may have adversely affected the job market.

12:30

CAD

Unemployment Rate (JUN)

7.3%

7.3%

12:30

CAD

Full Time Employment Change (JUN)

1.4

12:30

CAD

Part Time Employment Change (JUN)

6.3

12:30

CAD

Participation Rate (JUN)

66.8

66.8

12:30

CAD

Building Permits (MoM) (MAY)

-1.0%

-5.2%

12:30

USD

Change in Non-Farm Payrolls (JUN)

90K

69K

Unemployment rose last month for the first time since June 2011. Traders may already be pricing in another disappointing NFP release. Although a better than expected ADP report and a drop in the Initial jobless claims opens the possibility of an upbeat NFP report.

12:30

USD

Unemployment Rate (JUN)

8.2%

8.2%

12:30

USD

Change in Private Payrolls (JUN)

97K

82K

12:30

USD

Change in Manufacturing Payrolls (JUN)

5K

12K

12:30

USD

Average Hourly Earnings (MoM) (JUN)

0.2%

0.1%

12:30

USD

Average Hourly Earnings (YoY) (JUN)

1.7%

1.7%

12:30

USD

Average Weekly Hours (JUN)

34.4

34.4

12:30

USD

Underemployment Rate (U6) (JUN)

14.8%

14:00

CAD

Ivey Purchasing Managers Index s.a. (JUN)

57.0

60.5

Forecasting a slower rate of growth.

GMT

Currency

Upcoming Events & Speeches

7:30

EUR

ECB's Joerg Asmussen Speaks on Euro Economy

14:30

EUR

ECB's Noyer, Coeure Speaks on Euro Economy

SUPPORT AND RESISTANCE LEVELS

To see updated SUPPORT AND RESISTANCE LEVELS for the Majors, visitTechnical Analysis Portal

To see updated PIVOT POINT LEVELS for the Majors and Crosses, visit ourPivot Point Table

CLASSIC SUPPORT AND RESISTANCE

EMERGING MARKETS 18:00 GMT

SCANDIES CURRENCIES 18:00 GMT

Currency

USDMXN

USDTRY

USDZAR

USDHKD

USDSGD

Currency

USDSEK

USDDKK

USDNOK

Resist 2

15.5900

2.0000

9.2080

7.8165

1.3650

Resist 2

7.5800

5.6625

6.1150

Resist 1

15.0000

1.9000

8.5800

7.8075

1.3250

Resist 1

6.5175

5.3100

5.7075

Spot

13.3966

1.8111

8.1412

7.7545

1.2671

Spot

6.9695

6.0061

6.0524

Support 1

12.5000

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

1.2525

1.5662

80.70

0.9806

1.0231

1.0386

0.8117

100.42

125.64

Resist. 2

1.2491

1.5628

80.51

0.9779

1.0210

1.0357

0.8094

100.09

125.27

Resist. 1

1.2457

1.5594

80.33

0.9752

1.0189

1.0329

0.8070

99.75

124.90

Spot

1.2389

1.5526

79.97

0.9697

1.0148

1.0272

0.8023

99.07

124.16

Support 1

1.2321

1.5458

79.61

0.9642

1.0107

1.0215

0.7976

98.39

123.43

Support 2

1.2287

1.5424

79.43

0.9615

1.0086

1.0187

0.7952

98.05

123.06

Support 3

1.2253

1.5390

79.24

0.9588

1.0065

1.0158

0.7929

97.72

122.69

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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