US Dollar Barely Off of August Lows Ahead of Jackson Hole
The US Dollar has pared yesterday’s gains thus far on Friday, with the Dow Jones FXCM Dollar Index (Ticker: USDOLLAR) falling by less than one half of one percent to come within 0.55% of its low set on August 23. This is quite a coincidence, with the US Dollar falling today towards the August 23 low ahead of the Jackson Hole Economic Policy Symposium, as that date was when the Federal Reserve July 31 to August 1 meeting Minutes were released, which cued investors to look towards today’s events for a closer look at monetary policy in the world’s largest economy.
It’s been our longstanding belief that another round of quantitative easing, or QE3, would not be announced before the US Presidential Elections in November. Given the political backdrop in the US that has seen frustration with the Federal Reserve’s policies grow, we believe that this influence should be enough to keep monetary officials on the sidelines for at least the next few months. The Fed Minutes released last week suggested that “New QE” could be on the way, which in our opinion could translate to some form of assistance to consumers and home owners as a way to not only aid the recovery in the US (any measures that increase disposable income among consumers will help an economy whose nearly 75% of the headline growth figure is rooted in consumption).
If QE3 is announced, we should expect the US Dollar to take a severe beating, especially against the Euro and the Japanese Yen, over the next several weeks and months (withstanding a tail-risk event out of Europe). However, if any form of New QE is announced which doesn’t suppress the yield curve, the US Dollar could appreciate quickly over the coming weeks. In any scenario – a major announcement, a minor announcement, or no announcement at all – investors will be focused squarely on the September 13 Federal Open Market Committee meeting once Federal Reserve Chairman Bernanke steps away from the podium today.
The Italian 2-year note yield has increased to 2.849% (+1.2-bps) while the Spanish 2-year note yield has increased to 3.585% (+3.1-bps). Similarly, the Italian 10-year note yield has increased to 5.769% (+0.8-bps) while the Spanish 10-year note yield increased to 6.647% (+10.7-bps); higher yields imply lower prices.
RELATIVE PERFORMANCE (versus USD): 11:30 GMT
Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.37% (-0.12% past 5-days)
While there’s much by way of significant data on the calendar for today, the docket is still flush with potentially market moving events. At 08:30 EDT / 12:30 GMT, the CAD Gross Domestic Product report for June and the second quarter are due, both of which are forecasted to show modest gains and a slight slowdown in the trajectory of output. At 09:55 EDT / 13:55 GMT, the final USD U. of Michigan Consumer Confidence report for August is due, with no change expected at 73.6. At 10:00 EDT / 14:00 GMT, USD Factory Orders for July will be released, with the consensus forecast calling for gains of +1.2% after a -0.5% contraction in June.
But the big event is at 10:00 EDT / 14:00 GMT, when Federal Reserve Chairman Bernanke takes the podium to discuss monetary policy at the Jackson Hole Economic Policy Symposium. This is a lengthy discussion, so please view my full thoughts in the article “Musings on Jackson Hole and What the Fed Could Do to Save QE3”.
BB represents Bollinger Bands ®
EURUSD: The Bull Flag previously noted within the EURUSD ascending channel/wedge off of the July 24 low has broken to the upside, with a test of 1.2600 line as with potential for 1.2615/20. Still, there is a potential Inverse Head & Shoulders pattern in the works since late-June. Given the Head at 1.2040/45, this would draw into focus 1.2760 (would come amid a major breakout) as long as price holds above 1.2405. Interim resistance comes in at1.2615/20 (channel resistance, 100-DMA) and 1.2660/70 (long-term descending channel resistance). Near-term support comes in at 1.2560, 1.2500, 1.2440/45 (former swing highs), 1.2405 (Neckline), 1.2310/30, 1.2250/65, and 1.2155/70.
USDJPY: The USDJPY closed above the key 78.60 level yesterday, though price has oscillated around both sides and has started to move lower intraday. This level coincides with former June swing lows and a level of resistance for most of July (note the daily wicks above said level but no closes). For now, this is the most important level: potential exists for a rally back into 79.10/20 as long as 78.60 holds, whereas a daily close below suggests a move towards 78.10/20 at the minimum. Penetration of the August low at 77.90 will likely result in a washout to new lows with the potential for 77.65/70 and 77.30.
GBPUSD: The GBPUSD continues to push higher, as expected. We do believe, however, that this is the “final push higher before the next leg lower.” Key levels for the near-term are 1.5880/1.5900 to the upside and 1.5770/90 to the downside; we are continuing to become overextended on shorter-term charts, suggesting that another failure at 1.5900 could lead to profit taking before further bullish price action. A daily close below 1.5770/90 over the coming days should lead to a drop into 1.5700/20. Beyond that, support comes in at 1.5635/40 (last week’s low), and 1.5625 (ascending trendline support off of August 6 and August 10 lows). A daily close above 1.5900 points towards 1.5985.
AUDUSD: The AUDUSD has rebounded today, as expected, though price remains significantly lower than originally expected last week. Regardless, the Australian Dollar has been struggling immensely the past several days, with poor news out of China driving down the highest yielding currency covered in this report. Near-term resistance comes in at 1.0345, 1.0420 1.0480, 1.0530/45 (former swing highs, and would also represent a break of the downtrend off of the August 9 high), and 1.0600/15 (August high). Should we see a rally up towards 1.0600 again, another failure would market a Double Top and signal a push for a test of 1.0200/05 (100-DMA). Near-term support comes in at 1.0330, 1.0305/10 (descending trendline support, 200-DMA), 1.0275/80 (weekly low) and 1.0200/20 (100-DMA, 1.618% extension on August 9 high to August 17 low, measured against the August 23 high).
--- Written by Christopher Vecchio, Currency Analyst
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