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Dollar Rally Extends And Breaks Key Levels Along the Way

Dollar Rally Extends And Breaks Key Levels Along the Way

2015-05-27 04:17:00
John Kicklighter, Chief Strategist
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Talking Points:

  • Dollar Rally Extends And Breaks Key Levels Along the Way
  • Euro: Greece Risk of an Accident Growing
  • Japanese Yen Pairs Conviction Uneven but USDJPY Propelled to 7-Year High

Dollar Rally Extends And Breaks Key Levels Along the Way

The Dollar started a strong move through the close of the past week. The strongest weekly launch for the Greenback in nearly two years was a convincing effort from a currency that spent the previous five weeks in retreat. There was only one problem: an extended holiday weekend in the US and a few other key financial centers (UK, Germany, Hong Kong) threatened to thin the ranks and suffocate speculative momentum. Monday’s session was certainly lacking for conviction, but it didn’t encourage the recent swell in speculative interests to simply abandon their post. And, when liquidity filled out this past session, the world’s most liquid currency picked up where it left off.

In the past session’s performance, the Dollar gained ground on all of its counterparts and further notched its seventh climb in the past eight trading days. Whether or not this move continues to build upon recent critical breaks – EURUSD 1.1000, GBPUSD 1.5500, USDJPY 122 – depends on what has motivated the drive to this point. A revived appreciation for the Fed’s monetary policy lead seems to be taking the reins, and that would be an effective enough motivator to sustain a run with the proper fuel. Building on the strong combination of Friday’s core CPI uptick and Fed Chair Janet Yellen’s remarks for a 2015 first hike, the news feed reinforced the hawkish swell this past session. On the data front, a durable goods improvement led to an upward revision in growth forecasts and consumer confidence marked an unexpected uptick. Meanwhile, following in his colleague’s footsteps, Vice Chair Stanley Fischer seconded the sentiment of a hike before year’s end. There is considerable room for speculation as to how much premium has been afforded the Dollar for its advantageous rate forecast, but with Fed Fund futures tables still pricing a first move out in January 2016, there is short-term potential to be squeezed.

Monetary policy may be a ready contributor to the Dollar’s advance, but fuel is needed for this long burning fire. That said, the docket ahead doesn’t provide the same type of kindling. Treasury auctions and MBA mortgage applications are the extent of scheduled event risk. Bulls may be able to find supplement to timing the first FOMC hike (and the subsequent pace thereafter) if risk aversion grows legs. This past session, with the return of liquidity the S&P 500 took a tumble with many other sensitive assets following suit. The problem with any ebb in speculative appetite is that complacency has proven consistently a stronger market force. Richmond Fed President Jeffrey Lacker reminded us this morning of the risks that lurk even within our field of vision. He remarked that distorted incentives have contributed to the erosion of financial stability – a different way of noting the ‘costs’ associated with the catchall of stimulus. When will the market pay closer attention and adjust to these more frequent warnings? It seems not yet. As an aside, Lacker said he wouldn’t write off a June hike just yet.

Euro: Greece Risk of an Accident Growing

The last self-imposed ‘make or break’ deadline for Greece passed a few weeks ago, and there has been little evidence that progress has been made since that transition back into the game of financial roulette. Allianz Chief Economic Advisor Mohamed El-Erian put the risk in perspective when he assessed that risk of a financial ‘accident’ in Greece (running out of cash) was growing. CDS and bond yields support this fear.

Japanese Yen Pairs Conviction Uneven but USDJPY Propelled to 7-Year High

The Yen crosses rose across the board this past session, but the stand out was clearly the stand out. Backed by a general bid for the Dollar, this pair cleared seven months of resistance – the top placed after the QQE upgrade in October – and charged to a fresh 7 year high above 122. Yet, not all pairs were showing this motivation. What’s more, the risk backdrop opposed this carry appetite. USDJPY won’t be able to go it alone.

Australian Dollar Suffers Weak Chinese Data, Tempered Commodity Prices, Weak Housing

One of the worst performing major currencies this past session, the Aussie Dollar was plagued by a number of issues. A drop in key commodity prices for which the country is a notable exporter of would saddle the bulls. In addition to the general risk aversion, the data would also find this morning a drop in 1Q Aussie construction and persistent slump in Chinese consumer sentiment. Not much is going the Aussie’s way.

Canadian Dollar Likely Faces No BoC Changes…But Vigilance Worthwhile

As a base case scenario, the Bank of Canada is unlikely to change its bearings on policy today – either officially or through rhetoric in its statement. However, the market has proven exceptionally sensitive to perceived shifts in the ‘comm bloc’ policy groups. At its last meeting the BoC turned dead neutral on its view for policy moving forward. That sets a very fine line to walk and a ripe situation for speculators to respond.

Emerging Markets on Verge of Bigger Retreat, Ruble and Real Selling Gaining Purchase

Emerging Markets have proven one of the more willing asset classes to take a tumble on waning speculative appetite this week. The MSCI EM ETF dropped back to its lowest level in nearly two months this past session on rising volume. Key currencies have also given back ground versus the USD (RUB, BRL, INR). It doesn’t help that the Fed’s Fischer suggested EM is sensitive to FOMC moves but prepared.

Gold Suffers Sharp Drop, Another One-Off?

Like other metals and general commodities priced in Dollars, Gold suffered a sharp decline this past session. We have seen abrupt tumbles like these multiple times over the past few months, but they have consistently turned out to be one-offs that would ultimately hold to congestion (rather than revive bullish interests). Whether the precious metal is ready to commit to a serious tumble likely has much to do with the USD.**Bring the economic calendar to your charts with the DailyFX News App.

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

-:-

JPY

Japan Cabinet Office Economic Report (MAY)

1:30

AUD

Australia Construction Work (1Q)

1:30

CNH

China Industrial Profits (APR)

1:45

CNH

China Consumer Confidence - MNI (MAY)

5:00

JPY

Japan Small Business Confidence (MAY)

6:00

CHF

Switzerland Consumption Indicator - UBS (MAY)

6:00

EUR

Germany Consumer Confidence - GfK (JUN)

6:45

EUR

France Consumer Confidence (MAY)

11:00

USD

US Mortgage Applications - MBA (May 22)

14:00

CAD

Bank of Canada Rate Decision

23:50

JPY

Japan Retail Sales | Retail Trade (APR)

23:50

JPY

Japan Capital Flows (May 22)

GMT

Currency

Upcoming Events & Speeches

23:50

JPY

Bank of Japan Meeting Minutes (Apr 30)

0:10

USD

Fed's Lacker to Discuss Financial Stability

0:30

AUD

RBA's Lowe to Speak

1:30

JPY

BoJ's Iwata to Speak

-:-

EUR

ECB to Discuss ELA Liquidity Lines

-:-

ALL

G-7 Finance Ministers, Central Bankers Meet [May 27-29]

9:30

EUR

Germany to Sell €2 Bln in 30-year Bonds

9:30

GBP

UK to Sell £700 Mln in 43-Year Inflation Bonds

15:30

USD

US to Sell 1-Month Bills (Liquidity)

15:30

USD

US to Sell $25 Bln in 1-Year Bills

15:30

USD

US to Sell $13 Bln 2-Year Floating Rate Notes

17:00

USD

US to Sell $35 Bln in 5-Year Notes

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

16.5000

2.7500

13.8500

7.8165

1.4275

Resist 2

9.3300

7.3650

8.5270

Resist 1

16.0000

2.7000

12.6500

7.8075

1.3935

Resist 1

8.7400

7.1000

8.4735

Spot

15.2857

2.6407

12.0874

7.7524

1.3501

Spot

8.4705

6.8484

7.7472

Support 1

14.5000

2.3580

11.3500

7.7490

1.3425

Support 1

8.2675

6.4725

7.3000

Support 2

13.6800

2.2850

10.8500

7.7450

1.3230

Support 2

7.8150

6.3325

6.7300

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

1.1020

1.5535

124.27

0.9643

1.2546

0.7847

0.7343

135.47

1207.66

Res 2

1.0986

1.5500

123.97

0.9611

1.2517

0.7823

0.7319

135.08

1202.92

Res 1

1.0951

1.5464

123.67

0.9580

1.2487

0.7800

0.7294

134.70

1198.19

Spot

1.0883

1.5393

123.07

0.9517

1.2428

0.7752

0.7246

133.94

1188.72

Supp 1

1.0815

1.5322

122.47

0.9454

1.2369

0.7704

0.7198

133.18

1179.25

Supp 2

1.0780

1.5286

122.17

0.9423

1.2339

0.7681

0.7173

132.80

1174.52

Supp 3

1.0746

1.5251

121.87

0.9391

1.2310

0.7657

0.7149

132.41

1169.78

--- 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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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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