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Dollar’s Week Complicated after Major Break, Jackson Hole In View

Dollar’s Week Complicated after Major Break, Jackson Hole In View

2012-08-25 05:05:00
John Kicklighter, Chief Strategist
Share:
  • Dollar’s Week Complicated after Major Break, Jackson Hole In View
  • Euro has Nothing but Rumor to Sustain Strength Until Mid September
  • British Pound: UK Bond Yields Slide Faster than Global Counterparts
  • Australian Dollar Ends Week in a Risky Position, Odd Counterpart to USDollar
  • Canadian Dollar: 2Q GDP Figures on Deck
  • Japanese Yen Sets the Line Between Speculative and Fundamental Risk Trends
  • Gold Breaks its Best Bull Run in a Year, Volume Suspiciously Absent

Dollar’s Week Complicated after Major Break, Jackson Hole In View

The dollar was pushed into an unstable position this past week. The currency’s public tumble below a trendline that has supported its bullish ambitions for over a year signals a precarious balance that can tip to either direction given the right (or wrong) fundamental developments. A technical move of this caliber would be perfectly respectable as a reaction to a major catalyst or even into the lead up into a serious event. However, we have made this remarkable move without encouragement from risk trends or clear guidance on stimulus expectations. Furthermore, the immediate outlook is lacking the heavy-weighted fundamentals that could justify a preemptive move. We won’t absorb high-level event risk until the very end of the coming week when the Jackson Hole Economic Symposium begins (running from Friday, August 31 to Sunday, September 1). That leaves us with an entire week where the stimulus-dependent market participants will second guess their positions and rumor will determine volatility and consensus (a common theme for August).

With the knowledge that critical updates to element fundamental themes are due the first two weeks of September (ECB rate decision and NFPs the following week; while the Fed decision, G20 and EU Summit are due the week after), there is further reason for investors to hold their funds aside until there the volatility has passed and there is a clearer bearing on how the global economy and financial market will fare. In the meantime, we cannot discount the slow return of speculative interests into our ranks that can amplify volatility without committing to a lasting trend. As for the Jackson Hole event, Bernanke speaks at 14:00 GMT on Friday. Proactive commentary for more stimulus is expected, but it would be difficult for him to lift expectations even further without offering full commitment – and that would be aggressive ahead of the Fed.

Euro has Nothing but Rumor to Sustain Strength Until Mid September

The Euro’s performance this past week was remarkable – posting the best run of the majors. The Swiss franc slightly outpaced the world’s second most liquid currency, but did so on the euro’s dime. The trouble with this impressive feat was that it lacked for tangible support. On the economic front, the leading PMI figures reflected a distinct trend towards recession while regional consumer confidence plunged. An economic shortfall can be supplemented by stimulus hopes, but that front was similarly flimsy. Through Friday, renewed rumors that the ECB was considering a band on government bond yields was offset by another report that they would wait until the German Constitutional Court ruled on the ESM’s ability to provide support on the bank and sovereign level. ECB and EU stimulus is on hold; while Greece, Spain and more suffer.

British Pound: UK Bond Yields Slide Faster than Global Counterparts

There are a number of currencies that draw their performance from more fundamentally-influential or yield-intensive counterparts. The pound is currently one of those pairs. As the threat of the Euro-area crisis rises and falls, the warnings by Prime Minister Cameron and Chancellor of the Exchequer Osborne (that the regional behemoth is the greatest threat to the UK’s well-being) cement themselves in traders’ minds. Yet, the sterling can still alter its own future. A concerning development through this past week, however, suggests it may amplify its own troubles. With risk-reward always in mind, it was worth noting that the benchmark Gilt yields suffered a deep tumble than its major counterparts last week.

Australian Dollar Ends Week in a Risky Position, Odd Counterpart to USDollar

The AUDUSD set an interesting contradiction to the USDollar this past week. Both managed to break the floors on their respective rising trends. The only problem is that the former rises when risk appetite advances and the latter rises when sentiment suffers. Through traditional risk channels, the Aussie currency certainly deviated from the passive strength of US equity indexes; but there was a notable sense of risk across the board. Aussie traders (and indeed everyone watching risk) should keep a very close eye on FX volatility readings. It can’t afford a jump.

Canadian Dollar: 2Q GDP Figures on Deck

The Canadian dollar is a unique currency. It has the appeal of an investment currency (yields and resource ventures), but it is also seen as a safe haven given its financial stability. Its dual roles didn’t help the loonie very much this past week though as it would drop against all its major counterparts. Perhaps this balance will be further manipulated this coming week with the release of the June GDP figures that will round out the second quarter. Joining other troubled counterparts or rising above them could better position the currency moving forward.

Japanese Yen Sets the Line Between Speculative and Fundamental Risk Trends

When we look to the fundamentals in the FX market, we sometimes blur the cause and effect together. Risk appetite trends can be both an end and a means. Sentiment can certainly build upon itself and amplify a tip into fear or greed. However, there are very few instances where risk trends can initiate the development of a market-wide move. That highlights a considerable advantage of the Japanese yen. As a funding currency, we measure appetite for yield versus the risk of volatility generally unencumbered by its own fundamental concerns (thanks to market’s complete disregard for policy efforts in Japan). Using the ‘safe haven’ currency to gauge market sentiment this past week, we found all of the high-yield investment majors decline. The US dollar suffered individually for the rise of QE3 hopes. Yet, it was the Euro (and its companion Swiss franc) that stood out for its gains. Confidence in a recovery of the Euro crisis could be a serious catalyst for optimism – if it had traction…

Gold Breaks its Best Bull Run in a Year, Volume Suspiciously Absent

We would come so close, but it simply was not meant to be. Spot gold ended its impressive run at a seven-day consecutive advance with a Friday close a mere 0.05 decline on the session. Nevertheless, the run through the previous day matched the most consistent effort we have seen from the precious metal in 13 months. Furthermore, the 3.4 percent climb through this past week alone was the strongest climb since the final week of January. All of this is very encouraging except for the fact that volume (one of the best measures of conviction and participation) offered no support to the move. Futures turnover for the week was the second lowest since September 2010. Fundamentally, follow through doesn’t require risk trends, rather it falls to stimulus speculation. Expectations for the Fed are already extreme, so follow through may be hard.

For Real Time Forex News, visit: http://www.dailyfx.com/real_time_news/

**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

23:01

GBP

Hometrack Housing Survey (MoM) (AUG)

-0.1%

Peaked on 5/31. Home prices are now on the decline. (Leading)

23:01

GBP

Hometrack Housing Survey (YoY)(AUG)

-0.5%

1:30

CNY

Industrial Profits YTD (YoY) (JUL)

-2.2%

Industrial sector has been losing money since late February of this year. (Leading)

6:00

JPY

Machine Tool Orders (YoY) (JUL)

-6.8%

On the decline since January 2012. (Leading)

8:00

EUR

German IFO - Business Climate (AUG)

103.3

Survey assessment on business conditions; current and forward. Declining since April. (Coincidental to Leading)

8:00

EUR

German IFO - Current Assessment (AUG)

111.6

8:00

EUR

German IFO – Expectations (AUG)

95.6

14:30

USD

Dallas Fed Manufacturing Activity (AUG)

-13.2

Entered negative territory on 7/31. (Coincidental to Leading)

GMT

Currency

Upcoming Events & Speeches

10:00

USD

Fed's Evans Speaks in Hong Kong

13:30

EUR

ECB Announces Bond Purchases

16:15

USD

Fed's Pianalto Speaks on Economy in Ohio

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 GMTSCANDIES 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

13.1731

1.7975

8.4003

7.7568

1.2506

Spot

6.6054

5.9532

5.8306

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

1.2637

1.5929

79.27

0.9696

0.9995

1.0516

0.8203

99.67

125.72

Resist. 2

1.2606

1.5900

79.12

0.9671

0.9977

1.0488

0.8180

99.37

125.38

Resist. 1

1.2575

1.5870

78.97

0.9646

0.9959

1.0459

0.8158

99.06

125.04

Spot

1.2512

1.5810

78.67

0.9597

0.9923

1.0403

0.8112

98.44

124.37

Support 1

1.2449

1.5750

78.37

0.9548

0.9887

1.0347

0.8066

97.82

123.70

Support 2

1.2418

1.5720

78.22

0.9523

0.9869

1.0318

0.8044

97.51

123.36

Support 3

1.2387

1.5691

78.07

0.9498

0.9851

1.0290

0.8021

97.21

123.02

v

--- Written by: John Kicklighter, Chief 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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