- Dollar Rally Less a Fundamental Recovery and More a Speculative Retrenchment
- Euro Strong Despite Deepening Financial Concerns, 3Q GDP Will Clarify Fundamental Bearing
- British Pound Likely to See More Influence from Quarterly Statement than Last Weeks BoE Decision
- Japanese Yen’s Plunge back to Fundamental Reality Delayed by BoJ’s Uneventful Policy Decision
- Australian Dollar will Clarify Interest Rate Expectations with Employment, Inflation Consensus
- Swiss Franc: What Happens When the SNB Starts to Yield to Inflation?
Dollar Rally Less a Fundamental Recovery and More a Speculative Retrenchment
The dollar put in for its biggest rally in nearly three weeks Friday. Yet, is that necessarily encouraging when it follows a series of three declines to the lowest levels the currency has suffered this year? Putting the currency’s week-end performance into context with comparisons to its relative lows and the fundamentals that have forced it to that level, it is premature to suggest that the greenback has put in for a meaningful reversal. Looking at the technical bearings of the greenback, we see that the most appealing argument for a reversal comes from the trade-weighted dollar index. With the greenback’s correction, this benchmark actually finds itself back above the long-term rising trendline (tracing its history back to the March 2008 swing lows) that was so dramatically broken in the previous session. However, the influence of this move is diminished when we look at the dollar’s showing against its major benchmarks. First of all, against the so-called high-yield Australian, New Zealand and Canadian dollars; the greenback actually lost ground for a seventh consecutive session. From the majors, the performance was more variable. The dollar struggled for gains against the Swiss franc, is conspicuously constrained to congestion against the yen and was overdue for a bounce following six consecutive declines against pound. EURUSD was the primary source of the dollar’s performance in a move back towards 1.40.
Gauging the greenback’s fundamental health is essential to establishing its direction going forward. That said, there are two major drivers working against the benchmark: a dramatic skew in the supply-and-demand for the currency and a remarkable run in risk appetite trends. The concept of a currency depreciating due to an overabundance is an elementary concept of value. For a market that is already incredibly liquid and has deeply-rooted channels of capital flow (like Chinese purchases of Treasuries); it supply and demand is oftentimes ignored. However, over the past few months, this has changed as investors start to react to the divergence in stimulus between major economies. In contrast to the European Central Bank’s, Bank of England’s and Bank of Japan’s decision to maintain policy this past week; the Federal Reserve confirmed traders’ fears/hopes by expanding its stimulus program by an additional $600 billion over a time frame of eight months. More than flooding the market with dollars, this effort has the (intended?) side effect of boosting investor confidence by lowering the cost of funds and encouraging traders to invest this leveraged position abroad. In fact, despite the dollar’s correction, the S&P 500 actually climbed into Friday’s close to a new two-year high. This strong finish was partially encouraged through the October employment figures. For a crowd that is predisposed to bullish trends, the better-than-expected 151,000 net increase in nonfarm payrolls (NFPs) was enough to lift the market. Yet, on closer inspection, the jobless rate is still at 9.6 percent, the underemployment rate is still 17 percent, the number of persons not in the labor force is at a record high and food stamp usage hit a record high. Risk trends played a clear role in interpreting this data.
As we look ahead to the coming week, the dollar has a natural selling point in the Fed’s liberal stimulus stance. Aiming to support growth (and perhaps asset prices), the policy authority puts the greenback at the bottom of the risk spectrum and amplifies the effect by simultaneously encouraging risk appetite. This will be difficult to overcome; but it is a trend that can break. A natural slump in investor confidence is the primary threat. A more interesting catalyst could be the upcoming G20 meeting as they label manipulators and perhaps work towards coordination.
Related:Discuss the Dollar in the DailyFX Forum, John’s Analyst Picks: A Pullback after a Strong Bullish Breakout Sets up a EURUSD Trade
Euro Strong Despite Deepening Financial Concerns, 3Q GDP Will Clarify Fundamental Bearing
With EURUSD clearing 1.40 and scaling multi-month highs, it is easy to overlook the actual fundamental performance of the euro itself. However, against the pound, franc and commodity dollars; this shared currency has pitched into a steep dive. This can perhaps be traced back to the recent surge in the Mediterranean members’ sovereign debt yields recently. Though it was somewhat under the radar, the funding costs for these already pained economies surged to records as German official look to torpedo confidence by threatening shared responsibility in losses for bond holders. Perhaps another sign of divergence in performance intra-EU will come via Friday’s 3Q GDP numbers.
British Pound Likely to See More Influence from Quarterly Statement than Last Weeks BoE Decision
Though the Bank of England was mum on its policy decision last week; a hold was all that was needed to boost the sterling against its troubled US counterpart. However, the reasoning for this decision is very important to gauging when/if stimulus will be expanded down the line. We will be offered evidence one way or the other come next week with the Quarterly Inflation report which is stocked with new growth and CPI forecasts.
Japanese Yen’s Plunge back to Fundamental Reality Delayed by BoJ’s Uneventful Policy Decision
Of all the non-FOMC central bank decisions this past week, the Bank of Japan’s rescheduled meeting was the most tension-filled. Having taken aggressive steps towards boosting markets and fighting deflation, it was highly likely that this meeting would end with a larger stimulus package. And yet, when the decision passed without event the yen was still lower on. Perhaps the market is pricing in further easing later down the line.
Australian Dollar will Clarify Interest Rate Expectations with Employment, Inflation Consensus
It’s hard to find to find fault with the Australian dollar with risk rallying and the RBA following through with its hawkish course. However, as the market works to squeeze every last inch of rally from the Aussie through pricing in forward rates and improved sentiment, the currency grows increasingly susceptible to even a modest correction in prevailing trends. That leverages a lot of importance on jobs and inflation data ahead.
Swiss Franc: What Happens When the SNB Starts to Yield to Inflation?
The Swiss franc is a currency that has appreciated despite its own fundamentals and policy authority’s effort to curb appreciation. And, just when it seems the Swissie is losing momentum, actual support looks like it is just around the corner. This past week, central bankers have stepped up their warnings that rates can’t be held low for much longer. Perhaps risk trends will take a turn by the time rate hikes are really priced in…
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ECONOMIC DATA
Next 24 Hours
|
Currency |
GMT |
Release |
Survey |
Previous |
Comments |
|
JPY |
23:50 |
Official Reserve Assets (OCT) |
$1109.6B |
Increased in the past four months. |
|
|
AUD |
0:30 |
ANZ Job Advertisements (MoM) (OCT) |
0.7% |
Ads rose in the past five months. |
|
|
JPY |
5:00 |
Leading Index (SEP P) |
99.0 |
99.5 |
Leading index declined in August to lowest level in six months. |
|
JPY |
5:00 |
Coincident Index (SEP P) |
102.0 |
103.3 |
|
|
CHF |
6:45 |
Unemployment Rate s.a. (OCT) |
3.6% |
3.7% |
The Swiss unemployment rate sits at its lowest reading in 16 months. |
|
CHF |
6:45 |
Unemployment Rate (OCT) |
3.5% |
3.5% |
|
|
EUR |
7:00 |
German Trade Balance (euros) (SEP) |
12.0B |
9.0B |
Germany’s trade surplus probably grew in September as exports resume their positive trend. |
|
EUR |
7:00 |
German Current Account (euros) (SEP) |
9.0B |
4.6B |
|
|
EUR |
7:00 |
German Exports s.a. (MoM) (SEP) |
1.5% |
-0.4% |
|
|
EUR |
7:00 |
German Imports s.a. (MoM) (SEP) |
1.0% |
0.9% |
|
|
EUR |
9:30 |
Euro-Zone Sentix Investor Confidence (NOV) |
10.0 |
8.8 |
Investor confidence near 3-yr high. |
|
EUR |
11:00 |
German Industrial Production s.a. (MoM) (SEP) |
0.4% |
1.7% |
Industrial production increased in August for a 5th time in 6 months. |
|
EUR |
11:00 |
German Industrial Production (YoY) (SEP) |
9.5% |
10.7% |
|
|
NZD |
11:00 |
QV House Prices (YoY) (OCT) |
2.0% |
Oct. increase slowest since 2009. |
|
|
13:15 |
Housing Starts (OCT) |
181.0K |
186.4K |
Pace declined in last two months. |
|
|
NZD |
21:45 |
NZ Card Spending (MoM) (OCT) |
1.5 |
Sept. increase was first since June. |
|
Currency |
GMT |
Upcoming Events & Speeches |
|
EUR |
Bank of Italy Publishes Report on Lending and Bad Debt |
|
|
EUR |
7:00 |
Bank for International Settlements Bi-Monthly Meeting |
|
USD |
17:30 |
Fed’s James Bullard Speaks on Deflation |
|
USD |
18:00 |
Fed’s Richard Fisher Speaks on Financial Reform, Recovery |
|
USD |
20:30 |
Fed’s Kevin Warsh Speaks on Economy, Financial Markets |
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 |
1.4800 |
1.6715 |
89.00 |
1.0460 |
1.0922 |
1.0600 |
0.8230 |
127.60 |
146.05 |
|
Resist 1 |
1.4450 |
1.6420 |
86.00 |
0.9950 |
1.0750 |
1.0200 |
0.8000 |
120.00 |
140.00 |
|
Spot |
1.4037 |
1.6189 |
81.32 |
0.9618 |
1.0001 |
1.0152 |
0.7970 |
114.13 |
131.64 |
|
Support 1 |
1.3700 |
1.5650 |
80.00 |
0.9500 |
0.9950 |
0.9640 |
0.6850 |
103.80 |
125.00 |
|
Support 2 |
1.3500 |
1.5500 |
75.00 |
0.9000 |
0.9700 |
0.9375 |
0.6585 |
100.00 |
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 |
14.4500 |
1.6755 |
8.7915 |
7.8165 |
1.4945 |
Resist 2 |
7.7500 |
5.7800 |
6.2750 |
|
Resist 1 |
13.8500 |
1.4865 |
8.3675 |
7.8075 |
1.4655 |
Resist 1 |
7.5800 |
5.5400 |
6.1150 |
|
Spot |
12.1951 |
1.3970 |
6.7725 |
7.7505 |
1.2857 |
Spot |
6.6027 |
5.3098 |
5.7583 |
|
Support 1 |
12.0500 |
1.3665 |
6.6950 |
7.7490 |
1.2750 |
Support 1 |
6.4500 |
5.2625 |
5.7030 |
|
Support 2 |
11.7200 |
1.3475 |
6.4300 |
7.7450 |
1.2500 |
Support 2 |
6.1250 |
5.1000 |
5.5200 |
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 |
1.4328 |
1.6345 |
81.99 |
0.9695 |
1.0116 |
1.0237 |
0.8031 |
115.52 |
132.92 |
|
Resist 1 |
1.4183 |
1.6267 |
81.65 |
0.9657 |
1.0059 |
1.0195 |
0.8001 |
114.83 |
132.28 |
|
Pivot |
1.4103 |
1.6217 |
81.14 |
0.9602 |
1.0025 |
1.0140 |
0.7942 |
114.36 |
131.39 |
|
Support 1 |
1.3958 |
1.6139 |
80.80 |
0.9564 |
0.9968 |
1.0098 |
0.7912 |
113.67 |
130.75 |
|
Support 2 |
1.3878 |
1.6089 |
80.29 |
0.9509 |
0.9934 |
1.0043 |
0.7853 |
113.20 |
129.86 |
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 |
1.4232 |
1.6378 |
82.26 |
0.9745 |
1.0119 |
1.0303 |
0.8089 |
115.68 |
133.47 |
|
Resist. 2 |
1.4183 |
1.6330 |
82.03 |
0.9713 |
1.0090 |
1.0265 |
0.8059 |
115.29 |
133.01 |
|
Resist. 1 |
1.4135 |
1.6283 |
81.79 |
0.9682 |
1.0060 |
1.0228 |
0.8029 |
114.90 |
132.55 |
|
Spot |
1.4037 |
1.6189 |
81.32 |
0.9618 |
1.0001 |
1.0152 |
0.7970 |
114.13 |
131.64 |
|
Support 1 |
1.3939 |
1.6095 |
80.85 |
0.9554 |
0.9942 |
1.0076 |
0.7911 |
113.36 |
130.73 |
|
Support 2 |
1.3891 |
1.6048 |
80.61 |
0.9523 |
0.9912 |
1.0039 |
0.7881 |
112.97 |
130.27 |
|
Support 3 |
1.3842 |
1.6000 |
80.38 |
0.9491 |
0.9883 |
1.0001 |
0.7851 |
112.58 |
129.81 |
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
