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FOREX ANALYSIS: Dollar Unable to Close Fifth Advance on Fed Slump

FOREX ANALYSIS: Dollar Unable to Close Fifth Advance on Fed Slump

2012-10-25 04:24:00
John Kicklighter, Chief Strategist
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  • Dollar Unable to Close Fifth Advance on Market’s Fed Slump
  • British Pound On the Verge of Critical 128.50 Break Versus Yen Ahead of GDP
  • Euro Sees a Controlled Slide after Officials Deflate Rescue Rumors
  • New Zealand Dollar Rallies Beyond 0.8200 after RBNZ Maintains Hawkish Bias
  • Japanese Yen Connection to Risk Trends Waning as Stimulus Expectations Build
  • Australian Dollar Rallies Back Above 1.0300 as Chinese Data Compliments CPI
  • Gold Tests 1700 as Fed Holds Back on Stimulus

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

Dollar Unable to Close Fifth Advance on Market’s Fed Slump

A five-day rally proved too much for the Dow Jones FXCM Dollar Index (ticker = USDolllar). Though risk trends were making little progress this past session (bullish or bearish) and the Fed announced that it would not be increasing its MBS purchases as some stimulus-addicts had expected, the dollar put in for a sharp decline Wednesday. Looking at individual performances, we find a better sense of why the dollar slid and why its immediate ambitions are not necessarily to see EURUSD surge above 1.3000. The Dollar Index is comprised of an equal weighting of four of the currency’s most liquid and fundamental distinct counterparts. For the benchmark EURUSD, the greenback actually put in for a modest gain on the day. Elsewhere, the reflection was on cross currency strength rather than dollar weakness. AUDUSD posted an aggressive rally largely due to the strong CPI figures while the cable rallied as a consensus for a rebound in 3Q GDP takes hold of speculative appetites.

For the dollar itself, the top fundamental concern remains general risk trends. In a market where rates are already extremely low, the near-zero yield on US benchmark rates lays the burden for sentiment on the volatility (i.e. ‘Risk’) side of the equation. On that side, we find that that the Forex-based FX VIX Index is very slow to pick up off its five-year lows while the equities version has actually eased back modestly from its three-month high (just below 20 percent). There are two means for leveraging the fear that catalyzes these measures higher: a severe deterioration on fundamentals or rapid price action away from higher yielding assets (which itself is often a response to the first factor).

This past session, we were met with a potential risk booster (and thereby dollar weight) in the form of the FOMC rate decision. Though the central bank had just introduced its QE3 program to buy $40 billion in mortgage-backed securities in September, there was a building murmur amongst the speculative ranks that the central bank would announce an increase to the size of the purchases in response to a pickup in benchmark rates or as a preemptive offset to the expiration of the Treasury purchases in the Operation Twist program at the end of the year. Recognition that the Fed wouldn’t ramp up stimulus removed a burden, but it wasn’t a spark for serious risk aversion. The same reticence heading into event risk and tepid reaction afterwards is a serious possibility heading into the end of this week with the US 3Q GDP reading.

British Pound On the Verge of Critical 128.50 Break Versus Yen Ahead of GDP

On the topic of growth readings, the UK is scheduled to report its own third quarter GDP reading at (08:30 GMT). As we have seen many times before, the UK data has limited influence over the pound itself and rarely is the source of a meaningful trend from the currency. However, this particular piece of event risk carries more sway than most events. Furthermore, there are certain pairs that a particular outcome can play to serious breakout potential (like GBPUSD’s long-term trendline at 128.50) or spur a trend already underway (such as the GBPAUD decline or tentative EURGBP drop back below 0.8100). Key here is a significant enough surprise to stir momentum. The bar has been set high with the Bloomberg consensus showing a 0.6 percent quarterly jump. Falling short of elevated expectations in a weak risk environment would be painful.

Euro Sees a Controlled Slide after Officials Deflate Rescue Rumors

Hope and speculation was starting to leak into the euro’s defense Tuesday with suggestions (initially by unconfirmed sources and then officials themselves) that said Greece had received approval for a two-year extension on its effort to return to the 3 percent deficit-to-GDP effort by the Troika. That was cleared up this past session when the German Finance Minister stated plainly that no such accommodations were made. Adding to that crush of unsubstantiated hope, the Euro Zone PMI Composite ( a good, timely proxy for general growth) printed at its lowest level since June 2009 and rumors began to circulate that EU officials were demanding junior bond holders of Bankia take losses. Quite the change.

New Zealand Dollar Rallies Beyond 0.8200 after RBNZ Maintains Hawkish Bias

The kiwi was easily the biggest mover on the day Wednesday. Once again, market expectations set up a big move from what would have otherwise been considered a ‘neutral’ outcome for event risk. After New Zealand 3Q inflation dropped to its lowest level since 1999 (a 0.8 percent reading that was well below the target band), the market started to assume, the RBNZ would take the same tack as the RBA in a dovish tone. Instead, new Governor Wheeler retained a slight hawkish bias. This is good for a relief rally on risk pairs and momentum for AUDNZD.

Japanese Yen Connection to Risk Trends Waning as Stimulus Expectations Build

As the market’s favorite funding currency in the carry trade, we have come to expect the Japanese yen to hold a perfectly negative correlation to risk trends (fall when sentiment improves, rise when confidence collapses). However, recently we have seen a significant turn on benchmarks in the US equity indexes; and yet, the commodity currency pairs have not conceded to the push. The yen is a safe haven currency in many regards, but there is a better alternative (USD). Carry is what sustains the correlation, but how much carry exposure is left in the market. In the meantime, there is now a suggestion floating around that the government will announce a 400 billion yen stimulus program on Friday.

Australian Dollar Rallies Back Above 1.0300 as Chinese Data Compliments CPI

The Aussie dollar started a rally early Wednesday morning that began with the surprise showing from 3Q CPI figures. The 2.0 percent pace is hardly turning doves to hawks, but it does remove some pressure for aggressive cuts. Then there was the Chinese PMI figures which printed better than expected but were 12 months into a contractionary phase. In fundamentals terms, this is a relief rally. To continue, risk is important.

Gold Tests 1700 as Fed Holds Back on Stimulus

Though there was considerable back and forth for FX pairs this past session, gold aligned nicely to the fundamentals. A reflection of an otherwise steady dollar, the precious metal would look at the Fed decision for guidance. An increase in MBS purchases would have dinged the value of traditional currency nicely and bolstered the alternative store of wealth’s appeal. Alas, that didn’t happen. Traders watch 1700.

**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

-:-

JPY

Small Business Confidence (OCT)

45.1

Index still shrinking

2:00

CNY

China Leading Economic Index (SEP)

240.4

Leading index seeing rise as leadership change approaches

8:00

EUR

Euro-Zone M3 s.a. (YoY) (SEP)

3.0%

2.9%

Eurozone money supply continues to grow steadily, additional room to rise available

8:00

EUR

Euro-Zone M3 s.a. (3M)(SEP)

3.1%

3.2%

8:30

GBP

GDP (YoY) (3Q A)

-0.5%

-0.5%

British double dip recession expected to continue, will forerun November 8th BOE decision

8:30

GBP

GDP (QoQ) (3Q A)

0.6%

-0.4%

8:30

GBP

Index of Services (MoM) (AUG)

0.3%

1.1%

Services index expected to decline again in 3m long term view

8:30

GBP

Index of Services (3Mo3M) (AUG)

-0.3%

0.1%

12:30

USD

Chicago Fed Nat Activity Index (SEP)

-0.2

-0.87

Midwestern index recovering

12:30

USD

Durables Ex Transportation (SEP)

0.8%

-1.6%

Durable goods orders may refuel growth expectations after disappointing earnings numbers from GE, CAT

12:30

USD

Durable Goods Orders (SEP)

6.8%

-13.2%

12:30

USD

Cap Goods Orders Nondef Ex Air (SEP)

0.3%

1.1%

12:30

USD

Cap Goods Ship Nondef Ex Air (SEP)

0.5%

-0.9%

12:30

USD

Initial Jobless Claims (OCT 19)

371K

388K

Weekly data expected to drop further as labor market strengthens

12:30

USD

Continuing Claims (OCT 12)

3260K

3252K

14:00

USD

Pending Home Sales (MoM) (SEP)

2.0%

-2.6%

Home sales expected to rise as market buys with low mortgages

14:00

USD

Pending Home Sales (YoY) (SEP)

9.6%

14:30

USD

EIA Natural Gas Storage Change (OCT 19)

51

Natural gas in seasonal higher demand

15:00

USD

Kansas City Fed Manf. Activity (OCT)

5

2

Following stronger agriculture, shipping sectors

21:45

NZD

Trade Balance (New Zealand dollars) (SEP)

-850M

-789M

Exports expected to be stable, moderately weaker as strong Kiwi cuts into Aussie, Chinese demand

21:45

NZD

Exports (New Zealand dollars) (SEP)

3.30B

3.32B

21:45

NZD

Imports (New Zealand dollars) (SEP)

4.20B

4.10B

21:45

NZD

Balance (YTD) (New Zealand dollars) (SEP)

-914M

-866M

23:30

JPY

National CPI (YoY) (SEP)

-0.4%

-0.4%

Core inflation expected to drop sharply again, may prompt even more BoJ/government easing November polling nears

23:30

JPY

National CPI Ex-Fresh Food (YoY) (SEP)

-0.2%

-0.3%

23:30

JPY

National CPI Ex Food, Energy (YoY) (SEP)

-0.7%

-0.5%

23:30

JPY

Tokyo CPI (YoY) (OCT)

-0.8%

-0.7%

23:30

JPY

Tokyo CPI Ex-Fresh Food (YoY) (OCT)

-0.5%

-0.4%

23:30

JPY

Tokyo CPI Ex Food, Energy (YoY) (OCT)

-1.1%

-1.1%

GMT

Currency

Upcoming Events & Speeches

03:45

JPY

Japan to Sell 2-Year Bills

17:00

USD

US to Sell $29 Bln in 7-Year Notes

-:-

USD

US Earnings (Apple)

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

6.1875

6.1150

Resist 1

15.0000

1.9000

9.1900

7.8075

1.3250

Resist 1

6.7600

5.8175

5.7075

Spot

12.9524

1.8012

8.7596

7.7505

1.2213

Spot

6.6778

5.7446

5.7421

Support 1

12.5000

1.6500

8.5650

7.7490

1.2000

Support 1

6.0800

5.5840

5.3040

Support 2

11.5200

1.5725

6.5575

7.7450

1.1800

Support 2

5.8085

5.3350

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

1.6151

80.59

0.9392

1.0002

1.0462

0.8314

104.98

129.48

Resist. 2

1.3071

1.6125

80.43

0.9373

0.9984

1.0439

0.8294

104.70

129.19

Resist. 1

1.3042

1.6099

80.28

0.9353

0.9966

1.0416

0.8274

104.41

128.91

Spot

1.2985

1.6046

79.98

0.9313

0.9930

1.0370

0.8235

103.85

128.33

Support 1

1.2928

1.5993

79.68

0.9273

0.9894

1.0324

0.8196

103.29

127.76

Support 2

1.2899

1.5967

79.53

0.9253

0.9876

1.0301

0.8176

103.00

127.47

Support 3

1.2870

1.5941

79.37

0.9234

0.9858

1.0278

0.8156

102.72

127.18

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

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

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