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Dollar Reversal Risk High if Fear Doesn’t Fill in for QE3 Debate

Dollar Reversal Risk High if Fear Doesn’t Fill in for QE3 Debate

2013-05-28 01:12:00
John Kicklighter, Chief Strategist
Share:
  • Dollar Reversal Risk High if Fear Doesn’t Fill in for QE3 Debate
  • Japanese Yen: Volatility in Japan Adds to Dangers for Yen Bears
  • Euro Traders Should be Ready for Updates on Spain, France, Portugal, etc.
  • Australian Dollar Oversold so Long as Fundamentals Don’t Kick In
  • Swiss Franc: Tempered Euro Influence Makes for Data Sensitivity
  • Canadian Dollar at Crucial Levels before BoC Rate Decision
  • Gold Volume, Price Action Signal Impending Breakout

Dollar Reversal Risk High if Fear Doesn’t Fill in for QE3 Debate

The extended holiday weekend for the US and UK sapped the speculative drive from the global markets Monday. However, this lull will soon pass, and we will return to the menacing volatility and equity drop seen the second half of last week. Is the market destined to have its faith in persistent capital gains and central bank stimulus shaken, or has the extended weekend cured investors of those doubts? Taking the temperature of sentiment ahead of the official US open is difficult as the FX market carved out an exceptionally small range through the opening session. The Dow Jones FXCM Dollar Index (ticker = USDollar) posted its smallest daily trading range in a month – a mere 28 points – while the equally risk-sensitive yen crosses failed to take up the cause of risk trends. That said, a strong performance for Euro-area stocks could frame expectations in the absence of commitment Tuesday morning before the New York session begins.

When projecting either activity levels or underlying direction, the best instigation for conviction is a meaningful fundamental catalyst. Last week, risk appetite was shaken by the admission by Federal Reserve Chairman Ben Bernanke and suggestion from the May FOMC minutes that a ‘tapering’ of the $85 billion per month QE3 stimulus effort could be implemented over the next two or three central bank meetings. Speculators have been raising their suspicions of this threat / opportunity for a number of weeks – and this significant first step towards reversing the US and global market’s important backstop was no doubt a significant contributor to the dollar’s impressive rally this month. However, having had time to assess the situation without panicked volatility overwhelming traders’ senses; fear of the eventual Fed exit may not easily take root.

Though there was evidence to suggest both Bernanke and the Committee saw the possibility of a moderation in Fed stimulus over the coming months, there was also clear evidence that this would unlikely be a consensus for the June 19 policy gathering. That presents a problem as speculation of the tapering has played a significant part in the dollar’s charge higher – particularly when risk trends have held steady. Without a productive slump in stalwart capital markets, the greenback may find itself out of anti-stimulus fodder to justify multi-year highs. Once again, FX traders will direct their attention to risk trends; and regardless of direction sentiment takes, we are likely to see an active market this week.

Japanese Yen: Volatility in Japan Adds to Dangers for Yen Bears

Nowhere was the break in last week’s volatility fever more appreciated than in the Japanese financial markets. While the Nikkei 225 extended its decline Monday, the momentum and erratic intraday swings were notably tamed. Elsewhere, the yen crosses and JGB (Japanese Government Bond) yields were little changed through the opening session. That being said, conditions are far from stable. To start the week off, there was concern raised in both a speech by Bank of Japan Governor Kuroda and the minutes from the last central bank meeting. Kuroda remarked that excessive risk taking could destabilize the financial system – yet in a brush of disregard said he saw no issues despite JGB volatility or equities’ surge. Meanwhile, the minutes show doubt amongst some members that the 2 percent inflation target will be achievable.

Euro Traders Should be Ready for Updates on Spain, France, Portugal, etc.

The euro posted a modest advance against most counterparts through Monday’s session, helped by a news report that suggested that Germany was making a behind-the-scenes change on its strict austerity stand for the Eurozone. According to a weekly news magazine Die Spiegel, Chancellor Merkel and Finance Minister Schaeuble were planning to change the region’s perception of their influence over the region by supporting growth through possible support programs for the periphery. This would represent a remarkable – and likely costly – change for Germany, so skepticism will be maintained in heavy doses; so don’t expect a full-blown speculative rally on this gossip alone. The upcoming event risk is far more tangible. Spain will release its budget balance through April. The Bank of Portugal is due to release its Financial Stability Report. And, the ECB’s Noyer is expected to deliver his annual letter on France’s health – timely given an S&P ratings warning Monday.

Australian Dollar Oversold so Long as Fundamentals Don’t Kick In

Interest rates – and interest rate expectations – have lost their sway over the Australian dollar. The Reserve Bank of Australia (RBA) has maintained a steady yet infrequent regime of policy easing for months. While the most recent cut was something of a surprise, yields on the traditional carry trades has long been stagnant and the market’s appetite for yield at any cost unflappable. So where is the recent bout of individual Aussie weakness coming from? Reserve diversification? Possibly, but that is unlikely to hold alone. Now if risk aversion kicks in…

Swiss Franc: Tempered Euro Influence Makes for Data Sensitivity

The correlation between Euro-based and Swiss franc-based pairs has cooled notably. In fact, the 20-day (1 trading month) relationship between CHFGBP and EURGBP has dropped to its lowest level since September 2011 – just before the SNB floor was put into place. This tells us that the franc isn’t simply tracking the euro around. As such, data like the upcoming trade reportcan generate more volatility for the franc.

Canadian Dollar at Crucial Levels before BoC Rate Decision

Monetary policy decisions are carry more influence over the market nowadays – expectations heading into the events as much as the policy decisions themselves. Canada is particularly interesting as the BoC has refused to relinquish its warning that a hike would be the next move despite cooling growth trends and temperate inflation. Will the market price something dramatic from Governor Carney on Wednesday?

Gold Volume, Price Action Signal Impending Breakout

Though the end of last week, we witnessed speculative interest for gold in the futures market drop to its lowest level since November 2008 (80,259 contracts) while ETF holdings of the precious metal extended its collapse to two-year lows on an 18 percent tumble from December’s peak. The outflow of capital is a long-term concern, but there is also short-term evidence of a more impending breakout a well. With volume posting a one month low and very small trading ranges just below $1,400; a pickup in activity could clear some boundaries.

**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

EUR

German Import Price Index (MoM)

-0.4%

-0.1%

Lower commodity prices may contribute to import prices.

EUR

German Import Price Index (YoY)

-2.3%

-2.3%

0:00

GBP

Hometrack Housing Survey (MoM)

0.3%

IMF has expressed concerns that housing aid launched in Mar may increase risk by pushing up house prices.

0:00

GBP

Hometrack Housing Survey (YoY)

0.2%

EUR

German Retail Sales (MoM)

-0.3%

Large fluctuation; 1Y (YoY) avg. -0.5; High 4.6; Low -3.5.

EUR

German Retail Sales (YoY)

-2.8%

5:00

JPY

Small Business Confidence

50

49.4

Reached 04/07 high; Supported by upbeat comments by Kuroda and Abe.

6:00

CHF

Trade Balance (Swiss franc)

2.05B

1.89B

1Y avg. 2.1; High 2.805; Low 0.878

6:00

CHF

Exports (MoM)

5.1%

Engaged in trade capacity building program to boost export.

6:00

CHF

Imports (MoM)

2.0%

9:30

ZAR

South Africa GDP (1Q)

13:00

USD

S&P/Case-Shiller Home Price Index

146.57

Prices remain below pre-crisis level; Improving housing demand allowed producers to raise prices. Should employment improves further, it could further support the housing market, Pre-mature stimulus withdrawal may hurt housing market and economic recovery.

13:00

USD

S&P/CS 20 City s.a. (MoM)

1.00%

1.24%

13:00

USD

S&P/Case-Shiller Composite-20 (YoY)

10.2%

9.32%

13:00

USD

S&P/Case-Shiller US Home Price Index (YoY)

7.3%

13:00

USD

S&P/Case-Shiller US Home Price Index

135.22

14:00

USD

Richmond Fed Manufacturing Index

-4

-6

Measures of manufacturers’ sentiment about their future business prospects.

14:00

USD

Consumer Confidence

71

68.1

Bolstered by risk appetite in equities.

14:30

USD

Dallas Fed Manufacturing Activity

-10

-15.6

Regional report; Provide insights into national report (ISM),

23:50

JPY

Large Retailers' Sales

-1.00%

2.5%

Retreated after reaching 1Y high.

23:50

JPY

Retail Trade s.a. (MoM)

-0.2%

-1.5%

Overall trade deficit for 19 months; US is the major demand for Japanese goods.

23:50

JPY

Retail Trade (YoY)

-0.4%

-0.3%

GMT

Currency

Upcoming Events & Speeches

3:45

JPY

Bank of Japan Board Member Miyao Speech

3:45

JPY

Japan to Sell 20-Year Bonds

-:-

EUR

Spain Budget Balance Year-to-Date (APR)

7:30

EUR

German Fin Min Schaeuble at Future of Euro Meeting

8:00

EUR

ECB (Bank of France) Noyer Delivers Annual Letter on Country

8:30

EUR

ECB's Almunia Speaks to Euro Parliament

9:00

ZAR

South Africa to Sell 10, 13 and 18-Year Bonds

9:00

EUR

Italy to Sell €1 Bln in 1.7%, 5-Year Bonds

12:00

EUR

ECB's Asmussen Speaks on Banking Union

14:00

EUR

Bank of Portugal Releases Financial Stability Report

17:00

GBP

BoE's Tucker to Speak

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 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

15.0000

2.0000

9.8365

7.8165

1.3650

Resist 2

7.5800

5.8950

6.1150

Resist 1

12.9000

1.9000

9.7000

7.8075

1.3250

Resist 1

6.8155

5.8300

5.8620

Spot

12.4613

1.8451

9.6160

7.7634

1.2610

Spot

6.6442

5.7635

5.8450

Support 1

12.0000

1.6500

8.9500

7.7490

1.2000

Support 1

6.0800

5.6075

5.5000

Support 2

11.5200

1.5725

8.7750

7.7450

1.1800

Support 2

5.8085

5.4440

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

1.3046

1.5233

102.47

0.9735

1.0426

0.9735

0.8189

132.62

154.66

Resist. 2

1.3018

1.5201

102.14

0.9709

1.0405

0.9709

0.8163

132.16

154.19

Resist. 1

1.2989

1.5169

101.80

0.9683

1.0385

0.9682

0.8138

131.71

153.72

Spot

1.2932

1.5105

101.14

0.9631

1.0343

0.9629

0.8087

130.79

152.77

Support 1

1.2875

1.5041

100.48

0.9579

1.0301

0.9576

0.8036

129.87

151.83

Support 2

1.2846

1.5009

100.14

0.9553

1.0281

0.9549

0.8011

129.42

151.35

Support 3

1.2818

1.4977

99.81

0.9527

1.0260

0.9523

0.7985

128.96

150.88

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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