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FOREX: Dollar Ends Week Unchanged, What Will Force a EURUSD Break Out?

FOREX: Dollar Ends Week Unchanged, What Will Force a EURUSD Break Out?

2012-10-27 04:12:00
John Kicklighter, Chief Strategist
Share:
  • Dollar Ends Week Unchanged, What Will Force a EURUSD Break Out?
  • Euro Hopes Seek Spain Bailout, Fear Centered on Greece
  • Japanese Yen: Japan’s Fiscal Cliff Could Drive USDJPY to 85, Beyond
  • Canadian Dollar Sensitive to Jobs Data as Policy Wavers
  • New Zealand and Australian Dollar: Rely on Risk Trend, If that Fails Intervention
  • Oil Traders Watch Hurricane Sandy but Supplies Already Topped Off
  • Gold Posts First Three-Week Decline in 13 Months, Next Break 1700?

New to FX? Watch this Video; For live market updates, visit DailyFX’s Real Time News Feed

Dollar Ends Week Unchanged, What Will Force a EURUSD Break Out?

With the close this past Friday, the Dow Jones FXCM Dollar Index (ticker = USDollar) closed the week out less than a point from where it opened. In fact, this measure of the currency has progressed less than 0.1 percent through each of the past three weeks. There is no better measure of congestion and indecision. The lack of progress fits the fundamental backdrop of a market that grows increasingly concerned about the outlook for growth, yields and financial stability yet doesn’t deflate risky assets due to unrelenting hope for more stimulus. This lack of conviction has left the S&P 500 with a critical reversal of the most recent phase of its rally from June but without the commitment to build momentum on a move below 1400. Similarly, the same uncertainty has kept EURUSD anchored to congestion between 1.3100 and 1.2825.

If we want to see a clear and lasting move from the dollar – we need a development that plays to its most basic role: ultimate safe haven and liquidity provider. Given the low level of participation in the capital markets (many investors have kept their money on the sidelines due to the extremely low yields and persistent of financial risks), it is rather easy to spur volatility with economic indicators. Yet, turning the tides of sentiment is an order that few of the ordinary indicators and releases can accomplish. The October NFPs due Friday are the pinnacle for scheduled economic data on the US docket; yet its already-lukewarm fundamental impact has been further diminished. We learned this past week that the Fed would not move to increase its stimulus efforts until at least the expiration of the Operation Twist program, and its ‘growth proxy’ role has been diminished by the release of 3Q GDP. That said, the typical slowdown into its release will likely reply.

To break the cycle of indecision and hesitation ahead of never-ending event risk (we can wait for NFPs, then the US election, then the Fiscal Cliff, etc), we need a serious withdrawal of capital from risky exposure or mass influence of sidelined funds into the system. It would be extremely difficult to line up the necessary events to spur lasting rally (another interim stimulus, a move towards permanent fix for the Euro-zone, a turn in growth, slow recovery in benchmark rates, etc), but that doesn’t preclude another temporary rally on another short-term fix. Meanwhile, the backdrop has deteriorated enough that all it would take is the infectious belief that stimulus has reached is limits to spark fear.

Euro Hopes Seek Spain Bailout, Fear Centered on Greece

Europe’s two greatest threats carry opposing high-impact possibilities. While both Greece and Spain can see their situations improve or deteriorate, there is a greater influence over the euro and investor sentiment depending on which way they fall. Considering Spain is the Eurozone’s fourth largest economy, a fully engaged crisis can cause severe problems for the region’s future. However, there are still a number of interim steps that the country would have to go through before the market considered it hopeless. In fact, should Spain ask for a full rescue, it would very likely spur a substantial rally and perhaps even sentiment rally. It wouldn’t solve the underlying issues but it would delay the pain. Alternatively, Greece has passed through too many iterations of rescue for investors to be fooled by temporary measures. Furthermore, the country is struggling just to receive aid to keep running. Amid a lot of data, there is also a Troika-Greece meeting on Monday and Wednesday.

Japanese Yen: Japan’s Fiscal Cliff Could Drive USDJPY to 85, Beyond

The market is well aware of the fiscal shortfalls of Japan, but the country’s troubles on this front have not received as much press (from financial news and traders) as its US counterpart. This was at least partially due to the fact that there was a hard time frame to the United States’ trouble (the Fiscal Cliff that can cut $600 billion from GDP at the end of year) while the world grew accustomed to Japan’s debts. Well, that passive acceptance may come to an end as the government struggles to pass a bill necessary to keep operating. The recently announced stimulus program will tap reserve funds. But, by the end of November – with a scheduled debt sale – the country may run out of cash.

Canadian Dollar Sensitive to Jobs Data as Policy Wavers

Loonie skeptics have long warned that the Canadian economy is facing the same sort of troubling housing bubble and consumer debt that led so many other country’s to crisis. Yet, if it isn’t an immediately pressing problem, why not take advantage of the currency’s relative yield and stability. That ideal mix of safety and return may be coming to an end. Moody’s this past Friday placed six large Canadian banks on downgrade reviews. Next week, we have Canadian employment figures which can further weigh BoC Governor Carney’s concerns about ‘growing risks’.

New Zealand and Australian Dollar: Rely on Risk Trend, If that Fails Intervention

Both the Aussie and kiwi dollars have shown exceptional resilience through a questionable risk environment. Both are investment currencies for global Forex and interest rate traders; but their historically low yields are bolstered by a severe lack of alternative options with positive, real return. Central banks have recognized this and started to diversify into these funds. To offset this stubborn inflow, RBA and RBNZ central bankers are likely hoping that risk aversion drops carry to offer exchange rate relief. If that doesn’t happen, they have to cut rates / intervene.

Oil Traders Watch Hurricane Sandy but Supplies Already Topped Off

Risk aversion and a long building supply-demand imbalance pushed US crude to its lowest close in three months this past week. Having fallen five out of the past six weeks, a clear trend is starting to develop (though futures volume and open interest are dropping). With the speculative appeal of the commodity tarnished, the market recognizes production at 17-year highs. Not even Hurricane Sandy can change that glut.

Gold Posts First Three-Week Decline in 13 Months, Next Break 1700?

The bear trend that began for gold at the beginning of this month just below 1800 is proving just as consistent as the climb that preceded it. The metal is now eyeing 1700 with something that looks like hesitation. A dollar tumble and/or stimulus for Spain are among the few events that can turn this tide. Meanwhile, we are seeing the most consistent bear trend in 13-months, a drop in speculative interest and building volume.

**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

Retail Trade (YoY) (SEP)

1.0%

1.7%

Trade expected to follow last week’s spending data weaker

23:50

(Sun)

JPY

Retail Trade s.a. (MoM) (SEP)

-1.5%

1.5%

23:50

(Sun)

JPY

Large Retailers' Sales (SEP)

-1.2%

-0.9%

(Sun)

CNY

Leading Index (SEP)

99.63

Leading index seen higher with additional government support

0:01

GBP

Lloyds Business Barometer (OCT)

10

Lloyd’s index continues rise

0:01

GBP

Hometrack Housing Survey (MoM) (OCT)

-0.1%

BoE-watched index continues to fall, tracking tighter credit

0:01

GBP

Hometrack Housing Survey (YoY) (OCT)

-0.5%

9:30

GBP

Net Consumer Credit (SEP)

0.1B

-0.1B

Credit seen shrinking with housing as Bank of England may look to increase asset purchases

9:30

GBP

Net Lending Sec. on Dwellings (SEP)

0.5B

-0.3B

9:30

GBP

Mortgage Approvals (SEP)

48.5K

47.7K

9:30

GBP

M4 Money Supply (MoM) (SEP)

0.2%

Broadest view of money supply showing relatively moderate growth. Recession concerns may prompt more easing

9:30

GBP

M4 Money Supply (YoY) (SEP)

-4.1%

9:30

GBP

M4 Ex IOFCs 3M Annualised (SEP)

7.8%

12:30

USD

Personal Income (SEP)

0.4%

0.1%

Consumer income continues to rise, though low rate of growth may be point of concern for economic recovery

12:30

USD

Personal Spending (SEP)

0.6%

0.5%

12:30

USD

PCE Deflator (YoY) (SEP)

0.4%

1.5%

12:30

USD

PCE Core (YoY) (SEP)

0.1%

1.6%

13:00

EUR

German CPI (YoY)(OCT P)

1.9%

2.0%

German preliminary inflation seen to be under control near 2%,

13:00

EUR

German CPI - EU Harmonized (YoY) (OCT P)

2.0%

2.1%

14:30

USD

Dallas Fed Manufacturing Activity (OCT)

0.0

-0.9

Dallas index growing with other regional surveys

23:30

JPY

Jobless Rate (SEP)

4.2%

4.2%

Japanese labor market stagnant, though weakness seen as overall economy slows

23:30

JPY

Job-To-Applicant Ratio (SEP)

0.83

0.83

23:30

JPY

Household Spending (YoY) (SEP)

0.8%

1.8%

Spending may continue drop, mirroring slower retail spending

23:50

JPY

Industrial Production (YoY) (SEP P)

-7.1%

-4.6%

Preliminary industrial production expected to drop further on weak exports

23:50

JPY

Industrial Production (MoM) (SEP P)

-3.1%

-1.6%

GMT

Currency

Upcoming Events & Speeches

-:-

EUR

Greece Expected to Brief Troika on Progress

7:30

EUR

ECB’s Jens Weidmann Speaks on Euro Economy

19:00

USD

US Treasury Issues Quarterly Borrowing Estimate

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

6.1875

6.1150

Resist 1

15.0000

1.9000

9.1900

7.8075

1.3250

Resist 1

6.7600

5.8175

5.7800

Spot

12.9897

1.8005

8.6431

7.7503

1.2206

Spot

6.7003

5.7654

5.7729

Support 1

12.5000

1.6500

8.5650

7.7490

1.2000

Support 1

6.0800

5.5840

5.6000

Support 2

11.5200

1.5725

6.5575

7.7450

1.1800

Support 2

5.8085

5.3350

5.3040

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

1.3051

1.6210

80.28

0.9425

1.0041

1.0466

0.8309

104.17

129.47

Resist. 2

1.3023

1.6184

80.12

0.9406

1.0023

1.0443

0.8289

103.89

129.17

Resist. 1

1.2994

1.6157

79.96

0.9386

1.0005

1.0420

0.8269

103.61

128.88

Spot

1.2938

1.6105

79.65

0.9347

0.9969

1.0373

0.8229

103.05

128.28

Support 1

1.2882

1.6053

79.34

0.9308

0.9933

1.0326

0.8189

102.49

127.68

Support 2

1.2853

1.6026

79.18

0.9288

0.9915

1.0303

0.8169

102.21

127.39

Support 3

1.2825

1.6000

79.02

0.9269

0.9897

1.0280

0.8149

101.93

127.09

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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