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Forex: Dollar Rally May Soon Run Out of Steam, Stranding AUD/USD

Forex: Dollar Rally May Soon Run Out of Steam, Stranding AUD/USD

John Kicklighter, Chief Strategist
  • Dollar Rally May Soon Run Out of Steam, Stranding AUD/USD
  • Euro: Beware the Relief Rally and 200-Day Moving Average
  • Japanese Yen Likely to Sustain its Tumble Regardless of Risk
  • Swiss Franc: SNB Officials Still Silent, EURCHF May Not Need Warnings
  • Australian Dollar Finally Showing Capitulation
  • Gold Extends Decline as Dollar Advance Outweighs Fiscal Cliff Fear

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

Dollar Rally May Soon Run Out of Steam, Stranding AUD/USD

Since peaking back on November 5, the Dow Jones Industrial Average has dropped almost 800 points or 6 percent. That level of move from one of the benchmarks for investor sentiment is a strong reading of risk aversion for the financial markets. And yet, though that same period, the Dow Jones FXCM Dollar (ticker = USDollar) – a liquidity asset on the extreme opposite of the risk spectrum – has only recently made bullish progress of its own for a net 90 points or 1 percent . The contrast reflects the escalation of risk deleveraging and the point at which the effort finally made its shift to a market-wide influence. Given the ‘rich’ pricing of the US equities market under the belief that Fed participation would absorb investors’ risk, it is most sensitive of the asset classes to a correction. Currency exposure, on the other hand, didn’t have that direct prop.

So, now risk aversion is heavy enough that it has finally engaged selling in stubborn FX holdouts like favored carry trade pair AUDUSD. Just as the Dollar Index has just recently cleared resistance at 10,000 to make its way to three-month highs, this pair just recently broke its rising trend and 20-day moving average to move back towards 1.0300. Bears have an eye towards a more prominent 1.0150, but it may take longer to reach that big figure than they had anticipated. The dollar’s late start (or more appropriately, the late escalation of risk aversion to market-wide levels) may ultimately sabotage a lasting trend – or at least stall it for a while. Next week, is the Thanksgiving holiday for the US markets. Markets are closed on Thursday and activity on the following Friday to the holiday is historically extremely low. Furthermore, in the lead up to the break, investors often throttle back on their trading. This is something of a firebreak for a risk drive that is still trying to find its legs. If the Eurozone crisis, Fiscal Cliff, Middle Eastern tension and other worries abate; the dollar may be out of steam.

In the meantime, another fundamental theme that works against the greenback started to pop up again: stimulus. Wednesday, the conversation went to the FOMC minutes, which suggested a number of its membership wanted to increase stimulus after Operation Twist ended. That was already baked in as the program’s expiration - and its $45 billion in long-term Treasury purchases - would be a defacto tightening. San Francisco Fed President Williams echoed these sentiments when he predicted an increase in QE3 purchases to $85 billion per month. On the same topic, the New York Fed released a survey of its primary dealers (market makers for Treasuries) which showed expectations for the current stimulus regime to hold through the first quarter of 2014 and the first rate hike in the third quarter of 2015. That sets the market’s benchmark forecast. Any changes to that will shift the fundamental tone behind the dollar and stimulus-supported risk trends.

Through the final trading session of the week, the docket carries the TIC flows data (net foreign interest is US assets) for September. Far more compelling for dollar traders though is the scheduled meeting between President Obama and Congressional leaders on the Fiscal Cliff.

Euro: Beware the Relief Rally and 200-Day Moving Average

EURUSD has defined the standard lines of risk trends in the markets and advanced for a second consecutive session through Thursday’s close. Now, the well worn technical resistance and 200-day moving average at 1.2825 are within reach. If it were as simple as risk trends taking over, we could look to the correlation to other sentiment benchmarks to gauge the next move. However, the market conditions heading into next week complicate that catalyst and there are internal fundamental concerns that will vie for the currency’s attention. This past session offered tepid ‘improvement’. The Eurozone GDP reading for 3Q reported its second quarterly contraction (0.1 percent) for an official recession, but Germany and France bested their respective forecasts – though both are still slowing. The focus now turns back towards imminent financial threats. There is another EU ministers meeting on the docket for Tuesday, November 20. There is chatter that this is a definitive decision time for Greece…

Japanese Yen Likely to Sustain its Tumble Regardless of Risk

In little more than a week, US equities have dropped nearly 6 percent; but over that same period, the yen has dropped as much as 1.8 percent against its major crosses. The Japanese currency is a safe haven and funding currency. It should theoretically gain as FX traders seek safety, Japanese investors repatriate capital and low-yielding carry trade positions are unwound. Yet, that hasn’t happened. This could speak to a fundamental shift where carry interest is essentially fully expunged and its safety status is under question. More likely though, risk trends simply haven’t found enough momentum to offset the growing threat of devaluation made by policy officials. With the December 16 vote and LDP leader Abe calling on the BoJ to embark on unlimited stimulus, current Finance Minister Jojima has said he would look into a second stimulus program.

Swiss Franc: SNB Officials Still Silent, EURCHF May Not Need Warnings

EURCHF has retraced to little more than 35 pips away from the 1.2000 floor the Swiss National Bank imposed back in September of last year (and the pair was anchored to for five months through September), and yet we haven’t heard a peep from policy officials. This could be a sign that Jordan and his fellow central bankers are planning on giving up holding back the tide – but that is unlikely. Perhaps they expect a short-term solution for Greece and bailout request for Spain in the near future that can reduce euro tail risk and naturally lift the pair. That is a lot of hope.

Australian Dollar Finally Showing Capitulation

The Australian dollar is finally giving in to risk trends. Up until yesterday, the highest-yielding major was holding out despite the slide in equities and other speculative assets. Through the past week, when sentiment offered a gap; the Aussie dollar managed to fill it with an ‘improving’ rate outlook. However, we have seen the 12-month forecast top out recently around 55 bps worth of cuts. Without further relief, it is all risk.

Gold Extends Decline as Dollar Advance Outweighs Fiscal Cliff Fear

We may have seen the extent of what gold bulls are able to muster for a correction from the bear wave that took root at the beginning of October. The dollar’s individual progress these past 48 hours has no doubt had a significant impact on the metals’ decline to this point. Yet, even if the greenback stalls, gold may continue its slide. If risk abates, it likely will be due to a tamed Fiscal Cliff or Eurozone fears – gold drivers.

ECONOMIC DATA

Next 24 Hours

GMT

Currency

Release

Survey

Previous

Comments

7:00

EUR

EU 25 New Car Registrations (OCT)

-

-10.8%

Large purchases continue to decline

9:00

EUR

Euro-Zone Current Account n.s.a. (SEP)

-

7.2B

Trade balance may increase on lower imports

9:00

EUR

Euro-Zone Current Account s.a. (SEP)

-

8.8B

10:00

EUR

Euro-Zone Trade Balance (SEP)

10.0B

6.6B

10:00

EUR

Euro-Zone Trade Balance s.a. (SEP)

9.5B

9.9B

13:30

CAD

International Securities Transactions (SEP)

-

6.90B

Demand for Canadian assets remain robust

14:00

USD

Total Net TIC Flows (SEP)

-

$91.4B

Treasury purchases expected to decrease in risk-positive September

14:00

USD

Net Long-term TIC Flows (SEP)

$50.0B

$90.0B

14:15

USD

Industrial Production (OCT)

0.2%

0.4%

Domestic heavy industries and manufacturing growing slowly

14:15

USD

Manufacturing (SIC) Production (OCT)

0.4%

0.2%

14:15

USD

Capacity Utilization (OCT)

78.3%

78.3%

GMT

Currency

Upcoming Events & Speeches

-:-

EUR

Greece to Roll €5 Bln in Expiring Debt

-:-

USD

President Obama to Discuss Fiscal Cliff with Congressional Leaders

9:45

CHF

SNB’s Jordan speaks on Swiss economy

10:30

EUR

ECB’s Weidmann Speaks on Euro Economy

20:45

USD

Fed's Lockhart Speaks in Virginia

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

5.8575

5.7800

Spot

13.1656

1.7859

8.7089

7.7514

1.2253

Spot

6.6782

5.8526

5.7210

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

1.2853

1.6083

80.09

0.9536

1.0071

1.0489

0.8222

102.41

128.22

Resist. 2

1.2827

1.6057

79.94

0.9517

1.0054

1.0467

0.8203

102.14

127.92

Resist. 1

1.2800

1.6032

79.79

0.9497

1.0038

1.0445

0.8185

101.87

127.63

Spot

1.2746

1.5981

79.49

0.9459

1.0004

1.0402

0.8148

101.32

127.04

Support 1

1.2692

1.5930

79.19

0.9421

0.9970

1.0359

0.8111

100.77

126.44

Support 2

1.2665

1.5905

79.04

0.9401

0.9954

1.0337

0.8093

100.50

126.15

Support 3

1.2639

1.5879

78.89

0.9382

0.9937

1.0315

0.8074

100.23

125.85

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

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