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Australian Dollar Volatility Risk High with RBA Rate Decision

Australian Dollar Volatility Risk High with RBA Rate Decision

2013-08-06 00:13:00
John Kicklighter, Chief Strategist
Share:
  • Dollar Gains Little Taper Traction from Strong ISM Data, Fed Remarks
  • Australian Dollar Volatility Risk High with RBA Rate Decision
  • Euro: Will Italian 2Q GDP Generate More Heat than Spain Figure?
  • British Pound Receives a Strong Push on Service Sector Strength
  • New Zealand Dollar Suffers as China Cuts Off Vital Export Revenue
  • Canadian Dollar Deviate from Futures Positioning, Trade Data Ahead
  • Gold Bears at Make or Break $1,300

Dollar Gains Little Taper Traction from Strong ISM Data, Fed Remarks

After this past week’s round of heavy event risk – US GDP, FOMC rate decision, NFPs – it is clear that the market has tempered its fears of an impending Taper. However, this distinct threat for risk trends and opportunity for the US dollar can easily revive its influence over the market with the proper swell in volatility. Currently, the equities-based VIX Volatility Index stands at 11.8 percent – the lowest level for the activity / fear gauge since March 15. When looking for a sentiment-based drive for the global capital markets, there needs to be an impetus to align investors in different asset classes and regions to the same motivation: fear of volatility and loss or appetite for higher yield on assets with depressed values. With the S&P 500 trading just off record highs and the VIX index seemingly reflecting a ‘low risk’ environment, it may seem that we are naturally leaning towards a ‘risk on’ market. Yet, an absence of risk doesn’t innately feed speculative positioning. That is why we still see the USDollar just off three year highs, carry trade down 10 percent from April highs and even FX volatility measures still elevated.

It is difficult to pinpoint exactly what event risk can tip the scales towards a certain time frame on the Fed’s QE3 wind-down time frame, but it is likely that this speculation begins well before the September FOMC meeting. Through Monday’s session, we were delivered another round of event risk to maintain support for the Taper to begin next month. The ISM service sector (which accounts for three-quarters of US GDP) survey printed its sharpest increase in over four-years with its July read – further evidence that the economy is showing improvement that curbs the need for external support. That said, the employment component slipped the same month. The other highlight was the remarks from Dallas Fed President Fisher. A well known hawk and non-voter this year, Fisher repeated his call for the Taper in September – and said he would have preferred dialing back some time ago. We have a voting member scheduled to speak in the upcoming session: Chicago Fed President Evans. The antithesis of Fisher, Evans is a vocal dove. That said, his comments will also likely be played down unless he turns hawkish.

Australian Dollar Volatility Risk High with RBA Rate Decision

The Reserve Bank of Australia (RBA) is expected to weigh in on monetary policy this morning. According to the consensus of economists polled by Bloomberg, 26 of the 27 submitting their forecasts expect a 25 basis point rate cut to 2.50 percent. The market seem to be of the same mind as overnight index swaps are pricing in a 100 percent probability of a quarter-percent cut. The interest rate market isn’t the only area where doves are certain in their convictions. Looking at the performance of the Aussie dollar this past month, it is easy to spot similar levels of certainty. The high-yield currency has dropped between 6.3 to 2.3 percent against the majors in that period of time.

Yet, against those concrete expectations, we find that the market is exceptionally exposed should the group deviate from the presumed path. A one-sided bet whereby the market is positioned for certainty (the COT figures revealed record short interest in Aussie futures) leverages extreme volatility risk should the RBA unexpectedly hold. Even if the central bank follows script, there is still room for clarification on plans going forward. Backing off future rate hikes could rouse a bullish recovery even if they do cut – a type of ‘sell the rumor, buy the news’ outcome.

Euro: Will Italian 2Q GDP Generate More Heat than Spain Figure?

Last week, the Spanish National Statistics office (INE) reported that the country extended its recession through the second quarter with a 0.1 percent contraction through the three-month period that translated into a 1.7 percent economic slump from the year prior. Yet, despite the implications this data held for escalating the country’s problems into region-wide financial trouble, the euro was little moved (Intro to EUR/USD). We should therefore view the upcoming Italian 2Q GDP release with the same level of skepticism. A 0.4 percent contraction would mark an improved pace from 1Q but nevertheless burden a ‘core’ EZ member. Also worth noting, Greece will be selling 6 month bills.

British Pound Receives a Strong Push on Service Sector StrengthWhile we have seen a series of significant items from the economic docket fall flat for market reaction over the past weeks, the sterling projected a hefty response to the better-than-expected service sector activity report this past session. The 60.2 reading was significantly better than the consensus forecast and represented the highest measure of health for the series since December 2006. While not typically considered a crucial measure, the level of the data and focus on BoE Governor Carney’s quarterly report Wednesday captures the market’s attention.

New Zealand Dollar Suffers as China Cuts Off Vital Export Revenue

Gareth Berry from UBS put it best when he said “Dairy is to New Zealand as iron ore is to Australia”. Most traders are familiar with the Aussie economy’s dependency on exports of industrial metals and energy products to China, but New Zealand is similarly reliant on its trade link to the Asian behemoth. Yet, from New Zealand, the exports are instead milk, wool and meat. Therefore, news that the Chinese government was temporarily suspending shipments from Fonterra (the largest dairy producer in New Zealand and world’s largest exporter) due to contaminated imports was seen as a serious concern. The kiwi dollar gapped lower on the open, but retraced ground through the day.

Canadian Dollar Deviate from Futures Positioning, Trade Data Ahead

The Canadian dollar managed to avoid its first, three-day losing streak against the US currency in six weeks Monday when USDCAD closed 0.3 percent lower on the day. The pair is still leaning higher having revived its advance after basing at 1.0250. The current bear-trend by the loonie contradicts what we have seen recently in futures positioning. Speculative trader shed their short positions for a second week through this past Tuesday with the COT balance near its highest level in five months. For near-term event risk, watch Canada’s trade data Tuesday.

Gold Bears at Make or Break $1,300

So much for mounting a strong recovery for gold. The precious metal closed Monday in the red – the sixth drop in seven trading days – to keep bulls off kilter. Looking at how futures traders were positioned, the CFTC’s Commitment of Traders report showed the two week rebound in net long speculative interest through July 23 was curbed this past week with a 17 percent drop in net long interest. Open interest (participation) has dropped sharply and volume in ‘paper’ (ETF, futures) has deflated. Standing at $1,300, it wouldn’t take much to force gold lower.

**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

1:30

AUD

Trade Balance (Australian dollar) (JUN)

800M

670M

RBA’s key interest rate decision will be the major event risk of the Asian session and will weigh heavily on the Australian Dollar. Market participants have priced in a 25 bps cut, so any deviation from the expectation would add more volatility following the announcement.

1:30

AUD

House Price Index (QoQ) (2Q)

1.0%

0.1%

1:30

AUD

House Price Index (YoY) (2Q)

3.0%

2.6%

1:30

AUD

ANZ Job Advertisements (MoM) (JUL)

-1.8%

4:30

AUD

Reserve Bank of Australia Interest Rate Decision

2.50%

2.75%

5:00

JPY

Leading Index (JUN P)

107.3

110.7

Massive easing from the BoJ has pushed the leading index indicator up almost 10% YTD.

5:00

JPY

Coincident Index (JUN P)

105.1

106.0

8:00

EUR

Italian Industrial Production s.a. (MoM) (JUN)

0.3%

0.1%

Although YoY industrial production has fallen from its 2010 high of 14.7%, it has been on the rise since the April 2012 print of -9.2%.

8:00

EUR

Italian Industrial Production w.d.a. (YoY) (JUN)

-3.5%

-4.2%

8:00

EUR

Italian Industrial Production n.s.a. (YoY) (JUN)

-4.2%

8:30

GBP

Industrial Production (MoM) (JUN)

0.7%

0.0%

Current estimates put the industrial production MoM print at the highest year to date. All readings are expected to improve sentiment relative to last month’s disappointing numbers.

8:30

GBP

Industrial Production (YoY) (JUN)

0.8%

-2.3%

8:30

GBP

Manufacturing Production (MoM) (JUN)

1.0%

-0.8%

8:30

GBP

Manufacturing Production (YoY) (JUN)

1.0%

-2.9%

9:00

EUR

Italian GDP s.a. and w.d.a. (QoQ) (2Q P)

-0.4%

-0.6%

Although the YoY GDP print looks to be a disappointing -2.2%, the reading is still off its December low of -2.78%, industry specific indicators have improved in recent weeks.

9:00

EUR

Italian GDP s.a. and w.d.a. (YoY) (2Q P)

-2.2%

10:00

EUR

German Factory Orders s.a. (MoM) (JUN)

1.0%

-1.3%

Germany is the sole growth engine of the EU and continued strength is necessary for Euro-Zone confidence.

10:00

EUR

German Factory Orders n.s.a. (YoY) (JUN)

0.3%

-2.0%

12:30

CAD

International Merchandise Trade (C$) (JUN)

-0.51B

-0.30B

The print has not been positive since December of 2011.

12:30

USD

Trade Balance (JUN)

-$43.5B

-$45.0B

A print closer to 0 from its current negative $45B is a positive sign of a healthier US trade balance.

14:00

GBP

NIESR Gross Domestic Product Estimate (JUL)

0.6%

The print has not passed above 0.7% since July of 2010.

22:45

NZD

Employment Change (QoQ) (2Q)

0.3%

1.7%

The NZD has come under a bout of volatility in recent weeks due to the hawkish tone out of the RBNZ in addition to bans on some milk products out of New Zealand. Unemployment data and updates on bans of those milk products may fuel another volatile week for the kiwi.

22:45

NZD

Employment Change (YoY) (2Q)

0.7%

0.3%

22:45

NZD

Unemployment Rate (2Q)

6.3%

6.2%

22:45

NZD

Participation Rate (QoQ) (2Q)

67.9%

67.8%

22:45

NZD

Private Wages ex Overtime (QoQ) (2Q)

0.5%

0.4%

22:45

NZD

Private Wages inc Overtime (QoQ) (2Q)

0.6%

1.0%

22:45

NZD

Labor Cost Private Sector (QoQ) (2Q)

0.5%

0.3%

23:30

AUD

AiG Performance of Construction Index (JUL)

39.5

The Aussi’s price action will revolve around the RBA rate decision, but this print will provide insight into how a Chinese slowdown may be impacting the property sector.

23:50

JPY

Official Reserve Assets (JUL)

$1238.7B

The reading is down 5% since November of 2011.

GMT

Currency

Upcoming Events & Speeches

9:00

EUR

Greece to Sell €625 Mln in 6-Month Bills

17:00

USD

Fed's Charles Evans Speaks on U.S. Economy

17:00

USD

US Treasury to Sell $32 Bln in 3-Year Bills

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

13.4800

2.0000

10.7000

7.8165

1.3650

Resist 2

7.5800

5.8950

6.5135

Resist 1

13.2000

1.9500

10.2500

7.8075

1.3250

Resist 1

6.8155

5.8475

6.2660

Spot

12.6477

1.9298

9.8378

7.7569

1.2684

Spot

6.5837

5.6237

5.9198

Support 1

12.6000

1.9100

9.3700

7.7490

1.2000

Support 1

6.0800

5.6075

5.9365

Support 2

12.0000

1.6500

8.9500

7.7450

1.1800

Support 2

5.8085

5.4440

5.7400

INTRA-DAY PROBABILITY BANDS 18:00 GMT

\CCY

EUR/USD

GBP/USD

USD/JPY

USD/CHF

USD/CAD

AUD/USD

NZD/USD

EUR/JPY

Gold

Res 3

1.3367

1.5490

99.47

0.9363

1.0439

0.9025

0.7939

131.76

1336.08

Res 2

1.3339

1.5456

99.17

0.9341

1.0419

0.8997

0.7913

131.38

1328.06

Res 1

1.3312

1.5422

98.87

0.9318

1.0400

0.8969

0.7888

131.01

1320.04

Spot

1.3257

1.5354

98.26

0.9274

1.0361

0.8913

0.7837

130.26

1304.01

Supp 1

1.3202

1.5286

97.65

0.9230

1.0322

0.8857

0.7786

129.51

1287.98

Supp 2

1.3175

1.5252

97.35

0.9207

1.0303

0.8829

0.7761

129.14

1328.06

Supp 3

1.3147

1.5218

97.05

0.9185

1.0283

0.8801

0.7735

128.76

1336.08

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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