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FOREX: Dollar May Rise as Traders Rethink Cental Banks' Swap Rate Cut

FOREX: Dollar May Rise as Traders Rethink Cental Banks' Swap Rate Cut

2011-12-01 06:35:00
Ilya Spivak, Sr. Currency Strategist
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Talking Points

  • US Dollar Consolidates as FX Markets Digest Yesterday’s Volatility Surge
  • Australian Dollar Falls as Chinese PMI Shows Manufacturing Contracted
  • Risk Aversion to Return as Traders Rethink Central Banks’ Swap Rate Cut
  • S&P 500 Stock Index Futures Lower, Hinting Sentiment Turning Defensive

The US Dollar was little changed against the major currencies as markets consolidated after yesterday’s breakneck volatility. The Australian Dollar underperformed, sliding as much as 0.8 percent against its top counterparts after Chinese Manufacturing PMI data fell short of expectations, showing the bellwether factory sector shrank for the first time since February 2009. China is Australia’s top export partner and a dent in demand for the country’s coal and iron ore foreshadowed by a contraction in the East Asian giant’s industrial sector naturally bodes ill for economic growth, interest rates, and thereby the exchange rate.

Looking ahead, a re-evaluation of recent news-flow seems likely to put the brakes on the surge in risk appetite witnessed over the preceding 24 hours. Needless to say, the top catalyst for investors’ optimism was the announcement of a multilateral 50bps reduction in major central banks’ swap rates. Traders initially cheered the announcement, but its subtext seems altogether negative.

A reduction in swap rates allows the ECB to borrow Dollars from the Federal Reserve at a lower cost and pass on those savings to banks thirsting for liquidity. Presumably, this reduces the threat of a credit shortage in event that a Eurozone member state defaults and banks scramble to raise cash to cover losses on their holdings of the failed country’s debt, withholding loans and sapping funding access for the real economy (complete with all the negative growth implications therein).

While this seems positive at first blush, the central banks’ decision to explicitly prepare for the default of a Eurozone member state is hardly encouraging. Indeed, if the world’s leading monetary policy authorities were confident in the ability of the currency bloc’s officials to get their house in order, the swap rate reduction would be unnecessary. While its certainly better to be safe than sorry – meaning the move was likely precautionary rather than indicative of the certainty that the worst-case scenario will transpire – the lack of confidence in Eurozone policymakers that it implies begs the question. After all, if the G10 central bankers see a credible-enough threat that Europe fails, why shouldn’t investors?

With this in mind, it seems reasonable that some of the pro-risk sentiment witnessed yesterday is unwound. Indeed, S&P 500 stock index futures are ticking lower (albeit slightly so) in late Asian trade, hinting optimism is already fading and suggesting the safe-haven US Dollar may mount a deeper recovery against its sentiment-linked counterparts. On the economic data front, Manufacturing PMI figures from Switzerland and the UK are expected to show the factory sector in both continued to deteriorate in November, reminding investors of the negative regional impact of the Eurozone debt crisis as exporters in both countries feel the pain of slowing growth in the currency bloc.

Asia Session: What Happened

GMT

CCY

EVENT

ACT

EXP

PREV

21:45

NZD

Terms of Trade Index (QoQ) (3Q)

-0.7%

1.1%

2.4% (R+)

22:30

AUD

AiG Perf of Manufacturing Index (NOV)

47.8

-

47.4

0:00

NZD

ANZ Commodity Price (NOV)

-1.0%

-

-3.5%

0:30

AUD

Retail Sales s.a. (MoM) (OCT)

0.2%

0.4%

0.4%

0:30

AUD

Building Approvals (MoM) (OCT)

-10.7%

3.3%

-14.2% (R-)

0:30

AUD

Building Approvals (YoY) (OCT)

-29.8%

-14.4%

-12.6% (R-)

1:00

CNY

PMI Manufacturing (NOV)

49.0

49.8

50.4

2:30

CNY

HSBC Manufacturing PMI (NOV)

47.7

-

51

5:00

JPY

Vehicle Sales (YoY) (NOV)

24.1%

-

28.3%

5:30

AUD

RBA Commodity Price Index (NOV)

107.7

-

107.6 (R+)

5:30

AUD

RBA Commodity Index SDR (YoY)(NOV)

18.1%

-

19.6% (R+)

Euro Session: What to Expect

GMT

CCY

EVENT

EXP

PREV

IMPACT

6:30

EUR

French ILO Mainland Unemployment Rate (3Q)

9.3%

9.1%

Low

6:30

EUR

French Mainland Unemployment Change (3Q)

-

-12K

Low

6:30

EUR

French ILO Unemployment Rate (3Q)

9.7%

9.6%

Low

6:45

CHF

Gross Domestic Product (QoQ) (3Q)

0.1%

0.4%

High

6:45

CHF

Gross Domestic Product (YoY) (3Q)

1.8%

2.3%

High

8:15

EUR

French PMI Manufacturing (NOV F)

47.6

47.6

Low

8:30

CHF

PMI Manufacturing (NOV)

46.6

46.9

Medium

8:45

EUR

Italian PMI Manufacturing (NOV F)

42.8

43.3

Low

8:55

EUR

German PMI Manufacturing (NOV F)

47.9

47.9

Medium

9:00

EUR

Euro Zone PMI Manufacturing (NOV F)

46.4

46.4

Medium

9:30

GBP

PMI Manufacturing (NOV)

47.0

47.4

Medium

Critical Levels

CCY

SUPPORT

RESISTANCE

EURUSD

1.3292

1.3566

GBPUSD

1.5560

1.5814

Complete Table of Support and Resistance Levels: www.dailyfx.com/technical_analysis/pivot_points/

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

To contact Ilya, e-mail ispivak@dailyfx.com. Follow me on Twitter at @IlyaSpivak

To be added to Ilya's e-mail distribution list, send a note with subject line "Distribution List" to ispivak@dailyfx.com

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