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Dollar Suffers First Drop this Week as S&P 500 Hits New Highs

Dollar Suffers First Drop this Week as S&P 500 Hits New Highs

2012-08-24 04:24:00
John Kicklighter, Chief Strategist
Share:
  • Dollar Stalls After Most Critical Stumble in Year-Long Advance
  • Euro Firm in its Recessionary Path, Traders Tuning out Official Talk
  • British Pound will be as Unmoved by GDP Update as Retail Sales Data
  • Australian Dollar Tumbles as Chinese Growth Overwhelms RBA’s Repetition
  • New Zealand Dollar: Finance Minister English Says Kiwi too High
  • Japanese Yen to Talk on Economy
  • Gold Extends its Rally to Match Most Consistent Bull Run in a Year

Dollar Suffers First Drop this Week as S&P 500 Hits New Highs

The dollar looked dazed and confusedThursday. After taking a critical fundamental and technical hit the previous trading day, the greenback found relief in the form of reserved market conditions. Just as surely as the strong risk-positive market moves through the first half of August have been hampered by a lack of speculative liquidity and the distraction of more meaningful fundamental updates in the following month; the dollar’s moral hazard tumble is stalled by general market conditions. In the aftermath of the FOMC minutes-triggered stimulus rush, we can more readily observe the damage. For the greenback, the hit was sharp but survivable. The Dow Jones FXCM Dollar Index (ticker = USDollar) cleared its year-long rising trendline support and 10,000 mark. Amongst individual crosses, the genuine bearish progress was seen across the European currency crosses (EURUSD, GBPUSD, USDCHF). In contrast, the investment currency and balanced safe haven pairings held to preconceived ranges. This highlights an important, fundamental matter: whether the escalated stimulus talk can materially alter risk appetite or just QE hopes.

In measuring the possible ‘positive’ influences that we can garner from global markets going forward, the appetite for external support from central banks is one of the few remaining developments that can be expected to ramp asset prices. The outlook for growth and rates of return is discouraging at best and we can’t lower risk levels much further considering FX market volatility readings are at half-decade lows. And, from a stimulus perspective, the Fed has proven itself to be the last hope for tangible influence - the capital market payoff from Japanese and European programs has already passed the marginal rate of speculative return. For the dollar, there are two risks that stimulus presents. First we have the natural devaluation of the currency via altering the money supply. Over time, a growing supply of funds sloshing around the market is slowly absorbed by steady demand for US-based liquidity assets, but the point of recognition that another program is on the table has an immediate impact on the currency. The reverberating pain, however, comes through risk appetite. At record low rates, the dollar is firmly planted as a safe haven – something investors don’t need if sentiment is established. If QE3 expectations leverage another S&P 500 rally, the dollar will suffer.

From the FOMC’s minutes, it is evident that there the doves are winning majority and their base case scenario leans more towards action. Chicago Fed President Evans leads this view with calls for unbound stimulus – renewed this past session. Alternatively, St Louis Fed head Bullard notes that data has improved since the last rate decision and reminds of the diminishing returns of more support. It is fitting that both are non-voters this year. Regardless, expectations for a third round of Fed asset purchases has never been higher. The burden for keeping these hopes elevated (much less push it further) is growing ever more extreme. With three weeks until the Fed decision, can optimists retain control?

Euro Firm in its Recessionary Path, Traders Tuning out Official Talk

Euro traders’ sensitivity to disappointing economic data and unfulfilled promises has clearly diminished. This past session, the economic docket offered a very unflattering outlook for the regional economy. The advance readings of the August PMI figures (timely proxies for underlying growth trends) presented steady contraction. The Eurozone Composite is just off a three year low after on a seventh contraction (read below 50). In other news, German Chancellor Merkel stuck to her line of reality versus hope after a meeting with Hollande. She meets Samaras Friday.

British Pound will be as Unmoved by GDP Update as Retail Sales Data

The sterling failed to forge any further progress against the safe haven dollar and Japanese yen Thursday – though the currency was feeding off the relative weakness of its ‘investment’ counterparts. Once again, the pound is in fundamental neutral while others’ strength or weakness defines its performance. The data on deck does little to change this. The CBI’s retail report for August and BBA home loan figures do little to offset preexisting growth concerns, and the second reading on the 2Q GDP figures will likely equate to the same.

Australian Dollar Tumbles as Chinese Growth Overwhelms RBA’s Repetition

RBA Governor Glenn Stevens continued to talk up the Australian dollar bulls – unintentionally of course. The central bank chief repeated his belief that Australia will see growth and inflation close to trend going forward, while the slowdown in China and global financial uncertainties will be buffered at the country’s borders. FX traders seem to have had their fill of his optimism as the currency was unable to advance on these remarks. More novel perhaps was the report of new orders in Chinese manufacturing dropping to a three-year low.

New Zealand Dollar: Finance Minister English Says Kiwi too High

There has been a notable effort by country heads around the world attempting to coerce their monetary policy managers into supplement their fiscal efforts by pulling the levers on rates and stimulus. New Zealand Finance Minister English is no different – though he has been more subtle. This morning, English reiterated his belief that the kiwi is ‘higher than we want it to be’. The market response was more obvious with pairs that are highly sensitive to subtle rate potential changes (AUDNZD). The 12-month rate forecast is still essentially flat.

Japanese Yen to Talk on Economy

The Japanese yen is generally the foil to more fundamentally active currencies. Despite the long-term fundamental issues, the yen will consistently default to its position as the ‘funding currency’ as risk trends wax and wane. The only break from this reality comes when markets are dead or officials shock the market with stimulus. BoJ Governor Shirakawa is on deck this morning, but traders doubt his influence.

Gold Extends its Rally to Match Most Consistent Bull Run in a Year

Gold’s rally has extended to a seventh consecutive session. This is the longest run for the precious metal since a similar length drive two months ago (though this particular move has covered more ground). For those wondering, we have seen an eight-day plus move since July 2011. Considering risk trends are acting as the break for most capital markets – gold is able to keep its sights focused on stimulus speculation to feed its run. That said, a move of this caliber in broader congestion (and on relatively tame volume) will be highly exposed to correction.

**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

Trade Balance (New Zealand dollars) (JUL)

-47M

331M

China PMI component: raw material inventory rose 0.3% to 48.5% indicating a slower rate of decline.

22:45

NZD

Balance (YTD) (New Zealand dollars) (JUL)

-647M

-747M

22:45

NZD

Exports (New Zealand dollars) (JUL)

3.78B

4.20B

22:45

NZD

Imports (New Zealand dollars) (JUL)

3.76B

3.87B

23:50

JPY

Corporate Service Price (YoY) (JUL)

-0.2%

-0.3%

June decline lead by lower prices for advertising, airlines, and freight transport.

0:00

AUD

Conference Board Leading Index (JUN)

-

0.4%

The board expects the Australia’s growth to moderate over the near term.

1:35

CNY

MNI Flash Business Sentiment Indicator (AUG)

-

49.73

MNI report: sub-indicator are dropping to levels not seen since 2099

8:30

GBP

Gross Domestic Product (QoQ) (2Q P)

-0.5%

-0.7%

Advance prints have already noted an expected decline.

8:30

GBP

Gross Domestic Product (YoY) (2Q P)

-0.6%

-0.8%

8:30

GBP

Private Consumption (2Q P)

-0.2%

-0.1%

4Q 2011 was the first increase since 4Q 2010.

8:30

GBP

Government Spending (2Q P)

0.3%

1.9%

Implemented austerity to preserve AAA rating.

8:30

GBP

Gross Fixed Capital Formation (2Q P)

-0.8%

1.9%

Measure of countries infrastructure.

8:30

GBP

Exports (2Q P)

-0.2%

-1.7%

Second quarter exports declined in the past two years.

8:30

GBP

Imports (2Q P)

0.4%

-0.3%

8:30

GBP

Total Business Investment (QoQ) (2Q P)

-

1.9%

At a 7 year high.

8:30

GBP

Total Business Investment (YoY) (2Q P)

-

14.8%

8:30

GBP

Index of Services (MoM) (JUN)

-1.8%

0.9%

Business service and finance were the largest contributor to the May increase.

8:30

GBP

Index of Services (3Mo3M) (JUN)

0.0%

0.5%

12:30

USD

Durable Goods Orders (JUL)

2.5%

1.6%

Measure of the Business sentiment in the US; Capital goods orders have been less volatile since the beginning of the year.

12:30

USD

Durables ex Transportation (JUL)

0.5%

-1.1%

12:30

USD

Non-Defense Capital Goods Orders ex Aircrafts (JUL)

-0.5%

-1.4%

12:30

USD

Non-Defense Capital Goods Shipments ex Aircrafts (JUL)

-

1.2%

GMT

Currency

Upcoming Events & Speeches

23:30

AUD

RBA Governor Glenn Stevens Testifies on Monetary Policy

7:45

JPY

BoJ Governor Masaaki Shirakawa Speaks on Japanese Economy

9:45

EUR

Greek PM Samaras Meets with German Chancellor Merkel

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

13.1679

1.7931

8.3286

7.7564

1.2487

Spot

6.6039

5.9297

5.8374

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

1.2683

1.5981

79.22

0.9659

1.0008

1.0542

0.8213

99.98

126.03

Resist. 2

1.2653

1.5951

79.07

0.9635

0.9990

1.0515

0.8190

99.67

125.70

Resist. 1

1.2622

1.5922

78.92

0.9610

0.9972

1.0487

0.8168

99.36

125.37

Spot

1.2560

1.5862

78.62

0.9562

0.9936

1.0432

0.8123

98.75

124.70

Support 1

1.2498

1.5802

78.32

0.9514

0.9900

1.0377

0.8078

98.14

124.03

Support 2

1.2467

1.5773

78.17

0.9489

0.9882

1.0349

0.8056

97.83

123.70

Support 3

1.2437

1.5743

78.02

0.9465

0.9864

1.0322

0.8033

97.52

123.36

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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