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Dollar Wins a 1.3000 Break on EURUSD, But Where’s the Conviction?

Dollar Wins a 1.3000 Break on EURUSD, But Where’s the Conviction?

John Kicklighter, Chief Strategist
  • Dollar Wins a 1.3000 Break on EURUSD, But Where’s the Conviction?
  • Euro Selloff Outpaces Risk Aversion, Greek Rumors Offer Little Relief
  • Australian Dollar Suffers Speculative Winds, Chinese Data
  • Japanese Yen No Longer Acknowledges BoJ Stimulus
  • British Pound: Is There Appeal in a Smaller Central Bank Balance Sheet?
  • Canadian Dollar: USDCAD and Oil Correlation Diverge
  • Gold Probing 1775 as ETF Interest Builds

Dollar Wins a 1.3000 Break on EURUSD, But Where’s the Conviction?

The Dow Jones FXCM Dollar Index (ticker = USDollar) showed the third advance for the benchmark this week through Thursday’s close; but there is still a crucial, missing element to this move: conviction. This week’s rebound is playing out more likely a shift to congestion than a true correction for the safe haven currency. That is a serious problem for EURUSD which slid back below the speculative-favorite 1.3000 level. As speculators, we look for such technical developments to act as catalysts to follow through and potential trend development. When the standard progression fails, it bodes ill for the currency and undermines the fundamental drive behind the shift.

The greenback’s immediate struggle is with stubborn risk trends. The S&P 500 (my favored measure of both speculative appetite and moral hazard) refuses to unwind the post-Fed rally and put in for a notable bounce at 1450 Thursday. The fundamental persistence behind this speculative positioning is the carryover of the latest round of external support by the Big Three central banks (Fed, ECB and BoJ). We haven’t seen much of a ‘risk on’ push from these moves, but it nevertheless is offering enough of a backstop to forestall an unwinding of speculative leverage. This is a passing period of indecision. Either risk finds a second wind or the masses recognize we’ve hit the end of the stimulus road.

Euro Selloff Outpaces Risk Aversion, Greek Rumors Offer Little Relief

The top headline for the Euro this past session was a FTD report that Greece’s lenders were considering a debt write off on bonds purchased in the first bailout effort back in 2010. That is a hefty story, so it is very telling of the shared currency’s condition that it didn’t advance on the day. In fact, it sold off across the board – against high yield and safe haven alike. The market doesn’t seem to have a taste for rumor given the ECB played its trump card with the OMT program (loaded with its own questions and hang-ups). The relief in periphery Euro Zone government bond yields and Spain’s bond auction results this past session are certainly improvement. Yet, skepticism is obviously just below the surface.

Australian Dollar Suffers Speculative Winds, Chinese Data

An Aussie dollar slide this past session saw the currency slide against most of its liquid safe haven and fellow-high yield counterparts (the exception was with the Euro). The slide in general risk trends Thursday was a distinct factor to the carry currency’s stumble, but the rebound through the US session undermines the direct correlation. There was an additional factor of fundamental weakness for the currency that can be attributed to headlines – not its own, but rather Chinese news. Updates that showed the manufacturing sector of the world’s second largest economy had contracted for an eleventh consecutive month and bad loans at its 10 largest banks surged through the second quarter speak to a serious weakening for Australia’s most important trade partner. The first increase in the MNI’s business sentiment indicator (50.3) in five months provides a little more balance, but the larger trend for China - and Australia’s trade health - are clear.

Japanese Yen No Longer Acknowledges BoJ Stimulus

There is a frequent mention as to the half life of stimulus programs. While actions by central banks can take time to filter into the economy via regular fund distribution or intentional secondary affects (such as capital given to banks eventually making it into consumer loans), there is an immediate reaction by speculators and the capital markets to such efforts. The announcement of a sizable infusion of support is a sign that a central bank is taking significant risk out of the market and holding it on its own books – leading to risk appetite. That said, neither the risk appetite consideration nor the direct effort to devalue the local currency guided the yen for much more than a few hours. After the BoJ’s move earlier this week, we now have two instances that tell us asset purchases are not enough to leverage influence on the yen. What will they do?

British Pound: Is There Appeal in a Smaller Central Bank Balance Sheet?

The sterling was a mixed bag this past session with GBPUSD stubbornly holding 1.6200 while EURGBP extended its correction to slip back below 0.8000. The docket contributed modestly to this performance with retail sales meeting expectations and a CBI factory activity report recovering from the August tumble. Friday’s listings will hit a little closer to home (with public financing figures), but they will not likely rouse much volatility from sterling traders. Instead, those looking at the fundamentals behind the pound crosses may be looking at something grander in scope. Competitive devaluation may not be the intention of global central banks, but it is certainly a side effect. That said, the Bank of England’s balance sheet is dwarfed by the ECB’s and Fed’s holdings. Could this encourage the medium-term GBPUSD and EURGBP trends?

Canadian Dollar: USDCAD and Oil Correlation Diverge

The correlation between USDCAD and US crude (WTI) prices are one of the most well-known FX-capital market links amongst cross market traders. Yet, that relationship has shown a significant deviation this week. Before Wednesday’s incredible break lower for oil, trend and momentum between the two were showing exceptional consistency. That changed in the recent trend shift as USDCAD has resisted a meaningful momentum shift similar to the rest of the majors and risk-sensitive currencies; while the commodity dove into its tumble through supply and demand factors (a sharp increase in US inventories). This is a good case for illustrating that correlations can and will change. Yet, when something as sweeping as risk trends gains traction, everything else takes a back seat.

Gold Probing 1775 as ETF Interest Builds

With Thursday’s close, we have seen five days of congestion for gold since the last 2 percent-plus rally. This is the longest period of quiet we have seen for the precious metal since it began its impressive climb in mid-August. Traders are no doubt wondering whether this is the end of drive. It is difficult to generate a reversal in a strong and constructive trend – such a move requires a considerable impetus. However, from congestion, bulls and bears are on more even footing. The fundamental drive that has pushed us to the current level – stimulus – is behind us, and the search for a supplement is coming up short. Meanwhile, it’s worth nothing that volume on the GLD ETF and Gold futures have both eased retreated from mid-week highs and are far lower than last week’s peak. Alternatively, ETF holdings hit a fresh record 81.1 million ounces.

**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

0:00

AUD

Conference Board Leading Index (JUL)

-

0.2%

Leading index stagnant

1:35

CNY

MNI Flash Business Sentiment Indicator (SEP)

-

47.54

Indicator steadily dropping

3:00

NZD

Credit Card Spending (YoY) (AUG)

-

0.1%

Falling spending may indicate weaker retail sales, inflation over next months

3:00

NZD

Credit Card Spending s.a. (MoM) (AUG)

-

-1.5%

7:00

CHF

Money Supply M3 (YoY) (AUG)

-

9.8%

Swiss supply continues to expand

8:30

GBP

Public Sector Net Borrowing (Pounds) (AUG)

13.2B

-1.8B

Government finances seen to improve on continued austerity

8:30

GBP

Public Finances (PSNCR) (Pounds) (AUG)

-5.5B

-22.9B

8:30

GBP

PSNB ex Interventions (AUG)

15.1B

0.6B

12:30

CAD

CPI (MoM) (JUL)

0.3%

-0.1%

Canadian prices seen subdued by lower commodity prices, relatively strong Canadian dollar in July. Report may not cause direction in CAD

12:30

CAD

CPI s.a. (MoM) (JUL)

0.3%

-0.1%

12:30

CAD

CPI (YoY) (JUL)

1.3%

1.3%

12:30

CAD

Bank Canada CPI Core (MoM) (JUL)

0.3%

-0.1%

12:30

CAD

Core CPI s.a. (MoM) (JUL)

0.1%

0.0%

12:30

CAD

Bank Canada CPI Core (YoY) (JUL)

1.6%

1.7%

12:30

CAD

CPI (JUL)

121.8

121.5

12:30

CAD

Wholesale Sales (MoM) (JUL)

-0.2%

-0.1%

Domestic sales may be weaker

GMT

Currency

Upcoming Events & Speeches

14:00

USD

American Petroleum Institute Monthly Report

16:40

USD

Fed's Lockhart Speaks on Policy and Economy in Atlanta

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

12.8536

1.7965

8.3015

7.7527

1.2236

Spot

6.5218

5.7422

5.7272

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

1.3104

1.6338

78.83

0.9409

0.9817

1.0575

0.8387

102.71

128.18

Resist. 2

1.3074

1.6311

78.68

0.9387

0.9800

1.0549

0.8366

102.42

127.88

Resist. 1

1.3043

1.6284

78.54

0.9366

0.9783

1.0523

0.8344

102.14

127.58

Spot

1.2983

1.6230

78.24

0.9323

0.9748

1.0471

0.8302

101.57

126.98

Support 1

1.2923

1.6176

77.94

0.9280

0.9713

1.0419

0.8260

101.00

126.38

Support 2

1.2892

1.6149

77.80

0.9259

0.9696

1.0393

0.8238

100.72

126.08

Support 3

1.2862

1.6122

77.65

0.9237

0.9679

1.0367

0.8217

100.43

125.78

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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