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Dollar: Volume and Volatility Wither Just as Reversal Risk Mounts

Dollar: Volume and Volatility Wither Just as Reversal Risk Mounts

John Kicklighter, Chief Strategist
  • Dollar: Volume and Volatility Wither Just as Reversal Risk Mounts
  • Euro Traders Debate SMP, Greece and Spain
  • Australian Dollar: What to Expect from an RBA Hold
  • British Pound Finds Little Support from Euro Strength, Factory Data Look Ominous
  • Swiss Franc Sees Sharp, Temporary Drop Against Euro Ahead of Reserves Update
  • Japanese Yen Little Convinced by Azumi Dollar Facility Extension, JGBs Still Rising
  • Gold’s Lack of Direction Wears on Futures Traders, Open Interest at Three-Year Low

Dollar: Volume and Volatility Wither Just as Reversal Risk Mounts

The benchmarks for risk trends have edged ever higher and the Dow Jones FXCM Dollar Index (ticker = USDollar) has found itself struggling to keep its head above a trendline that has kept the greenback heading higher for over a year. A collapse and aggressive reversal no doubt looks seductive to those that have been holding out hope for some measure of consistency (regardless of direction) from markets that have deferred to congestion with a controlled drift for the past two months. Yet, just as the threat of a major bear trend in underlying risk trends failed to take root not long ago, so too will this tide change struggle to build a self-generating momentum . We are still missing a few critical ingredients for a new cycle: a steady increase in market participation and fundamentals to fortify conviction. From the speculative side of the equation, daily volume (on a rolling one-month average) for the benchmark risk measure S&P 500 has dropped to its lowest level since the beginning of 1999, while the ICI’s mutual fund flows report has shown capital bleed from US equities.

Without the proper level of market depth, it becomes extraordinarily difficult to carry markets (whether an individual asset or the speculative market as a whole) on a lasting trend. Yet, the proper mixture of fundamentals can entice sidelined money back into the market to feed a building drive. That said, the current risk-positive bearing for the capital and FX markets counters the outlook for growth, numerous sources of global financial troubles, historically low benchmark rates of return and already extreme lows in implied volatility measures. In other words, it will be exceptionally difficult to feed a climb in high-yield and high-risk assets until the proper backdrop forms – which could take months. On the other hand, a wholesale risk aversion move (which is the foundation for dollar strength until it revives a competitive yield) would naturally equate to deleveraging from risky exposure. Yet, participation levels are already reduced. What does this mean for the dollar? Short runs on fear or exuberance-based volatility but ongoing struggle for trend. In other words, a thin docket could make this week the epitome of summer doldrums.

Euro Traders Debate SMP, Greece and Spain

The euro was virtually unmoved Monday against its major counterparts. The biggest move the shared currency could muster to start the week was a 0.35 percent gain against the British pound. Its other liquid pairings were far more restrained. This restriction in activity is a dramatic about face in comparison to the high-level volatility from last week. We can see quantifiable evidence of this shift in the one-week implied (expected) volatility measure for the EURUSD. Heading into the ECB rate decision, the reading peaked at 13.4 percent. By Monday’s close, the reading plunged by 4.59 ‘vols’. It may seem remarkable that the euro could shift to neutral given the level of volatility related to its financial troubles this year, but we have interest in the well-known fundamental issues for the Eurozone ebb and flow numerous times in the recent past.

This week, euro traders seem less determined to drive the market on the assumptions that the ECB will either follow through or fail in their efforts to pull Spanish and Italian government bonds down via the reactivation of the SMP program (or mere threat of it). In the meantime, officials have managed to buy time for both Spain and Greece through various means. In the upcoming session, we will see markets judge their confidence in Greece and the EFSF with bond auctions for each. There is better impact potential, though, in the first reading of Italian 2Q GDP.

Australian Dollar: What to Expect from an RBA Hold

The RBA’s rate decision doesn’t look to carry much weight this week as Governor Glenn Stevens has made it clear in the past weeks and months that there is better balance in the Australia’s fundamentals – diminishing the need for more immediate accommodation. The economist consensus reflects a virtual certainty that there will be no change this go around. The markets agree with a 9 percent probability of a 25bp cut. An expected curb in the RBA’s dovish approach has further eased the 12-month rate forecast to its most neutral level since March 22 (53 bps of cumulative cuts). Just as the specter of aggressive rate cuts leveraged the previous risk aversion drive, a rebalancing can feed a rebound.

British Pound Finds Little Support from Euro Strength, Factory Data Look Ominous

If the greatest threat to the United Kingdom’s economy and financial markets is the Eurozone’s troubles (as policy officials like to say), then the settling of key European assets (Spanish yields, IBEX, Euro) should help out the sterling. That wasn’t the cast Monday however. The sterling dropped against all its most liquid counterparts. In the upcoming session, we should watch the fundamental docket for potential volatility-stoking event risk. The June industrial production reading is expected to report the biggest drop since June 2002, and the NIESR July GDP figure is due.

Swiss Franc Sees Sharp, Temporary Drop Against Euro Ahead of Reserves Update

The average daily range for the EURCHF over the past week was a mere 10 pips through the end of last week. The pair has come to a virtual standstill as the SNB continues to offset franc bids around the 1.2000 level and Europeans continue to seek shelter for their capital in the country. That said, Monday’s range ballooned to more than 5-times the norm in mere minutes. It is difficult to pinpoint the cause, but it is likely a covering of a speculative bet that the floor falters. In the upcoming session, we’ll measure the SNB’s efforts with July reserve levels.

Japanese Yen Little Convinced by Azumi Dollar Facility Extension, JGBs Still Rising

Japanese Finance Minister Azumi was on the wires early Tuesday morning announcing that the government’s emergency lending facility would be extended through March of 2012. This is another program that has had dubious influence on correcting the yen’s ascent. In the meantime, JGBs are showing little relief from the buildup in interest through recent months. The BoJ Is later this week, but expectations are low.

Gold’s Lack of Direction Wears on Futures Traders, Open Interest at Three-Year Low

Gold has carved out a range (though a volatile one) for the better part of a year. Recently, however, market conditions have grown to extremely anemic proportions (the average daily range over the previous month has been little more than 20 points). The market’s want direction and momentum. This lack of progress is almost certainly the reason open interest in COMEX gold futures is at its lowest level in three years.

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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

22:45

NZD

Average Hourly Earnings (QoQ)

0.5%

1.3%

Awaiting 2012 1Q data, 1Q jobs data saw unemployment rise 2.7% year over year.

22:45

NZD

Private Wages ex Overtime (QoQ)

0.6%

0.5%

22:45

NZD

Labor Cost Private Sector (QoQ)

0.6%

0.5%

23:01

GBP

BRC Sales Like-For-Like (YoY)

-0.2%

1.4%

May report noted higher sales on warm weather.

JPY

Official Reserve Assets

$1270.6B

Wealth held by the BoJ.

GBP

New Car Registrations (YoY)

3.5%

Funding for Lending is designed to make credit more available.

04:30

AUD

Reserve Bank of Australia Rate Decision

3.50%

3.50%

16% chance of 25 bp rate cut.

05:45

CHF

Unemployment Rate

2.7%

2.7%

Seasonally adjusted has risen in the past 6mth well non adjusted fell.

05:45

CHF

Unemployment Rate s.a.

2.9%

2.9%

07:00

CHF

Foreign Currency Reserves

364.9B

Sharp increase in May.

07:15

CHF

Consumer Price Index (MoM)

-0.6%

-0.3%

Switzerland is currently experiencing deflation, which may adversely effects borrowing and business activities.

07:15

CHF

Consumer Price Index (YoY)

0.8%

-1.1%

07:15

CHF

CPI - EU Harmonised (MoM)

-0.2%

07:15

CHF

CPI - EU Harmonised (YoY)

-1.2%

08:30

GBP

Industrial Production (MoM)

-3.5%

1.0%

Largest component of the declines in the manufacturing sector was from Food and Drink businesses.

08:30

GBP

Industrial Production (YoY)

-5.3%

-1.6%

08:30

GBP

Manufacturing Production (MoM)

-4.3%

1.2%

08:30

GBP

Manufacturing Production (YoY)

-5.7%

-1.7%

09:00

EUR

Italian Gross Domestic Product s.a. and w.d.a. (QoQ)

-0.8%

-0.8%

Last three quarters have seen declined in the Italian economy.

09:00

EUR

Italian Gross Domestic Product s.a. and w.d.a. (YoY)

-2.5%

-1.4%

10:00

EUR

German Factory Orders s.a. (MoM)

-0.8%

0.6%

June exports are expected to decline 1.3%.

10:00

EUR

German Factory Orders n.s.a. (YoY)

-7.0%

-5.4%

12:30

CAD

Building Permits (MoM)

-3.9%

7.4%

May had the highest increase in building permits since May 2007.

14:00

CAD

Ivey Purchasing Managers Index s.a.

52

49

Survey is designed to reflect the activity of the whole economy.

14:00

USD

JOLTs Job Openings

3642

The hire rate advanced 3.3% in May.

14:00

GBP

NIESR Gross Domestic Product Estimate

-0.2%

6 of the 7 months have forecasted contraction.

19:00

USD

Consumer Credit

$10.5B

$17.117B

Retail sales declined 0.2% in June.

GMT

Currency

Upcoming Events & Speeches

18:30

USD

Fed Chairman Ben Bernanke Speaks on U.S. Economy

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

13.1982

1.7755

8.1695

7.7552

1.2406

Spot

6.7086

6.0037

5.9597

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

1.2524

1.5708

78.85

0.9792

1.0078

1.0681

0.8300

98.22

123.25

Resist. 2

1.2493

1.5677

78.70

0.9766

1.0059

1.0654

0.8277

97.91

122.91

Resist. 1

1.2461

1.5646

78.55

0.9741

1.0040

1.0626

0.8255

97.60

122.58

Spot

1.2397

1.5584

78.24

0.9690

1.0003

1.0570

0.8209

96.99

121.92

Support 1

1.2333

1.5522

77.93

0.9639

0.9966

1.0514

0.8163

96.38

121.25

Support 2

1.2301

1.5491

77.78

0.9614

0.9947

1.0486

0.8141

96.07

120.92

Support 3

1.2270

1.5460

77.63

0.9588

0.9928

1.0459

0.8118

95.76

120.58

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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