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Dollar Carving out its Smallest Range in 15 Months Before Fed

Dollar Carving out its Smallest Range in 15 Months Before Fed

2012-08-01 04:10:00
John Kicklighter, Chief Strategist
Share:
  • Dollar Carving out its Smallest Range in 15 Months Before Fed
  • Euro: The Stakes for ECB Support Growing While Probabilities Fade
  • British Pound Slips Across the Board, 10 Year Gilt Yield Drops
  • Swiss Franc Advances Thanks to Euro Help, EURCHF Fight Weighing
  • Canadian Dollar Struggles as May GDP Reading Falls Short
  • Australian Dollar Eases Back Before Risk-Influential Fundamentals
  • Gold: What Happens if the Fed Doesn’t Offer Stimulus?

Dollar Carving out its Smallest Range in 15 Months Before Fed

The markets are showing an affinity towards either risk appetite or risk aversion. Instead, investor sentiment seems anchored; and sidelined speculative interest is showing through in the dollar’s performance. The Dow Jones FXCM Dollar Index (ticker = USDollar) has carved out its smallest five-day average true range (ATR) in two-and-a-half months. Perhaps better exemplifying the tension and hesitation in this market, Monday’s range for the Index was the smallest in 15 months (since April 11, 2011). If the speculative and fundamental backdrop were quiet / stable, we could attribute restrained activity levels to a general level of calm. However, we know that is the case. Economic and financial conditions have steadily deteriorated, while risk positioning has surprisingly grown. Anticipation of external support for the markets from prolific central banks has offered a tenuous balance to tangible decay. Now it is time to put this balance of hope to the test.

Since late 2008, in the wake of the Lehman Brothers collapse, the Federal Reserve has injected an incredible amount of support into the capital markets to promote growth and ensure financial stability. In fact, from September 2008 to its peak earlier this year, the central bank increased the size of its balance sheet by 225 percent (over $2 trillion) in its effort. This extraordinary effort with chaste intent, however, has created its own risk: moral hazard. Having grown acclimated to steadily rising capital markets and abnormally-low implied volatility (fear) levels, expectations for stimulus swell whenever turbulence and uncertainty rise. The deepening debt crisis for the Euro Zone and the slowing US growth engine seems to be enough of a signal for most to expect another round of support from the Fed.

There are a number of avenues that the world’s largest central bank can pursue, but the foundation of their decision is whether they will change any aspect of their program or not. We have to remember that they extended their Operation Twist program by $276 billion at the last meeting even though capital markets were buoyant and volatility levels were exceptionally low. In fact, their efforts have grown more and more reserved over time (from outright QE to extension of ‘duration extension’). Furthermore, there seems a growing concern within the Fed that newer programs have offered diminishing payoff. From a fundamental perspective, the economy is not threatening an immediate slip back into recession having printed 2Q annualized growth of 1.5 percent this past Friday. An outright asset purchasing program (Treasuries, mortgage-backed securities, or both) therefore is a low probability. There isn’t an immediate liquidity problem to justify a lending program through the discount window and lowering interest rates on excess reserves was questioned by Chairman Bernanke himself. What may be offered is an extension of the language for rates to remain low until ‘late 2014’ out to ‘mid-2015’, but that wouldn’t satiate high risk. If the Fed fails to deliver, the ECB’s position will be even more difficult come Thursday.

Euro: The Stakes for ECB Support Growing While Probabilities Fade

The euro rose across the board Tuesday despite a fading fundamental backdrop and growing skepticism surrounding the ECB’s intentions come Thursday. From the docket, the Italian unemployment rate jumped its highest level since 1999 and the Euro Zone’s jobless level hit a record (going back 22 years) high. As we recall the proposals that ECB President Draghi seemingly floated last week (possible rate cut, reactivate the SMP program, a new LTRO, supporting an ESM bank license) that market participants rallied around, reality that these agenda points are uncertain and that they ultimately won’t fix the underlying problem loom. Spain could use help of ECB bond purchases as the Bank of Spain announced it would delay its bank stress test until late September (hard to see this as a good sign). Meanwhile, Germany reminded the market that they wouldn’t support an ESM banking license even if Draghi did. In other news, the EFSF sold three-year notes at a highish 0.54 percent.

British Pound Slips Across the Board, 10 Year Gilt Yield Drops

Despite a strong performance by the Euro and the sterling’s connection its larger trade partner, the latter currency fell against all of its major counterparts. The official calendar offered only the BRC shop inflation report. More remarkable though was Moody’s lowered GDP forecasts for the UK (0.4 percent in 2012 and 1.8 percent in 2013) as well as the Stats office’s report that household income per capital hit a 2Q 2005 low.

Swiss Franc Advances Thanks to Euro Help, EURCHF Fight Weighing

The Swiss National Bank (SNB) released its mid-year report about its FX Reserve holdings composition. According to the central bank’s figures, their holdings of reserve assets have growth from 44 percent of GDP in December to 62 percent. Furthermore, the share of these holdings in euros accounts for 60 percent of the total. This suggests that not only is the EURCHF fight proving costly, they are struggling to diversify.

Canadian Dollar Struggles as May GDP Reading Falls Short

The Canadian Dollar struggled Tuesday, but the economic docket wasn’t likely the source of this malaise. The May GDP figuresreported a 0.1 percent pick up for the month and 2.4 percent pace of growth from the same period a year ago. This was modestly weaker than expected, but it doesn’t change the country’s relative investment appeal. So where was the weakness coming from: fear that the US may not find stimulus.

Australian Dollar Eases Back Before Risk-Influential Fundamentals

The Australian dollar was a mixed bag this past session, but the threat of heavy waves for risk trends through Wednesday’s Fed rate decision would work well to keep the currency anchored. On the docket this morning, the modest slide in the Chinese manufacturing PMI reading encouraged a slow pullback (still above 50). The Australian PMI reading was far worse with a 40.3 reading – the biggest slump since June 2009.

Gold: What Happens if the Fed Doesn’t Offer Stimulus?

Expectations for immediate relief in the form of additional stimulus at the upcoming Fed meeting are fading quickly. In turn, gold (currency and fiat-hedge) has retreated from its premature congestion breakout. If the central bank doesn’t offer stimulus this go around, they can still leave the door open to September (which carries forecast updates) and the ECB could offer its own stimulus. But will gold bugs hold out?

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ECONOMIC DATA

Next 24 Hours

GMT

Currency

Release

Survey

Previous

Comments

23:30

AUD

AiG Performance of Manufacturing Index

-

47.2

Business leaders noted softer demand in June.

01:00

CNY

Manufacturing PMI

50.4

50.2

Index has been indicating expansion in the Chinese economy since Nov 2011.

01:30

AUD

House Price Index (YoY)

-4.2%

-4.5%

July RBA Minutes reported a subdued housing market.

01:30

AUD

House Price Index (QoQ)

-0.5%

-1.1%

02:30

CNY

HSBC Manufacturing PMI

-

48.2

July 24th report cited contraction in New Export Orders.

06:00

GBP

Nationwide House Prices n.s.a. (YoY)

-2.0%

-1.5%

Declining since the beginning of the UK recession.

06:00

GBP

Nationwide House Prices s.a. (MoM)

-0.2%

-0.6%

07:45

EUR

Italian Purchasing Manager Index Manufacturing (JUL)

44.1

44.6

EU PMI continues to decline off the of the February 2011 peak. Preliminary figures pointed to a decline during the month of July.

07:50

EUR

French Purchasing Manager Index Manufacturing (JUL F)

43.6

43.6

07:55

EUR

German Purchasing Manager Index Manufacturing (JUL F)

43.3

43.3

08:00

EUR

Euro-Zone Purchasing Manager Index Manufacturing (JUL F)

44.1

44.1

08:30

GBP

Purchasing Manager Index Manufacturing (JUL)

48.4

48.6

Incoming new business and export demand fell for the 3rd month in June.

11:00

USD

MBA Mortgage Applications

-

0.9%

Refinancing activity accounted for 80.1 % of applications on July 13.

12:15

USD

ADP Employment Change

120K

176K

In June the Goods-Producing sector added jobs for the first time in two months.

12:58

USD

Markit US PMI Final

51.8

-

Markit reported July as the weakest improvement in manf in 19 months.

14:00

USD

Construction Spending (MoM)

0.4%

0.9%

FOMC notes that the housing market remained subdued.

14:00

USD

ISM Manufacturing

50.2

49.7

June release reported first contraction in the manf. sector since July 2009.

14:00

USD

ISM Prices Paid

41

37

18:15

USD

Federal Open Market Committee Rate Decision

0.25%

0.25%

Traders may be anticipating stimulus to support the ECB statements.

GMT

Currency

Upcoming Events & Speeches

12:30

EUR

Italy’s Monti Visits Finland

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

13.3555

1.7956

8.2853

7.7539

1.2458

Spot

6.8109

6.0580

6.0382

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

1.5795

78.60

0.9890

1.0116

1.0591

0.8191

97.05

123.52

Resist. 2

1.2388

1.5762

78.44

0.9862

1.0096

1.0562

0.8167

96.73

123.16

Resist. 1

1.2353

1.5728

78.28

0.9834

1.0076

1.0532

0.8142

96.40

122.80

Spot

1.2284

1.5660

77.95

0.9778

1.0037

1.0473

0.8094

95.75

122.07

Support 1

1.2215

1.5592

77.62

0.9722

0.9998

1.0414

0.8046

95.10

121.34

Support 2

1.2180

1.5558

77.46

0.9694

0.9978

1.0384

0.8021

94.77

120.98

Support 3

1.2155

1.5544

77.57

0.9662

1.0008

1.0301

0.7924

94.83

121.18

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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