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Dollar Loses Ground Monday but No Pressure Behind the Selling

Dollar Loses Ground Monday but No Pressure Behind the Selling

2012-08-21 03:59:00
John Kicklighter, Chief Strategist
Share:
  • Dollar Loses Ground Monday but No Pressure Behind the Selling
  • Euro Crisis-Rescue Rumors Hit Heavy Rotation, Fail to Force Breakout
  • British Pound Looks for Further Risk, Euro Separation with Upcoming Data
  • Australian Dollar Advances in Quiet Session on Predictable RBA Minutes
  • New Zealand Dollar Taps Spending, Inflation Outlook Data for its Bearings
  • Japanese Yen: Finance Minister Azumi Has Yet to Decide on More Intervention
  • Gold and Silver Show Building Physical Demand Despite Staid Prices

Dollar Loses Ground Monday but No Pressure Behind the Selling

In direct contrast to Friday’s performance, the Dow Jones FXCM Dollar Index (ticker = USDollar) reported its biggest daily drop Monday in two weeks. Yet, just like Friday’s performance, this move is impressive only because the price action surrounding it is so exceptionally low. The average daily range of the Dollar Index is still a sparse 41.2 points – just off of multi-year lows. Meanwhile, it is fundamentally significant that the dollar is holding above the 10,000 level at the same time as US equities are moving on four-year highs – low volume and liquidity or not. In fact, the multi-year low readings from volatility measures only further increase the remarkable status of the greenback, which is by nature a liquidity haven. The question on most FX traders’ minds is: when will volatility return (we have arguable moved beyond concern of direction as long as there is some pace). There is a growing belief amongst analysts that the Jackson Hole Economic Symposium will present a source of turmoil as that is where QE2 was announced. The belief is that no hint of QE3 (which is unlikely) will lead to a disappointment for risk trends. Yet, that isn’t necessarily priced into markets. We can see that implied volatility on EURUSD two weeks out is significantly lower than one month (when the Fed decision, ECB decision, EU Summit and G20 meeting are due). We have to avoid falling victim to an anchoring and confirmation bias.

Euro Crisis-Rescue Rumors Hit Heavy Rotation, Fail to Force Breakout

The euro didn’t wasn’t able to gain any significant traction in the FX market over the opening 24 hours of trading this week, but volatilitywas picking up. Like a car trying to turn over, headlines and rumors were being used to in an attempt to push the shared currency into a definable trend. The bullish effort started early over the weekend after Spain’s Economic Minister called on the ECB to purchase unlimited amounts of government debt (or simply not state a limit) in order to curb the painful rise in lending rates. To that point, German news magazine Der Spiegel ran a story (unsourced) that suggested the ECB was working out a plan for a program that targeted yields on bonds – in other words, buying unlimited amounts of a country’s debt to ensure a certain rate. If left unchecked, that could have been enough to push EURUSD above 1.2400. Alas, the ECB made sure to squash such expectations. Perhaps the upcoming Greek and EFSF auctions will be a little more influential.

British Pound Looks for Further Risk, Euro Separation with Upcoming Data

Though the general markets seem anchored in place, the sterling is proving particularly dormant. Through the opening session of the trading week, the biggest move the currency could post was a 0.1 percent drop against the otherwise strong Australian dollar. The sterling is slowly trying to release the mooring line to the Euro’s future as the imminent threat of a spreading Euro Zone crisis has eased. Yet, this is yet another example of positive sentiment that is founded on an uneasy quiet. Nevertheless, FX traders can look to take advantage of the lull and react to volatility that may be roused by straight-forward economic event risk. On the UK docket for this upcoming session, we have inflation and manufacturing data from the CBI. Far more influential though are the July public debt figures. How is the austerity-growth balance working?

Australian Dollar Advances in Quiet Session on Predictable RBA Minutes

The Aussie dollar gained against all its major counterparts Monday, and that push is continuing into today’s Asian trading session. The net move for the currency is still modest as there is little push from underlying risk trends, but the broad-based speaks to an inherent strength. Part of this buoyancy no doubt traces back to the rebound in interest rate expectations. While we aren’t looking at a hike in the foreseeable future, expectations of 150 bps of cumulative cuts just two-and-a-half months ago is now 50 bps. The RBA helped the already bullish/hawkish justify their positioning this morning with meeting minutes that suggested domestic growth was offsetting global headwinds and that there was a notable global interest in Australian government debt. Reflecting traders’ interests, the COT’s net speculative readings on the Australian dollar futures have shown an improvement in the balance of long interest in 9 of the past 10 weeks.

New Zealand Dollar Weathers Spending, Inflation Outlook Data

What matters more to the kiwi dollar: where the Australian dollar is heading or the direction and timing of its own rate outlook? Apparently, the latter is the more persuasive as we find the New Zealand currency following its Aussie counterpart and holding steady despite disappointing showings from the economic docket. The most notable release on the newswires was the RBNZ’s 2 year inflation forecast for the 3Q. The 2.3 percent reading was the fifth consecutive quarter that the price pressure expectations have eased and brings the reading to its lowest level since 2Q 2009. That said, this read will likely do little to alter the RBNZ’s plans to hold rates – a forecast that is priced into overnight swaps.

Japanese Yen: Finance Minister Azumi Has Yet to Decide on More Intervention

Before Japan released the advanced read on 2Q GDP for the country, Finance Minister Azumi remarked that his next move for unorthodox policy (FX intervention or asset purchases) would depend on how the growth readings printed. It has now been over a week since annualized growth figures for the past quarter printed a slower-than-expected 1.4 percent pace and the policymaker has yet to update the market on his intentions. To be fair, even if Azumi were to take action, his efforts would be heavily fought by the global investors that have shown an insatiable appetite for the Japanese yen. The only sign of temporary relief is a near-20 percent rebound from the 10-year JGB yield’s July lows. Though there is the long-term concern that Japanese pension funds will eventual amplify liquidation of its government bond holdings to cover payments.

Gold and Silver Show Building Physical Demand Despite Staid Prices

Silver made a notable but unaccompanied thrust higher (gold was little changed on the day) this past session. The 2.5 percent jump was the biggest daily advance for the metal since July 3 and tentatively provides a bullish resolution to a two-month congestion pattern. As with nearly anything else in these market conditions, an independent drive from one asset will be hard to sustain without confirmation in either risk appetite or tangible gold demand (two of the strongest drivers for silver). Further disconcerting to follow through potential, volume on silver futures was an anemic 36,800 – still well below the one-month average. Yet, even if the market’s two most renowned precious metals are not generating heavy volume or strong follow through, we should keep a close eye on demand for the physical itself. Total ETF holdings of gold are just off a record 78.2 million ounces (up 3.7 percent in 2012) while ETF exposure to silver rose 5.2 percent on the year at 582 million ounces. Is this a sign?

**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

22:45

NZD

Net Migration s.a.

-

490.0

Highest print in 15 months.

03:00

NZD

Credit Card Spending s.a. (MoM)

-

0.8%

Retail sales (Ex inflation) rose 1.3% during 2Q.

03:00

NZD

Credit Card Spending (YoY)

-

4.6%

03:00

NZD

Reserve Bank of New Zealand 2-Year Inflation Expectation

-

2.4%

2Q CPI: 1.0% (YoY).

04:30

JPY

All Industry Activity Index (MoM)

0.2%

-0.3%

Industrial output and government services led the decline in May.

05:30

JPY

Nationwide Department Store Sales (YoY)

-

-1.2%

Moved from a 10 year low to a 10 year high between March 2011 to March 2012.

05:30

JPY

Tokyo Department Store Sales (YoY)

-

-0.1%

07:00

CHF

Money Supply M3 (YoY)

-

7.4%

June saw the sharpest increase in the money supply in 9 months.

07:00

CHF

Real Estate Index Family Homes

-

410.4

On a four year continuous climb.

08:30

GBP

Public Finances (PSNCR) (Pounds)

-

3.0B

The UK is attempting an economic recovery well implementing austerity.

08:30

GBP

Public Sector Net Borrowing (Pounds)

-3.2B

12.1B

08:30

GBP

PSNB ex Interventions

-2.2B

14.4B

8:30

EUR

Spain to Sell 12-Mth and 18-Mth Bills

-

-

-

10:00

EUR

EFSF to Sell 6-Mth Bills

-

-

-

10:00

GBP

CBI Trends Total Orders

-10

-6

July report notes that demand and production have grown steadily in the past 3 month.

10:00

GBP

CBI Trends Selling Prices

-2

-3

12:30

CAD

Wholesale Sales (MoM)

0.3%

0.9%

Retail sales less auto rose 0.5% in May.

GMT

Currency

Upcoming Events & Speeches

01:30

AUD

AUD Reserve Bank Board - August Minutes

12:45

USD

USD Fed's Lockhart Speaks in Atlanta

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

13.1144

1.8025

8.3333

7.7573

1.2528

Spot

6.6796

6.0306

5.9240

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

1.2473

1.5832

80.13

0.9830

0.9958

1.0558

0.8182

99.36

126.22

Resist. 2

1.2442

1.5801

79.97

0.9805

0.9941

1.0529

0.8159

99.05

125.88

Resist. 1

1.2410

1.5771

79.81

0.9779

0.9923

1.0500

0.8136

98.74

125.54

Spot

1.2347

1.5709

79.48

0.9728

0.9888

1.0443

0.8089

98.13

124.86

Support 1

1.2284

1.5647

79.15

0.9677

0.9853

1.0386

0.8042

97.52

124.18

Support 2

1.2252

1.5617

78.99

0.9651

0.9835

1.0357

0.8019

97.21

123.84

Support 3

1.2221

1.5586

78.83

0.9626

0.9818

1.0328

0.7996

96.90

123.50

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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