• Dollar Tumbles as Risk Trends Succumb to an Episode of Temporary Insanity that Fosters Optimism
  • Euro Advance Fully Dependent on Investor Sentiment, That is Until Tomorrows ECB Decision
  • British Pound Benefits from Demand for Yield as Manufacturing Data Undermines Growth Outlook
  • Australian Dollar Extends its Remarkable Run as Fundamentals Line up for a Reversal
  • Swiss Franc Traders may Respond to GDP Data if it Aligns to the Prevailing Winds of Sentiment
  • Canadian Dollar Lack of Direction Impacts Trading as BIS Repots First Drop in Volume Since 1983

Dollar Tumbles as Risk Trends Succumb to an Episode of Temporary Insanity that Fosters Optimism

After a month of chop and questionable conviction behind investor confidence, Wednesday’s price action shouldn’t surprise too many active traders. General congestion with a restrained risk-aversion bias left the capital markets exposed to a sudden revival in confidence; and that is exactly what we say for the day. The direction of the move isn’t so startling as the fact that correlations tightened across the various asset classes. Normally, a correction like this one doesn’t normally find such consistency; but the reassurance provided by confirmation in other securities would certainly add to the strength of the move. From the simple barometers for risk appetite, we would see the S&P 500 rally 3 percent, US-based crude advance 2.8 percent and the benchmark 10-year Treasury not futures contract mark its second largest daily loss since June 10th. For the FX market, this would translate into the biggest drop for the US dollar since July 22nd and subsequent rally for those currencies that have been labeled fundamental pariahs or high yielders. The question for dollar traders (and indeed market participants in all assets) now is whether today’s spark of optimism is permanent or fleeting.

The first step in establishing the permanence of today’s upswing in risk appetite is to determine what the catalyst for the rally in confidence was in the first place. If we look at intraday price action for the more speculative sensitive securities (equity futures and crude for example), we can see the distinct phases for the day’s rally. A bid started to develop early in the Asian session with the far-better-than-expected Australian GDP reading and the uptick from China’s manufacturing survey. However, the drive this data fostered was mild. The real drive began first at 8:30 EST when US liquidity was injected into the market place. Then, come 10:00 EST, the market would really start to climb. Simple deduction isolates the ISM Manufacturing report for August as the source of this move. Why is this US factory activity indicator so important? Manufacturing is one of the few remaining pillars of expansion for an economy that has seen consumer spending, housing sector activity and investment moderate. Therefore, a positive reading from this particular reading stands as a direct contrast to a building fear that the world’s largest economy is heading for a double dip recession. That being said, the 56.3-reading was hardly a move that suggests all the other detrimental elements to growth will be offset. Therefore, this report should be viewed for what it is: a contradiction to the underlying trend of risk aversion linked to fear that activity will stagnate and financial uncertainty is returning.

Moving forward, another reason to remain cautious on the follow through to a rally in risk appetite is the existence of heavy event risk through the end of the week. Friday’s NFP release may not generate a lot of volatility when released; but it could nonetheless dampen speculation ahead of time. With employment in mind, we should take note of the 10,000 net drop in ADP private payrolls (the first decline since January) and the highest reading in the ISM’s employment component since 1983. For Thursday, we have pending home sales, factory orders and ICSC sales.

Related: Discuss the Dollar in the DailyFX Forum, John’s Analyst Picks: USDCAD and GBPAUD Take Quick Profit, NZDUSD New Setup

Euro Advance Fully Dependent on Investor Sentiment, That is Until Tomorrows ECB Decision

The euro would post a strong performance against the US dollar, euro, pound and especially the Swiss franc Wednesday. However, the source of this strength should come into question when we see how the shared currency did against high yield currencies like the Australian and New Zealand dollars. Without meaningful scheduled or unscheduled event risk (all we had was the final reading on manufacturing activity and the outcome of a Portuguese bond sale), traders would conform to risk appetite trends. Going forward, this compliance to the prevailing speculative tides will likely continue; but European event risk could help forge a deviation or define event risk. On Thursday, the ECB will announce its policy decision. While no change to the benchmark lending rate is expected; the Fed’s expansion of its unorthodox stimulus measures will hone the focus on European policy makers. Pursuing an extension or expansion of government and financial liquidity measures could weigh the euro.

British Pound Benefits from Demand for Yield as Manufacturing Data Undermines Growth Outlook

Good thing for sterling bulls that risk appetite swept over the market. Otherwise, the pound would likely have extended its tumble against the US dollar with a round of discouraging news on and off the docket. For indicators, the manufacturing PMI dropped to a nine month low 54.3 reading to curb the enthusiasm surrounding the 2Q GDP performance. Then there was the CBI’s service sector health report which reported a distinct bearish outlook for profit. And, then there was the Time’s article for credit card debt write offs hitting a record high 2.1 billion pounds in 2Q.

Australian Dollar Extends its Remarkable Run as Fundamentals Line up for a Reversal

The Aussie dollar’s reaction to its impressive second quarter GDP reading and the improvement in Chinese manufacturing (a boon for a very important Australian export sector) was initially bullish. However, as risk appetite solidified and the US joined the group for positive sentiment, the currency really ramped up. However, the heavy round of data has passed. Now the currency is fully dependent on sentiment trends.

Swiss Franc Traders may Respond to GDP Data if it Aligns to the Prevailing Winds of Sentiment

We wouldn’t assign much importance to economic data from Switzerland when it comes to market movement as the franc has a one-track mind: risk appetite as it pertains to European capital flows. However, tomorrow’s 2Q GDP could adjust the Swissie’s standing as a safe haven should the data significantly diverge from the performance of European Union. If it cooled sharply, there will be a little more caution in buying the franc.

Canadian Dollar Lack of Direction Impacts Trading as BIS Repots First Drop in Volume Since 1983

The USDCAD currency pair is a currency pair that often deviates from straightforward fundamental runs from the US or Canadian dollars amongst other pairs as well as risk appetite trends. This divergence is born from the fundamental connection between the two economies and often leads to choppy price action. Apparently, this is frustrating to traders as volume cooled in 2Q for the first time since 1983.

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ECONOMIC DATA

Next 24 Hours

Currency

GMT

Release

Survey

Previous

Comments

JPY

23:50

Monetary Base (YoY) (AUG)

6.1%

Rose annually in last 23 months.

JPY

23:50

Japan Buying Foreign Bonds (Yen) (AUG 27)

1040.8B

Japanese investors were net buyers of foreign bonds last week, purchasing net 1 trillion yen of overseas debt.

JPY

23:50

Japan Buying Foreign Stocks (Yen) (AUG 27)

32.0B

JPY

23:50

Foreign Buying Japan Bonds (Yen) (AUG 27)

-129.5B

JPY

23:50

Foreign Buying Japan Stocks (Yen) (AUG 27)

-39.1B

AUD

1:30

Trade Balance (Australian dollar) (JUL)

3100M

3539M

Posted record trade surplus in June.

EUR

5:30

French Mainland Unemployment Change (2Q)

4K

France’s unemployment rate likely rose in 2Q to the highest reading since 1999.

EUR

5:30

French ILO Mainland Unemployment Rate (2Q)

9.6%

9.5%

EUR

5:30

French ILO Unemployment Rate (2Q)

9.9%

CHF

5:45

Gross Domestic Product (QoQ) (2Q)

0.8%

1.0%

Swiss GDP slowed in 1Q on a drop in investment and gov spending.

CHF

5:45

Gross Domestic Product (YoY) (2Q)

2.6%

2.3%

GBP

6:00

Nationwide House Prices s.a. (MoM) (AUG)

-0.2%

-0.5%

U.K. home prices fell in July for only the second month this year.

GBP

6:00

Nationwide House Prices n.s.a. (YoY) (AUG)

4.9%

6.6%

CHF

7:15

Retail Sales (Real) (YoY) (JUL)

1.0%

Sales increased in last 7 months.

EUR

8:00

Italian Producer Price Index (MoM) (JUL)

0.4%

0.2%

Italian producer prices increased in June for a ninth straight month.

EUR

8:00

Italian Producer Price Index (YoY) (JUL)

4.3%

3.5%

GBP

8:30

Purchasing Manager Index Construction (AUG)

53.9

54.1

Dropped to four-month low in July.

EUR

9:00

Euro-Zone GDP s.a. (QoQ) (2Q P)

1.0%

1.0%

Europe’s economy expanded more than forecast in the second quarter as German exports powered the region’s recovery.

EUR

9:00

Euro-Zone GDP s.a. (YoY) (2Q P)

1.7%

1.7%

EUR

9:00

Euro-Zone Gross Fixed Capital (QoQ) (2Q P)

-1.2%

EUR

9:00

Euro-Zone Government Expenditure (QoQ) (2Q P)

0.2%

EUR

9:00

Euro-Zone Household Consumption (QoQ) (2Q P)

0.2%

-0.1%

Declined in two of past 3 months.

EUR

9:00

Euro-Zone Producer Price Index (MoM) (JUL)

0.3%

0.3%

Producer-price inflation unexpectedly slowed in June.

EUR

9:00

Euro-Zone Producer Price Index (YoY) (JUL)

4.0%

3.0%

EUR

11:45

European Central Bank Interest Rate Decision

1.0%

1.0%

Market implies no chance of hike.

USD

12:30

Non-Farm Productivity (2Q F)

-1.9%

-0.9%

Productivity unexpectedly fell in 2Q as employers expanded workweek.

USD

12:30

Unit Labor Costs (2Q F)

1.2%

0.2%

USD

12:30

Initial Jobless Claims (AUG 28)

475K

473K

Fell to lowest level last week since mid-July.

USD

12:30

Continuing Claims (AUG 21)

4450K

4456K

USD

14:00

Pending Home Sales (MoM) (JUL)

-1.0%

-2.6%

Home sales declined 2.6% in June following a near 30% plunge in May.

USD

14:00

Pending Home Sales (YoY) (JUL)

-20.1%

USD

14:00

Factory Orders (JUL)

0.2%

-1.2%

Orders fell in last two months.

USD

14:30

ICSC Chain Store Sales (YoY) (AUG)

2.8%

Sales rose in the last eight months.

Currency

GMT

Upcoming Events & Speeches

USD

21:15

Fed’s Charles Evans Speaks at Washington Summit

EUR

12:30

ECB President Trichet Holds Press Conference

USD

13:00

Fed’s Eric Rosengren,Sandra Pianalto Speak at Washington Summit

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

1.0600

1.0922

0.9850

0.7635

127.60

146.05

0.8725

Resistance 1

1.3500

1.5965

89.00

1.0460

1.0750

0.9335

0.7440

120.00

140.00

0.8600

Spot

1.2799

1.5449

84.47

1.0158

1.0525

0.9085

0.7112

108.11

130.49

0.8285

Support 1

1.2500

1.5125

83.00

1.0130

0.9950

0.8100

0.6850

103.80

125.00

0.8065

Support 2

1.2150

1.5000

80.00

0.9960

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

13.0885

1.5170

7.2983

7.7753

1.3468

Spot

7.2896

5.8165

6.1899

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

1.2966

1.5581

85.27

1.0253

1.0728

0.9225

0.7227

109.80

132.22

0.8366

Resistance 1

1.2882

1.5515

84.87

1.0206

1.0627

0.9155

0.7169

108.96

131.36

0.8325

Pivot

1.2773

1.5426

84.27

1.0135

1.0555

0.9028

0.7075

107.77

130.08

0.8287

Support 1

1.2689

1.5360

83.87

1.0088

1.0454

0.8958

0.7017

106.93

129.22

0.8247

Support 2

1.2580

1.5271

83.27

1.0017

1.0382

0.8831

0.6923

105.74

127.94

0.8208

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

1.2966

1.5639

85.57

1.0289

1.0658

0.9219

0.7222

109.91

132.70

0.8373

Resistance 2

1.2924

1.5591

85.29

1.0256

1.0625

0.9186

0.7194

109.46

132.14

0.8351

Resistance 1

1.2883

1.5544

85.02

1.0223

1.0592

0.9152

0.7167

109.01

131.59

0.8329

Spot

1.2799

1.5449

84.47

1.0158

1.0525

0.9085

0.7112

108.11

130.49

0.8285

Support 1

1.2715

1.5354

83.92

1.0093

1.0458

0.9018

0.7057

107.21

129.39

0.8241

Support 2

1.2674

1.5307

83.65

1.0060

1.0425

0.8984

0.7030

106.76

128.84

0.8219

Support 3

1.2632

1.5259

83.37

1.0027

1.0392

0.8951

0.7002

106.31

128.28

0.8197

v

Written by: John Kicklighter, 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