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Dollar Retreats against Euro but Risk Trends Notably Absent

Dollar Retreats against Euro but Risk Trends Notably Absent

2012-08-22 04:17:00
John Kicklighter, Chief Strategist
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  • Dollar Retreats against Euro but Risk Trends Notably Absent
  • Euro Posts Biggest Market-Wide Rally in Weeks on Bailout Efficacy Hopes
  • British Pound Rides Out Poor Budget Showing on Euro’s Coattails
  • Australian Dollar Finds Limited Follow Through on Euro Run, RBA Minutes Glow
  • Japanese Yen: Economy Reports 17th Monthly Trade Deficit
  • Canadian Dollar Suffers on an Unproductive Risk Day, Carney and Data Ahead
  • Gold Finally Posts a Break from Three Months of Congestion, Does it Have Follow Through?

Dollar Retreats against Euro but Risk Trends Notably Absent

The dollar was under considerable pressure Tuesday, but the currency regained its footing before the session was done. The most remarkable performance for the greenback was against the considerable strength of the euro. EURUSD managed a 1 percent rally that defied the low liquidity and volume levels that have constantly burdened traders that have awaited more from these markets. Yet, as this benchmark pair hovers at six-week highs, we have to note that the dollar managed to fought its way back from early session losses against its more risk-laden counterparts (AUDUSD leading them). In fact, looking at the Dow Jones FXCM Dollar Index (ticker = USDollar), we witnessed a hold at the now infamous, 12-month rising trendline that happens to coincide with the even 10,000 mark. Tuesday’s tumult was stirred by shifting expectations of more stimulus support from global policy authorities; but there was limited, tangible evidence to support a serious shift. Speculation on QE3 and ECB bond purchases will only intensify, but it is important to put these expectations into context of backdrop market conditions. Participation is extremely thin and there are big events that will confirm or refute stimulus hopes in the first half of September. A move now would be hampered.

Euro Posts Biggest Market-Wide Rally in Weeks on Bailout Efficacy Hopes

The euro is not a stranger to moving on the whims of rumor and speculative consensus, so Tuesday’s rally shouldn’t surprise us too much. That said, the single currency managed an impressive performance across the board (with the exception of the virtually fixed EURCHF) Tuesday. In fact, the market’s benchmark pair – EURUSD – posted its biggest rally since August 3. Perhaps more impressive than the initial drive itself is the realization that the pair held its gains as broader sentiment trends faded through the US session. If the euro’s performance contradicts the gravity of ‘risk’, where was this inherent strength coming from? From the newswires, we learned that CDU Spokesman Barthle that there may be room for small concessions for Greece such as more time to repay loans and lower rates so long as the country met the fiscal targets outlined. In a true Germany-versus-Greece assessment, this may seem like progress; but in reality, there is little substance to this update. Offering small adjustments falls short of the open-ended rescue traders and periphery leaders want, and even these terms may first require evidence that targets are met. If the market is willing to bite, however, we should watch the Juncker-Samaras meeting a little more closely.

British Pound Rides Out Poor Budget Showing on Euro’s Coattails

The sterling was particularly strong this past session, advancing against all its counterparts with the exception of fellow Euro-area currencies (the Euro and Swiss franc). This performance is particularly interesting considering there was a turn in risk trends through the trading session (that should have generated mix results between higher yielding and safe havens) along with disappointing updates for the event risk. Top news was the hefty deficit the UK government ran in July. Corporate tax revenues were reportedly down 19.3 percent (total revenues dropped only 0.8 percent) while spending rose 5.1 percent. The ComRes and ITV News poll that showed confidence in Chancellor Osborne at record lows was therefore well timed. The sterling was able to offset this disappointing update through the break in the constant Euro-area fears.

Australian Dollar Finds Limited Follow Through on Euro Run, RBA Minutes Glow

If the Euro-area financial crisis looks less menacing, we would normally interpret that as a clear enough reason to build on carry exposure. Yet, risk trends weren’t operating under those assumptions this past session and therefore the Aussie dollar was also struggling. The market’s effort to ignore the positive tone in the RBA minutes Tuesday morning is further disconcerting to the fundamental assessment for the currency. The 12-month rate forecast is the most hawkish (closest to neutral) it has been in five months. Ignoring bullish developments is a concerning sign.

Japanese Yen: Economy Reports 17th Monthly Trade Deficit

Despite the aggressive shift in risk trends through the past trading session, the Japanese funding currency was showing an uneven performance. The highest yielding yen crosses amongst the majors (AUDJPY and NZDJPY) traded back from early advances, while the European counterparts (EURJPY, GBPJPY and CHFJPY) held gains. Following risk lines, the transition in sentiment measured in equities from the European to US trading sessions Tuesday supports the yen’s rebound; but there is no clear risk and therefore carry trend. Meanwhile, the Ministry of Finance reported a larger than expected 517 billion yen trade deficit on a 8.1 percent drop in exports – further pain from a high yen.

Canadian Dollar Suffers on an Unproductive Risk Day, Carney and Data Ahead

Though we would expect the euro and pound to win ground against the Canadian dollar given the improved sentiment surrounding the Euro crisis outlook, the currency actually dropped against all of its major counterparts this past session. The shift in risk trends added to the loonie’s problems Tuesday, but the performance relative to the Aussie and Kiwi doesn’t borrow from larger themes and suggests there the Canadian currency itself is showing weakness. From the docket, only the modest 0.1 percent slip in wholesale sales (a volatile reading) and comments from the BoC Deputy Governor Cote that the bank does stress tests on households and lenders were noteworthy. Coming up, we have far more direct fundamental developments: June retail sales and BoC Governor Carney speaking on the state of the Canadian economy.

Gold Finally Posts a Break from Three Months of Congestion, Does it Have Follow Through?

The rally by silver Monday – that so effectively forced a long-overdue, bullish breakout – proved a precursor to a similar move for gold. The pricier metal put in for its biggest rally since July 25 this past session, but traders were looking at the progress the move made rather that the momentum it was based upon. With this particular drive, we have finally seen the equilibrium between bulls and bears tip after three months of congestion above the 1535 floor. Now trading at highs last seen in early May on a pickup in volume, we have to assess the fundamental drive to keep this push moving. There are a few particular catalysts that can drive the commodity forward, but their occurrence is suspect. Perhaps one of the best means to generate a short-to-medium advance is a persistent dollar selloff. The greenback’s drop this past session is likely the primary foundation for this particular move; but without risk aversion, the currency may hold its own. The other consideration is that stimulus expectations can gain serious traction. Yet, with real decision-making opportunities (ECB, Fed, EU Summit) in September, that may be deferred.

**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

23:50

JPY

Adjusted Merchandise Trade Balance (Yen) (JUL)

-460.0B

-300.8B

Exports declined during June, year over year growth remains Above January levels.

23:50

JPY

Merchandise Trade Balance Total (Yen) (JUL)

-270.0B

61.7B

23:50

JPY

Merchandise Trade Exports (YoY) (JUL)

-2.7

-2.3

23:50

JPY

Merchandise Trade Imports (YoY) (JUL)

3

-2.2

0:30

AUD

Westpac Leading Index (MoM) (JUN)

-

0.8%

Growth in print lead by dwelling approvals.

1:00

AUD

DEWR Internet Skilled Vacancies (MoM) (JUL)

-

-1.8%

WESPAC notes a trend in job growth being driven by part-time employment.

5:00

JPY

Supermarket Sales (YoY) (JUL)

-

-3.9%

Nationwide Dept. Sales to be released 24 hours prior.

11:00

USD

MBA Mortgage Applications (AUG 17)

-

-4.5%

The Aug 15 report notes that 81% of applications were for refinancing.

12:30

CAD

Retail Sales (MoM) (JUN)

0.1%

0.3%

Largest component of retail sales is food and beverages at 22%.

12:30

CAD

Retail Sales Less Autos (MoM) (JUN)

0.3%

0.5%

14:00

USD

Existing Home Sales (JUL)

4.52M

4.37M

National Association of Realtors reported a tight supply of affordable housed.

14:00

USD

Existing Home Sales (MoM) (JUL)

3.3%

-5.4%

GMT

Currency

Upcoming Events & Speeches

15:00

CAD

BoC Governor Mark Carney Speaks on Canadian Economy

18:00

USD

Federal Open Market Committee Meeting Minutes

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

13.1621

1.7934

8.2600

7.7567

1.2519

Spot

6.6809

5.9772

5.8940

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

1.2586

1.5900

79.90

0.9739

0.9975

1.0561

0.8173

100.02

126.45

Resist. 2

1.2555

1.5869

79.75

0.9714

0.9957

1.0533

0.8150

99.71

126.11

Resist. 1

1.2523

1.5839

79.59

0.9689

0.9940

1.0506

0.8128

99.41

125.77

Spot

1.2460

1.5778

79.28

0.9639

0.9905

1.0451

0.8083

98.79

125.10

Support 1

1.2397

1.5717

78.97

0.9589

0.9870

1.0396

0.8038

98.17

124.42

Support 2

1.2365

1.5687

78.81

0.9564

0.9853

1.0369

0.8016

97.87

124.08

Support 3

1.2334

1.5656

78.66

0.9539

0.9835

1.0341

0.7993

97.56

123.75

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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