- Dollar Strength Fragile as Markets Weigh the Fed against Stability
- Euro as Much a Financial Risk as the Dollar
- Australian and New Zealand Dollars Side With Risk Trends
- Japanese Yen Gaining Ground as Long as the Sell Off is Orderly
- Swiss Franc Still the Favored Safe Haven, SNB Little Worry
- Gold Happy to Play the Role of Alternative Store of Wealth
Dollar Strength Fragile as Markets Weigh the Fed against Stability
There are many repercussions with downgrading the United States’ top credit rating; and it seems pretty clear through Monday’s price action which concern came out on top. Despite the implications that a downgrade holds for the greenback’s primary fundamental appeal in the FX market, habit is hard to ignore. And, there is no more engrained tendency in the global capital markets than running to US Treasuries during a flight to safety. If we weren’t in the midst of a global unwinding of risky positioning, the greenback would likely have collapsed further and essentially struggled to perform any near-term safe haven role. Yet, this downgrade comes at a strategically beneficial time for the dollar where leverage was already being unwound at an aggressive pace; and the Standard & Poor’s downgrade to AA+ read more easily as a crisis point than it did as a dollar consideration. So, what we are left with here; is a market that is prioritizing its many signals – not unusual. Yet, this prevailing dollar strength could fail very quickly in the near future depending on which path the markets follow.
Monday’s session was something of a mixed bag for the Dow Jones FXCM Dollar Index (ticker = USDollar). The index advanced through the opening day; but didn’t really overtake Friday’s highs until the afterhours trading. This performance was fully the responsibility of the S&P 500 and risk aversion. The benchmark equities index plummeted 6.7 percent for the biggest single day decline since December 1st, 2008. In such heavy winds, the market isn’t concerned with the long-term impact of a one-step downgrade. They simply want refuge from out of control capital losses. And so, they find their way back to the very asset that was downgraded but has become the habitual shelter to previous storms. That said, there is a notable discrepancy in performance according to the different applications of the majors. For the high-yielding comm bloc pairs (AUDUSD and NZDUSD), selling was straightforward. When we move up to the more fundamentally ambiguous EURUSD and GBPUSD, the greenback’s appeal was far more restrained. Confronted with the more adept carry unwind in the Japanese yen and better safe haven Swiss franc though, the dollar lost ground. The signal is clear: the dollar is only appealing as stability is falling apart.
Going forward, we should be tuned into the health of the financial markets (not the capital markets). Orderly selling needs to give way to disorder and panic. The incredibly aggressive after hours selloff in Asian trading starts the ball rolling; but to turn USDJPY and USDCHF around, we need to see credit markets freeze up. That is a possibility with the early rumblings of a few major banks starting to confront funding issues. If there is any serious talk of a run on a major financial player (coming back to the Too Big to Fail group); then short-term lending will start freezing up and sheer panic will take over. This is something the Fed is no doubt very aware of as we head into the scheduled FOMC rate decision tomorrow. Despite the aggressive selling already taking place; there is almost certainly some hold out in market participants’ minds that the central bank will swoop in for the rescue with QE3 or something similar. If these investors are disappointed; there will be little reason to hold out on faith any longer. This could be a truly pivotal event in what can already be termed a ‘market crash’.
Related:Discuss the Dollar in the DailyFX Forum, John’s Picks: AUDUSD and NZDUSD Play out as Expected; but Caution Above All Else
Euro as Much a Financial Risk as the Dollar
You know conditions are really strained when a policy authority that was previously steadfast in its anti-stimulus position pulls a 180 and says it is taking the lead on propping the market up. The market picked up the dealing discussions that the ECB was now actively purchasing Spanish and Italian bonds on the open market (in additional to Greek, Irish and Portuguese debt). This effort was quite clear in the 10-year government bond yields of the two EU members as the Spanish rate collapsed 14.6 percent to 5.156 percent and the Italian equivalent dropped 13.1 percent to 5.288 percent. The question now is whether this is permanent relief or a brief exhale on another failed stimulus effort. Come the European open; we will find out. If the selling pressure that really picked up steam through the active New York trading carries over to the Frankfurt open though; expect these rates to jump. European officials are running out of water to fight its own fire – much less a global blaze.
Australian and New Zealand Dollars Side With Risk Trends
It still catches many FX traders off guard when the Australian and New Zealand dollars falter when capital markets are selling off. Why would these relatively stable, commodity-supported economies with high yields not draw capital in when risk is off? Traders generally build carry positions when they have freely available capital. When capital markets are frenzied; they need that capital to build their cash reserves and cover margin. So, naturally, when the S&P 500 is down as much as 10 percent from Friday’s close; liquidity seems important.
Japanese Yen Gaining Ground as Long as the Sell Off is Orderly
Risk aversion plays nicely into the carry unwind and yen repatriation scheme – and it will continue to do so as long as the sell off is orderly. With the shock in activity between the New York close and Tokyo open, stability is questionable. If credit markets freeze, carry unwind isn’t as important as liquidity. In the meantime, we saw a sharp USDJPY rally overnight. Was that intervention? Hard to say. Did it work? Absolutely not.
Swiss Franc Still the Favored Safe Haven, SNB Little Worry
Between orderly selling and sheer panic, there are different needs. Where does the Swiss franc sit in this equation? The franc certainly has better safe haven appeal than the pure repatriation appeal of its Japanese counterpart; but it also competes with the dollar for its role as a true harbor from financial storms. So while liquidity flows may benefit the greenback a little more, its gains on the franc will be comparatively small.
Gold Happy to Play the Role of Alternative Store of Wealth
The US has been downgraded, Europe’s financial situation has forced the ECB to expand its influence in the capital markets and capital markets are tumbling. It can be difficult to establish what currency will prevail; but when it comes to gold, the picture is relatively clear. That is, until the appetite for liquidity really becomes insatiable. When funds are needed to cover losses; there are profits that can be good on gold longs…
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**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar
ECONOMIC DATA
Next 24 Hours
|
GMT |
Currency |
Release |
Survey |
Previous |
Comments |
|
1:30 |
AUD |
Home Loans (JUN) |
0.8% |
4.4% |
Amount of lending expected to drop, could point to high interest rates slowing down domestic economy and credit |
|
1:30 |
AUD |
Investment Lending (JUN) |
4.4% |
||
|
1:30 |
AUD |
Value of Loans (MoM)(JUN) |
2.2% |
||
|
1:30 |
AUD |
NAB Business Confidence (JUL) |
0 |
Confidence levels near lowest levels since recovery |
|
|
1:30 |
AUD |
NAB Business Conditions (JUL) |
2 |
||
|
1:30 |
CNY |
Producer Price Index (YoY) (JUL) |
7.5% |
7.1% |
Higher expected inflation data may add more pressure on PBoC and government to tighten |
|
1:30 |
CNY |
Consumer Price Index (YoY) (JUL) |
6.4% |
6.4% |
|
|
2:00 |
CNY |
Industrial Production (YoY) (JUL) |
14.6% |
15.1% |
Lower production data could show tightening is slowing economy, but may still be too high for standards |
|
2:00 |
CNY |
Industrial Production YTD (YoY) (JUL) |
14.3% |
14.3% |
|
|
2:00 |
CNY |
Fixed Assets Inv Excl. Rural YTD (YoY) (JUL) |
25.5% |
25.6% |
|
|
2:00 |
CNY |
Retail Sales (YoY) (JUL) |
17.7% |
17.7% |
Level of consumer spending may indicate future path of consumer prices |
|
2:00 |
CNY |
Retail Sales YTD (YoY) (JUL) |
17.0% |
16.8% |
|
|
5:00 |
JPY |
Consumer Confidence (JUL) |
37 |
35.3 |
Expected higher as recovery moderate |
|
5:45 |
CHF |
SECO Consumer Confidence (JUL) |
-5 |
-1 |
Higher franc may weigh on spending |
|
6:00 |
EUR |
German Exports s.a. (MoM) (JUN) |
-1.0% |
4.4% |
Exports and import demand may fall once again as global recovery slows, peripheral challenges weigh |
|
6:00 |
EUR |
German Imports s.a. (MoM) (JUN) |
-1.5% |
3.8% |
|
|
6:00 |
EUR |
German Current Account (euros) (JUN) |
11.0B |
6.9B |
|
|
6:00 |
EUR |
German Trade Balance (euros) (JUN) |
14.0B |
14.8B |
|
|
6:00 |
JPY |
Machine Tool Orders (YoY) (JUL P) |
53.5% |
Preliminary numbers may guide rebuilding |
|
|
6:45 |
EUR |
French Central Government Balance (euros) (JUN) |
-68.4B |
Lending may widen debt level |
|
|
8:30 |
GBP |
Industrial Production (YoY) (JUN) |
0.2% |
-0.8% |
British industries expected to mildly recover as the worst parts of government austerity seen to be ending |
|
8:30 |
GBP |
Industrial Production (MoM) (JUN) |
0.4% |
0.9% |
|
|
8:30 |
GBP |
Manufacturing Production (YoY) (JUN) |
2.8% |
2.8% |
|
|
8:30 |
GBP |
Manufacturing Production (MoM) (JUN) |
0.2% |
1.8% |
|
|
8:30 |
GBP |
Visible Trade Balance (Pounds) (JUN) |
-8100 |
-8478 |
British trade balance expected to slightly recover as spending on imports slightly relax |
|
8:30 |
GBP |
Trade Balance Non EU (Pounds) (JUN) |
-4800 |
-5109 |
|
|
8:30 |
GBP |
Total Trade Balance (Pounds) (JUN) |
-3600 |
-4060 |
|
|
12:15 |
Housing Starts (JUL) |
195.0K |
197.4K |
Construction slowdown may be due to lower US demand |
|
|
12:30 |
USD |
Unit Labor Costs (Q2 P) |
2% |
4% |
Lower secondary labor numbers will confirm weaker economy in Q2 |
|
12:30 |
USD |
Non-Farm Productivity (Q2 P) |
1.8% |
||
|
18:15 |
USD |
Federal Open Market Committee Rate Decision |
0.25% |
0.25% |
Major data of US session. Although the FOMC is expected to hold rates, traders will be listening for commentary on whether additionally easing will be hinted |
|
23:50 |
JPY |
Housing Loans (YoY) (Q2) |
2.7% |
Loans may gain with easing credit |
|
|
23:50 |
JPY |
Tertiary Industry Index (MoM) (JUN) |
0.9% |
Industries expected to recover |
|
|
23:50 |
JPY |
Domestic Corporate Goods Price Index (MoM) (JUL) |
0.0% |
-0.1% |
Goods index expected to rise moderately, though unlikely to change any BoJ policies |
|
23:50 |
JPY |
Domestic Corporate Goods Price Index (YoY) (JUL) |
2.6% |
2.5% |
|
|
NZD |
REINZ Housing Price Index (JUL) |
3229 |
House prices may lead hawkishness for RBNZ to hike rates in the near future |
||
|
NZD |
REINZ Housing Price Index (MoM%) (JUL) |
1.3% |
|||
|
NZD |
REINZ House Sales (YoY) (JUL) |
14.2% |
|||
|
GBP |
NIESR Gross Domestic Product Estimate (JUL) |
0.1% |
Previous official GDP was 0.7% YoY |
|
GMT |
Currency |
Upcoming Events & Speeches |
|
23:50 |
JPY |
BOJ to Publish Minutes of July 11-12 Board Meeting |
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 |
0.8550 |
1.0275 |
1.1800 |
0.9020 |
118.00 |
146.05 |
|
Resist 1 |
1.5000 |
1.6475 |
81.50 |
0.8275 |
1.0000 |
1.1000 |
0.8750 |
113.50 |
140.00 |
|
Spot |
1.4211 |
1.6350 |
77.71 |
0.7562 |
0.9895 |
1.0244 |
0.8269 |
110.43 |
127.05 |
|
Support 1 |
1.4000 |
1.5935 |
77.00 |
0.7500 |
0.9425 |
0.9925 |
0.7745 |
109.00 |
125.00 |
|
Support 2 |
1.3700 |
1.5750 |
76.25 |
0.7300 |
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 |
12.2745 |
1.7765 |
7.1680 |
7.8070 |
1.2204 |
Spot |
6.4750 |
5.2423 |
5.4625 |
|
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 |
1.4558 |
1.6556 |
78.86 |
0.7753 |
1.0016 |
1.0538 |
0.8534 |
113.94 |
129.88 |
|
Resist 1 |
1.4385 |
1.6453 |
78.29 |
0.7658 |
0.9955 |
1.0391 |
0.8401 |
112.19 |
128.47 |
|
Pivot |
1.4257 |
1.6375 |
77.89 |
0.7570 |
0.9869 |
1.0300 |
0.8311 |
110.95 |
127.47 |
|
Support 1 |
1.4084 |
1.6272 |
77.32 |
0.7475 |
0.9808 |
1.0153 |
0.8178 |
109.20 |
126.06 |
|
Support 2 |
1.3956 |
1.6194 |
76.92 |
0.7387 |
0.9722 |
1.0062 |
0.8088 |
107.96 |
125.06 |
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 |
1.4427 |
1.6522 |
78.67 |
0.7697 |
1.0019 |
1.0412 |
0.8411 |
112.31 |
128.88 |
|
Resist. 2 |
1.4373 |
1.6479 |
78.43 |
0.7663 |
0.9988 |
1.0370 |
0.8375 |
111.84 |
128.42 |
|
Resist. 1 |
1.4319 |
1.6436 |
78.19 |
0.7629 |
0.9957 |
1.0328 |
0.8340 |
111.37 |
127.96 |
|
Spot |
1.4211 |
1.6350 |
77.71 |
0.7562 |
0.9895 |
1.0244 |
0.8269 |
110.43 |
127.05 |
|
Support 1 |
1.4103 |
1.6264 |
77.23 |
0.7495 |
0.9833 |
1.0160 |
0.8198 |
109.49 |
126.13 |
|
Support 2 |
1.4049 |
1.6221 |
76.99 |
0.7461 |
0.9802 |
1.0118 |
0.8163 |
109.02 |
125.68 |
|
Support 3 |
1.3995 |
1.6178 |
76.75 |
0.7427 |
0.9771 |
1.0076 |
0.8127 |
108.55 |
125.22 |
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
The information contained herein is derived from sources we believe to be reliable, but of which we have not independently verified. Forex Capital Markets, L.L.C.® assumes no responsibility for errors, inaccuracies or omissions in these materials, nor shall it be liable for damages arising out of any person’s reliance upon this information. Forex Capital Markets, L.L.C.® does not warrant the accuracy or completeness of the information, text, graphics, links or other items contained within these materials. Forex Capital Markets, L.L.C.® shall not be liable for any special, indirect, incidental, or consequential damages, including without limitation losses, lost revenues, or lost profits that may result from these materials. Opinions and estimates constitute our judgment and are subject to change without notice. Past performance is not indicative of future results.
