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Dollar Posts First Back-to-Back Drop in Four Weeks, Resistance Holds

Dollar Posts First Back-to-Back Drop in Four Weeks, Resistance Holds

2012-10-12 05:40:00
John Kicklighter, Chief Strategist
Share:
  • Dollar Posts First Back-to-Back Drop in Four Weeks, Resistance Holds
  • Euro Bounces from 1.2825 after Spain Downgrade, Record Greek Jobless Rate
  • Australian Dollar Climbs on Jobs Data but Not Risk Trends
  • Canadian Dollar 0.9750 Close but Trade Deficit and Oil Prices Hold Currency Back
  • New Zealand Dollar Trading Activity Hits Extreme Low on Verge of 0.8150 Support
  • Japanese Yen Unfazed by Threats of and Calls for Intervention, Manipulation, Stimulus
  • Gold Breaks its Slow Bear Trend, Dollar Breakout Still a Prominent Risk

New to FX? Watch thisVideo; For live market updates, visitDailyFX’s Real Time News Feed

Dollar Posts First Back-to-Back Drop in Four Weeks, Resistance Holds

This past week, the dollar had positioned itself at the very precipice of a major bull wave against its most liquid counterparts. Yet, faced with the gravity that further progression would entail, FX traders shied away from the critical next step. For the Dow Jones FXCM Dollar Index (ticker = USDollar), the rejection translated into a second bearish daily close. This stumble secured the first back-to-back decline since September 14 - notably, the end of the currency’s last significant bear phase. For the majors, EURUSD would responded by rally from its 200-day moving average at 1.2825, AUDUSD closed in on 1.0300 and GBPUSD secured itself above 1.6000. The rejection of a risk deleveraging effort and solid lasting dollar rally was unmistakable in its conformity. Yet, a bounce doesn’t mean case is closed. The markets still have a decision to make.

Sentiment is essentially in a dead zone. Appetite for yield or the avoidance of capital losses will inevitably define the next serious trend for the markets. Taking stock of the medium-term it is hard to rationalize a medium-term case that is bullish on ‘risk’. Beyond evidence of a slowing global economy and corporate earnings, benchmarks for rates of return are near historical or multi-year lows. A considerable amount of good will can be found through lowering risk (as through stimulus) which we measure through volatility. There is a little more room to deflate; but with the FX Volatility index at a five-year low, it is dangerous game to simply expect the masses to take further exposure on the assumption that risk will continuously decline against our cloudy fundamental outlook.

Ultimately, a sizable risk aversion move from US equities at four-year highs and carry currencies is the greatest probability moving forward. However, expectations (on more central bank support or a sudden return of sidelined money) can hold long after the actual data sours. To break this lassitude, we need a substantial development that the trader and investor across all asset classes can rally behind. Shocks like the Euro-area crisis or looming US fiscal cliff are at the right level but they lack definition. GDP figures may offer quantifiable measures of cost and opportunity, but the first of the 3Q numbers doesn’t start until next week’s Chinese release. Meanwhile, the burden of fundamentals can also be measured in earnings. Alcoa reported Tuesday, but the season really starts this morning with JPMorgan and Wells Fargo figures.

Euro Bounces from 1.2825 after Spain Downgrade, Record Greek Jobless Rate

There are periods where certain headlines or data can touch off severe volatility and even the birth of a new trend. Yet, when the masses are distracted by something else (say global risk trends) or have become acclimated to a particular fundamental sign post (such as arguments for additional financial support from Greece), otherwise important developments can render little to no response from price action. So it was with the euro this past session. Well before the European session, Standard & Poor’s announced a downgrade for Spain to one step above ‘junk’ status. Adding to that picture, Greece reported a 35th consecutive monthly increase to the jobless rate to a record 25.1 percent. Barely a hiccup from the euro. Later unconfirmed reports that EU officials were discussing a delay of Basel III requirements (which would require Euro-area banks to improve their balance sheets) generated a little more interest, but nothing that lasted. The market demands something for its commitment.

Australian Dollar Climbs on Jobs Data but Not Risk Trends

Though there was a mild rebound in risk-sensitive assets through Thursday, the Aussie dollar wouldn’t participate in this particular move. The currency used up its bullish energy earlier in the session with the release of the September employment figures. The stronger net jobs figures (with a particular boost from full-time positions) carried the torch for a short-run. For AUDUSD, the quick move was suitable enough for a technical break higher, but lacking the force necessary to overtake 1.3000. Given RBA rate forecasts, the need for a risk push is far greater.

Canadian Dollar 0.9750 Close but Trade Deficit and Oil Prices Hold Currency Back

Unless there is a particular momentum behind it, sentiment trends are often a consistent driver for the Canadian currency. Given the lack of aim behind risk this past session, the loonie was left to other fundamental devices. On the docket, the August trade balance reported a considerably smaller C$1.32 billion deficit from the previous month. Yet, even if the shortfall was cut nearly in half, it was an improvement from a record trade outflow. As for the USDCAD’s oil correlation, US crude closed green on the day but didn’t come any closer to progressing beyond 93.50.

New Zealand Dollar Trading Activity Hits Extreme Low on Verge of 0.8150 Support

The kiwi offers a comparable fundamental appeal to its Australian counterpart – which makes the AUDNZD exchange rate’s level (relative to where it was back in 2008) so remarkable. Both are high yield currencies and the FX market treats them as such. Yet, the kiwi has greater buffer to the slowdown of the Chinese growth engine (providing soft commodities rather than manufacturing materials) and its 10-year government trades at a premium. Yet, foreign holdings of debt shows 77.5 percent interest for Aussie bonds and 62.4 percent for New Zealand’s. In the meantime, we find that the kiwi has fallen into an extreme period of quiet (daily ranges using ATR). This often precedes a breakout.

Japanese Yen Unfazed by Threats of and Calls for Intervention, Manipulation, Stimulus

Japanese officials are using the ongoing IMF meetings to voice concern about the impact that a record high yen has on their nation’s exports. The IMF itself agreed that there was likely room to offer further stimulus to reach the BoJ’s inflation target (in other room stimulus). Warnings, support and second opinions matter little to the FX market. Action is the only thing traders now respective/fear. But can the MoF act?

Gold Breaks its Slow Bear Trend, Dollar Breakout Still a Prominent Risk

Though not a particular aggressive move, gold’s four day decline matched the longest bear run in months. Yet, just as equities held support and the greenback was unable to transition to a more permanent bull trend, gold would not carry its move to the next phase. A resolution on risk trends is still the biggest threat to capital and FX markets, but that is an indirect catalyst for this commodity (though it can still be effective if it significantly alter the dollar’s course). To directly impact gold and sustain a lasting trend, we need a change in stimulus.

**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

2:00

NZD

Non Resident Bond Holdings (SEP)

-

61.8%

Interest in NZ bonds tapering; may be due for growth of local economy

9:00

EUR

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

-0.4%

0.6%

Industrial production expected to fall sharply as confidence lags

9:00

EUR

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

-4.1%

-2.3%

12:30

USD

PPI Ex Food & Energy (MoM) (SEP)

0.2%

0.2%

Producer prices expected to rise slower even with weaker dollar. May preview CPI data later next week

12:30

USD

PPI (MoM) (SEP)

0.7%

1.7%

12:30

USD

PPI (YoY) (SEP)

1.7%

2.0%

12:30

USD

PPI Ex Food & Energy (YoY) (SEP)

2.5%

2.5%

13:55

USD

U. of Michigan Confidence (OCT P)

77.5

78.3

Expected to decline; may indicate consumer opinion of recent easing on goods prices and the recovery

10-13 (SAT)

CNY

Chinese Trade Balance (SEP)

$20.54B

$26.66B

GMT

Currency

Upcoming Events & Speeches

JPY

IMF, World Bank Group Annual and Spring Meetings

USD

3Q Earnings (Morgan Stanley, Wells Fargo)

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

9.1900

7.8075

1.3250

Resist 1

6.5175

5.3100

5.7075

Spot

12.8848

1.8062

8.6706

7.7523

1.2219

Spot

6.7022

5.7681

5.7043

Support 1

12.5000

1.6500

8.5650

7.7490

1.2000

Support 1

6.0800

5.1050

5.3040

Support 2

11.5200

1.5725

6.5575

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

1.3046

1.6138

78.96

0.9432

0.9855

1.0363

0.8274

102.48

126.84

Resist. 2

1.3018

1.6112

78.82

0.9412

0.9838

1.0340

0.8254

102.20

126.55

Resist. 1

1.2989

1.6086

78.68

0.9392

0.9821

1.0316

0.8234

101.93

126.27

Spot

1.2932

1.6034

78.40

0.9352

0.9787

1.0268

0.8194

101.38

125.71

Support 1

1.2875

1.5982

78.12

0.9312

0.9753

1.0220

0.8154

100.83

125.14

Support 2

1.2846

1.5956

77.98

0.9292

0.9736

1.0196

0.8134

100.56

124.86

Support 3

1.2818

1.5930

77.84

0.9272

0.9719

1.0173

0.8114

100.28

124.58

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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