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FOREX: US Dollar Drops as Expected - Where to From Here?

FOREX: US Dollar Drops as Expected - Where to From Here?

2011-06-30 06:53:00
Ilya Spivak, Sr. Currency Strategist
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Talking Points

  • US Dollar Extends Losses as Asia Reacts to Greek Budget Vote
  • New Zealand Dollar Outperforms on Business Confidence Data
  • Dollar Weakness to be Cut Short by Second-Half Growth Fears
  • German Labor Market Data Likely to Pass with Little Fanfare

As we expected, the US Dollar came under intense selling pressure as an affirmative Greek parliamentary votesigning off on an austerity plan – a scheme including tax hikes, spending cuts and government asset sales – paved the way for additional EU/IMF aid for the beleaguered Mediterranean nation. The outcome eased fears of an imminent sovereign default within the Euro Zone, boosting market-wide confidence and weighing on safe-haven demand. The Dow Jones FXCM US Dollar Index (Ticker: USDollar) fell as much as 0.6 percent against its leading counterparts while the MSCI Asia Pacific regional stock index rose 1 percent.

Broadly speaking, the current bout of weakness in US currency appears corrective, with optimism likely to fade as fears of a global economic slowdown in the second half of the year return to the forefront. Indeed, a disappointing set of Euro Zone PMI figures released last week is set to be compounded by similar weakness in analogous readings from China and the US (due at 1:00 GMT and 14:00 GMT tomorrow, respectively), with the former telegraphed to have fallen to an 11-month low by HSBC. Taken together, this amounts to broad-based weakness in the world’s leading growth engines, weighing on risk appetite and boosting the safety-linked Dollar against the majors.

The New Zealand Dollar outperformed, leading the majors against its US namesake to add as much as 0.8 percent, after a gauge of Business Confidence jumped to the highest in 13 months. A survey from ANZ Bank showed that 46.5 percent of companies polled for the report expect the economy to improve over the coming year, representing the largest share of optimists since May 2010. The rosy outlook was chalked up to record-low borrowing costs and windfall profits for commodities exporters from rising global raw materials profits. The data boosted RBNZ rate hike expectations, with traders now pricing in between two and three 25bps increases in benchmark borrowing costs over the coming year.

Looking ahead, a degree of consolidation and corrective price action seems reasonable after the sharp volatility witnessed over the last 24 hours, opening the door for the US Dollar to reclaim a bit of lost ground. Still, S&P 500 stock index futures are pointing higher (albeit modestly so) ahead of the opening bell in Europe, hinting sentiment-sensitive currencies will remain relatively well-supported against the greenback.

German labor market figures headline the economic calendar. Expectations call for a 17,000 drop in unemployment, leaving the jobless rate at 7 percent. While this is nominally encouraging, it hardly represents anything traders have not seen or expected to see since unemployment topped out two years ago and so should not set off major fireworks. With that in mind, the risks are stacked on the downside for the Euro after yesterday’s sharp advance, so the single currency may prove more responsive to a negative outcome than a positive one. A preliminary Euro Zone Consumer Price Index reading for June is also on tap, with economists looking for a modest increase in the annual inflation rate to 2.8 percent.

Asia Session: What Happened

GMT

CCY

EVENT

ACT

EXP

PREV

22:45

NZD

Building Permits (MoM) (MAY)

2.2%

3.2%

-1.2% (R-)

23:01

GBP

GfK Consumer Confidence Survey (JUN)

-25

-24

-21

23:15

JPY

Nomura/JMMA Manufacturing PMI (JUN)

50.7

-

51.3

23:50

JPY

Loans & Discounts Corp (YoY) (MAY)

-2.0%

-

-1.7%

0:30

AUD

RPData-Rismark House Px Raw (MAY)

-0.5%

-

-0.3% (R-)

0:30

AUD

RPData-Rismark House Px S.A (MAY)

-0.3%

-

-0.4% (R-)

1:00

NZD

NBNZ Activity Outlook (JUN)

38.7

-

39.7

1:00

NZD

NBNZ Business Confidence (JUN)

46.5

-

38.3

1:30

AUD

Job Vacancies (MAY)

-4.5%

-

-1.7%

1:30

AUD

Private Sector Credit (MoM) (MAY)

0.3%

0.4%

0.0%

1:30

AUD

Private Sector Credit (YoY) (MAY)

3.1%

3.2%

3.3%

3:00

NZD

Money Supply M3 (YoY) (MAY)

5.7%

-

5.7%

4:00

JPY

Vehicle Production (YoY) (MAY)

-30.9%

-

-60.1%

5:00

JPY

Housing Starts (YoY) (MAY)

6.4%

3.1%

0.3%

5:00

JPY

Construction Orders (YoY) (MAY)

25.5%

-

31.4%

5:00

JPY

Annualized Housing Starts (MAY)

0.815M

0.790M

0.798M

Euro Session: What to Expect

GMT

CCY

EVENT

EXP

PREV

IMPACT

6:00

GBP

Nationwide House Prices s.a. (MoM) (JUN)

0.0%

0.3%

Low

6:00

GBP

Nationwide House Prices n.s.a. (YoY) (JUN)

-1.3%

-1.2%

Medium

6:00

EUR

German Retail Sales (MoM) (MAY)

0.5%

0.3%

Medium

6:00

EUR

German Retail Sales (YoY) (MAY)

0.2%

3.6%

Medium

6:45

EUR

French Consumer Spending (YoY) (MAY)

0.5%

1.2%

Low

6:45

EUR

French Consumer Spending (MoM) (MAY)

0.8%

-1.6%

Low

6:45

EUR

French Producer Prices (MoM) (MAY)

0.2%

0.8%

Low

6:45

EUR

French Producer Prices (YoY) (MAY)

6.6%

6.4%

Low

7:55

EUR

German Unemployment Change (JUN)

-17K

-8K

Medium

7:55

EUR

German Unemployment Rate s.a. (JUN)

7.0%

7.0%

High

8:00

EUR

Euro-Zone M3 s.a. (3M) (MAY)

2.1%

2.1%

Low

8:00

EUR

Euro-Zone M3 s.a. (YoY) (MAY)

2.1%

2.0%

Low

9:00

EUR

Euro-Zone CPI Estimate (YoY) (JUN)

2.8%

2.7%

Medium

9:00

EUR

Italian CPI (NIC incl. tobacco) (MoM) (JUN P)

0.1%

0.1%

Low

9:00

EUR

Italian CPI (NIC incl. tobacco) (YoY) (JUN P)

2.7%

2.6%

Low

9:00

EUR

Italian CPI - EU Harmonized (MoM) (JUN P)

0.1%

0.2%

Low

9:00

EUR

Italian CPI - EU Harmonized (YoY) (JUN P)

3.0%

3.0%

Low

Critical Levels

CCY

SUPPORT

RESISTANCE

EURUSD

1.4363

1.4635

GBPUSD

1.5996

1.6141

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To receive future articles by email, please contact Ilya at ispivak@dailyfx.com

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