• Dollar Retraces More than Half of its 2010 Gains as Risk Appetite Soars
  • Euro Slowly Climbs as European Manufacturing Adds to a Recovery Picture
  • British Pound Surges as Modest Dip in Factory Activity Supports a Gradual Recovery
  • Australian Dollar Traders Batten the Hatches as an RBA Rate Decision Threatens Volatility
  • Japanese Yen Slides as Sentiment, JGB Yields Divert Capital Away from Japanese Assets
  • New Zealand Dollar Climbs on Sentiment but not on Fundamentals

Dollar Retraces More than Half of its 2010 Gains as Risk Appetite Soars

Another milestone has been reached for the dollar’s steady deterioration. On a trade-weighted basis, the benchmark currency slipped below the midpoint of its December-to-June rally (approximately 81.40). From another perspective, the greenback’s losses total nine percent; and for the technically inclined trader, the new low brings the currency in direct contact with the often-watched 200-day moving average. How has the dollar come to this point? An explanation for this disastrous performance is very different from a short-term and long-term perspective. Over the past two-months, the depreciation can largely be largely attributed to a ‘correction’ effort. The six-month rally that preceded the June reversal developed well before the negative turn in risk appetite and the fundamental deterioration behind the European Union (the most prominent threat to global financial stability since the US housing collapse). Naturally, this would lead us to believe that there was excess premium built into the reserve currency that could easily dissipate as soon as the trend was broken and risk appetite enlivened. So far, we have seen both conditions met. If we were looking at the dollar’s activity on a short-term basis (just Monday’s activity); the notable decline for the day can be attributed to the highly reactive shifts in risk appetite.

If we wanted to confirm the influence of risk appetite on the dollar and broader currency market, we only need to look to the standard for investor activity: the Dow Jones Industrial Average. The benchmark equity index rallied two percent to match its best performance in four weeks and advanced to a new two-and-a-half month high in the process. Clearing a technical level can often encourage such momentum; but this rally began well off the range high and was further supported by an equivalent performance in European and Asian equities as well as crude oil (which finally surpassed $80). So then, what was the spark that turned investor optimism on its head? Taking stock of the headlines and the scheduled event risk from the economic docket today; there was little to support such an impressive move. In fact, beginning in the early trading hours of the week, confidence could have been undermined by the release of the Chinese manufacturing activity report. The backbone of growth and investment for the rest of the world, the rapidly growing economy saw its first contraction in factory activity in 16 months according to a proprietary report (the official indicator was still above the expansion/contraction figure). In theory, such a reading would incite concern; but for an already bullish-leaning market, such a reading would be interpreted as evidence that officials will take their foot off the regulatory breaks that have been applied to cool growth and lending. Whether that will in fact be the case remains to be seen; and the side effects could be dire.

For the US economic docket, the limited offerings would offer a mixed picture that could easily be reconfigured to bulls’ ideal outlook. Top event risk was the ISM manufacturing report. The 55.5 reading was the worst reading for the series since December of 2009; but the month over month contraction was far smaller than what was predicted. What’s more, the natural reading from the indicator is still well above its growth cutoff. What this reading tells us is that the US is economy is still expanding; but that expansion is slowing – something we already knew, especially after last Friday’s 2Q GDP reading. Looking ahead to tomorrow, we have a long list of data. The most meaningful data in order of importance is the personal spending, personal income, pending home sales and factory orders.

Related: Discuss the Dollar in the DailyFX Forum, US Dollar Could Be Dragged Lower On Rising Unemployment

Euro Slowly Climbs as European Manufacturing Adds to a Recovery Picture

It has been the case for weeks now that a strong updraft behind risk appetite leads to an equally impressive performance from the euro. Where does this link come from? The shared currency was so severely depressed over the first half of the year (even before the EU troubles started really show up); that a global rebound in confidence naturally offers the euro a boost. This correlation to risk appetite is essential to the euro’s bullish performance going forward; because the economic and financial health that back the currency are far from encouraging. Helping to remind us what kind of condition the region is in, a Bloomberg News story reported European banks in the most indebted member countries would need to rollover $122 billion in bonds this year – more in 2011. The same doubt creeps in to economic data. The final reading of July manufacturing activity confirmed expansion; but a concentration in performance was notable set upon Germany – the largest economy.

British Pound Surges as Modest Dip in Factory Activity Supports a Gradual Recovery

Though the euro has garnered more attention recently for its undervaluation, the pound has been held underwater for far longer. This condition is frequently overlooked; but it is a key reality to note when assessing the direction and momentum of the sterling. The outlook for the UK has been so significantly diminished in fact that a slip in the region’s factory activity report is still construed as evidence that the economy is expanding (albeit at a slower pace). We will see if this confidence can sustain itself with housing and construction data due tomorrow.

Australian Dollar Traders Batten the Hatches as an RBA Rate Decision Threatens Volatility

Amid an already active outlook for fundamentally-based volatility, the Australian dollar perhaps holds the greatest potential for movement. The RBA rate decision is expected to pass without a change to the 4.50 percent benchmark lending rate; but commentary has proven itself to be an effective catalyst all its own. With the market pricing in little more than a quarter point rate hike over the coming 12 months, the bar is set low.

Japanese Yen Slides as Sentiment, JGB Yields Divert Capital Away from Japanese Assets

It isn’t difficult to establish the primary catalyst for the Japanese yen: risk appetite advances and the market’s favored funding currency for the carry trade tumbles. However, there is another facet to its poor performance. Today, Japanese Finance Minister Noda suggested today that the extremely low yield in government bonds was a sign of confidence in Japan. In reality, it is a low expectation for rising rates into the near future.

New Zealand Dollar Climbs on Sentiment but not on Fundamentals

The New Zealand dollar rallied against low yield and safe haven currencies Monday; but it would put in for a very weak performance against its Australian counterpart. This could easily be chocked up to yield differentials; but yield potential favors the kiwi. Further shifting the idea of performance, 2Q wage data reported a greater-than-expected 0.5 percent increase. Here we see there is a need for yield and stability.

For Real Time Forex News, visit: http://www.dailyfx.com/real_time_news/

**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar

ECONOMIC DATA

Next 24 Hours

Currency

GMT

Release

Survey

Previous

Comments

NZD

22:45

Labor Cost Private Sector (QoQ) (2Q)

0.4%

0.3%

New Zealand companies reduced labor demand in 1Q, as paid hours fell 0.4% from the fourth quarter.

NZD

22:45

Average Hourly Earnings (QoQ) (2Q)

0.5%

-0.4%

NZD

22:45

Private Wages ex Overtime (QoQ) (2Q)

0.4%

0.3%

JPY

23:50

Monetary Base (YoY) (JUL)

3.6%

Rose annually in last 22 months.

AUD

1:30

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

0.4%

0.2%

Australian retail sales rose in May for a third month.

AUD

1:30

Retail Sales ex Inflation (QoQ) (2Q)

0.7%

0.1%

AUD

1:30

Building Approvals (MoM) (JUN)

2.0%

-6.6%

Building approvals fell in May for a second straight month.

AUD

1:30

Building Approvals (YoY) (JUN)

16.0%

26.6%

AUD

4:30

RBA Interest Rate Decision

4.50%

4.50%

Market implies no chance of hike.

CHF

7:15

Consumer Price Index (MoM) (JUL)

-0.5%

-0.4%

Swiss consumer prices declined in June for a second month.

CHF

7:15

Consumer Price Index (YoY) (JUL)

0.7%

0.5%

GBP

8:30

PMI Construction (JUL)

58.0

58.4

Likely fell in June for second month.

EUR

9:00

EZ Producer Price Index (MoM) (JUN)

0.4%

0.3%

Euro-Zone purchasing prices rose in May for an eighth straight month.

EUR

9:00

EZ Producer Price Index (YoY) (JUN)

3.1%

3.1%

USD

12:30

Personal Income (JUN)

0.2%

0.4%

Personal income likely increased in June for a sixth consecutive month.

USD

12:30

Personal Spending (JUN)

0.1%

0.2%

USD

12:30

PCE Core (MoM) (JUN)

0.1%

0.2%

PCE core posted a 0.2% month-over-month rise in May, its largest since October 2009.

USD

12:30

PCE Core (YoY) (JUN)

1.3%

1.3%

USD

12:30

PCE Deflator (YoY) (JUN)

1.3%

1.9%

USD

14:00

Factory Orders (JUN)

-0.5%

-1.4%

Fell in May following 8-month rise.

USD

14:00

Pending Home Sales (MoM) (JUN)

3.9%

-30.0%

Pending home sales plunged in May after rising in the prior three months.

USD

14:00

Pending Home Sales (YoY) (JUN)

-15.6%

USD

21:00

ABC Consumer Confidence (AUG 1)

-46

-48

Fell last week to a 3-month low.

USD

21:00

Domestic Vehicle Sales (JUL)

8.90M

8.57M

U.S. auto sales dipped slightly in June from $9.14M reading in May.

USD

21:00

Total Vehicle Sales (JUL)

11.60M

11.08M

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

1.3500

1.6375

95.05

1.0900

1.0922

0.9335

0.7635

127.60

146.05

0.8725

Resistance 1

1.3275

1.5965

89.00

1.0700

1.0750

0.9150

0.7440

120.00

140.00

0.8600

Spot

1.3181

1.5893

86.44

1.0391

1.0233

0.9137

0.7328

113.92

137.37

0.8293

Support 1

1.2500

1.5125

86.00

1.0350

0.9950

0.8100

0.6850

106.90

125.00

0.8200

Support 2

1.2150

1.5000

85.00

1.0135

0.9700

0.7835

0.6585

103.80

119.00

0.8065

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

12.5847

1.4948

7.3033

7.7649

1.3482

Spot

7.1077

5.6530

5.9665

Support 1

12.0500

1.4500

7.2250

7.7490

1.3440

Support 1

1.1650

5.3000

5.8000

Support 2

11.7200

1.3665

7.1560

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

1.3287

1.6043

87.19

1.0533

1.0344

0.9218

0.7401

115.22

139.18

0.8364

Resistance 1

1.3234

1.5968

86.81

1.0462

1.0288

0.9178

0.7364

114.57

138.27

0.8328

Pivot

1.3142

1.5832

86.52

1.0405

1.0247

0.9105

0.7306

113.54

136.77

0.8291

Support 1

1.3089

1.5757

86.14

1.0334

1.0191

0.9065

0.7269

112.89

135.86

0.8256

Support 2

1.2997

1.5621

85.85

1.0277

1.0150

0.8992

0.7211

111.86

134.36

0.8219

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

1.3334

1.6066

87.46

1.0498

1.0353

0.9268

0.7437

115.70

139.55

0.8378

Resistance 2

1.3295

1.6023

87.21

1.0471

1.0323

0.9235

0.7410

115.25

139.01

0.8357

Resistance 1

1.3257

1.5980

86.95

1.0444

1.0293

0.9203

0.7383

114.81

138.46

0.8336

Spot

1.3181

1.5893

86.44

1.0391

1.0233

0.9137

0.7328

113.92

137.37

0.8293

Support 1

1.3105

1.5806

85.93

1.0338

1.0173

0.9071

0.7273

113.03

136.28

0.8251

Support 2

1.3067

1.5763

85.67

1.0311

1.0143

0.9039

0.7246

112.59

135.73

0.8229

Support 3

1.3028

1.5720

85.42

1.0284

1.0113

0.9006

0.7219

112.14

135.19

0.8208

v

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

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