Dollar Actually Loses Ground as Pessimism Washes Over the Markets, Is this a Permanent Divergence?
It is one of the most dependable fundamental correlations Forex traders have to work with: as one of the market’s favorite safe haven currencies, the US dollar moves inversely to risk appetite. Yet, this unfailing link clearly broke down Tuesday under a significant shift in risk appetite – exactly when we would expect the connection to be the strongest. To verify that investor confidence was indeed on the decline, we merely have to take note of the correlation across other growth/yield-sensitive asset classes. Looking for benchmarks, the S&P 500 would slide 1.5 percent, the 10-year US Treasury note climbed to a 17-month high, and crude oil dropped 2.0 percent. This is exactly as would be expected under a scenario where fear is in control of investment decisions. As the need to unwind risky positions intensified, the magnitude of the market’s moves would increase and the bond between the various assets tightened. However, the greenback stood as a very obvious abstainer to this broad wave of deleveraging. Though most of the US session, the single currency was in the red while other safe havens were pushing sharply higher. And, while the trade-weighted Dollar Index closed its fifth positive day, the lack of progress presents a clear divergence from its function in the global markets. That being said, it should be no surprise that this deviation is fundamentally based and is unlikely to last for long.
Through much of the Asian and European trading sessions, the dollar was playing its usual roll as the backdrop to risk-defined market shifts. In fact, the morning would bring a few shocks to the system that would bolster the currency’s appeal as a shelter (including suspicion surrounding the German GDP reading, which is discussed below). However, the real driver of fundamental interest and risk appetite for the day was a US indicator that is rarely very market moving. The existing home sales report for July was already expected to print a remarkable 13.4 percent drop in turnover. Therefore, it would take an incredible 27.2 percent plunge to really catch investors off guard. The monthly plunge was the biggest since records began (1999) and the annual pace of sales (3.83 million) was similarly the worst seen over this time frame. Further statistics from this NAR report detail inventories at their highest level since 1999, the number of unsold single family home on the market at its highest level since 1983 and sales for these particular residences falling to a 15-year low. Putting this data into context, persistently high unemployment and rising foreclosure rates are keeping this market under water. In turn, this sector will not only cool economic output; but the cumulative drop in homeowner equity and the intangible impact on consumer confidence will present a significant anchor going forward. So why would this uncertainty not boost the dollar? The greenback is a safe haven to the point that the US economy is performing at par or moderately better than its global counterparts and the financial markets are working normally. This data threatens these requirements; but it doesn’t break them.
Given today’s data, investors in the FX and the mundane asset classes will be highly sensitive to growth and housing data. That means tomorrow’s new home sales and durable goods orders could carry more weight than they would normally. Through it all, watch risk trends.
Related: Discuss the Dollar in the DailyFX Forum, John’s Analyst Picks: EURUSD, GBPUSD and USDCHF Exposure Casts a Wide Net
Euro Drops Across the Board as Skepticism Spreads with German GDP Numbers, Ireland Downgraded
The euro would hold up relatively well through the US session thanks to the unusual flow of liquidity for the EURUSD. However, setting aside the influence of the greenback, we see that the shared currency itself is facing greater fundamental headwinds. The most visible update for the day was the update on the second quarter German GDP reading. The headline reading would confirm the initial record 2.2 percent growth reported for the three month period. Yet, the real concern is not in past performance (especially one that furthers the skew between EU members) and more about future trends. As expected, exports (8.2 percent growth) and construction investment (5.2 percent) were responsible for the majority of this growth. And, this would only act to confirm suspicions that this pace is not sustainable. These figures are heavily dependent on global growth and strong financial markets – both dynamics that are falling apart. Putting some kinetic energy to uncertainty, we were further met with an S&P downgrade of Ireland’s sovereign credit rating and reports that Greece’s banks are trying to consolidate to avoid failure.
Japanese Yen Boasts a 15 Year High against the US Dollar and Yet Officials’ Commentary Still Halfhearted
While it would be easy to attribute USDJPY’s break below 85 to 15-year lows to the dollar’s reaction to today’s housing data; the move occurred well before this development. Instead, after months of trend and weeks of congestion, a breakout was necessary; and doubt that policy officials would make the effort to cap the currency forced the issue. It is interesting that even after the break; the language both the Prime Minister and Finance Minister would use was still soft. Long-term fundamentals don’t support this trend; but short-term speculation can push it further.
Canadian Dollar Stumbles as a Drop in Core Retail Sales Further Undermines Growth, Interest Rates
Lost in a session of far bigger headlines, the Canadian dollar would still react to its disappointing retail sales showing. The headline figure for June grew a sparse 0.1 percent; but excluding autos, it actually was a 0.5 percent drop. This is one more piece of evidence that the BoC is justified in holding rates at current levels as growth and inflation stagnate. In fact, the 12-month forecast for rates is at an 8-month low.
British Pound Drops after BoE Member Raises the Threat Profile of a Return to Recession
Considering GPBPUSD would still put in for a meaningful break and significantly decline Tuesday, doubt surrounding the strength of the sterling must be considerable. In fact, skepticism is so prevalent that even the BoE is starting to doubt the future. In an interview, central banker Martin Weale reportedly spoke of a “real risk†for a second recession supported by the group’s recent economic forecasts.
Australian Dollar Looks to Construction Activity as a Guide to 2Q GDP Performance
The Australian Bureau of Statistics is run by smart people. The group releases a number of component quarterly figures before the actual GDP numbers. Today, we saw a 3.5 percent rise in 2Q construction that tell us that rates hadn’t chocked off growth…yet. Next is capital investment.
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ECONOMIC DATA
Next 24 Hours
|
Currency |
GMT |
Release |
Survey |
Previous |
Comments |
|
JPY |
23:50 |
Adjusted Merchandise Trade Balance (Yen) (JUL) |
397.5B |
456.0B |
Japanese exports rose faster than expected in June, as shipments abroad advanced 27.7% in the month. |
|
JPY |
23:50 |
Merchandise Trade Balance Total (Yen) (JUL) |
466.3B |
686.4B |
|
|
JPY |
23:50 |
Merchandise Trade Exports (YoY) (JUL) |
21.8 |
27.7 |
|
|
JPY |
23:50 |
Merchandise Trade Imports (YoY) (JUL) |
19.8 |
26.1 |
|
|
JPY |
23:50 |
Corporate Service Price (YoY) (JUL) |
-1.0% |
-1.0% |
Declined for 21st month in June. |
|
AUD |
1:30 |
Construction Work Done (2Q) |
3.0% |
1.9% |
Work rose in 3 of last 4 quarters. |
|
EUR |
8:00 |
German IFO – Expectations (AUG) |
104.3 |
105.5 |
German business climate index increased in July to a three-year high. |
|
EUR |
8:00 |
German IFO – Business Climate (AUG) |
105.7 |
106.2 |
|
|
EUR |
8:00 |
German IFO – Current Assessment (AUG) |
107.5 |
106.8 |
|
|
USD |
11:00 |
MBA Mortgage Applications (AUG 20) |
13.0% |
Apps increased in last 3 weeks. |
|
|
USD |
12:30 |
Durable Goods Orders (JUL) |
3.0% |
-1.2% |
Durable goods orders declined in June for a second month. |
|
USD |
12:30 |
Durables Ex Transportation (JUL) |
0.5% |
-0.9% |
|
|
USD |
12:30 |
Cap Goods Orders Non-Defense ex Aircrafts (JUL) |
0.2% |
Capital goods orders increased in June for a second month. |
|
|
USD |
12:30 |
Cap Goods Shipments Non-Def ex Aircrafts (JUL) |
0.5% |
||
|
USD |
14:00 |
New Home Sales (MoM) (JUL) |
0.0% |
23.6% |
New home sales were probably unchanged in July. |
|
USD |
14:00 |
New Home Sales (JUL) |
330K |
330K |
|
|
USD |
14:00 |
House Price Purchase Index (QoQ) (2Q) |
-0.4% |
-1.9% |
House price purchase index declined in the last 11 quarters. |
|
USD |
14:00 |
House Price Index (MoM) (JUN) |
0.1% |
0.5% |
|
|
USD |
14:30 |
DOE U.S. Crude Oil Inventories (AUG 20) |
400K |
-818K |
Crude inputs averaged 15.2M barrels per day last week as refineries operated at 90% of capacity. |
|
USD |
14:30 |
DOE U.S. Gasoline Inventories (AUG 20) |
-500K |
-39K |
|
|
USD |
14:30 |
DOE U.S. Distillate Inventory (AUG 20) |
1000K |
1069K |
|
|
EUR |
16:00 |
French Total Jobseekers (JUL) |
2691 |
Jobless claims likely increased in July for a third time in four months. |
|
|
EUR |
16:00 |
French Total Jobseekers Change (JUL) |
14 |
-8.6 |
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 |
1.0900 |
1.0922 |
0.9850 |
0.7635 |
127.60 |
146.05 |
0.8725 |
|
Resistance 1 |
1.3500 |
1.5965 |
89.00 |
1.0700 |
1.0750 |
0.9335 |
0.7440 |
120.00 |
140.00 |
0.8600 |
|
Spot |
1.2680 |
1.5445 |
84.24 |
1.0310 |
1.0602 |
0.8844 |
0.7049 |
106.81 |
130.11 |
0.8209 |
|
Support 1 |
1.2500 |
1.5125 |
83.00 |
1.0300 |
0.9950 |
0.8100 |
0.6850 |
103.80 |
125.00 |
0.8065 |
|
Support 2 |
1.2150 |
1.5000 |
80.00 |
1.0135 |
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 |
12.9479 |
1.5317 |
7.3591 |
7.7769 |
1.3621 |
Spot |
7.4488 |
5.8745 |
6.2837 |
|
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 |
1.2793 |
1.5590 |
85.95 |
1.0513 |
1.0747 |
0.8970 |
0.7117 |
109.07 |
133.68 |
0.8261 |
|
Resistance 1 |
1.2737 |
1.5518 |
85.09 |
1.0412 |
1.0674 |
0.8907 |
0.7083 |
107.94 |
131.89 |
0.8235 |
|
Pivot |
1.2662 |
1.5445 |
84.35 |
1.0349 |
1.0593 |
0.8852 |
0.7045 |
106.69 |
130.35 |
0.8193 |
|
Support 1 |
1.2606 |
1.5373 |
83.49 |
1.0248 |
1.0520 |
0.8789 |
0.7011 |
105.56 |
128.56 |
0.8167 |
|
Support 2 |
1.2531 |
1.5300 |
82.75 |
1.0185 |
1.0439 |
0.8734 |
0.6973 |
104.31 |
127.02 |
0.8125 |
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 |
1.2851 |
1.5635 |
85.33 |
1.0441 |
1.0737 |
0.8979 |
0.7162 |
108.62 |
132.34 |
0.8295 |
|
Resistance 2 |
1.2808 |
1.5588 |
85.06 |
1.0408 |
1.0703 |
0.8945 |
0.7134 |
108.17 |
131.78 |
0.8273 |
|
Resistance 1 |
1.2765 |
1.5540 |
84.78 |
1.0375 |
1.0670 |
0.8911 |
0.7106 |
107.71 |
131.23 |
0.8252 |
|
Spot |
1.2680 |
1.5445 |
84.24 |
1.0310 |
1.0602 |
0.8844 |
0.7049 |
106.81 |
130.11 |
0.8209 |
|
Support 1 |
1.2595 |
1.5350 |
83.70 |
1.0245 |
1.0534 |
0.8777 |
0.6992 |
105.91 |
128.99 |
0.8166 |
|
Support 2 |
1.2552 |
1.5302 |
83.42 |
1.0212 |
1.0501 |
0.8743 |
0.6964 |
105.45 |
128.44 |
0.8144 |
|
Support 3 |
1.2509 |
1.5255 |
83.15 |
1.0179 |
1.0467 |
0.8709 |
0.6936 |
105.00 |
127.88 |
0.8123 |
v
Written by: John Kicklighter, Currency Strategist for DailyFX.com
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