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Dollar Secures Fifth Straight Advance as Risk Trends Still Heavy

Dollar Secures Fifth Straight Advance as Risk Trends Still Heavy

2013-02-27 06:11:00
John Kicklighter, Chief Strategist
Share:
  • Dollar Secures Fifth Straight Advance as Risk Trends Still Heavy
  • Euro Steady While Capital Markets Tumble on Fears of Italy-Bred Instability
  • Japanese Yen Recovers as Panicked Selling Curbed
  • British Pound: Gilt Demand Soars Despite Moody’s Downgrade
  • New Zealand Suffers Market-Wide Drop, NZDUSD Suffers Serious Break
  • Swiss Franc Climbing as Euro-area Stability Trembling
  • Gold Recovery Extends Fourth Consecutive Day as FX Volatility Rises

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Dollar Secures Fifth Straight Advance as Risk Trends Still Heavy

Momentum behind a committed risk aversion theme stalled this past session – and thereby the most prominent fundamental driver for the greenback’s sustained climb has been curbed. For the Dow Jones FXCM Dollar Index (ticker = USDollar), a tame 17-point advance Tuesday extended the benchmark’s climb to a fifth consecutive trading day and toed yet another two-and-a-half year high. In the breakdown, however, we find that the greenback’s individual performance was once again uneven. EURUSD was virtually unmoved for the day (forming a doji) while USDJPY offered a sparse 0.2 percent bounce thanks to its sensitivity to risk trends. The saving grace for the currency was a 0.3 percent advance against the Australian dollar and far more substantive 1.0 percent rally versus the New Zealand dollar. Yet, both of those standout performances were the responsibility of the counter currency and not the greenback.

To extend the dollar’s already-impressive climb, we need to see a clear demand for the greenback itself – not demand that is a derivative of its counterparts’ weaknesses. A persistent rise in risk / fear is the best way to stoke the appeal of the market’s most elementary safe haven. Yet, the stalled selloff in yen crosses (more on that below) and the bounce from the S&P 500 to retest former support speaks to indecision after a possible, critical shift in the balance of sentiment. And, before we think that the chance has come and gone for lasting risk aversion, it is worth noting that the forex market volatility index (FX VIX) advanced to a fresh 8-month high and the equity-based VIX Index is still well above 16 percent. Furthermore, the Risk-Reward Index (a basic measure of market returns compared to market risk) has tumbled to a six-month low on its own. There is plenty of pent up energy in behind these markets…

Looking for potential catalysts to a market-wide risk aversion effort, some were looking to the Conference Board’s Consumer Confidence survey from this past session, but the indicator (beating expectations) doesn’t carry the necessary weight to induce systemic change. Fed Chairman Ben Bernanke’s testimony before the Senate Banking Committee carried a little more sway. With investors watching closely for any sign of a general time frame for the end to – and withdrawal of – QE, the central banker offered a few morsels for consideration. Bernanke said the central bank was monitoring asset prices (perhaps basing policy on market levels) but said he did not see evidence of an asset bubble. As to the eventual withdrawal, he said the exit would come with plenty of notice before hand. Have we already seen the early clues of this eventuality in the FOMC minutes? Looking ahead, the countdown to the Sequester continues; but the market’s concern isn’t yet clear.

Euro Steady While Capital Markets Tumble on Fears of Italy-Bred Instability

The euro was essentially stationary on the day – remarkable given the level of fundamental instability under the surface. The mild retracement of volatility readings offered just enough positive bearing to offset the heavy hit the European capital markets sustained. The region’s equity indexes suffered large losses Tuesday, but it Italy that suffered the most with a 4.9 percent drop on the day while the 10-year government bond yield surged by a record breaking 9 percent (or 41 basis points) to 4.897 percent. There are no immediate scenarios where the current political gridlock in the country will end up positive for Eurozone stability. Yet, a trend depends on whether Euro-area instabilityfears arise.

Japanese Yen Recovers as Panicked Selling CurbedWith the yen enjoying its biggest rally in nearly three years Monday, the currency could either capitalize on momentum or find pause. The latter scenario played out. Without active fundamental encouragement, there is little reason for the Japanese currency to advance when we know that in little more than a month the Bank of Japan will escalate its stimulus efforts and drive the currency even lower. There is a well-founded consensus that the new guard (Governor and two Deputy Governors) will escalate the easing effort. We will look for risk aversion to revive the yen crosses’ slide; but events like Prime Minister Abe announcing the officials BoJ nominees (possibly tomorrow) will create buoyancy.

British Pound: Gilt Demand Soars Despite Moody’s Downgrade

There was selling pressure for the sterling this past session, but nothing like the momentum from past weeks or the first opportunity to react to Moody’s downgrade of the United Kingdom’s AAA rating. This downgrade does indeed matter, but it has already been well priced into the currency’s performance lately. As evidence of how much influence this does have, we find that the 10-year UK government bond (Gilt) yield posted its biggest drop (5.4 percent) in five months. Second round GDP figures in the upcoming session will lack for punch.

New Zealand Suffers Market-Wide Drop, NZDUSD Suffers Serious Break

The New Zealand dollar was the biggest mover by a wide margin this past session. On an otherwise tame session, it’s drop was between 0.7 and 1.0 percent against its most liquid counterparts. The multi-year low in 1Q inflation expectations and unexpected trade deficit hurt the currency, but the benchmark 10-year yield decline carries more weight. As an investment currency, lower market rates are painful.

Swiss Franc Climbing as Euro-area Stability Trembling

Italy’s political situation is threatening to once again undermine European financial stability. Naturally, investors recognize the spread the contagion can encourage; and capital bypasses the slosh to a fellow EZ member and moves straight to the non-aligned safe haven: Switzerland. The 2-year Swiss government bond yield is negative again and the 5-year yields dropped to six-week lows. Keep an eye on EURCHF.

Gold Recovery Extends Fourth Consecutive Day as FX Volatility Rises

With the persistent rise in currency market volatility, investors are more sensitive to the changes in their wealth brought on by bigger changes in exchange rates. While the savvy market participant can hedge the risk in the FX market, many simply look to place their funds somewhere where it won’t be manipulated by competitive devaluation efforts. A fourth consecutive daily climb from gold matches the six-month high in the FX VIX index. In other news, ETF total gold holdings posted have dropped at their fastest pace on recent record over the past 20-days…

**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

7:00

CHF

UBS Consumption Indicator

1.34

A stronger CHF and auto industry led to an uptrend since 06/12

7:00

EUR

German GfK Consumer Confidence Survey

5.9

5.8

The disappointed growth forecasts could weigh on confidence.

8:00

CHF

KOF Swiss Leading Indicator

1

1.05

Declining after a peak at 1.68 on 09/12

9:00

EUR

Euro-Zone M3 s.a. (YoY)

3.2%

3.3%

Money supply increased at a slow pace for 5 years.

9:30

GBP

Gross Domestic Product (YoY)

0.0%

0.0%

Productivity and investment could benefit from BoE’s dovish tone for more QE. (BoE’s Fisher and King both consider more stimulus and bond buying)

9:30

GBP

Total Business Investment (YoY)

5.1%

9:30

GBP

Gross Fixed Capital Formation

0.2%

-0.2%

9:30

GBP

Total Business Investment (QoQ)

3.8%

9:30

GBP

Private Consumption

-0.1%

0.4%

Increasing expenditure since 03/11.

9:30

GBP

Exports

-0.8%

1.2%

A stable trade balance as exports are mostly within EU, changes in exch rates have limited effect.

9:30

GBP

Imports

0.0%

-0.4%

9:30

GBP

Government Spending

0.1%

0.8%

Has increased since 06/12, may due to more benefit claims.

10:00

EUR

Euro-Zone Economic Confidence

89.9

89.2

Economic. Business, service and industrial confidence have stabilized and rebounded since the low on 10/12 where unemployment in Eurozone reached new heights.

10:00

EUR

Euro-Zone Business Climate Indicator

-1.02

-1.09

10:00

EUR

Euro-Zone Industrial Confidence

-13.1

-13.9

10:00

EUR

Euro-Zone Consumer Confidence

-23.6

-23.6

10:00

EUR

Euro-Zone Services Confidence

-8.8

-8.8

13:30

USD

Durable Goods Orders

-4.0%

4.3%

1Y avg. 0.6%; H: 9.1%; L: -13.1%.

13:30

USD

Durables Ex Transportation

0.3%

1.3%

1Y avg. 0.1%; H: 1.8%; L: -2.2%.

13:30

USD

Cap Goods Orders Nondef Ex Air

0.2%

0.2%

1Y avg. -0.1%; H: 3.3%; L: -5.6%.

15:00

USD

Pending Home Sales (MoM)

1.7%

-4.3%

YoY sales has declined in prior reading, buyers remained cautious ahead of sequester debate.

15:00

USD

Pending Home Sales (YoY)

7.9%

4.9%

15:30

USD

DOE U.S. Crude Oil Inventories

2500K

4143K

Oil demand increased since 2013.

21:45

NZD

Building Permits (MoM)

-2.0%

9.4%

Subject to seasonal changes.

23:15

JPY

Nomura/JMMA Manufacturing PMI

47.7

Declining demand for foreign stocks (Japanese funds did not contribute to the recent US equities rally). Declining demand for foreign bonds (i.e. Australian bonds)

23:50

JPY

Foreign Buying Japan Bonds (Yen)

-¥181.2B

23:50

JPY

Industrial Production (MoM)

1.5%

2.4%

23:50

JPY

Japan Buying Foreign Bonds (Yen)

-¥620.6B

23:50

JPY

Foreign Buying Japan Stocks (Yen)

¥197.9B

GMT

Currency

Upcoming Events & Speeches

-:-

JPY

Japan Cabinet Office Economic Report (JAN)

-:-

AUD

Australia to Sell A$600 Mln in 2027 Bonds

10:00

EUR

ECB Announces 84-Day Dollar Tender

10:15

EUR

ECB Announces 3-Month Refinancing Trend

15:00

USD

Fed’s Bernanke Testifies to House Financial Services

17:30

EUR

ECB President Draghi Speaks in Munich

21:30

USD

Fed’s Fisher Speaks on Economy and Monetary Policy

23:00

NZD

New Zealand Finance Minister English Speaks

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

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CLASSIC SUPPORT AND RESISTANCE

EMERGING MARKETS 18:00 GMT

SCANDIES 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

5.8300

6.1150

Resist 1

15.0000

1.9000

9.1900

7.8075

1.3250

Resist 1

6.8155

5.7350

5.8200

Spot

12.8470

1.8059

8.8246

7.7586

1.2387

Spot

6.4549

5.7083

5.6977

Support 1

12.5000

1.6500

8.5650

7.7490

1.2000

Support 1

6.0800

5.4440

5.5000

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

1.3191

1.5272

93.28

0.9408

1.0338

1.0317

0.8345

122.26

141.16

Resist. 2

1.3159

1.5235

92.97

0.9385

1.0318

1.0294

0.8322

121.76

140.68

Resist. 1

1.3127

1.5198

92.67

0.9363

1.0299

1.0271

0.8299

121.26

140.20

Spot

1.3063

1.5125

92.06

0.9319

1.0259

1.0225

0.8254

120.26

139.24

Support 1

1.2999

1.5052

91.45

0.9275

1.0219

1.0179

0.8209

119.26

138.28

Support 2

1.2967

1.5015

91.15

0.9253

1.0200

1.0156

0.8186

118.76

137.80

Support 3

1.2935

1.4978

90.84

0.9230

1.0180

1.0133

0.8163

118.26

137.32

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

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