FOREX: Euro Losses on Portugal Downgrade Limited by Market Acclimation, ECB

• Dollar Gains Limited Ground on Low Volume Day
• Euro Losses on Portugal Downgrade Limited by Market Acclimation, ECB
• Australian Dollar Increasingly Prone to Risk Trends after RBA Dovish Notes
• New Zealand Dollar: GDP Reading May Shock Kiwi Traders to Reality
• British Pound Struggling to Post Further Gains as Rates Level Off
• Japanese Yen: Prime Minister Kan’s Budget Projection Smaller Than Expected
• Gold Posts Its Biggest Rally in Six Weeks, But is it Just a Speculative Correction?

Dollar Gains Limited Ground on Low Volume Day

Liquidity would fill out with the US market’s return from the extended holiday weekend; but you wouldn’t know it in volume figures. Nonetheless, it seems that a slump in activity is actually a boon for the recently deflated dollar – or is that just a side effect of the FX market’s prevailing trend? Heading into this new week of trading, the dominant trade was clear: a buildup in risk-based positioning and general selloff for the US currency. This combination would lead to a particularly aggressive, six-day rally for EURUSD and equally aggressive (though less consistent) dollar selling against the commodity block. After such an aggressive, one-sided move; a slump in volume works to expose the short-term positioning extreme and encourages position squaring. That is what we would see from the Dow Jones FXCM Dollar Index (ticker = USDollar) as it advanced for the second time this week – slowly trying to recover the consistent losses through the previous week. The Index has already recovered more than a third of the ground lost through this past week (now just below 9,600); but further gains will require further tangible fundamental support rather than a passive pullback in speculative shorts.

Through Tuesday’s session, it is safe to say that traditional risk aversion efforts played little role in the benchmark currency’s performance. Looking to the S&P 500, the index finished the day virtually unmoved (down 0.13 percent at 1,338) on exceptionally low volume. Even greater a confliction to the safe-haven theory was oil’s aggressive rally back above $96. That said, the dollar managed gains against all its major counterparts with the exception of the Swiss franc. This particular comparison highlights an interesting connection to the likely source of the greenback’s strength: the euro. As the most liquid currency pair (by far), EURUSD often dictates price action to all corners of the market. This is especially true on otherwise quiet trading days. With the euro tipped into a sharp selloff after the European market close on news of a Portuguese downgrade (more on that below), scramble for safety would guide capital to the shared currency’s most liquid counterpart (the dollar) and its most direct substitute (the franc). With the underlying appetite for risk and most other prominent fundamental themes neutralized for the time being; this particular driver would decide price action.

The problem with an indirect fundamental push like this is that it won’t last. Once speculative winds pick up again or a well-positioned fundamental catalyst comes back into play, the dollar will find itself engaged in an active driver. In the meantime, Tuesday’s top event risk (the smaller-than-expected 0.8 percent increase in factory orders) did little to boost overall growth forecasts. Elsewhere, the post QE2 yield boost has been pushed back another day with the 2-year Treasury note yield sliding. Tomorrow’s ISM services report may offer a little more to work with.

Euro Losses on Portugal Downgrade Limited by Market Acclimation, ECB

Over the past months, euro traders have effectively conditioned themselves to expect further financial deterioration in the Euro Zone and essentially. That is why Moody’s unexpected downgrade of Portugal’s sovereign credit rating to ‘junk’ status (Ba2) along with its negative outlook had such a limited impact. On the other hand, the reaction to this particular announcement proved more influential than the last downgrades for Greece, Spain and Italy. Why was this particular move unique? Technically, the ECB does not accept collateral below investment status for loans. And, even though the rules have already been bent for EU members; this particular move pushes it to an extreme (and raises the stakes of another default). Ultimately, this is a significant event; but with the ECB expected to hike rates on Thursday, the market is preoccupied.

Australian Dollar Increasingly Prone to Risk Trends after RBA Dovish Notes

There was little expected from the RBA rate decision early Tuesday morning; and in this balanced approach, the market found the need to adjust positioning. While the central bank would keep the benchmark rate unchanged for the seventh consecutive meeting; the commentary reflected a more dovish tone that pushed back the potential for future rates hikes. This will certainly boost the currency’s dependence on risk trends.

New Zealand Dollar: GDP Reading May Shock Kiwi Traders to Reality

It’s the New Zealand dollar’s turn Wednesday to be guided by a key piece of event risk. The first quarter GDP reading is due at the tail end of the US trading session – what could be considered the lull in liquidity for the currency market. Despite covering the devastating Christchurch earthquake, expectations for the opening period’s growth are still stable with a 0.3 percent forecast. This leaves a lot of room for surprise.

British Pound Struggling to Post Further Gains as Rates Level Off

The sterling would offer a volatile short-term reaction to Tuesday’s event risk. The unexpected improvement in service sector activity offers a much-needed boost to a country that is struggling to deal with its strict austerity efforts. However, lasting trends are more the realm of European financial health and rate potential. Well after rate expectations have fallen off, we are seeing market rates (Libor) fully flat-line.

Japanese Yen: Prime Minister Kan’s Budget Projection Smaller Than Expected

As a funding currency, there are few currencies that can compete with the Japanese yen. Not only are yields exceptionally low on Japanese funds; but the government continues to pump stimulus into the system and offer investors further capital to reinvest. That said, the expected injection with Prime Minister Kan’s reconstruction budget increase (2 trillion yen) seems smaller than the market had envisaged.

Gold Posts Its Biggest Rally in Six Weeks, But is it Just a Speculative Correction?

Risk appetite trends were little moved Monday and the dollar would actually climb against the core European and commodity currency; so where did gold’s biggest rally in six weeks come from? We often see a transfer of capital from one currency to another; but sticking with fiat imposes a general exposure to government budgets and credit conditions. The market wants gold when it is uncertain of underlying financial conditions.

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ECONOMIC DATA

Next 24 Hours

GMT	Currency	Release	Survey	Previous	Comments
5:00	JPY	Coincident Index (MAY P)	106.1	103.6	Preliminary overall economy measures expected to pick up slightly
5:00	JPY	Leading Index (MAY P)	99.8	96.2
7:00	GBP	Halifax Plc House Prices s.a. (MoM) (JUN)	0.0%	0.1%	Lower house prices growth may up downward pressure on rate increases
7:00	GBP	Halifax House Price (3MoY) (JUN)	-4.2%	-4.2%
7:00	CHF	Foreign Currency Reserves (JUN)	193.8B	Falling since May 2010 high
10:00	EUR	German Factory Orders s.a. (MoM) (MAY)	-0.5%	2.8%	Fewer expected orders from lower exports could change ECB rate increase expectations in the future
10:00	EUR	German Factory Orders n.s.a. (YoY) (MAY)	9.5%	10.5%
11:00	USD	MBA Mortgage Applications (JUL 1)	-2.7%	Indicates health of real estate market
11:30	USD	Challenger Job Cuts (YoY) (JUN)	-4.3%	May suggest Friday’s NFP reports
12:30	CAD	Building Permits (MoM) (MAY)	5.0%	-21.1%	Recovery may be buying spurred
14:00	USD	ISM Non-Manufacturing Composite (JUN)	53.7	54.6	Major data of the day – weaker reading could spur risk appetite, but US data could also hurt dollar competitiveness
22:45	NZD	Gross Domestic Product (QoQ) (1Q)	0.3%	0.2%	YoY figure expected to decline as strong NZD cuts into exports
22:45	NZD	Gross Domestic Product (YoY) (1Q)	0.5%	0.8%
23:30	AUD	AiG Performance of Service Index (JUN)	39.6	Service survey fallen since early 2011
23:50	JPY	Official Reserve Assets (JUN)	$1139.5B	Increasing to keep value of yen
23:50	JPY	Machine Orders (MoM) (MAY)	3.0%	-3.3%	Increase during May could restore confidence in Japan, rebuilding efforts working
23:50	JPY	Machine Orders (YoY) (MAY)	10.9%	-0.2%

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	89.00	0.9345	1.0275	1.1800	0.8400	122.00	146.05
Resist 1	1.5000	1.6300	86.00	0.8900	1.0000	1.1000	0.8300	118.00	140.00
Spot	1.4419	1.6055	81.12	0.8413	0.9632	1.0689	0.8246	116.96	130.24
Support 1	1.4000	1.5935	80.00	0.8300	0.9500	1.0400	0.7745	113.80	125.00
Support 2	1.3700	1.5750	75.00	0.8250	0.9055	1.0200	0.6850	105.50	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	1.6575	7.4025	7.8165	1.3650	Resist 2	7.5800	5.6625	6.1150
Resist 1	12.5000	1.6300	7.3500	7.8075	1.3250	Resist 1	6.5175	5.3100	5.7075
Spot	11.6425	1.6290	6.7510	7.7802	1.2279	Spot	6.2905	5.1732	5.3789
Support 1	11.5200	1.5040	6.5575	7.7490	1.2145	Support 1	6.0800	5.1050	5.3040
Support 2	11.4400	1.4725	6.4295	7.7450	1.2000	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	1.4614	1.6195	81.49	0.8558	0.9672	1.0784	0.8369	118.01	131.38
Resist 1	1.4516	1.6125	81.30	0.8485	0.9652	1.0737	0.8307	117.49	130.81
Pivot	1.4457	1.6058	81.01	0.8435	0.9623	1.0700	0.8271	117.09	130.28
Support 1	1.4359	1.5988	80.82	0.8362	0.9603	1.0653	0.8209	116.57	129.71
Support 2	1.4300	1.5921	80.53	0.8312	0.9574	1.0616	0.8173	116.17	129.19

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	1.4600	1.6209	81.92	0.8510	0.9719	1.0826	0.8356	118.47	131.71
Resist. 2	1.4555	1.6170	81.72	0.8486	0.9697	1.0792	0.8328	118.09	131.34
Resist. 1	1.4510	1.6132	81.52	0.8461	0.9676	1.0758	0.8301	117.71	130.97
Spot	1.4419	1.6055	81.12	0.8413	0.9632	1.0689	0.8246	116.96	130.24
Support 1	1.4328	1.5978	80.72	0.8365	0.9588	1.0620	0.8191	116.21	129.50
Support 2	1.4283	1.5940	80.52	0.8340	0.9567	1.0586	0.8164	115.83	129.13
Support 3	1.4238	1.5901	80.32	0.8316	0.9545	1.0552	0.8136	115.45	128.76

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

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