• Dollar Edges Lower as Risk Appetite Swells and Economic Data Posts Mixed Results
  • Euro Jumps on Confirmation of ‘Strong’ Irish and Spanish Debt Auction Results
  • British Pound Tumbles as Core Inflation Undermines Early Speculation of Future Hikes
  • Australian Dollar’s Risk-based Run Flags Early as China Link Dims Economic Expectations
  • Canadian Dollar Propped by Investor Sentiment Long Enough to Curb Reaction to Capital Inflow
  • Japanese Yen Falls back into Line with Risk Trends as Confidence Gathers Momentum

Dollar Edges Lower as Risk Appetite Swells and Economic Data Posts Mixed Results

With risk appetite on the rise Tuesday, the safe haven dollar would be led to its second consecutive loss. So far, this is looking like a consistent reversal of last week’s risk aversion / dollar rally trend; but the difference between the two is that the current advance in sentiment isn’t backed by the same severity of conviction that defined the fear-based move through this past Friday. The notion that today’s bullish drive across the capital markets was founded on investor sentiment can be established in the high level of correlation between the various asset classes. Equities climbed nearly two percent through the day (the S&P 500 advanced 1.9 percent), speculative-influenced commodities similarly climbed for the first time in a week (the Nymex based crude futures contract hit an intraday high 1.9 percent off the previous day’s close) and the yield on the benchmark 10-year Treasury note rose 7 basis points. When these very different assets move in the same direction with a significant pace, there is a systemic dynamic to the development; and very few drivers can claim such an influence. That being said, the Dollar Index’s inability to slip below 82 and EURUSD’s lack of progress below 1.2925 suggests the greenback may require more incentive than what’s currently offered.

One of the impediments to a more meaningful dollar reversal is the concern that confidence has not in fact recovered for good. If an upswing is expected to be temporary, it will draw relatively little capital. One reason to believe that this is the case currently is the simple fact that equities, commodities and bond yield would all retrace from their intraday highs into the close. Speculative influences are perhaps more important than objective fundamental considerations because price will follow the biases and misinterpretations that are filtered through the crowd. For this reason, we look at today’s seemingly positive exogenous risk factors. The positive bearing in the Chinese composite leading indicator survey and foreign direct investment are undermined by the tempered pace these data sets are taking and given the context of a government attempting to deflate a lending/investment bubble. Far more visible for dollar traders keeping an eye on risk trends was the performance of the European sovereign debt auctions scheduled for the day. Both Spain and Ireland were planning to sell bills and notes; and a failure would have been considered a distinct crisis threat. Investors would absorb both nations’ debt; but this is as successful as an unsustainably high yield can be construed as a positive outcome. A risk adverse market could have easily interpreted these events different.

From the dollar’s own economic docket, the event risk up for review was far from encouraging. The best performing report for the day was the 1.0 percent increase in industrial production. The breakdown of the report showed a broad increase in factory output; but this sector is proving to be one of the few that is shouldering growth. This is not a sustainable situation. More contentious was the performance of the housing sector data. Construction on homes rose 1.7 percent (less than expected); but the real point to make is that starts on single family homes fell for a third consecutive month. A sign of future construction, permits dropped 3.1 percent to year-low. As a considerable source of wealth and gauge of credit health, housing is a major burden on growth going forward. Data aside, another activity to take note of was the start of the Fed’s Treasury purchasing program. The central bank began its effort to cap stimulus and hold down rates by buying $2.55 billion in US government debt.

Related:Discuss the Dollar in the DailyFX Forum, US Dollar Forecast to Gain on an Unwind in Short Positioning

Euro Jumps on Confirmation of ‘Strong’ Irish and Spanish Debt Auction Results

Though EURUSD’s performance was muted; the euro itself was showing market-wide strength. For the fundamental trader that merely scratches the surface of event risk, this may come as a surprise; because the only piece of event risk scheduled for the day offered mixed results. The German ZEW Investor sentiment survey measured a forecast reading of 14 that was both well short of expectations and the weakest forecast for the group in 16 months. This may seem particularly surprising given the record advance in the 2Q GDP reading released just this past week; but the reality of a tempered pace in the current quarter is a common consideration across the masses. That being said, the current conditions figure did hit a 30-month high and the Eurozone figure ticked higher. The real interest for risk watchers though was the Irish and Spanish bond auctions. Ireland sold 1.5 billion euros in two maturities with the longer maturity pulling lower rates. The Spanish offering saw lower rates and higher demand on both of its instruments. This is an improvement only in the sense that it postpones the acceptance of reality for a little longer.

British Pound Tumbles as Core Inflation Undermines Early Speculation of Future Hikes

If we had just accepted the headline economic reading for the day, the British pound would probably have rallied. Instead, the sterling tumbled across the board. This downdraft can be tied to the fact that the core, annual inflation report had actually cooled form a 3.1 percent to 2.6 percent pace. Speculation amongst the FX crowd is still very high that the BoE could hike rates even while stimulus is held at extremely lax levels. With the underlying inflation reading slipping below the central bank’s upper target, it is likely that the headline figure will follow soon.

Australian Dollar’s Risk-based Run Flags Early as China Link Dims Economic Expectations

With a clear advance in risk appetite across the market, the Australian dollar would capitalize on its appeal as a high-yield currency. However, the momentum behind this advance is limited by virtue of risk trends and Australia’s economic ties. This continent economy is heavily dependent on China for export demand. With the ongoing effort to cool the world’s second largest economy, doubt of Aussie growth will progress.

Canadian Dollar Propped by Investor Sentiment Long Enough to Curb Reaction to Capital Inflow

There were two pieces of scheduled event risk for loonie traders to absorb Tuesday; and neither was particularly encouraging. Net capital inflows into the economy dropped from the record in the May reading to a more temperate C$5.39 billion purchase in June. At the same time, factory activity is struggling as a backbone of growth. Manufacturing sales grew a mere 0.06 percent in the same period.

Japanese Yen Falls back into Line with Risk Trends as Confidence Gathers Momentum

Given the bearing on underlying investor sentiment, it isn’t difficult to intuit the direction on the Japanese yen. However, momentum here too is lacking. The currency’s funding status will keep it tied to risk; but we need to monitor the correlation closely as fundamentals seep in.

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

ECONOMIC DATA

Next 24 Hours

Currency

GMT

Release

Survey

Previous

Comments

AUD

0:30

Westpac Leading Index (MoM) (JUN)

0.2%

Increased in 11 of past 12 months.

AUD

1:30

Wage Cost Index (QoQ) (2Q)

0.9%

0.9%

Australian wage cost index increased by the most since 2008.

AUD

1:30

Wage Cost Index (YoY) (2Q)

3.1%

3.0%

AUD

1:00

DEWR Skilled Vacancies (MoM) (AUG)

0.3%

Increased in last thirteen months.

AUD

1:00

CBAHIA House Affordability (2Q)

118.8

Index declined in last four quarters.

JPY

5:00

Leading Index (JUN F)

98.9

Japan’s leading index increased in June for the first time in 3 months.

JPY

5:00

Coincident Index (JUN F)

101.3

EUR

9:00

Euro-Zone Construction Output s.a. (MoM) (JUN)

-1.00%

Construction output declined in June for a fourth time in five months.

EUR

9:00

Euro-Zone Construction Output w.d.a. (YoY) (JUN)

-6.30%

USD

11:00

MBA Mortgage Applications (AUG 13)

0.60%

Apps increased in the last 2 weeks.

USD

14:30

DOE U.S. Crude Oil Inventories (AUG 13)

-1000K

-2988K

U.S. crude inputs averaged 15.1 million barrels per day last week, below the prior week’s average.

USD

14:30

DOE U.S. Gasoline Inventories (AUG 13)

-500K

409K

USD

14:30

DOE U.S. Distillate Inventory (AUG 13)

1500K

3456K

Currency

GMT

Upcoming Events & Speeches

GBP

8:30

Bank of England Meeting Minutes

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

1.2883

1.5567

85.50

1.0433

1.0330

0.9058

0.7129

110.14

133.11

0.8275

Support 1

1.2500

1.5125

85.00

1.0350

0.9950

0.8100

0.6850

106.90

125.00

0.8165

Support 2

1.2150

1.5000

80.00

1.0135

0.9700

0.7835

0.6585

103.80

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

12.6015

1.4983

7.2680

7.7699

1.3541

Spot

7.3166

5.7829

6.1302

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

1.2980

1.5749

85.99

1.0500

1.0489

0.9162

0.7213

111.25

134.24

0.8344

Resistance 1

1.2931

1.5658

85.75

1.0466

1.0410

0.9110

0.7171

110.70

133.68

0.8309

Pivot

1.2868

1.5605

85.43

1.0415

1.0359

0.9028

0.7106

109.88

133.38

0.8247

Support 1

1.2819

1.5514

85.19

1.0381

1.0280

0.8976

0.7064

109.33

132.82

0.8213

Support 2

1.2756

1.5461

84.87

1.0330

1.0229

0.8894

0.6999

108.51

132.52

0.8151

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

1.3048

1.5754

86.55

1.0558

1.0454

0.9188

0.7238

111.91

135.26

0.8359

Resistance 2

1.3007

1.5707

86.29

1.0526

1.0423

0.9155

0.7210

111.47

134.72

0.8338

Resistance 1

1.2965

1.5661

86.03

1.0495

1.0392

0.9123

0.7183

111.02

134.18

0.8317

Spot

1.2883

1.5567

85.50

1.0433

1.0330

0.9058

0.7129

110.14

133.11

0.8275

Support 1

1.2801

1.5473

84.97

1.0371

1.0268

0.8993

0.7075

109.26

132.04

0.8233

Support 2

1.2759

1.5427

84.71

1.0340

1.0237

0.8961

0.7048

108.81

131.50

0.8212

Support 3

1.2718

1.5380

84.45

1.0308

1.0206

0.8928

0.7020

108.37

130.96

0.8191

v

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

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