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Dollar Awaiting Chinese GDP, US Earnings to Back New Highs

Dollar Awaiting Chinese GDP, US Earnings to Back New Highs

2012-07-13 02:17:00
John Kicklighter, Chief Strategist
Share:
  • Dollar Awaiting Chinese GDP, US Earnings to Back New Highs
  • Euro Risks a Serious Extension of its Bear Trend
  • Japanese Yen Reflects Little Lasting Influence from BoJ, Except Disregard
  • Australian Dollar: Has the Aussie Dollar Led a Broader Risk Move?
  • British Pound Drops against All by High Yield Counterparts
  • Canadian Dollar Outperforms Even the Dollar on a Risk Off Day
  • Gold: In a Safe Haven Bout with the Dollar, Gold Will Lose

Dollar Awaiting Chinese GDP, US Earnings to Back New Highs

The Dow Jones FXCM Dollar Index (ticker = USDollar) marked a critical break above well-worn resistance at 10,190 and proceeded to trade at fresh four-week highs. We should always review simple technical breaks with a skeptical eye – looking for the vital ingredients for follow through. Setting the scene, a complementary drop from equities and rally for safe-haven Treasuries suggests we may have the foundation in risk trends to sustain a dollar climb. That said, the deleveraging effort that feeds the greenback requires a sizable fundamental push. The capital markets have found a comfortable zone of inaction. Sparking further losses in an unwinding effort is something the retail and institutional level wants to avoid. On the other hand, it is difficult to raise confidence in returns for growth-dependent assets when the growth outlook is so painful and we stand at the threshold of the 2Q US earnings season. Conviction may not be in place just yet, but that could be remedied very soon.

From Thursday’s session, the shift in investor confidence away from the yield-dependent to safe haven was apparent across the board – suggesting there is a willingness to expand upon the trend. Yet, the fundamental catalysts behind this ‘breakout stage’ of the shift was lacking for tangible sparks. It could be argued that the Australian employment data dropped around the same time risk aversion started to pick up in the Asian session, but this isn’t the type of data that normally strikes a nerve for underlying sentiment. With a more in-line outcome but digging deeper into the crowd’s psyche, the Fed’s minutes and a hold from the Bank of Japan at its own policy meeting undermines hope for additional stimulus and could have thereby shaken out uncommitted speculative bulls.

As surely as the driver for sentiment this past session was so immaterial, the catalysts in the final session this trading week are palpable. Starting off in the Asia trading session, we will meet the Chinese 2Q GDP figures. This will kick off the most recent round of growth reports for the world’s largest economies and thereby provide an early reading on global economic health – a clear catalyst for risk appetite. Furthermore, given the country’s appeal as a haven for investors during the slump following the 2008 financial crisis; the strength or weakness of this particular economy will be a particularly important reflection of the return potential in the risk-reward schema for world markets. And, where the Chinese growth reading is an easily interpretable outcome, the start of the US 2Q earnings session will be more dependent on risk trends themselves to forge progress. JPMorgan is an ideal company to start the season given the regulatory focus, their position in the key financial sector and the early move they made towards announcing a stock buyback and dividends after the Fed’s last stress test.

Euro Risks a Serious Extension of its Bear Trend

Taking a look at the performance of the euro across the FX spectrum, it is more than clear that the currency has been hobbled by bearish sentiment. The shared currency is at record lows against its high yield counterparts, it is just off a record low against the safe haven yen, the fundamentally-comparable sterling has managed to force it to near four-year lows and the yield anemic dollar has driven weighed EURUSD to a two-year low. It isn’t difficult to understand why. We have seen the latest effort to revive investor confidence in the financially troubled Euro Zone financial system fall apart in less than a week. It can sometimes be difficult to miss the moves if they don’t play out quickly, but the most consistent trends take time. Looking forward, there are few opportunities to hold out hope for more EU support, and that means reality weighs.

Japanese Yen Reflects Little Lasting Influence from BoJ, Except Disregard

There was virtually no, lasting impact from the Bank of Japan’s policy efforts this past session. Expectations were admittedly set low, but there has been measurable impact to sizable programs from the yen in the past and more so from regional equities. That said, there was little here to trip up the already skeptical masses. The benchmark rate was kept at a range up to 0.10 percent and the total size of stimulus programs was unchanged at 70 trillion yen. Looking closer, the 5 trillion yen decrease in the loan facility (to 25 trillion) offered the funding for a 5 trillion yen increase to the asset purchase program (to 45 trillion). That is slightly more favorable to short-term speculative interest, but not enough.

Australian Dollar: Has the Aussie Dollar Led a Broader Risk Move?

Did the Australian dollar start the risk aversion shift Thursday that offered attractive technical breaks for the dollar and S&P 500 alongside AUDUSD? It is a stretch to connect the influence; but in a finely balanced speculative backdrop, it can’t be written off. The 27,000 jobs lost in the month of June is a disappointment for a high-yield dependent currency, and at the very least offers a short-term Aussie catalyst. For follow through, however, the argument for further easing isn’t strong enough. We need an underlying risk move and perhaps Chinese encouragement.

British Pound Drops against All by High Yield Counterparts

Seeing the sterling drop against safe haven counterparts and modestly outperform the highest yielding majors isn’t particularly surprising on a ‘risk aversion’ day. That said, it is somewhat unusual for the currency to slide against its Euro and Swiss counterparts – arguably, more fundamentally troubled counterparts (the franc follows the euro more closely). We need to watch these adjustments for crisis spread fears.

Canadian Dollar Outperforms Even the Dollar on a Risk Off Day

The Canadian dollar is not your typical commodity bloc / investment currency. A disappointing consideration is that its yield is lower than the Aussie and Kiwi dollars, but that is more than offset by the fact that its financial and economic outlook offer perhaps the most stable fundamental backdrop amongst the majors. The loonie may very well be the best safe haven currency – supported by the USDCAD’s slip.

Gold: In a Safe Haven Bout with the Dollar, Gold Will Lose

Over the past four weeks, we have passed a number of major events that carried substantial potential for generating new stimulus programs – efforts that are tantamount to devaluing a currency and thereby bolstering the alternative-store-of-wealth appeal of gold. Yet, those opportunities have passed and the impact on investor stimulus, financial confidence and gold was modest. If it is just risk trends now, its ad-dollar.

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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

02:00

CNY

Real GDP YTD (YoY)

7.9%

8.1%

Slower growth will cause investor to reevaluate risk. May lead to investments being diverted to other countries and asserts.

02:00

CNY

Real GDP (QoQ)

1.6%

1.8%

02:00

CNY

Real GDP (YoY)

7.7%

8.1%

02:00

CNY

Retail Sales YTD (YoY)

14.4%

14.5%

Useful in measuring China’s progress toward transitioning to a consumer based economy.

02:00

CNY

Retail Sales (YoY)

13.5%

13.8%

02:00

CNY

Industrial Production YTD (YoY)

10.5%

10.7%

Continued growth is important for Australian and N.Z. exports.

02:00

CNY

Industrial Production (YoY)

9.8%

9.6%

02:00

CNY

Fixed Assets Inv Excl. Rural YTD (YoY)

20.0%

20.1%

Indicator of confidence in China’s growth prospects.

04:30

JPY

Capacity Utilization (MoM)

-0.6%

Monthly change had been less volatile.

04:30

JPY

Industrial Production (MoM)

-3.1%

Easing from the Q1 jump in production.

04:30

JPY

Industrial Production (YoY)

6.2%

07:15

CHF

Producer & Import Prices (MoM)

-0.4%

-0.2%

Predicts lower inflation, but also indicates less demand for international trade.

07:15

CHF

Producer & Import Prices (YoY)

-2.2%

-2.3%

12:30

USD

Producer Price Index (YoY)

-0.4%

0.7%

Inflation is at 1.7%, consumer prices are expect to have increased 0.3% month over month during June.

12:30

USD

Producer Price Index Ex Food & Energy (YoY)

2.6%

2.7%

12:30

USD

Producer Price Index Ex Food & Energy (MoM)

0.2%

0.2%

12:30

USD

Producer Price Index (MoM)

-0.6%

-1.%

13:55

USD

U. of Michigan Confidence (JUN P)

73.5

73.2

Unemployment remaining constant may help end the recent declines in confidence.

GMT

Currency

Upcoming Events & Speeches

11:00

USD

JPMorgan Reports 2Q Earnings

12:00

USD

Wells Fargo Reports 2Q Earnings

19:40

USD

USD Fed's Williams Speaks in Portland

17:20

USD

USD Fed's Lockhart Speaks on Economy in Mississippi

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 GMT 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

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

13.4525

1.8201

8.3183

7.7577

1.2694

Spot

7.0300

6.0969

6.1075

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

1.2339

1.5557

79.98

0.9959

1.0272

1.0251

0.7993

98.11

123.84

Resist. 2

1.2304

1.5523

79.81

0.9930

1.0252

1.0221

0.7969

97.77

123.45

Resist. 1

1.2269

1.5490

79.63

0.9901

1.0232

1.0192

0.7945

97.42

123.07

Spot

1.2199

1.5424

79.29

0.9844

1.0191

1.0133

0.7896

96.72

122.30

Support 1

1.2129

1.5358

78.95

0.9787

1.0150

1.0074

0.7847

96.02

121.52

Support 2

1.2094

1.5325

78.77

0.9758

1.0130

1.0045

0.7823

95.67

121.14

Support 3

1.2059

1.5291

78.60

0.9729

1.0110

1.0015

0.7799

95.33

120.75

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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