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Dollar Risks Heavy Selloff as EURUSD, USDJPY Face Critical Levels

Dollar Risks Heavy Selloff as EURUSD, USDJPY Face Critical Levels

2013-08-07 23:06:00
John Kicklighter, Chief Strategist
Share:
  • Dollar Risks Heavy Selloff as EURUSD, USDJPY Face Critical Levels
  • British Pound: BoE Spurs Most Active Trading Day in Over 3 Years
  • Australian Dollar Ready for Another Shock of Volatility on Jobs Data
  • Japanese Yen: Will the BoJ Move to Curb the Yen’s Rally?
  • Canadian Dollar Drops Across the Board as Manufacturing Survey Plummets
  • New Zealand Dollar Has Exercised its ‘Recovery’ Momentum after Fonterra Scare
  • Gold Finally Leverages an Advance Out of the Dollar’s Decline

Dollar Risks Heavy Selloff as EURUSD, USDJPY Face Critical Levels

The US dollar is seriously wounded, but it has yet to escalate its current drop into a full-scale plunge. That can change, however, before the week is out. Through Wednesday’s close, the Dow Jones FXCM Dollar Index has dropped for four consecutive trading days. In the past 20 months, there have been only four other instances where the benchmark currency has shown such bearish persistence, and each of those instances ended with a return to the dominant bull trend – and often with considerable momentum. Yet, as the saying goes ‘past performance is not indicative of future results’. These statistics will not necessarily continue ad infinitum. Fundamentals will play a key role from here as the index eyes 10,700 and EURUSD faces 1.3350. A committed unwinding of dollar longs can develop out of a delayed Taper outlook. However, that doesn’t seem the expected path. Instead, the S&P 500 ease starting to retreat – and risk aversion is distinctly dollar bullish.

British Pound: BoE Spurs Most Active Trading Day in Over 3 Years

Bank of England (BoE) Governor Mark Carney did not disappoint Wednesday. Traders saw the potential volatility that could erupt following the central bank’s scheduled Quarterly Inflation Report, and that is what it delivered. There were two elements to the report that investors were particularly interested in interpreting from the report: stimulus plans and growth forecasts. Proportionate to the rebound we have seen in monthly and quarterly economic readings this year, the BoE significantly upgraded its GDP forecasts for 2014 from a previous forecast of 1.9 percent to 2.7 percent (the 2013 forecast was nudged up to 1.4 percent). That is a considerable shift from the fear of a ‘Triple Dip’ recession expected towards the beginning of the year. As for the eventual change in accommodation, a stimulus ramp seems wholly unlikely after Carney deferred to guidance on timing the eventual rate hike, tyingit to a threshold of a 7.0 percent unemployment rate. That level isn’t expected to be reached until well into 2016, but inflation pressures – already a problem – can move that time frame up quickly. This significantly strengthens the sterling’s recovery potential from the 1Q, 1,500-pip GBPUSD tumble. And, the biggest daily range since May 2010 confirms that potential.

Australian Dollar Ready for Another Shock of Volatility on Jobs Data

Australian dollar traders are ready for another busy day for the already overheated fundamental newswires. Having already progressed through a service sector activity report, 2Q retail sales update, trade balance data, home activity figures and the RBA rate decision; the upcoming session offers another high-potential indicator for release. The labour data is a well-known volatility spark for the Aussie dollar when the data prints with enough of a surprise. Given the uneasy positioning of the currency after the cautious rebound following the central bank’s shift in tone away from an open-ended rate cut regime, bulls need something tangible to rally behind. A strong labor report can provide a foundation for the market to run on. However, a weak showing can halt a technical rebound especially as risk trends fade.

Japanese Yen: Will the BoJ Move to Curb the Yen’s Rally?Even before the recent slump in global equities, the yen crosses were edging back. With Fed-insured US indexes painted red, there is real pressure on those holding yen-based carry positions. From last fall until June this year, the Japanese currency was on a non-stop plunge fed by a central bank bent on devaluing its high exchange rate and a market that was reaching for any level yield that it could find. Yet, these conditions have clearly stalled, and it is exposing the ‘expensive’ yen crosses. Without a steady bid on ‘risk’ assets, the market is left to a carry trade that is exceptionally expensive and providing a record low yield (for AUDJPY specifically). The other leg of that consideration is the BoJ. Will the central bank maintain its drive to keep the yen down to promote trade and inflation? Since the group announced its open-ended stimulus program in April, they have made it clear that they have shifted to a ‘wait and see’ mode. If they confirm that today, it could further dim hope.

Canadian Dollar Drops Across the Board as Manufacturing Survey Plummets

Though there were more prolific themes on the day like the retreat in stimulus-propped US equities, a heavy bear trend from the dollar and market-wide carry unwind; the biggest mover amongst the majors on the day was the Canadian dollar. The currency dropped against all counterparts, helped along significantly by two very poor readings from key economic sector. The Ivey manufacturing activity survey for July reported a surprise contraction for the industry – only the fifth time in four years the important sector has shrunk. Meanwhile, murmurs of a Canadian housing bubble over the past months likely amplified the impact of the hefty 10.3 percent drop in building permits for June. The next 48 hours holds two more indicators to reflect on the housing sector, but it is Friday’s jobs data that threatens the real volatility.

New Zealand Dollar Has Exercised its ‘Recovery’ Momentum after Fonterra Scare

Having dramatically reversed its fortunes since the bearish gap at the start of the week, the New Zealand dollar has just closed out its third daily advance against the US dollar and most of its counterparts. This is a remarkably performance considering the all began with a trade scare after China announced it would halt imports of some products from New Zealand dairy giant Fonterra. The implications for the relationship between New Zealand and its largest trade partner (accounting for more than NZ$7 billion in export revenues) is recognizable but not immediately threatening. Yet, that doesn’t mean a skeptical rebound of a preceding gap can continue to rally on what is still a fundamental problem. Meanwhile, the 12-month rate forecast has leveled off around 70 bps of hikes, foreign bond demand is steady and the 2Q jobless rate rose.

Gold Finally Leverages an Advance Out of the Dollar’s Decline

The US dollar has dropped for four consecutive, hearty days. And yet, despite the gold’s position as the benchmark currency’s foil, the precious metal has maintained a bearish trajectory…that is until this past trading session. The biggest drop in two weeks for the greenback leveraged a close in the green for the commodity – the first advance for the active futures contract in seven consecutive trading days. However, the 0.2 percent advance is hardly convincing of a market that is ready to stage a dramatic recovery. Furthermore, volume across gold funds and futures remains anemic, ETF holdings of the metal have fallen to a fresh two-and-a-half year low of 62.9 mln ounces and the CBOE’s volatility index continues to hover 10 percentage points above its pre-April crash at 23.5 percent. If the dollar’s selloff intensifies to a committed bear-trend, buoyancy will increase. Though, without a firm probability of deferred Taper, it won’t advance easily.

**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

JPY

Bank of Japan Interest Rate Decision

0.10%

0.10%

Event risks will contribute to JPY volatility in the session.

JPY

Bank of Japan 2014 Monetary Base Target

270T

0:00

NZD

QV House Prices (YoY) (JUL)

7.6%

NZ house price data is becoming extremely important as the central bank deals with a strong Kiwi, record low interest rates and a possible housing bubble.

1:30

AUD

Employment Change (JUL)

6.0K

10.3K

As the Aussie flirts with key resistant levels following an RBA interest rate cut, employment data may trigger some volatility to push short term momentum. The unemployment rate has been ticking higher since the spring of 2011.

1:30

AUD

Unemployment Rate (JUL)

5.8%

5.7%

1:30

AUD

Full Time Employment Change (JUL)

-4.4K

1:30

AUD

Part Time Employment Change (JUL)

14.8K

1:30

AUD

Participation Rate (JUL)

65.3%

65.3%

2:00

JPY

Tokyo Average Office Vacancies (JUL)

8.46

Although traders may sit on the sidelines until Kuroda comments at 06:30GMT, the surveys will provide insight as to whether the uptrend holds.

4:30

JPY

Bankruptcies (YoY) (JUL)

-8.0%

5:00

JPY

Eco Watchers Survey: Outlook (JUL)

54.1

53.6

5:00

JPY

Eco Watchers Survey: Current (JUL)

53.5

53.0

5:45

CHF

Unemployment Rate s.a. (JUL)

3.2%

3.2%

The unemployment rate continues to fall since the start of 2013.

5:45

CHF

Unemployment Rate (JUL)

2.9%

2.9%

EUR

Greece Unemployment Rate (MAY)

26.9%

Any surprises here could give the recently improved sentiment in the Euro-Zone a jolt.

6:00

EUR

German Trade Balance (euros) (JUN)

15.0B

13.1B

After a disappointing prior export figure at -2.4%, market will be looking for an improvement. Survey’s point to a positive jump in the current account surplus.

6:00

EUR

German Current Account (euros) (JUN)

16.0B

11.2B

6:00

EUR

German Imports s.a. (MoM) (JUN)

0.5%

1.7%

6:00

EUR

German Exports s.a. (MoM) (JUN)

0.9%

-2.4%

6:30

AUD

Foreign Reserves (Australian dollar) (JUL)

A$51.9B

Foreign Reserves have gradually increased since posting A$30.521 in December, 2007.

12:30

CAD

New Housing Price Index (MoM) (JUN)

0.1%

0.1%

After Wednesday’s disappointing print on building permits, the CAD may face some pressure if reflected negatively in home prices.

12:30

CAD

New Housing Price Index (YoY) (JUN)

1.7%

1.8%

12:30

USD

Initial Jobless Claims (AUG 3)

335K

326K

As the Fed’s reduction in asset purchases remain in the context of incoming data, an unexpectedly large drop in jobless claims may increase the likelihood of a September taper.

12:30

USD

Continuing Claims (JUL 27)

2950K

2951K

22:45

NZD

Card Spending Retail (MoM) (JUL)

0.4%

1.1%

Any sharp drop in card spending may be a warning sign of stressed consumers as NZ faces a housing bubble of sorts.

22:45

NZD

Card Spending (MoM) (JUL)

1.2%

23:50

JPY

Japan Money Stock M2+CD (YoY) (JUL)

3.8%

3.8%

Japan’s money stock continues to rise as Abenomics fuels the largest debt-to-gdp ratio in the world.

23:50

JPY

Japan Money Stock M3 (YoY) (JUL)

3.1%

3.0%

23:50

JPY

Tertiary Industry Index (MoM) (JUN)

-0.4%

1.2%

GMT

Currency

Upcoming Events & Speeches

6:30

JPY

BoJ Governor Haruhiko Kuroda Holds Press Conference

8:00

EUR

European Central Bank Monthly Report

17:00

USD

US to Sell $16 Bln in 30-Year Bonds

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

12.8400

1.9459

9.9787

7.7564

1.2764

Spot

6.6082

5.6448

5.9497

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

1.3321

1.5252

100.79

0.9459

1.0426

0.9050

0.8000

132.98

1338.33

Res 2

1.3293

1.5217

100.47

0.9437

1.0407

0.9022

0.7975

132.59

1329.93

Res 1

1.3264

1.5182

100.15

0.9414

1.0388

0.8993

0.7949

132.20

1321.53

Spot

1.3207

1.5113

99.50

0.9369

1.0349

0.8936

0.7898

131.41

1304.72

Supp 1

1.3150

1.5044

98.85

0.9324

1.0310

0.8879

0.7847

130.62

1287.91

Supp 2

1.3121

1.5009

98.53

0.9301

1.0291

0.8850

0.7821

130.23

1329.93

Supp 3

1.3093

1.4974

98.21

0.9279

1.0272

0.8822

0.7796

129.84

1338.33

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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