Dollar Bludgeoned by Euro and Risk Rebound, GDP Data on Deck

DailyFX

  • Dollar Bludgeoned by Euro and Risk Rebound, GDP Data on Deck
  • Euro: Market Reacts to ECB President Draghi’s Support Vow
  • British Pound Wins its Biggest Intraday Rally Since May 2009
  • New Zealand Dollar Outpaces the Majors after RBNZ Hold
  • Australian Dollar Moving Step for Step with the S&P 500
  • Japanese Yen Hit by Risk Trends, Tumble Back into Deflation
  • Gold Breaks Four Month Congestion Without Conviction

Dollar Bludgeoned by Euro and Risk Rebound, GDP Data on Deck

The dollar’s fortunes changed quickly this week. Through the opening half of the period, the greenback looked like it was on the cusp of a credible bull trend – led by the progress of a two-year low for EURUSD. Yet, in the past 48 hours, those hopes were dashed with an aggressive two-day tumble that drove the Dow Jones FXCM Dollar Index (ticker = USDollar) to test a two-month low. Technical traders will recognize that this swing brings the benchmark back to the floor of congestion that has discouraged a clear trend (bullish and bearish) since the beginning of June. In other words, this dramatic decline fits comfortably within a well-worn range. Fundamentally speaking, the rise in risk appetite and subsequent hit to the greenback can arguably be tied to a natural correction from market-wide risk aversion.

Looking across the financial headlines Thursday, it was easy to see what the markets were attributing the strong performance in capital markets and high yield currencies to: stimulus-leaning comments from ECB President Mario Draghi. We have seen relatively benign comments lead to stark market reactions in the past – the masses will often look for fundamental evidence to support its bias – but the commentary made by the Euro-area monetary authority wasn’t particularly remarkable (more on that below). Instead, what we were witnessing was mere settling of preexisting fears that still have fundamental grounding but not the catalyst to graduate us to the next level of deleveraging.

If a spark is what we are looking for to instill a sense of conviction for risk appetite (or turn us back to the dollar-favored risk aversion), then the first read of 2Q US GDP is the right indicator for the job. There are few better reads on global economic health (an indelible component of investor sentiment) than the quarterly growth reading for the world’s largest economy. The consensus for the past quarter’s performance is an annualized 1.4 percent pace of expansion – a slowdown from the previous quarter’s 1.9 percent figure and 3.0 percent reading through the final months of 2011. If the market’s are genuinely bullish leaning, an upside surprise could lift the S&P 500 and AUDUSD to permanent breaks. That said, it is hard to envisage a market reassured by a smaller downshift when the bigger backdrop for global markets is still in turmoil. There is always the argument that a significantly worse read could also boost stimulus expectations – but we are seeing such will fading.

Euro: Market Reacts to ECB President Draghi’s Support Vow

EURUSD’s performance this past session was notable as the pair’s biggest rally since June 29 and a marked rebound back above the midpoint of its historic range. That said, how strong was the Euro this past session. The fundamental turbulent currency posted gains against the FX market’s two preferred safe havens, but ended the session notably lower against most of its other counterparts. This throws a wrench in the assumption that ECB President Draghi’s comments Thursday morning touched off the Euro’s and market’s rally. The remarks that the market was tuning into started that officials would do whatever was necessary to preserve the shared currency. This would be a provocative statement if it weren’t so overused and one of the most consistently unfulfilled promises made by central bankers and lawmakers the world over. This vow could loosely be interpreted as a turn in the ECB’s reticence to break mandate and participate in stimulus and financial efforts, but there is little to suggest they would move any faster than the EU itself. Meanwhile, Spanish 10-year yields are just below 7 percent.

British Pound Wins its Biggest Intraday Rally Since May 2009

While there was a lot of headline space dedicated to what Draghi said Thursday morning, the comments made by Bank of England Governor Mervyn King were arguably more provoking. What can central banks do that escalates their effort and genuinely expands their crisis fight ability beyond what has already been attempted? Coordination. King stated that individual programs were no longer effective and a true crisis solution would have to be a collective effort. Such a possibility is encouraging for all risk sensitive assets and currencies; but perhaps with a UK source, the sterling would see the most benefit. The biggest four-hour rally from GBPUSD since May 2009 certainly supports that suggestion. This is especially true considering just yesterday the country reported a deeper recession than expected and there is rate cut expectations next week.

New Zealand Dollar Outpaces the Majors after RBNZ Hold

There were some remarkable performances this past trading day, but the kiwi dollar stood at the top of the pack. Recently, the Aussie dollar has taken the lead thanks to easing of its extreme rate cut expectations; but not this time around. An extra push was conferred by the RBNZ after it announced that a hold on rates was appropriate. Meanwhile, it is worth restating that the 10-year yield for the New Zealand government bond is at a 39 bps premium to its Aussie counterpart.

Australian Dollar Moving Step for Step with the S&P 500

Is AUDUSD the perfect risk barometer in the FX market? On the one side is a safe haven that is only desired in the most dire of liquidity circumstances. Alternatively, the Aussie dollar is dependent on risk not just to feed appetite for yield but to also ensure the RBA doesn’t pursue more easing that lowers its benchmark. For evidence, the three-month rolling correlation between S&P 500 and AUDUSD is 0.86 – very strong.

Japanese Yen Hit by Risk Trends, Tumble Back into Deflation

Relief. With a rebound in traditional risk trends, carry trade has picked up and Japanese policy officials have seen the pressure on taken any effort they can to devalue their currency ease. Finance Minister Azumi took the opportunity to support Draghi’s vow to the euro (a hat tip for his help with the yen). Meanwhile, it is worth noting that USDJPY rose for the first time in seven days and has risen only three times in 15 days.

Gold Breaks Four Month Congestion Without Conviction

It has finally happened. Gold has traded outside of the closing congestion pattern that has defined its movements since mid-March. That said, it was the most unceremonious transition a trader could have hoped for. A slow move out of the consistent congestion we have seen with this benchmark suggests it is a move that will fail without further support. If the metal is to salvage the effort, it needs clear stimulus hope.

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ECONOMIC DATA

Next 24 Hours

GMT

Currency

Release

Survey

Previous

Comments

23:30

JPY

National Consumer Price Index Ex-Fresh Food (YoY)

0.0%

-0.1%

Historically has low levels of inflation and those low level are important for the Japanese Yen’s status as a safe haven currency.

23:30

JPY

National Consumer Price Index Ex Food, Energy (YoY)

-0.5%

-0.6%

23:30

JPY

National Consumer Price Index (YoY)

0.0%

0.2%

23:50

JPY

Retail Trade s.a. (MoM)

0.2%

0.7%

Japanese consumer confidence index rose slightly during the month of June.

23:50

JPY

Large Retailers' Sales

-1.6%

-0.8%

23:50

JPY

Retail Trade (YoY)

1.1%

3.6%

-

GBP

Nationwide House Prices s.a. (MoM)

-

-0.6%

Loans for housing purchases declined during June.

-

GBP

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

-

-1.5%

01:30

CNY

Industrial Profits YTD (YoY)

-

-2.4%

Profits have been declining since march 2010.

01:35

CNY

MNI July Business Condition Survey

-

-

07:00

CHF

KOF Swiss Leading Indicator

1.2

1.16

Figure improving since March 2012.

12:00

EUR

German Consumer Price Index (MoM)

0.4%

-0.1%

Previous to the June figures the CPI (MoM) declined three consecutive months, for the first time since 2005.

12:00

EUR

German Consumer Price Index - EU Harmonised (YoY)

1.9%

2.0%

12:00

EUR

German Consumer Price Index (YoY)

1.7%

1.7%

12:30

USD

Personal Consumption

1.3%

2.5%

Retail sales declined over the second quarter.

12:30

USD

Core Personal Consumption Expenditure (QoQ)

1.8%

2.3%

12:30

USD

Gross Domestic Product (Annualized)

1.4%

1.9%

Projecting a second consecutive quarter of declining GDP growth.

12:30

USD

Gross Domestic Product Price Index

1.5%

2.0%

13:55

USD

U. of Michigan Confidence

72

72

Declining since May.

GMT

Currency

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SUPPORT AND RESISTANCE LEVELS

To see updated SUPPORT AND RESISTANCE LEVELS for the Majors, visitTechnical Analysis Portal

To see updated PIVOT POINT LEVELS for the Majors and Crosses, visit ourPivot Point Table

CLASSIC SUPPORT AND RESISTANCE

EMERGING MARKETS 18:00 GMT

SCANDIES CURRENCIES 18:00 GMT

Currency

USDMXN

USDTRY

USDZAR

USDHKD

USDSGD

Currency

USDSEK

USDDKK

USDNOK

Resist 2

15.5900

2.0000

9.2080

7.8165

1.3650

Resist 2

7.5800

5.6625

6.1150

Resist 1

15.0000

1.9000

8.5800

7.8075

1.3250

Resist 1

6.5175

5.3100

5.7075

Spot

13.4047

1.8109

8.2393

7.7576

1.2512

Spot

6.8632

6.0531

6.0188

Support 1

12.5000

1.6500

6.5575

7.7490

1.2000

Support 1

6.0800

5.1050

5.3040

Support 2

11.5200

1.5725

6.4295

7.7450

1.1800

Support 2

5.8085

4.9115

4.9410

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

1.2425

1.5814

78.83

0.9882

1.0164

1.0529

0.8112

97.39

124.05

Resist. 2

1.2391

1.5781

78.67

0.9854

1.0144

1.0501

0.8088

97.07

123.69

Resist. 1

1.2357

1.5747

78.52

0.9827

1.0125

1.0472

0.8065

96.75

123.33

Spot

1.2290

1.5679

78.20

0.9772

1.0086

1.0415

0.8018

96.11

122.61

Support 1

1.2223

1.5611

77.88

0.9717

1.0047

1.0358

0.7971

95.47

121.90

Support 2

1.2189

1.5577

77.73

0.9690

1.0028

1.0329

0.7948

95.15

121.54

Support 3

1.2155

1.5544

77.57

0.9662

1.0008

1.0301

0.7924

94.83

121.18

v

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

To contact John, email jkicklighter@dailyfx.com. Follow me on twitter at http://www.twitter.com/JohnKicklighter

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