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Dollar Dives Versus Euro After Moody’s Warning, Fed Impact Growing

Dollar Dives Versus Euro After Moody’s Warning, Fed Impact Growing

2012-09-12 05:26:00
John Kicklighter, Chief Strategist
Share:
  • Dollar Dives Versus Euro After Moody’s Warning, Fed Impact Growing
  • Euro Advances Against Pound, Yen and Dollar ahead of German ESM Vote
  • Australian Dollar Closer to 1.06 Before Fed Means Higher Stakes
  • New Zealand Dollar Breaks Year-Long Wedge with Dollar Ahead of RBNZ
  • Japanese Yen: Pressure is On for Officials as USDJPY Slips 78.00
  • Swiss Franc Gaining Traction Despite Negative Yields
  • Gold: If Tuesday’s Drive was Fresh QE3 Hopes, Where Was the Rally?

Dollar Dives Versus Euro After Moody’s Warning, Fed Impact Growing

Though the dollar is facing an elevated level of volatility this week, significant breaks (bullish or bearish) are difficult to generate in the lead up to this week’s Fed rate decision. Yet, the greenback found a clear bead on direction with the help of a Moody’s downgrade warning. For the Dow Jones FXCM Dollar Index (ticker =USDollar), the fundamental was palpable in a broken trend channel that moved the benchmark closer to the mid-point of its July 2011 to June 2012 advance at 9825. The technical progress was even more remarkable for the benchmark EURUSD. Having already cleared remarkable resistance and shifted general trend bearings late last week, the world’s most liquid pair generated another bullish push to break the closely-monitored 200-day moving average on the way to four-month highs.

Had the rating agency not issued its threat of a credit hit to the world’s premier reserve currency, it is very likely that the majors would have stuck to congestion until the week’s top fundamental event crosses the wires. Yet, the lead up to major event risk can also empty the speculative ranks and amplify the short-term impact of unscheduled developments (while still diverting trends). That was the market scenario that the Moody’s warning was met with. The group said it may follow Standard & Poor’s and downgrade the United States’ top credit rating (Aaa) if Congress failed to reduce the nation’s deficit-to-GDP ratio. The influence this news exacted on the dollar was intense and broad, but it surprisingly did not undermine the more traditional ‘risk’ assets. The Dow Jones Industrial Average used the occasion to rebound and post its highest close since 2007 (though the index notably fell well short of jumpstarting a new trend).

The disparity in impact between currency and capital benchmark highlights the direct implications of the news and preoccupation with the week’s upcoming events. A second rating agency lowering the dollar’s top credit rating presents a serious blow to the standing belief that the currency is an ideal liquidity currency – even if the top alternatives are facing acute distrust at the moment. For US equities, however, this warning does little to put off the possibility of QE3 come Thursday. And, as we have seen from the persistent climb from benchmarks like the S&P 500 in the face of disconcerting fundamentals, stimulus is the primary source for bullishness these days.

Euro Advances Against Pound, Yen and Dollar ahead of German ESM Vote

The Euro crisis recovery effort is hobbling along, and it will take a consistent round of favorable votes and policy accommodations just to keep moving back towards neutral. In that ‘long road to recovery’, we can understand why news that the German Constitutional Court’s decision this past session to move forward with its ESM vote fails to generate much optimism amongst FX traders. The upcoming round of event risk could win a little more influence however. Germany’s actual decision on the legality of funding the ESM rescue program and using it to directly rescue troubled Eurozone banks and countries is most likely to pass to move us to the next step in the crisis fight. Of course, it should be noted that the greatest overall impact from this event would be a vote against the program that significantly disables the recovery path. Also on tap are the proposals for the Banking Union and Netherland’s election. Once again, both carry the risk of throwing the region of track in the worst-case-scenario outcomes; but the more likely outcome is to buy time with inconclusive details and a vote for a euro-supportive government respectively. Meanwhile, it is worth noting that one-week implied volatility on EURUSD is well off the month’s highs despite this week’s risks.

Australian Dollar Closer to 1.06 Before Fed Means Higher Stakes

The combination of a hobbled greenback and strong equities performance this past session helped drive AUDUSD nearly one percent higher. Through the early Asia session Wednesday we can see risk appetite has built a new head of steam and is driving the pair to within arm’s reach of the 1.0500 level. As long as capital markets are showing the progress of speculative interests, fundamentals will take a backseat; but they are nevertheless throwing in their support. Chinese new lending figures suggest more is being down to keep Australia’s largest trade partner strong while domestically consumer sentiment jumped 1.6 percent. The next level is 1.0600, but that level may be out of reach until the Fed.

New Zealand Dollar Breaks Year-Long Wedge with Dollar Ahead of RBNZ

It is difficult to account for anything outside of the gravity of Thursday’s Fed rate decision, but the kiwi will certainly have a fundamental distraction in the RBNZ policy meeting. The New Zealand policy authority has deferred from action and maintained a hawkish bias for months, but the comparatively impressive bearing for the high-yield currency (compared to the Aussie) has earned it little progress.

Japanese Yen: Pressure is On for Officials as USDJPY Slips 78.00

For most yen crosses, the rise in risk appetite trends headed by US equities translated into positive traction. That wasn’t true for USDJPY, however, given the dollar’s unique issues. And, when it comes to enacting policy actions, the Japanese authorities follow this benchmark pair. That is an important consideration heading into the Fed rate decision where a stimulus effort by the US could unintentionally leverage Japan’s struggle with its expensive currency. With an influx of volatility, the threat of Japanese intervention is heightened.

Swiss Franc Gaining Traction Despite Negative Yields

We have seen many instances of market activity that doesn’t fit the traditional standards of fundamentals. The Swiss franc’s recent strength is one such example. The tight EURCHF exchange rate is translating into considerable piggyback gains for the franc against high yield and fundamental sound currencies alike. That is particularly interesting given the negative rates in Switzerland and constant intervention threat.

Gold: If Tuesday’s Drive was Fresh QE3 Hopes, Where Was the Rally?

There is a common cognitive bias amongst market participants whereby an fundamental driver (like stimulus expectations) is already priced into the market, yet someone that just learns about the catalyst expects prices to adjust further because of their discover. We would expect the media is suffering this bias considering every advance and retreat is ascribed to QE3. Gold’s entrenchment Tuesday’s suggest it was not.

**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

0:30

AUD

Westpac Consumer Confidence (SEP)

-

-2.5%

Consumer confidence seen to continue drop even as RBA cuts borrowing costs

0:30

AUD

Westpac Consumer Confidence Index (SEP)

-

96.6

1:30

AUD

Dwelling Starts (2Q)

3.0%

-12.6%

Construction expected to recover after sharp drops

6:00

EUR

German CPI (MoM) (AUG F)

0.3%

0.3%

Lower German inflation may mean ECB more willing to cut rates sooner

6:00

EUR

German CPI (YoY) (AUG F)

2.0%

2.0%

6:00

EUR

German CPI - EU Harmonized (MoM) (AUG F)

0.3%

0.3%

6:00

EUR

German CPI - EU Harmonized (YoY) (AUG F)

2.2%

2.2%

8:30

GBP

Jobless Claims Change (AUG)

0.0K

-5.9K

8:30

GBP

Claimant Count Rate (AUG)

4.9%

4.9%

British labor data expected to soften again, though scope of easing through monetary policy becoming increasingly limited

8:30

GBP

ILO Unemployment Rate (3M) (JUL)

8.0%

8.0%

8:30

GBP

Employment Change (3M/3M) (JUL)

169K

201K

8:30

GBP

Weekly Earnings exBonus (3M/YoY) (JUL)

1.8%

1.8%

8:30

GBP

Average Weekly Earnings (3M/YoY) (JUL)

1.6%

1.6%

9:00

EUR

Euro-Zone Industrial Production w.d.a. (YoY) (JUL)

-3.3%

-2.1%

Production figures still seen to be dragged down by weaker export demand in main economies

9:00

EUR

Euro-Zone Industrial Production s.a. (MoM)(JUL)

0.1%

-0.6%

11:00

USD

MBA Mortgage Applications (SEP 7)

-2.5%

Credit seen to tighten again

12:30

USD

Import Price Index (YoY) (AUG)

-1.1%

-3.2%

US import prices seen to weaken in August as the dollar strengthened

12:30

USD

Import Price Index (MoM) (AUG)

1.3%

-0.6%

14:00

USD

Wholesale Inventories (JUL)

0.3%

-0.2%

Investment moderately growing

21:00

NZD

Reserve Bank of New Zealand Rate Decision

2.50%

2.50%

RBNZ expected to hold as Chinese demand weakens, though increasing house prices may give some alarm

22:30

NZD

Business NZ Performance of Manuf Index (AUG)

-

49.4

Domestic performance weakening

-

NZD

REINZ House Sales (YoY) (AUG)

-

19.9%

Increase in housing prices seen as trend in past months; demand questionable

-

NZD

REINZ Housing Price Index (AUG)

-

3377.1

-

NZD

REINZ House Index (YoY) (AUG)

-

-0.7%

GMT

Currency

Upcoming Events & Speeches

4:00

EUR

EU to Announce Details of Banking Union Plan

8:00

EUR

German Constitutional Court Announces ESM Ruling

11:00

GBP

BoE’s Broadbent Speaks on UK Economy

17:00

EUR

ECB’s Nowotny Speaks on Euro Economy

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

12.9847

1.8015

8.1591

7.7544

1.2286

Spot

6.5953

5.7893

5.7580

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

1.2995

1.6188

78.44

0.9475

0.9787

1.0587

0.8291

101.34

126.31

Resist. 2

1.2965

1.6160

78.29

0.9452

0.9770

1.0561

0.8270

101.06

126.03

Resist. 1

1.2935

1.6133

78.14

0.9430

0.9752

1.0535

0.8249

100.78

125.74

Spot

1.2874

1.6078

77.85

0.9384

0.9718

1.0483

0.8207

100.21

125.16

Support 1

1.2813

1.6023

77.56

0.9338

0.9684

1.0431

0.8165

99.64

124.58

Support 2

1.2783

1.5996

77.41

0.9316

0.9666

1.0405

0.8144

99.36

124.29

Support 3

1.2753

1.5968

77.26

0.9293

0.9649

1.0379

0.8123

99.08

124.00

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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