• Dollar Rallies as Speculative Liquidity Meets European Uncertainty, Follow Through is Still Uncertain
  • Euro at the Mercy of the Financial Media as the Market Leverages its Fiscal Troubles
  • British Pound Traders will Increase Their Focus on Growth as a Foundation of Fundamental Strength
  • Canadian Dollar Offers Top Event Risk Wednesday with a Rate Decision that May Actually Result in a Hike
  • Australian Dollar Pressured by the Evaporation of Risk Appetite and a Neutral RBA Stance
  • Japanese Yen Marks a New 15-Year High against the US Dollar on the Close as the BoJ Holds Policy

Dollar Rallies as Speculative Liquidity Meets European Uncertainty, Follow Through is Still Uncertain

Is it really shocking news that European officials understated the potential risk that its regional banks face? It would seem so given the strong risk aversion move and robust dollar bid (especially against the euro) that developed Tuesday. However, that wouldn’t hit at the root of the issue. This particular Wall Street Journal article wasn’t the catalyst for the general market like many analysts have idly claimed. Instead, this was a general concern surrounding the region that had started to build momentum yesterday. And, to be frank, the issue was not Europe’s finances; but rather, it was a general revival in uncertainty that would target those currencies and regions with the most unstable fundamental futures. It just so happens that the financial media took a special interest in this particular region yesterday; and therefore, the investors’ attention was redirected to this general region. Identifying the source of today’s move as a confidence issue rather than a region-specific catalyst offers far better perspective into gauging the stability and conviction of the resultant FX trend. Alone, EURUSD would offer a reading of extraordinary velocity in risk aversion with a consistent decline through the day and the biggest close-to-close decline in four weeks. Yet, when we look to the S&P 500, we see a contraction that does little to offset last week’s gains and selling pressure that was heavily front-ended. Further, the benchmark 10-year Treasury note is still well off its recent highs, crude oil (a speculative-based commodity) ended the day little changed, and Libor rates were offering no bias. With this mix, a shift in sentiment is far less likely than a simple reaction to the rebound in speculative interest.

Outside the pull of risk appetite trends Tuesday, the dollar was offered little guidance by more structured fundamental factors. The economic docket was extraordinarily light for the session with nothing that could be construed as top or even second tier event risk. That being said, there were a few events that would take place; but a distracted market wouldn’t fully account for the shift. Turning a spotlight on the otherwise overlooked, long-term concern of the United States’ fiscal troubles, the Fed released the minutes of its Board of Governors discount rate meeting. Looking beyond a week growth forecast, the real interesting development was that both the Dallas and Kansas City Fed Reserve banks voted for a higher discount rate. A major disconnect in lending (which is itself a prominent hurdle to growth) is banks’ propensity to sit on capital to bolster reserve ratios and protect balance sheets rather than pass the capital on to consumers and businesses that would turn it into economic activity. Many argue that raising the discount rate (the rate at which banks borrow from the Fed) could dissuade them from hoarding the capital for small and arguable guaranteed returns. We will see if this gains any traction going forward. In other news, the White House laid out more details of tax breaks and spending programs for tomorrow; while the Fed bought another $2.708 billion in treasuries.

Looking ahead to tomorrow, the docket will once again offer a definitive timeframe for event risk (whether it is really market moving is another issue). The Fed Beige books will offer an economic assessment that probably won’t surprise; but consumer credit could be interesting.

Related: Discuss the Dollar in the DailyFX Forum, John’s Analyst Picks: EURUSD Short Makes Headway, Yen Crosses Draw My Attention

Euro at the Mercy of the Financial Media as the Market Leverages its Fiscal Troubles

Significant fundamental concerns or comforts can easily be overlooked depending on the prevailing interests of the speculative ranks. If investors are optimistic, an economically troubled region could be construed as a late bloomer with depressed prices; or a prominence of pessimism could lead to a selloff of a relative leader. Today, we would see the shift in backdrop sentiment revive concerns surrounding the Eurozone. There were few actual developments from the region beside new record highs on Irish and Portuguese yield spreads as well as a nationwide strike in France – though these are hardly surprising. What currency traders were responding to were regurgitated stories. The Wall Street Journal’s report that government debt exposure in the EU stress tests was understated; and Bloomberg’s stories that Greece had yet to fully disclose the full details of its debt obligations while the Euro region banks will need to raise 240 billion euros through year’s end are well documented. Nonetheless, for an antsy market, these kinds of reports only fuel fear.

British Pound Traders will Increase Their Focus on Growth as a Foundation of Fundamental Strength

Fundamental sterling traders would have only a low-level piece of event risk to absorb Tuesday (the BRC inflation index). Far more important a concern for the currency going forward will be the overall health of the economy. Economic performance will further determine interest rates and fiscal policy going forward. From that perspective, no indicator is better suited to define expectations than the NIESR GDP estimate for August.

Canadian Dollar Offers Top Event Risk Wednesday with a Rate Decision that May Actually Result in a Hike

Those that trade interest rate changes and expectations have had to take a more nuanced approach to their analysis. That is because few central banks are changing their assessments and even further are actually touching policy. The BoC is perhaps the exception. Economists and the markets show a modest majority consensus for a 25 bps hike from the group tomorrow. Will they hike; and where will they go from there?

Australian Dollar Pressured by the Evaporation of Risk Appetite and a Neutral RBA Stance

As expected, policy makers at the Reserve Bank of Australia left interest rates untouched for a fourth consecutive meeting. That was fully expected; and traders were more than ready to interpret subtle changes in tone to forecast future shifts. Some interpreted Governor Steven’s suggestion that rates are appropriate “for the time being” as a hawkish lean; but that is stretching it. Regardless risk trends dominate.

Japanese Yen Marks a New 15-Year High against the US Dollar on the Close as the BoJ Holds Policy

Just weeks after they increased their lending program from 20 to 30 trillion yen, the Bank of Japan would see little scope for further expanding monetary policy at its official meeting. From a risk perspective, this could be interpreted as a fortification of return; but not really at this stage in the game. Instead, yen traders were looking for safety and unwinding carry when they push USDJPY down to retest its 15-year low.

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ECONOMIC DATA

Next 24 Hours

Currency

GMT

Release

Survey

Previous

Comments

JPY

23:50

Trade Balance – BOP Basis (Yen) (JUL)

865.0B

769.0B

Japan trade surplus likely increased for a second month in July to the highest level since March.

JPY

23:50

Adjusted Current Account Total (Yen) (JUL)

1362.9B

1362.1B

JPY

23:50

Current Account Total (Yen) (JUL)

1534.6B

1047.1B

JPY

23:50

Bank Lending Banks Adjustments (YoY) (AUG)

-1.7%

Japanese bank lending declined annually in July for an eighth consecutive month.

JPY

23:50

Bank Lending incl Trusts (YoY) (AUG)

-1.8%

JPY

23:50

Bank Lending Banks ex-Trust (AUG)

-1.9%

JPY

23:50

Machine Orders (MoM) (JUL)

2.0%

1.6%

Machinery orders rose less than forecast in June.

JPY

23:50

Machine Orders (YoY) (JUL)

8.1%

-2.2%

JPY

23:50

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

2.6%

2.7%

Japan’s M2 increased in June by 2.7%, less than the prior 2 months.

JPY

23:50

Japan Money Stock M3 (YoY) (AUG)

1.9%

2.0%

GBP

NIESR Gross Domestic Product Estimate (AUG)

0.9%

2Q growth was a ‘blip’, says NIESR.

AUD

1:30

Home Loans (JUL)

1.0%

-3.9%

Loans fell in 8 of the past 9 months.

JPY

4:30

Bankruptcies (YoY) (AUG)

-23.1%

Fell annually in last twelve months.

JPY

5:00

Eco Watchers Survey: Outlook (AUG)

46.4

46.6

Current survey rose in July to its highest level since October 2006.

JPY

5:00

Eco Watchers Survey: Current (AUG)

49.9

49.8

EUR

6:00

German Trade Balance (euros) (JUL)

13.0B

14.1B

Germany’s trade surplus increased in June to its highest level in three months.

EUR

6:00

German Current Account (euros) (JUL)

11.5B

12.9B

EUR

6:00

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

0.1%

1.6%

EUR

6:00

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

0.0%

3.7%

EUR

6:30

Bank of France Business Sentiment (AUG)

101

101

Sentiment held at 101 since May.

EUR

6:45

French Trade Balance (euros) (JUL)

-4.1B

-3.8B

Trade deficit widened to 19-month high in May on drop in aircrafts.

EUR

6:45

French Central Government Balance (euros) (JUL)

-61.7B

GBP

8:30

Industrial Production (MoM) (JUL)

0.4%

-0.5%

Industrial production declined in June for a second time in 3 months.

GBP

8:30

Industrial Production (YoY) (JUL)

2.0%

1.3%

GBP

8:30

Manufacturing Production (MoM) (JUL)

0.3%

0.3%

Manufacturing rose in May, boosted by electrical equipment.

GBP

8:30

Manufacturing Production (YoY) (JUL)

4.9%

4.1%

EUR

10:00

German Industrial Production s.a. (MoM) (JUL)

1.0%

-0.6%

German industrial production unexpectedly declined in June.

EUR

10:00

German Industrial Production n.s.a. and w.d.a. (YoY) (JUL)

12.5%

10.9%

USD

11:00

MBA Mortgage Applications (SEP 3)

2.7%

Apps rose in each week of August.

CAD

12:30

Building Permits (MoM) (JUL)

-4.9%

6.5%

Permits rose in 3 of past 4 months.

CAD

13:00

Bank of Canada Interest Rate Decision

1.00%

0.75%

Market implies 64% chance of hike.

CAD

14:00

Ivey Purchasing Managers Index (AUG)

55.5

54.0

Fell in July from 58.9 prior reading.

USD

19:00

Consumer Credit (JUL)

-$4.5B

-$1.3B

Likely fell for 5th month in June.

Currency

GMT

Upcoming Events & Speeches

USD

18:00

Fed Releases Beige Book Economic Report

USD

18:30

Fed’s Narayana Kocherlakota Speaks in Missoula, Montana

SUPPORT AND RESISTANCE LEVELS

CLASSIC SUPPORT AND RESISTANCE – 18:00 GMT

Currency

EUR/USD

GBP/USD

USD/JPY

USD/CHF

USD/CAD

AUD/USD

NZD/USD

EUR/JPY

GBP/JPY

EUR/GBP

Resistance 2

1.3815

1.6375

95.05

1.0600

1.0922

0.9850

0.7635

127.60

146.05

0.8725

Resistance 1

1.3500

1.5965

89.00

1.0460

1.0750

0.9335

0.7440

120.00

140.00

0.8600

Spot

1.2682

1.5358

83.83

1.0114

1.0480

0.9106

0.7196

106.32

128.76

0.8258

Support 1

1.2500

1.5125

83.00

1.0075

0.9950

0.8100

0.6850

103.80

125.00

0.8065

Support 2

1.2150

1.5000

80.00

0.9960

0.9700

0.7835

0.6585

100.00

119.00

0.7780

CLASSIC SUPPORT AND RESISTANCE –EMERGING MARKETS 18:00 GMTSCANDIES CURRENCIES 18:00 GMT

Currency

USD/MXN

USD/TRY

USD/ZAR

USD/HKD

USD/SGD

Currency

USD/SEK

USD/DKK

USD/NOK

Resistance 2

14.4500

1.8025

8.7915

7.8165

1.4945

Resistance 2

7.7500

5.7800

6.2750

Resistance 1

13.8500

1.6755

8.3675

7.8075

1.4655

Resistance 1

7.5800

5.5400

6.1150

Spot

13.0623

1.5175

7.2728

7.7673

1.3497

Spot

7.3367

5.8706

6.2223

Support 1

12.0500

1.4500

7.1615

7.7490

1.3440

Support 1

1.1650

5.3000

5.8000

Support 2

11.7200

1.3665

6.6950

7.7450

1.3000

Support 2

7.0000

5.1000

5.6000

INTRA-DAY PIVOT POINTS 18:00 GMT

Currency

EUR/USD

GBP/USD

USD/JPY

USD/CHF

USD/CAD

AUD/USD

NZD/USD

EUR/JPY

GBP/JPY

EUR/GBP

Resistance 2

1.2945

1.5488

84.61

1.0183

1.0570

0.9212

0.7265

109.21

130.54

0.8406

Resistance 1

1.2813

1.5423

84.22

1.0148

1.0525

0.9159

0.7230

107.77

129.65

0.8332

Pivot

1.2746

1.5360

83.87

1.0114

1.0437

0.9126

0.7209

107.01

128.78

0.8292

Support 1

1.2614

1.5295

83.48

1.0079

1.0392

0.9073

0.7174

105.57

127.89

0.8219

Support 2

1.2547

1.5232

83.13

1.0045

1.0304

0.9040

0.7153

104.81

127.02

0.8179

INTRA-DAY PROBABILITY BANDS 18:00 GMT

Currency

EUR/USD

GBP/USD

USD/JPY

USD/CHF

USD/CAD

AUD/USD

NZD/USD

EUR/JPY

GBP/JPY

EUR/GBP

Resistance 3

1.2845

1.5544

84.94

1.0243

1.0612

0.9238

0.7306

108.09

130.94

0.8347

Resistance 2

1.2805

1.5498

84.66

1.0211

1.0579

0.9205

0.7279

107.64

130.39

0.8325

Resistance 1

1.2764

1.5451

84.38

1.0179

1.0546

0.9172

0.7251

107.20

129.85

0.8302

Spot

1.2682

1.5358

83.83

1.0114

1.0480

0.9106

0.7196

106.32

128.76

0.8258

Support 1

1.2600

1.5265

83.28

1.0049

1.0414

0.9040

0.7141

105.44

127.67

0.8214

Support 2

1.2559

1.5218

83.00

1.0017

1.0381

0.9007

0.7113

105.00

127.13

0.8192

Support 3

1.2519

1.5172

82.72

0.9985

1.0348

0.8974

0.7086

104.55

126.58

0.8170

v

Written by: John Kicklighter, Currency Strategist for DailyFX.com

To receive John’s reports via email or to submit Questions or Comments about an article; email jkicklighter@dailyfx.com