• Dollar Rally and S&P 500 Tumble Hit Immediate Fundamental Headwinds
  • Euro Stumbles After Yet Another Greece Downgrade, Schaeuble Casts Doubt on EFSF
  • British Pound Traders Ignore BoE’s Miles, Fret CBI Factory Data
  • New Zealand Dollar: Don’t Write Off the RBNZ Rate Decision
  • Australian Dollar Maintains Its Bullish Bias Despite Risk Aversion
  • Swiss Franc vs Japanese Yen: Where Would they Intervene First?
  • Gold Eases Back for the first Tim in Four Days, The Dollar’s Work

Dollar Rally and S&P 500 Tumble Hit Immediate Fundamental Headwinds

The US dollar finally found some breathing room through Wednesday’s session – and the casual observer would connect the dots back to the slump in risk appetite trends. It is certainly true that the S&P 500 (our favored, simplified barometer for investor sentiment) suffered its biggest single-day decline since June 1st. Such an aggressive move can surely rouse the kind of wholesale selling that can produce temporary amnesia as to the dollar’s fiscal plight and encourage risk aversion flows by some segment of the market; but it will struggle to carry through. If the equities index is stopped up around 1,300; we will once wake to the reality that capital markets are discouraged from generating serious trends so long as the threat of a US downgrade looms.

Though the dollar’s bullish break may be short-lived; the move nevertheless prevents an extension of the now-familiar selling pressure. For the Dow Jones FXCM Dollar Index (ticker = USDollar), the positive close through Tuesday’s close was the first official advance in seven consecutive trading days – though the bounce would come after an intraday dip to a record low of 9,332. Looking at the liquid majors; there was a skew to the currency’s performance that clues us in to the unusual circumstances. Six of the seven majors actually showed a positive performance for the dollar; and its best run was seen against the euro (on the biggest EURUSD drop in two-and-a-half weeks). Naturally, we would tie this performance to risk aversion move as it would fit nicely with the S&P 500 slump. However, we note that the high-yielding Australian dollar actually advanced 0.6 percent against the greenback and the New Zealand dollar posted a very modest loss. We could attribute this performance to specific event risk (Australian CPI and the RNBZ decision); but there are other disconnects from the market-wide sentiment scenario. As the budget deadline draws closer, we will see investors in other asset classes become rattled. And, given the lack of precedence for how this situation could really play out; volatility will be far more prevalent than trend generation.

From the newswires this past session, market participants were combing through any and all updates on the budget debate. With the CBO noting both the Boehner and Reid plans fell short of their projected savings; the day of debt reckoning looks like it is charging forward. And, knowing the risk the worst-case-scenario entails; it shouldn’t come as a surprise that money market mutual fund managers are building up their short-term liquidity and cash holdings; while the short-term Treasury rates are rising on a drop in demand rather than outlook for higher returns. From the calendar, the 2.1 percent drop in durable goods was an unnecessary reminder that the US economy is downshifting; and the Fed Beige Book noted 8 of the 12 regions reported a slowdown in the economy. No rate hikes, QE3 potential and downgrade options come to mind.

Related:Discuss the Dollar in the DailyFX Forum, John’s Video: Dollar Rally and S&P 500 Drop not as Related as You Think

Euro Stumbles After Yet Another Greece Downgrade, Schaeuble Casts Doubt on EFSF

Nowadays, who is caught off guard when Greece is downgraded? Standard & Poor’s rating agency announced that it had lowered the troubled country’s benchmark rating from CCC to CC. This does little to alter the outlook where the market expects to hear that the restructuring effort (after implemented) will constitute a default – something that Standard & Poor’s noted Wednesday. What should draw our attention is their expectations that bond holders will recover between 30 and 50 percent of the principle for their Greek bond holdings. The greater the loss, the greater the contagion. In other news, the already panned EU rescue program may be facing official resistance after German Finance Minister Schaeuble said the government rejects a ‘carte blanche’ use of the EFSF to make purchases in the secondary market.

British Pound Traders Ignore BoE’s Miles, Fret CBI Factory Data

There was little pep in the sterling’s performance this past session. BoE member Miles did little to encourage bulls as he reiterated inflation shocks would pass and he does see the possibility of a double dip recession. In the meantime, the CBI manufacturing activity figures showed the lowest reading for optimism in two years. We’ll see whether the group’s retail report and the GfK sentiment survey offer the same tomorrow.

New Zealand Dollar: Don’t Write Off the RBNZ Rate Decision

A snap analysis on the RBNZ’s rate decision would tell us it was a non-event because Governor Bollard kept rates unchanged. Look a little harder and you note in his comments that he says there is little need for that March 50bps rate cut to remain in place for much longer. That alone would be hawkish more wasn’t already priced in and Bollard didn’t go on to say the kiwi’s level curbed the need for further hikes.

Australian Dollar Maintains Its Bullish Bias Despite Risk Aversion

This isn’t a scenario that we see very often: the S&P 500 tumbling and the Australian dollar rallying. It isn’t so much the contrasting direction as the momentum behind both moves. We can certainly tie the currency’s move back to the CPI data released early in the day; but that hardly speaks to rate hikes and more to a neutral policy. At the same time, a plunge in risk trends would certainly curb yield demand.

Swiss Franc vs Japanese Yen: Where Would they Intervene First?

If we see continued dollar selling, which would be the first central bank to intervene: BoJ or SNB? Both have been relatively active over the past year; and both have failed spectacularly to control their respective currencies’ rallies. That said, Japan stands to lose more as its finances and economy struggle; and would therefore likely act first. That said, neither would have a meaningful or lasting impact on the FX market.

Gold Eases Back for the first Tim in Four Days, The Dollar’s Work

We have grown so used to seeing gold rally that it is somewhat shocking to see the metal slip back for a session. Yet, that is in fact what it did through Wednesday’s close. A pullback against most of the liquid currencies suggests this is not just a dollar-based performance – though that no doubt helped. Yet, it won’t take long to turn back to the troubles that would follow a lackluster budget solution.

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ECONOMIC DATA

Next 24 Hours

GMT

Currency

Release

Survey

Previous

Comments

7:55

EUR

German Unemployment Change (JUL)

-15K

-8K

German labor markets expected to slightly improve, most likely led by manufacturing

7:55

EUR

German Unemployment Rate s.a. (JUL)

7.0%

7.0%

8:00

EUR

Italian Hourly Wages (MoM) (JUN)

0.0%

Wages slightly improving, may suggest inflation in southern European nation

8:00

EUR

Italian Hourly Wages (YoY) (JUN)

1.8%

9:00

EUR

Euro-Zone Consumer Confidence (JUL F)

-11.4

-11.4

Confidence surveys for July all expected lower, probably due to ongoing crisis in US, EU, slower economic recovery

9:00

EUR

Euro-Zone Business Climate Indicator (JUL)

0.83

0.92

9:00

EUR

Euro-Zone Economic Confidence (JUL)

104

105.1

9:00

EUR

Euro-Zone Industrial Confidence (JUL)

1.6

3.2

9:00

EUR

Euro-Zone Services Confidence (JUL)

9.2

9.9

10:00

GBP

CBI Reported Sales (JUL)

2

-2

Retail indication expected to improve

12:30

USD

Continuing Claims (JUL 16)

3700K

3698K

US labor market for this week expected to be still weak, slowly recovering

12:30

USD

Initial Jobless Claims (JUL 23)

415K

418K

13:45

USD

Bloomberg Consumer Comfort (JUL 24)

-44.9

-43.3

Index decline may be due to debt fight

14:00

USD

Pending Home Sales (YoY) (JUN)

14.7%

15.5%

Slower pace of home sales may confirm Fed’s beige book concern that real estate market still weak

14:00

USD

Pending Home Sales (MoM) (JUN)

-2.0%

8.2%

14:30

USD

EIA Natural Gas Storage Change (JUL 23)

60

Lower storage may point to demand

22:45

NZD

Building Permits (MoM) (JUN)

3.0%

2.2%

Could be due to earthquake recovery

23:01

GBP

GfK Consumer Confidence Survey(JUL)

-26

-25

Slower fall could be due to austerity

23:15

JPY

Nomura/JMMA Manufacturing PMI (JUL)

50.7

Has recovered since March earthquake

23:30

JPY

Job-To-Applicant Ratio (JUN)

0.61

0.61

Japanese labor remaining stagnant, pointing to economic moderation again

23:30

JPY

Jobless Rate (JUN)

4.6%

4.5%

23:30

JPY

Household Spending (YoY) (JUN)

-2.3%

-1.9%

Could show slowing continuing

23:30

JPY

Tokyo CPI (YoY) (JUL)

0.0%

-0.2%

Japanese inflation expected to still grow, though BoJ has said short term effects do not warrant any rate increases in the near term

23:30

JPY

Tokyo CPI Ex-Fresh Food (YoY) (JUL)

0.2%

0.1%

23:30

JPY

Tokyo CPI Ex Food(JUL)

0.1%

23:30

JPY

National CPI Ex-Fresh Food (YoY)

0.5%

0.6%

23:30

JPY

National CPI Ex Food (JUN)

0.1%

23:30

JPY

National CPI (YoY) (JUN)

0.2%

0.3%

23:50

JPY

Loans & Discounts Corp (YoY) (JUN)

-2.0%

Corporate health still weak, falling

23:50

JPY

Industrial Production (MoM) (JUN P)

4.5%

6.2%

Year-over-year production seen to slightly recover, though negative number still confirms continued recesssion

23:50

JPY

Industrial Production (YoY) (JUN P)

-1.2%

-5.5%

GMT

Currency

Upcoming Events & Speeches

18:30

USD

Fed’s Williams Speaks in Salt Lake City

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

Resist 2

1.5160

1.6600

86.00

0.8900

1.0275

1.1800

0.9020

118.00

146.05

Resist 1

1.5000

1.6475

81.50

0.8550

1.0000

1.1000

0.8750

113.50

140.00

Spot

1.4362

1.6321

78.01

0.8022

0.9498

1.1011

0.8691

112.03

127.32

Support 1

1.4000

1.5935

77.50

0.8000

0.9425

1.0400

0.7745

109.00

125.00

Support 2

1.3700

1.5750

76.25

0.7900

0.9055

1.0200

0.6850

106.00

119.00

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

Resist 2

13.8500

1.8235

7.4025

7.8165

1.3650

Resist 2

7.5800

5.6625

6.1150

Resist 1

12.5000

1.7425

7.3500

7.8075

1.3250

Resist 1

6.5175

5.3100

5.7075

Spot

11.6652

1.6915

6.6768

7.7917

1.2039

Spot

6.3473

5.1885

5.4032

Support 1

11.5200

1.6500

6.5575

7.7490

1.2000

Support 1

6.0800

5.1050

5.3040

Support 2

11.4400

1.5725

6.4295

7.7450

1.1800

Support 2

5.8085

4.9115

4.9410

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

Resist 2

1.4609

1.6484

78.52

0.8073

0.9567

1.1150

0.8798

113.68

128.48

Resist 1

1.4486

1.6402

78.26

0.8047

0.9532

1.1080

0.8744

112.86

127.90

Pivot

1.4412

1.6358

77.92

0.8022

0.9472

1.1012

0.8713

112.40

127.55

Support 1

1.4289

1.6276

77.66

0.7996

0.9437

1.0942

0.8659

111.58

126.97

Support 2

1.4215

1.6232

77.32

0.7971

0.9377

1.0874

0.8628

111.12

126.62

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

Resist. 3

1.4548

1.6477

78.88

0.8126

0.9591

1.1151

0.8808

113.61

128.81

Resist. 2

1.4501

1.6438

78.67

0.8100

0.9568

1.1116

0.8779

113.21

128.44

Resist. 1

1.4455

1.6399

78.45

0.8074

0.9544

1.1081

0.8749

112.82

128.07

Spot

1.4362

1.6321

78.01

0.8022

0.9498

1.1011

0.8691

112.03

127.32

Support 1

1.4269

1.6243

77.57

0.7970

0.9452

1.0941

0.8633

111.24

126.57

Support 2

1.4223

1.6204

77.35

0.7944

0.9428

1.0906

0.8603

110.85

126.20

Support 3

1.4176

1.6165

77.14

0.7918

0.9405

1.0871

0.8574

110.45

125.82

v

Written by: John Kicklighter, Senior 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

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