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Forex: Dollar’s First Positive Close in Six Weeks Doesn’t Confirm Reversal

Forex: Dollar’s First Positive Close in Six Weeks Doesn’t Confirm Reversal

2012-09-22 02:30:00
John Kicklighter, Chief Strategist
Share:
  • Dollar’s First Positive Close in Six Weeks Doesn’t Confirm Reversal
  • Euro Lower Against All Crosses Last Week, More to Come?
  • Australian Dollar Following Sentiment, China and Rates Outlook
  • British Pound Wins a Late Drive, Leverages Longest Rally Since 2004
  • Swiss Franc Nearly Three Weeks Off the EURCHF 1.2000 Floor
  • Canadian Dollar Faces Event Risk, But How About Volatility?
  • Gold Briefly Tests 7-Month High, Speculative Positioning Building

Dollar’s First Positive Close in Six Weeks Doesn’t Confirm Reversal

After a hearty round of selling, the dollar finally managed to bounce this past week. In fact, EURUSD closed out its first bearish week in six with the close below 1.3000. Yet, we need to look beyond the simple positive / negative performance and more to the character of the move. Though the greenback advanced, there was very little momentum from the currency or the risk aversion move that typically supports the safe haven. A better qualifying term for both investor sentiment and the currency would be ‘consolidation’ rather than ‘reversal’. Yet, given a recently expanded stimulus effort, extraordinarily low US yields and anemic speculative participation levels; a dollar rally requires clear risk aversion to build a trend.

Moving forward next week, the dollar will be in a highly unstable situation – at the extreme of a sharp selloff after fundamental drive has dried up. Though we could see the extension of congestion as we await heavier event risk in the opening weeks of October (NFPs, rate decisions, scheduled developments in the Eurozone crisis, the start of the 3Q earnings session, etc), it will be difficult to restrain risk barometers like the S&P 500 from build another head of momentum. Having likely peaked on global stimulus efforts this month, the greater and more portentous risk is a sudden selloff that stokes extremely low volatility measures and thereby throttles the dollar higher. However, calling reversals is always a risky business. It is better to find fundamental and technical confirmation for a dollar move (bullish or bearish) before committing to a trend trade.

Euro Lower Against All Crosses Last Week, More to Come?

Despite the euro’s standing in the risk spectrum and the points of progress in the region’s financial crisis fight, the currency suffered uniformly against its major counterparts this past week. Whether paired against the high-yield Australian dollar or the safe haven US dollar, the euro ended the week in the red last week. In a market where risk aversion is the dominant theme, a more critical group of FX traders could amplify their concerns in the euro’s persistent troubles. Yet, sentiment was more ‘flat line’ than dive. This consistency outside the narrow view of risk appetite – as well as the level of progress made in the euro’s selloff – is a clear sign of intrinsic fundamental weakness.

The normal culprits were still in force through the past week. Concerns about the stability of the sovereign debt market and banking sector feed into the general concern of the Euro-area crisis. If we were running on the ‘normal’ schedule of buying time through last minute rescue efforts, the euro would still be in the grace period following the ECB’s freshly promises Outright Monetary Transactions (OMT) program – a vow to buy unlimited government bonds of those countries that meet conditions for support until their yields are at ‘reasonable’ levels. Instead, doubt is creeping in to disrupt the passive rebound.

The most recent stage of the ongoing Greece rescue continues to be drawn out. According to officials, the coalition government has agreed on only €9.5 billion of the €11.5 billion budget cuts necessary to tap the next round of Troika funds. Beyond struggling to simply meet the spending cut requirements, there is a growing belief that the country will require a further write off on debt pulled in the first rescue program – a considerable escalation that speaks to the deep troubles the nation faces. Perhaps more market-moving for next week, however, will be the management of the Spanish portion of the region’s troubles. Spain is expected to present its 2013 Budget next Friday, the same day that the Bank of Spain is scheduled to release the delayed bank sector stress test results and Moody’s updates its review of the region’s debt. An ‘optimistic’ slant to this wave could prove damaging to the euro over the long run as it may delay an inevitable request for support from the ECB’s new program and leave the market’s to potentially drive yields higher again to force a last-minute (and less-effective) rescue.

Australian Dollar Following Sentiment, China and Rates Outlook

There are three leading fundamental drivers when it comes to directing the Australian dollar: risk appetite trends, yields forecasts (for its carry position) and China’s health (through growth and trade connections). Risk trends have meandered this past week and look murky heading through the immediate future. The 12-month rate forecast has found some level of balance between 80 and 100 bps worth of cuts which may find some alteration with the RBA financial stability report. More promising though are key, Chinese growth readings on the docket.

British Pound Wins a Late Drive, Leverages Longest Rally Since 2004

GBPUSD was virtually doing little more than consolidation through much of this past week, until a notable rebound from Thursday to Friday closed out the period in the green. For those keeping track, that moves the weekly tally of bullish candles to seven – the longest series since December 2004. The markets abhor extremes. A correction is extremely likely, but it is a mild consolidation or aggressive retracement?

Swiss Franc Nearly Three Weeks Off the EURCHF 1.2000 Floor

It has been nearly three weeks since EURCHF left the 10-pip band above 1.2000. Once again, we have to ask whether this is a permanent trend change. Speculators were not the source of the SNB’s trouble for keeping a floor and neither are they likely the primary factor in keeping this cross buoyant. Instead, we should keep a close eye on the Euro-area crisis level. If funds start pouring out of the region for safety, back to 1.20.

Canadian Dollar Faces Event Risk, But How About Volatility?

There are a few, meaningful macro-economic indicators scheduled for release in Canada next week. The question is whether they will be market-moving. The July retail sales and GDP figures are good measures of growth – an important factor when we are drawing comparison to the United States and fellow ‘investment’ currencies. That said, USDCAD won’t like move on this data. The loonie-crosses are another story.

Gold Briefly Tests 7-Month High, Speculative Positioning Building

Gold managed a fifth consecutive, close-over-close bullish week. This is now the longest run since the market peaks back in September of last year. Yet, we before that seven-week run, we had a series of five-period moves that led to extremely tame corrections (in a much larger bull trend). With net speculative positioning (COT) at the highest level in six-months and ETF holdings at records, interest can offset stalled stimulus.

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

1:00

AUD

HIA New Home Sales (MoM) (AUG)

-5.6%

AU construction still weaker

5:00

JPY

Supermarket Sales (YoY) (AUG)

-4.9%

Following retail data lower

8:00

EUR

German IFO – Expectations (SEP)

94.2

Expectations gradually rising; easing events in September seem to greatly help

8:00

EUR

German IFO - Business Climate (SEP)

102.3

8:00

EUR

German IFO - Current Assessment (SEP)

111.2

12:30

USD

Chicago Fed Nat Activity Index (AUG)

-0.13

Northern industries strengthening

14:30

USD

Dallas Fed Manufacturing Activity (SEP)

-1.6

Agriculture seeing improvement

23:50

JPY

Corporate Service Price (YoY) (AUG)

-0.2%

Business purchases continue to see deflation

GMT

Currency

Upcoming Events & Speeches

23:50

(Sun)

JPY

BOJ Minutes of Aug. 8-9 Meeting to Be Released

Sun

ALL

G20 Meeting of Fin Min and Central Bank Deputies

Mon

ALL

G20 Meeting of Fin Min and Central Bank Deputies

19:30

USD

Fed's Williams to Speak at the City Club of San Francisco

JPY

BOJ Deputy Governor Yamaguchi Speaks at Event in Tokyo

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

12.8585

1.7943

8.2780

7.7539

1.2248

Spot

6.5619

5.7439

5.7399

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

1.3100

1.6337

78.75

0.9412

0.9833

1.0560

0.8375

102.58

128.05

Resist. 2

1.3070

1.6310

78.60

0.9391

0.9816

1.0535

0.8354

102.30

127.76

Resist. 1

1.3040

1.6283

78.46

0.9370

0.9798

1.0509

0.8333

102.02

127.46

Spot

1.2980

1.6230

78.17

0.9327

0.9764

1.0458

0.8291

101.46

126.87

Support 1

1.2920

1.6177

77.88

0.9284

0.9730

1.0407

0.8249

100.90

126.28

Support 2

1.2890

1.6150

77.74

0.9263

0.9712

1.0381

0.8228

100.62

125.98

Support 3

1.2860

1.6123

77.59

0.9242

0.9695

1.0356

0.8207

100.34

125.69

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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