Dollar Extends Rally as S&P 500 Breaks Critical 1,600 Support

DailyFX

  • Dollar Extends Rally as S&P 500 Breaks Critical 1,600 Support
  • Japanese Yen: Why Isn’t the Carry Trade Unwinding?
  • Euro: PMI Improvement Doesn’t Offset Building Greece Fears
  • Swiss Franc Takes in US Tax Pressure, EURCHF Floor, Financial Warnings
  • British Pound Safe Haven Status for European Funds Seen in EURGBP
  • New Zealand Dollar Selling Outpaces Australian Dollar Ongoing Collapse
  • Gold Suffers Second Collapse in Two Months, Long-Term Trend Change

Dollar Extends Rally as S&P 500 Breaks Critical 1,600 Support

Risk aversion – which the dollar craves – showed a significant escalation this past session. While we have seen pressure in Chinese funding, a surge in Euro-area sovereign yields and multi-asset volatility swell; what really marks fear is the S&P 500’s drop below 1,300. Aside from representing a simple measure of the standard investors’ ‘risk’ exposure, this benchmark is also the most prolific beneficiary of hope founded in Fed stimulus. Therefore, a 2.5 percent decline – the largest daily loss since November 9, 2011 – to break the index’s bull trend for this year is a serious development. Yet, we are still multiple levels below the extreme panic end of the sentiment scale. In a wholesale flight to quality, two critical capital currents will join the fray: an unwinding of carry trade (yen rally) and rally is US Treasuries. The dollar can advance and S&P 500 tumble without these elements, but a mere speculative reversal of Fed exposure is far easier to revert back to the bulls.

Japanese Yen: Why Isn’t the Carry Trade Unwinding?

The curious case of buoyant yen crosses is confusing many traders. Why, if risk aversion is indeed engaged, isn’t the carry trade behind pairs like AUDJPY and EURJPY suffering? Looking at the yield differential (libor, sovereign bond rates, etc), the relative return on a long Aussie position is near historic lows. That contrasts severely with the current proximity to historic highs that so many of the yen-cross spot rates currently find themselves. For pairs like EURJPY, the differential is actually negative. There is a countervailing, fundamental wind that bears have to compete with: Japanese monetary policy. The stimulus program from the BoJ is a constant pressure on the yen. That said, Japan’s central bank and government have been overwhelmed by markets many times over the years. They could do so again now if fear builds.

Euro: PMI Improvement Doesn’t Offset Building Greece Fears

There were two very different perspectives of euro-based fundamentals. From the docket, the data was encouraging. The leading growth measure of the June PMI figures showed the Eurozone composite – the best proxy for GDP – advanced to its highest level since March 2012 (thought it was still in contractionary territory at 48.9). Furthermore, consumer confidence climbed to its highest balance in 22 months. A climb out of recession is important for Europe, but it will mean little in the short-term if financial crisis returns. Reports circulated that the IMF could suspend aid payments next month to Greece if the country didn’t enforce austerity to cover a shortfall in its plan. Pressure is nothing new and it usually works out. Yet, this fragile state may crack if rumors of the Greek coalition breaking down prove true. Traders should be on alert.

Swiss Franc Takes in US Tax Pressure, EURCHF Floor, Financial WarningsThe headlines from Switzerland continued to run heavy through this past session. Trade figures were the least influential headline. The 2.2 billion franc surplus was the largest in six months, but does little to change the landscape for growth. More interest was the Swiss National Bank (SNB) rate decision. Few were surprised by the central bank’s retention of the 1.2000 floor on EURCHF – increasingly important as Euro-area financial risks present themselves. A financial stability report from the group released separately says local banks have made strides but were still exposed to unfavorable international trends. And of course, we can’t forget the existential threat of the US pursuing Swiss banks.

British Pound Safe Haven Status for European Funds Seen in EURGBP

Is the sterling a safe haven currency? That depends on what you are comparing it to. Of course, the currency does not carry the same rank as a reserve as the US dollar; but for Europe, the pound is a haven that offers additional benefits of the country’s global financial status and connections to the European Union. We can see the appeal of stability in the EURGBP exchange rate. As risk has levitated, the pair posted its biggest drop in eight weeks. Meanwhile, data on the UK docket posted encouraging – if minimized – data. Retail sales matched its biggest monthly increase since April 2011 while the CBI manufacturing trends data posted its best reading (-18) in three months.

New Zealand Dollar Selling Outpaces Australian Dollar Ongoing Collapse

Surprisingly, the Australia dollar was not the worst performer over the past 24 hours. Yet it certainly wasn’t far behind the leader; and its two-month selloff is unrivaled in the majors. Plunging to levels not seen in three years and working on its worst week since September 23, 2011, selling pressure is well engrained. The same is true for the New Zealand dollar which topped the day for worst performer. Yet, with kiwi, the 8 percent drop against the greenback over the past two months puts it behind the curve on the Aussie’s 12 percent plunge. However, how intense the full unwind for each ultimately proves depends on what level of ‘diversification’ capital was injected to the respective financial systems. In the yield chase, FX traders were further assured of their carry trades on the assumption that the Aussie sported a dollar-level reserve status.

Gold Suffers Second Collapse in Two Months, Long-Term Trend Change

The hold out bulls behind battered gold were dealt a severe blow this past session. Recalling the extreme pain two months ago as the metal dropped nearly 15 percent in the span of just two days, the market dropped another 4.9 percent ($66) through the end of the New York session Thursday. That is the fifth largest notional drop on record and it easily drove us under $1,300. However, the one-day movement doesn’t encapsulate just how troubled conditions have grown. We are now trading at the lowest levels since September 2010 – and the bearish momentum that began back in October has clearly established its trend. In the span of eight months - not even a move from the record high in 2011 - gold has lost 30 percent of its value.

A shift of this magnitude should dispel the ‘gold can only go up’ mentality that many had assumed presumed for various reasons. The metal’s dominant three characteristics have been soundly undermined, and the commodity has clearly suffered for it. As a safe haven, the CBOE’s gold volatility index has surged back to 30 percent to reflect the level of oscillation we’ve seen these past three months. A shelter from risk does not experience this level of volatility. As an inflation hedge, there has been a remarkable lack of price growth in the world’s largest economies: US, Japan, Europe. Most prominent lately, the ‘alternative store of wealth’ appeal as offset for stimulus-distorted currency has clearly lost traction. With the US dollar – the benchmark reserve currency – rising in the wake of the Fed taper warning, there is little left.

**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

01:00

NZD

ANZ Consumer Confidence Index (JUN)

123.7

The index is at its highest reading since 2010.

01:00

NZD

ANZ Consumer Confidence (MoM) (JUN)

3.8%

07:00

CHF

Money Supply M3 (YoY) (MAY)

10.2%

M3 is at levels not seen since 2003 as the SNB continues to intervene in the CHF exchange rate.

08:00

CHF

KOF Institute June Economic Forecast

08:00

EUR

Euro-Zone Current Account n.s.a. (euros) (APR)

24.8B

Recent monthly prints are at the highest over the past decade.

08:00

EUR

Euro-Zone Current Account s.a. (euros) (APR)

25.9B

08:30

GBP

Public Finances (PSNCR) (Pounds) (MAY)

-2.5B

-10.8B

Markets will be looking for increased borrowing following record low interest rates.

08:30

GBP

PSNB ex Interventions (MAY)

12.6B

6.3B

08:30

GBP

Public Sector Net Borrowing (Pounds) (MAY)

13.5B

8.0B

12:30

CAD

Consumer Price Index Core (YoY) (MAY)

1.1%

1.1%

Economists surveyed for Friday’s Canadian data paint a better picture in regards to price indexes after previous disappointing prints. With energy accounting for a large percentage of the economy and prices on the rise since April, it is no surprise that data points improve out of Canada over the coming weeks.

12:30

CAD

Consumer Price Index (YoY) (MAY)

0.9%

0.4%

12:30

CAD

Consumer Price Index s.a. (MoM) (MAY)

-0.4%

12:30

CAD

Core CPI s.a. (MAY)

0.0%

12:30

CAD

Retail Sales (MoM) (APR)

0.2%

0.0%

12:30

CAD

Retail Sales Less Autos (MoM) (APR)

0.0%

-0.2%

GMT

Currency

Upcoming Events & Speeches

1:00

AUD

Australia Sells A$700 Mln in 5-Year Bonds

06:35

JPY

BOJ Governor Kuroda Speaks at NASB

-:-

CHF

Deadline by EU for Swiss to Drop Ring Fencing

7:00

EUR

European Union Finance Minister Meet

SUPPORT AND RESISTANCE LEVELS

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

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

CLASSIC SUPPORT AND RESISTANCE

EMERGING MARKETS 18:00 GMT

SCANDIES CURRENCIES 18:00 GMT

Currency

USD/MXN

USD/TRY

USD/ZAR

USD/HKD

USD/SGD

Currency

USD/SEK

USD/DKK

USD/NOK

Resist 2

15.0000

2.0000

10.7000

7.8165

1.3650

Resist 2

7.5800

5.8950

6.1150

Resist 1

12.9000

1.9000

10.2500

7.8075

1.3250

Resist 1

6.8155

5.8300

5.9365

Spot

12.6508

1.8635

9.8671

7.7638

1.2504

Spot

6.4843

5.5860

5.7475

Support 1

12.0000

1.6500

9.3700

7.7490

1.2000

Support 1

6.0800

5.6075

5.7400

Support 2

11.5200

1.5725

8.9500

7.7450

1.1800

Support 2

5.8085

5.4440

5.5000

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

1.3471

1.5837

96.50

0.9339

1.0246

0.9728

0.8187

128.84

151.40

Resist. 2

1.3441

1.5805

96.12

0.9312

1.0226

0.9696

0.8159

128.34

150.84

Resist. 1

1.3412

1.5772

95.74

0.9285

1.0207

0.9665

0.8130

127.83

150.29

Spot

1.3353

1.5707

94.98

0.9231

1.0168

0.9602

0.8073

126.82

149.18

Support 1

1.3294

1.5642

94.22

0.9177

1.0129

0.9539

0.8016

125.81

148.08

Support 2

1.3265

1.5609

93.84

0.9150

1.0110

0.9508

0.7987

125.30

147.52

Support 3

1.3235

1.5577

93.46

0.9123

1.0090

0.9476

0.7959

124.80

146.97

v

--- Written by: John Kicklighter, Chief 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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