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FOREX: Dollar Returns to Critical Channel Top, EURUSD and USDJPY Ready

FOREX: Dollar Returns to Critical Channel Top, EURUSD and USDJPY Ready

2012-10-20 02:20:00
John Kicklighter, Chief Strategist
Share:
  • Dollar Returns to Critical Channel Top, EURUSD and USDJPY Ready
  • Euro May Tumble to 1.2800 on EURUSD, 100 with EURJPY After EU Summit
  • British Pound Drops for a Fourth Consecutive Week, Still Above 1.6000
  • Australian Dollar Looks to Risk, China and CPI to Assess Parity Before November
  • New Zealand Dollar: Will the RBNZ Shift its Tone and Send the Kiwi Tumbling?
  • Canadian Dollar Traders Head into BoC Decision with Dovish Beliefs
  • Gold Ends Week with a Convincing Close at Six-Week Low, Volatility Jump

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

Dollar Returns to Critical Channel Top, EURUSD and USDJPY Ready

What a way to end the week. The Dow Jones FXCM Dollar Index (ticker = USDollar) climbed for a second day through Friday to close right at the top of its four-month descending channel and 50-day moving average. Alone, this may not present such an exceptional level of potential – we have seen bulls’ will collapse when faced with this buffer point numerous times before. However, there is more weight behind the greenback’s bullish possibilities when we look at the standard bearers for underlying investor sentiment: US equities. The S&P 500 closed at the very floor of its own rising channel from early June just above 1,425 while the Dow Jones Industrial Average finds itself eying 13,300 nervously. Even those that pay little heed to technicals no doubt recognize these figures sway over immediate trend. And, the fundamentally-inclined quickly make the connection between risk trends and the dollar’s role as the FX market’s premier safe haven.

Given the proximity of the market’s archetypal safe haven and risk asset to a serious momentum shift, interest in market-wide sentiment will be a top concern almost immediately. Though the pressure seems remarkable, we don’t often seen new trends established at the beginning of the week after such a sharp move through the previous week’s final 48 hours and when there is heavy event risk on the docket. If we do see an early break, though, it is more likely to develop into a lasting trend (regardless of the data and events that follow). Combing through the calendar, there are a number of events that carry the proper level of influence to mobilize investor sentiment and thereby the greenback. The most recognizable listing is the first reading of 3Q US GDP. The direct implications of US health versus its global counterparts doesn’t matter as much to the dollar as the world’s largest economy defining the outlook for worldwide growth. In other words, a substantially weaker-than-expected figure is actually good for the dollar (playing to its safe haven status). There is also the issue that the GDP’s Friday release can prevent traders from moving until the data clears if markets aren’t active enough. Also worth keeping track of: the Chinese PMI, Euro Zone PMI, Fed rate decision (all Wednesday) and Apple earnings (Thursday).

Euro May Tumble to 1.2800 on EURUSD, 100 with EURJPY After EU Summit

The second day of EU Summit ended with even less fanfare than the first. All told, the group agreed that the ECB should take the roll of the EU Banking Supervisor by the end of the year, Greece was commended on its progress, and Spanish Prime Minister Rajoy has said he feels no pressure to seek out a rescue. Wary euro traders recognize the familiar sense complacency of complacency that has escalated the regional crisis numerous times in the past. The alternative view for each shows: no clear agreement on when banks can be recapitalized; Greece on pace for its next tranche payment but not receiving further accommodation which many believe is already necessary; and Spain eventually acting too late – when market rates force desperate action.

In the coming week, the currency will be more sensitive to risk trends now that the ambiguity of the Summit has passed without resolution. A swell in market-wide fear would find a particularly vulnerable euro. From the docket, the Fed decision, US and UK GDP will have spillover implications for the Eurozone. However, for the Euro’s own docket, the PMI activity reports are a good, timely proxy for growth.

British Pound Drops for a Fourth Consecutive Week, Still Above 1.6000

GBPUSD’s progress has proven exceptionally choppy since the pair peaked approximately a month ago. Yet, we have found the pair end on Friday lower than where it was the previous Friday for four weeks in a row. That is a fitting trend given the seven-week rally that preceded this most recent phase. However, such a restrained correction eats away at the potential of a decisive reversal – and so is the life of this more reserved pair. On the docket moving forward, we have 3Q UK GDP. How far will this recession go? Will Cameron have to ease up on austerity?

Australian Dollar Looks to Risk, China and CPI to Assess Parity Before November

The Aussie dollar’s fundamental trifecta is not in alignment for a clear direction. Risk trends are starting to aim lower, but we have yet to catalyze the dramatic shift. Chinese fixed direct investment figures revealed the country investors 40 percent less in Australia in the period from January to September from a year ago, and that its economy slowed to its weakest pace since 2008 (stemming demand). In between the risk focus next week, rate watchers will tune into Aussie 3Q CPI. A pickup is expected, but even then it would be well below the target zone (2-3 percent).

New Zealand Dollar: Will the RBNZ Shift its Tone and Send the Kiwi Tumbling?

The likelihood that the RBNZ – under leadership change to Governor Wheeler – lowers its benchmark rate is extremely low. However, we don’t need an actual cut for the Wednesday rate decision to be a heavy market mover. As we have seen with the Aussie dollar and Euro with their respective monetary policy schemes in recent months, the shift in tone that precedes action on rates can be even more influential on price (not surprising given speculators move in to discount all news). Swap markets are currently pricing in 26 bps worth of easing over 12 months.

Canadian Dollar Traders Head into BoC Decision with Dovish Beliefs

In recent, official commentary; the Bank of Canada struck a slightly more dovish chord when it spoke to global risks and slowing growth. And even though the warning that inflation was the top concern and there was still a possibility of hikes in the future, the market recognized the subtle shift. Swap markets have been inconsistent in pricing Canadian rate forecasts, but we can see in the loonie’s performance as of late (especially when it has struggled during ‘risk on’ conditions) an inherent fundamental concern. The BoC decision on Tuesday will be scrutinized for further, definitive evidence that the central bank is pulling back from its readiness for future rate hikes. This is already a low-yield investment currency.

Gold Ends Week with a Convincing Close at Six-Week Low, Volatility Jump

Few markets look as convincing in their progress as gold does. The metal – notoriously running outside the influence of standard risk appetite – dove through Friday to close the biggest weekly drop in four months while closing at a six week low of 1720. What adds to the sense of conviction was the pickup in the CBOE’s gold volatility index. While its didn’t hold the high, it did peak above 16 percent. The hope for further fresh stimulus (beyond the already promised rounds) through the foreseeable future has collapsed. Watch the dollar for guidance on the metal.

**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

23:50

(Sun)

JPY

Adjusted Merchandise Trade Balance (SEP)

-760.3B

-472.8B

Both exports and imports expected to decline further as yen strong, domestic demand weak

23:50

(Sun)

JPY

Merchandise Trade Exports (YoY) (SEP)

-9.9

-5.8

23:50

(Sun)

JPY

Merchandise Trade Imports (YoY) (SEP)

2.9

-5.4

23:50

(Sun)

JPY

Merchandise Trade Balance Total (SEP)

-547.9B

-755.9B

5:00

JPY

Supermarket Sales (YoY) (SEP)

-1.3%

Weaker sales suggest deflation continue to take toll

5:30

JPY

Nationwide Department Store Sales (YoY) (SEP)

-1.0%

5:30

JPY

Tokyo Department Store Sales (YoY) (SEP)

0.2%

7:00

JPY

Convenience Store Sales (YoY) (SEP)

-1.3%

7:00

CHF

Money Supply M3 (YoY) (SEP)

8.5%

Money supply continues to expand on SNB policies

9:00

EUR

Euro-Zone Government Debt-GDP Ratio (2011)

87.2%

Zone-wide overall ratio still increasing

GMT

Currency

Upcoming Events & Speeches

23:50

(Sun)

JPY

Minutes of BoJ Meeting

00:30

JPY

BoJ Gov Shirakawa Speaks at Branch Managers Meeting

08:30

GBP

BoE Publishes Quarterly Asset Purchase Facility Report

08:30

EUR

ECB’s Asmussen Speaks on Euro Economy

13:00

EUR

ECB’s Constancio Speaks on EU Banking Reform

13:30

EUR

ECB’s Liikanen Speaks on EU Banking Standards

16:00

EUR

ECB’s Nowotny Speaks on EU Banking Supervision

17:30

USD

Fed’s Pianalto Speaks on US Economy

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

9.1900

7.8075

1.3250

Resist 1

6.5175

5.3100

5.7075

Spot

12.8804

1.7947

8.6603

7.7500

1.2211

Spot

6.5818

5.7268

5.6615

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

1.3138

1.6101

79.88

0.9361

1.0004

1.0414

0.8231

104.36

127.98

Resist. 2

1.3110

1.6076

79.73

0.9341

0.9986

1.0391

0.8211

104.09

127.71

Resist. 1

1.3081

1.6051

79.58

0.9322

0.9969

1.0368

0.8192

103.82

127.43

Spot

1.3024

1.6001

79.29

0.9282

0.9933

1.0322

0.8153

103.27

126.87

Support 1

1.2967

1.5951

79.00

0.9242

0.9897

1.0276

0.8114

102.72

126.31

Support 2

1.2938

1.5926

78.85

0.9223

0.9880

1.0253

0.8095

102.45

126.04

Support 3

1.2910

1.5901

78.70

0.9203

0.9862

1.0230

0.8075

102.18

125.76

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

Sign up for John’s email distribution list, here.

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