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Dollar Selloff Hits Day Three as Stocks Rebound, Volatility Low

Dollar Selloff Hits Day Three as Stocks Rebound, Volatility Low

2012-07-18 04:16:00
John Kicklighter, Chief Strategist
Share:
  • Dollar Selloff Hits Day Three as Stocks Rebound, Volatility Low
  • Euro Follow Risk Lines as Bond Auctions and Investor Confidence Pass
  • British Pound Traders Look for Volatility in BoE Minutes and Labor Data
  • Canadian Dollar Not Paid its Fundamental Dues after BoC Keeps Hawkish Lean
  • Australian Dollar Outperforms on Equities Swell, Shift in RBA Tone
  • New Zealand Dollar: Rate Forecast Surprisingly Stable Despite CPI
  • Gold Within a Closing $50 Range as Implied Volatility Hits a Two-Month Low

Dollar Selloff Hits Day Three as Stocks Rebound, Volatility Low

If we boiled the greenback down to its most basic fundamental elements, there would be little to no surprise in its ongoing retracement. Keeping score, the Dow Jones FXCM Dollar Index (ticker = USDollar) closed this past session in the red and notched its slide to three consecutive sessions. We haven’t seen a tumble this consistent since a similar string of losses through June 4. For the last four-day bear run, we need to look all the way back to April 27 – a move that notably preceded a particularly aggressive 5 percent rally in only a month’s time. It is important to put this unfavorable performance into context however. Though the currency is carving out a relatively consistent decline that is obvious with pairs like EURUSD and AUDUSD, the conviction of the drive is hardly convincing. Momentum has not yet taken and the greenback has so far only retraced ground on broader ranges. That isn’t to suggest that the bear phase can’t find follow through. Rather, to make a true run lower, we need a catalyst and more importantly a fundamental theme to keep the pressure consistent.

The dollar’s role in the global scheme is the liquidity provider – bid when there is an extreme level of risk aversion or when there is no competitive level of yield from major alternatives. Looking at our standard measures for speculative interests, we find that the S&P 500 and Dow Jones Industrial Average both closed higher on the day and are closing in on the multi-month, swing high set near the beginning of the month. Given the advance in the standard ‘risk’ benchmarks, measures of volatility were naturally lower as well. The VIX closed at its lowest level since the end of April (16.5 percent) while the FX equivalent tested similar lows (at 9.1 percent). Rather than assessing the capital markets to be in a true bull trend, it is more appropriate to label this a correction occurring within a lull. A selloff like EURUSD is naturally prone to slow retracements as are other markets that are seeing their risk premium drop (measured through derivatives).

A true bull leg would need to see more than just a drop in expected volatility (risk) however. The measures of fear are already exceptionally low. We would need a climb in expectations for returns. Since growth forecasts won’t be picking up anytime soon and yields are clearly on the same track, the responsibility falls to temporary drivers – in other words, stimulus. On that track, stimulus hopefuls held their breath at Fed Chairman Bernanke’s policy testimony to the Senate. He repeated the group’s readiness to act if needed, listed a few general areas of support they could pursue and voiced concern over the risks from the EU as well as the pace of labor recovery. Nothing here set a time frame or direct steps for new rounds of stimulus. Some were apparently hoping for more, as the dollar rallied; but the unchanged bearing pulled the dollar back.

Euro Follow Risk Lines as Bond Auctions and Investor Confidence Pass

The fundamental headlines for the euro were particularly heavy Tuesday, but the currency itself proved disinterested with a mixed performance against its largest counterparts. Notably, the shared currency slid against its unaffected, investment-favored counterparts and climbed against the safe haven alternatives. In other words, the euro followed the normal lines of risk trends. From the headlines, Greece and Spain both sold bonds (an opportunity to gauge the markets confidence). Greece saw little improvement in rates, but Spanish yields were over a percentage point lower, suggesting the recent austerity push is drawing confidence. In other news, Italy’s Economic Bulletin downgraded 2012 and 2013 growth while Euro-area consumer confidence (ZEW) dropped. Watch for Portugal’s bond sale and an EU report on EZ public finances today.

British Pound Traders Look for Volatility in BoE Minutes and Labor Data

Given the Bank of England’s recent increase to its stimulus program, there was limited interest paid to the June CPI figures from this past session. That said, the 2.4 percent year-over-year pace inflation represents the lowest reading since November 2009. The hawkish policy argument has evaporated quickly. Though this past session’s data was played down, perhaps the upcoming labour stats and minutes from the last policy decision can stir more volatility for the sterling. It wouldn’t take much. The currency looks primed for a breakout in narrow ranges.

Canadian Dollar Not Paid its Fundamental Dues after BoC Keeps Hawkish Lean

In a market where global rates are near a record low and financial risks linger in the background, the Canadian dollar stands well above its counterparts. After announcing that the benchmark rate would be kept at 1.00 percent, the Bank of Canada did something that stands in direct contrast to every one of its major counterparts: they maintained their hawkish (albeit restrained) bias. The loonie is at somewhat a disadvantage because its yield is lower than its Aussie and kiwi counterparts, but the safe haven appeal puts it in a very unique position. Just wait for ‘risk off’.

Australian Dollar Outperforms on Equities Swell, Shift in RBA Tone

Given the sharp swing in risk trends this past session, it should come as little surprise that the Aussie dollar was taking full advantage by advancing against every one of its liquid counterparts. The currency’s first drive higher happened around the same time as the RBA minutes. That said, the surge happened before the official release and was more likely the reaction to Asian equities strong advance on Tuesday’s open. Nevertheless, the shift back to neutral for monetary policy is a bullish contributor as well as it removes rate-cut potential positioning.

New Zealand Dollar: Rate Forecast Surprisingly Stable Despite CPI

With risk trends posting a deliberate trend, the kiwi dollar’s reaction to fundamental event risk was a little scheduled. The New Zealand currency’s position in the global FX market is secured by its place as an investment currency. That said, the risk posed by the weakest CPI reading since 1999 would normally be read as a selling point. That said, currency and rate forecast (12-month sees -17bps) were little affected.

Gold Within a Closing $50 Range as Implied Volatility Hits a Two-Month Low

Fed Chairman Bernanke’s refusal to feed speculators’ expectations for additional stimulus disarms a potentially potent fundamental catalyst for gold. That said, his reiteration of ‘readiness’ doesn’t write off the possibility. The metal showed some volatility on the day but didn’t make any serious progress. With a $50 range and implied (expected) volatility at a two-month low, the risk of a serious breakout is growing.

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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

00:30

AUD

Westpac Leading Index (MoM)

-

0.5%

Two consecutive months above zero.

01:30

CNY

China June Property Prices

-

-

Looming fears of a property bubble.

04:00

JPY

Tokyo Condominium Sales (YoY)

-

-14.9%

Easing off of the 82% spike seen in April.

06:00

JPY

Machine Tool Orders (YoY)

-

-15.5%

Indicator of lower confidence.

08:30

GBP

Claimant Count Rate

4.9%

4.9%

Unemployment figures at all time highs; the claimant count rate has plateaued in recent months. Important to see if stimulus programs will be effective in lowing unemployment.

08:30

GBP

Jobless Claims Change

5.K

8.1K

08:30

GBP

Average Weekly Earnings (3M/YoY)

1.4%

1.4%

08:30

GBP

Weekly Earnings ex Bonus (3M/YoY)

1.9%

1.8%

08:30

GBP

ILO Unemployment Rate (3M)

8.2%

8.2%

08:30

GBP

Employment Change (3M/3M)

120K

166K

09:00

EUR

Euro-Zone Construction Output s.a. (MoM)

-

-2.7%

Fell roughly 25% (yoy) during January and February.

09:00

EUR

Euro-Zone Construction Output w.d.a. (YoY)

-

-5.0%

09:00

CHF

ZEW Survey (Expectations)

-

-43.4

Second consecutive month below zero.

11:00

USD

MBA Mortgage Applications

-2.1%

Affected by changes in refinancing volume.

12:30

USD

Housing Starts (MoM)

5.2%

-4.8%

Indicator of economic growth and optimism. Building permit and housing start have been steadily climbing since 2012.

12:30

USD

Housing Starts

745K

708K

12:30

USD

Building Permits (MoM)

-2.4%

7.9%

12:30

USD

Building Permits

765K

784K

GMT

Currency

Upcoming Events & Speeches

23:50

JPY

BOJ to publish minutes of 14-15 June board meeting

08:30

GBP

Bank of England Minutes

10:00

EUR

EU Issues Report on Public Finances in Euro Zone

14:00

USD

Fed's Bernanke Gives Semiannual Report to U.S. House

14:30

CAD

Bank of Canada Monetary Policy Report

18:00

USD

Fed Releases Beige Book Economic Survey

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

13.1578

1.8040

8.1708

7.7562

1.2595

Spot

6.9518

6.0540

6.0770

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

1.2422

1.5786

79.76

0.9876

1.0202

1.0411

0.8057

98.54

125.29

Resist. 2

1.2389

1.5753

79.60

0.9850

1.0182

1.0383

0.8035

98.21

124.93

Resist. 1

1.2357

1.5720

79.44

0.9824

1.0163

1.0355

0.8012

97.89

124.58

Spot

1.2292

1.5655

79.12

0.9771

1.0125

1.0300

0.7967

97.25

123.86

Support 1

1.2227

1.5590

78.80

0.9718

1.0087

1.0245

0.7922

96.61

123.15

Support 2

1.2195

1.5557

78.64

0.9692

1.0068

1.0217

0.7899

96.29

122.79

Support 3

1.2162

1.5524

78.48

0.9666

1.0048

1.0189

0.7877

95.96

122.43

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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