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Dollar Toils for First Rise in Four Days, Range Preferable to Trend

Dollar Toils for First Rise in Four Days, Range Preferable to Trend

2012-09-11 04:31:00
John Kicklighter, Chief Strategist
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  • Dollar Toils for First Rise in Four Days, Range Preferable to Trend
  • Euro Turns from 1.2800 Against Dollar as Headlines Undermine ECB Progress
  • Australian Dollar is Monday’s Worst Performance As Risk, Chinese Data Weakens
  • Swiss Franc Regains Traction with EURCHF, Is the Rally Over?
  • Japanese Yen Advances on Risk, Disregards Growth Downgrade
  • New Zealand Floundering Before RBNZ Rate Decision
  • Gold: Despite Tempered Advance, Volatility and Positioning Rising

Dollar Toils for First Rise in Four Days, Range Preferable to Trend

The dollar managed its first advance against the Euro and Australian dollar in four and three days, respectively, Monday. However, we shouldn’t mistake this tempered correction to mean that the dollar is on the fast track to revisit 1.2650 on EURUSD and 1.0200 with AUDUSD before Thursday’s big-ticket event: the Fed rate decision. While the greenback managed to squeeze out an advance against all but the loonie through the opening session of the week, we should note the lack of drive behind the move. In fact, the EURUSD’s range through this past session was a sparse 60 pips while the AUDUSD traversed only 53 pips. While these don’t overtake the record lows of the past year, they are exceptionally close. That is surprising considering that we should have supposedly recovered from the August Summer Doldrums last week. Activity and participation levels have yet to show the return of investor participation that anxious traders and analysts (myself included) have long awaited. Yet, this reticence fits the long-term withdrawal of capital from the markets and the caution expressed in the lead up to the Fed rate decision.

When there is a ‘forced period of inactivity’ (such as in the lead up to major event risk), there is a tendency to unwind short-term speculative positions that may have been taken more heady markets. Given the sharp rally for the Euro and in risk trends through the second half of last week at the mention of European stimulus (the ECB’s new bond program), that correction just so happens to benefit the US dollar. It should be clear, though, that the withdrawal of short-term trading interest does not constitute the generation of a new trend. It is a balancing move rather than a new speculative effort. To tap momentum, we need to align speculative appetites through a heavy fundamental driver. Most likely, that catalyst will be Thursday’s Fed decision, where the market is pricing in a near 100 percent probability of a sizable QE3 program (according to a composite indicator from Citigroup). To generate a lasting, market-move before this media-centered event would take a remarkable event. From a probability perspective, that translates into better trading conditions for range and short-term breakout strategies rather than trend.

Euro Turns from 1.2800 Against Dollar as Headlines Undermine ECB Progress

Despite the exceptionally quiet trading conditions of the opening 24 hours of the trading week, the Euro showed a consistent, bearish performance through the session. Quiet turnover, in fact, was likely a considerable boon for the shared currency because the fundamental updates through the day were particularly discouraging. In the EURUSD’s rally above 1.2650 and own to 1.2800 this past week, the impetus for the move was the ECB’s announcement of another of yet another round of stimulus support for the region: the supposedly unlimited bond purchases under the Outright Monetary Transactions (OMT) program. Headlines Monday casted significant doubt on the OMT’s effectiveness.

With the market still mulling over its confidence in yet another program that lacks for detail and fails to target the root of the region’s troubles, news that it could be ignored by those that need it and/or that another node of the region’s financial trouble is deteriorating doesn’t come at a good time. Spanish Prime Minister Rajoy joined Italy in remarking that he was not considering drawing on the new program (which would require a request for a full bailout from the ESM along with clearly drawn conditions). The greater threat to euro optimism is the redirect in focus away from Spain back to Greece. It was reported that the Troika rejected some of the public spending cuts proposed by the country (demanding cuts in public jobs instead). Adding to the scene, Germany’s Constitutional Court will reportedly vote on Tuesday if it should defer its ESM vote.

Australian Dollar is Monday’s Worst Performance As Risk, Chinese Data Weakens

We could tell unwinding of risky positions taken last week was a top catalyst Monday with the Australian dollar dropping across the board. Under normal conditions, we could attributed some responsibility of its poor performance to the deteriorating rate forecast, but the current 95 bps worth of cuts priced suggests it is leveling off. To fill in the gap, the Chinese data to start the week was more than enough to supplement selling pressure. Industrial production reported slowed to its weakest pace of expansion (8.9 percent) in three years while imports for August dropped 2.6 percent. As Australia’s largest trade partner, these is not an encouraging mix.

Swiss Franc Regains Traction with EURCHF, Is the Rally Over?

EURCHF posted a bearish close for the first time in five trading sessions Monday. Given the preceding move that it is counteracting and the months of insufferable chop prior to last week’s swell, the 0.2 percent drop happens to be the largest since March 15. This particular pair is especially important in gauging the health of both the Swiss franc and the Euro. This pair is representative of actual capital flows rather than speculative appetites (unique in this market). If there are doubts that ECB and EU efforts will garner progress, EURCHF will drop back to 1.20.

Japanese Yen Advances on Risk, Disregards Growth Downgrade

Another benefactor of risk aversion, the yen effectively ignored the influence of disappointing business, consumer and ‘man on the street’ sentiment surveys. Another overlooked print was the 0.7 percent 2Q GDP reading – half the pace reported in the initial print. Yen crosses will continue to trace out the pattern risk dictates this week, but we should be especially aware of USDJPY. Would the BoJ counteract the Fed?

New Zealand Floundering Before RBNZ Rate Decision

The New Zealand economic docket is generating little interest amongst the trading ranks. A contraction in 2Q manufacturing and retail spending will do little to alter the kiwi’s position as a high-yield carry currency, so traders overlook it. The RBNZ decision Wednesday is one of the few events that alter its position. And, in that vein, we note that Finance Minister Kew said it would be ‘irresponsible’ to devalue the kiwi. Let it run…

Gold: Despite Tempered Advance, Volatility and Positioning Rising

While not yet a reversal, gold has certainly entered a second phase correction in its bull wave from August 15. The 0.5 percent slide Monday was the sharpest since August 29. That said, this is one asset where price doesn’t fit participation. Looking at COT figures (futures positioning), we see net large speculative interest is at a six-month high; while the Gold Volatility Index nudged another six-week high.

**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

0:40

NZD

QV House Prices (YoY) (AUG)

-

4.6%

Still increasing prices may prompt RBNZ action to deflate bubble

1:30

AUD

NAB Business Conditions (AUG)

-

-3

Deterioration seen as falling Chinese demand hurting mining sector sentiment

1:30

AUD

NAB Business Confidence (AUG)

-

4

6:00

JPY

Machine Tool Orders (YoY) (AUG P)

-

-6.7%

Orders continue to fall with exports

8:30

GBP

Trade Balance Non EU (JUL)

-£4500M

-£5176M

British trade deficit expected to improve, though data not expected to drive future policy

8:30

GBP

Total Trade Balance (JUL)

-£3200M

-£4308M

8:30

GBP

Visible Trade Balance (JUL)

-£9000M

-£10119M

11:30

USD

NFIB Small Business Optimism (AUG)

91.3

91.2

Steady growth may show some signs of overall recovery

12:15

CAD

Housing Starts (AUG)

201.0K

208.5K

Strength may be due to overseas demand

12:30

CAD

International Merchandise Trade (JUL)

-1.45B

-1.81B

Canadian merchandise trade seen to drop on July CAD strength

12:30

USD

Trade Balance (JUL)

-$44.2B

-$42.9B

July US deficit seen to widen

14:00

USD

IBD/TIPP Economic Optimism (SEP)

-

45.6

May track NFIB data

14:00

USD

JOLTs Job Openings (JUL)

-

3762

July data after last week’s NFPs unlikely to move markets

23:50

JPY

Machine Orders (YoY) (JUL)

-3.6%

-9.9%

Machine orders still seen to weaken in long term, manufacturing industry still capped by weak exports

23:50

JPY

Machine Orders (MoM) (JUL)

2.0%

5.6%

23:50

JPY

Tertiary Industry Index (MoM) (JUL)

-0.5%

0.1%

Services industry may weaken

23:50

JPY

Domestic Corporate GPI (YoY) (JUL)

-1.9%

-2.1%

Corporate input prices expected to fall in July report, deflation may still continue

23:50

JPY

Domestic Corporate GPI (MoM) (JUL)

0.1%

-0.4%

-:-

EUR

German Wholesale Price Index (YoY) (AUG)

-

2.0%

Fall in wholesale and consumer prices may open scope for easing at next meeting

-:-

EUR

German Wholesale Price Index (MoM) (AUG)

-

0.3%

GMT

Currency

Upcoming Events & Speeches

-:-

EUR

German Const. Court to Review Whether or not to Delay ESM Ruling

-:-

EUR

Greek PM Samaras to Meet ECB President Draghi

9:00

EUR

Greece to Sell Bills

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

13.0711

1.8019

8.1875

7.7551

1.2363

Spot

6.6325

5.8381

5.7974

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

1.2883

1.6105

78.78

0.9549

0.9841

1.0429

0.8171

100.98

126.26

Resist. 2

1.2853

1.6077

78.64

0.9527

0.9824

1.0403

0.8151

100.69

125.97

Resist. 1

1.2824

1.6050

78.50

0.9504

0.9807

1.0378

0.8131

100.41

125.68

Spot

1.2765

1.5994

78.21

0.9459

0.9773

1.0328

0.8090

99.84

125.10

Support 1

1.2706

1.5938

77.92

0.9414

0.9739

1.0278

0.8049

99.27

124.52

Support 2

1.2677

1.5911

77.78

0.9391

0.9722

1.0253

0.8029

98.99

124.22

Support 3

1.2647

1.5883

77.64

0.9369

0.9705

1.0227

0.8009

98.70

123.93

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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