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Can EURUSD Overtake 1.3000 after Dollar’s Biggest Drop in Two Weeks?

Can EURUSD Overtake 1.3000 after Dollar’s Biggest Drop in Two Weeks?

2012-09-28 04:38:00
John Kicklighter, Chief Strategist
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  • Can EURUSD Overtake 1.3000 after Dollar’s Biggest Drop in Two Weeks?
  • Euro Rally after Spain Budget Announcement Uneven, High Risk of Reversal
  • Australian Dollar Rate Expectations Dampen Risk Appetite Climb
  • Japanese Yen Stoic as Spending, Inflation, Employment Data Prints
  • British Pound Rebounds Versus Dollar, On Pace to Close Eight Week Rally…
  • Canadian Dollar Faces GDP Data and 0.9850 for USDCAD as Market Stresses Growth
  • Gold Generates Biggest Rally in Two Weeks Despite Spain’s Vows

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Can EURUSD Overtake 1.3000 after Dollar’s Biggest Drop in Two Weeks?

With risk appetite and the euro advancing across the board this past session, the dollar was bound to take a hit. The dollar’s biggest drop in two weeks could not have been timed better for EURUSD which posted a herculean reversal from the 200-day moving average at 1.2820. It is such a consequential move that is difficult to believe it was the work of the day’s fundamentals. The focus was on the Spanish budget effort (more on that below), but data like the final US GDP reading (which was revised down sharply) was particularly discouraging. More likely, this bounce in risk trends is a result of the market conditions we have discussed all week (unfavorable for trends). Worth noting, Friday marks the quarter’s end.

Euro Rally after Spain Budget Announcement Uneven, High Risk of Reversal

Should we be surprised that Spain’s 2013 budget carries reform aimed at working down the country’s deficit and includes economic projections that tend to lean to the optimistic side? Given the probability of the outcome, it would be reasonable to expect the contents of the budget report would be largely priced in; but the euro’s rally proves otherwise. The shared currency posted a well-placed reversal against the dollar after the headlines started to cross the wires and general risk trends rode the data’s coattails.

In the headlines, we were met with policy announcements that are more appropriately described as ‘necessary’ than progressive. Within 43 new laws, we see measures targeting significant spending cuts that lead the government to project €13 billion in savings through 2013 with spending down 7.3 percent and a forecasted 4 percent rise in income. Among the more controversial moves was a plan to tap the social security reserves for €3 billion to pay pensions in 2012. Serious doubt starts with the assumptions that despite the budget effort, the growth forecasts remain unchanged (1.7 percent contraction in 2012 and a modest 0.5 percent slump in 2013). Speculators likely find more interest in the probability that this program lays the ground work for a full bailout request. That may be so, but such a move does not itself solve any major issues.

Australian Dollar Rate Expectations Dampen Risk Appetite Climb

The climb in risk trends through this past session would have the obvious influence on the FX market’s favorite carry currency. The Aussie dollar easily gained against most of its lower yielding counterparts with only the kiwi managing to outpace the climb. In fact, it is the AUDNZD that should alert us to a fundamental issue behind the Aussie dollar. Though there was enough risk appetite to extend the currency’s lift into the early trading hours of Friday’s session, there is notable restraint to the move. We can associate this tempered pace to the quality of sentiment itself (US equity indexes are struggling with their own resistance levels), it is likely that the Aussie’s own fundamental issues are showing through. According to overnight swap (from Credit Suisse), the market is pricing in 100 bps (1.00 percent) worth of rate cuts by the RBA over the coming 12 months. What’s more, the same market gauge shows a 65 percent probability that the central bank cuts next week.

Japanese Yen Stoic as Spending, Inflation, Employment Data Prints

The Japanese docket was data-heavy this morning, but the currency didn’t seem to appreciate the fundamental run. As it happens, the bulk of the wave was supportive of the Japanese economy. Amongst the highlights, the country’s unemployment rate for August unexpectedly ticked down to match the lowest level since November 2008 (4.2 percent). Less impressive - but nevertheless supportive - the retail sales, inflation and household spending figures all printed better than projected. How has the yen responded? By sliding slowly lower. Standard rounds of data from Japan do not compete with the currency’s more significant role in the global FX market: as a funding currency. When risk moves, the yen moves.

British Pound Rebounds Versus Dollar, On Pace to Close Eight Week Rally…

Whether it was the optimistic outlook for the Eurozone’s leading crisis purveyor or simply belief that Spain is on the path to seeking a bailout, the pound clearly benefit from the easing pressure of a ‘European’ crisis. Benchmarking the sterling’s performance against the universally battered dollar, we saw the most constructive rally in two weeks. That said, GBPUSD is still within the congestion that has stalled the pair at five month highs for two weeks now. Following up on the coincidence of extremes for this pair specifically (such as the lowest 20-period average of daily change in years as a sign of breakout), we may also see the cable close out an eighth consecutive weekly advance. That would be the longest run for the pair since 2003. Risk trends will likely determine when and where we move, but we can’t ignore the historical extremes.

Canadian Dollar Faces GDP Data and 0.9850 for USDCAD as Market Stresses Growth

The Canadian dollar took advantage of the risk appetite environment of the past session to modest gains against safe havens (dollar and yen) as well as European currencies (euro, pound and franc). The loonie’s drive was far more reserved than its higher-yielding counterparts, but that may work to its advantage going forward. Unusually volatile moves very often signal an exhaustion or otherwise temporary push that can be quickly reversed. A more moderate and deliberate performance is far more often the cadence we see with trend development. Whether USDCAD has indeed posted a serious reversal with new resistance (former support) at 0.9850 may depend on the docket as much as the follow risk trend performance Friday. On deck we have July GDP. The country’s growth readings have generated limited volatility in past months, but the market has shown a greater interest and sensitivity to growth prospects recently. And, of course, the level of surprise counts.

Gold Generates Biggest Rally in Two Weeks Despite Spain’s Vows

If there was genuine confidence in Spain’s budget efforts and optimistic growth forecasts, then why would a positive turn for the Euro-area financial system not curb demand for the market’s alternative store of wealth – gold? There is no doubt serious doubts surrounding the efficacy of policy officials’ ability to contain the growing threat in the Eurozone’s fourth largest economy, but investors in the metal were likely looking a few steps ahead. Rather than debating Spain’s projections, anti-inflation / anti-devaluation interests likely saw this event as a setup for the heavily anticipated request for a full bailout. More stimulus plays directly into gold’s fundamental appeal. We should also appreciate that commodity’s move Thursday hit the same stride as the dollar (biggest rally in two weeks versus biggest drop in two weeks). Not a coincidence.

**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

1:30

AUD

Private Sector Credit (YoY) (AUG)

4.3%

4.2%

Private lending seen on the increase again as RBA cuts rates

1:30

AUD

Private Sector Credit (MoM) (AUG)

0.3%

0.2%

1:35

CNY

MNI Business Sentiment Indicator (SEP)

-

47.53

May follow other indicators lower

3:00

NZD

Money Supply M3 (YoY) (AUG)

-

7.2%

Rapid growth could lead to tightening sooner than expected

4:00

JPY

Vehicle Production (YoY) (AUG)

-

16.7%

Largely domestic sales

5:00

JPY

Construction Orders (YoY) (AUG)

-

8.0%

Construction still expected to be weak, though expansion in other cities helping growth

5:00

JPY

Housing Starts (YoY) (AUG)

-7.5%

-9.6%

5:00

JPY

Annualized Housing Starts (AUG)

0.872M

0.870M

5:30

EUR

French GDP (QoQ) (2Q F)

0.0%

0.0%

French economy close to stalling levels

5:30

EUR

French GDP (YoY) (2Q F)

0.3%

0.3%

6:00

EUR

German Retail Sales (MoM) (AUG)

0.2%

-1.0%

Retail sales expected to recover in short term, may be due to easing events in Europe in August

6:00

EUR

German Retail Sales (YoY) (AUG)

-0.9%

-1.0%

7:00

CHF

KOF Swiss Leading Indicator (SEP)

1.5

1.57

Swiss economy stable

8:30

GBP

Index of Services (MoM) (JUL)

1.5%

-1.7%

Services industry seeing moderate pickup as private sector still relatively resilient

8:30

GBP

Index of Services (3Mo3M) (JUL)

0.1%

-0.1%

9:00

EUR

Euro-Zone CPI Estimate (YoY) (SEP)

2.4%

2.6%

Still relatively high as slow economy countering input price rises

12:30

CAD

GDP (MoM) (JUL)

0.1%

0.2%

July output seen to decrease on slower US economy

12:30

CAD

GDP (YoY) (JUL)

2.0%

2.4%

12:30

USD

Personal Income (AUG)

0.2%

0.3%

US spending continues to be stable in August; decline may not bring forth additional easing on recent introduction of QE3

12:30

USD

Personal Spending (AUG)

0.5%

0.4%

12:30

USD

PCE Deflator (YoY) (AUG)

1.5%

1.3%

12:30

USD

PCE Core (YoY) (AUG)

1.6%

1.6%

12:30

USD

PCE Deflator (MoM) (AUG)

0.5%

0.0%

12:30

USD

PCE Core (MoM) (AUG)

0.1%

0.0%

13:00

USD

NAPM-Milwaukee (SEP)

-

42.9

North Midwestern industry weaker

13:45

USD

Chicago Purchasing Manager (SEP)

53

53

13:55

USD

U. of Michigan Confidence (SEP F)

79

79.2

Final revision expected lower

GMT

Currency

Upcoming Events & Speeches

-:-

EUR

Moody’s Review of Spain Debt Due

-:-

EUR

Bank of Spain Stress Test Results Due

09:00

EUR

France to Present 2013 Budget

-:-

USD

Fed Expected to Announce October MBS Purchase Plan

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

12.8212

1.7874

8.2182

7.7536

1.2251

Spot

6.5171

5.7628

5.6953

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

1.3056

1.6362

78.08

0.9438

0.9861

1.0566

0.8431

101.42

127.18

Resist. 2

1.3027

1.6335

77.94

0.9417

0.9844

1.0541

0.8410

101.14

126.88

Resist. 1

1.2997

1.6307

77.80

0.9396

0.9827

1.0516

0.8390

100.85

126.59

Spot

1.2937

1.6253

77.52

0.9353

0.9793

1.0466

0.8348

100.29

126.00

Support 1

1.2877

1.6199

77.24

0.9310

0.9759

1.0416

0.8306

99.73

125.41

Support 2

1.2847

1.6171

77.10

0.9289

0.9742

1.0391

0.8286

99.44

125.11

Support 3

1.2818

1.6144

76.96

0.9268

0.9725

1.0366

0.8265

99.16

124.81

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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