Dollar Suffers First Drop this Week as S&P 500 Hits New Highs

DailyFX

  • Dollar Suffers First Drop this Week as S&P 500 Hits New Highs
  • Euro Rallies and Spanish Yields Drop on Neglect, Not Optimism
  • Canadian Dollar Hits Fresh Three Month High Despite Report of Capital Outflow
  • British Pound Rallies after BoE Eases Rate Cut Talk, Data Rises
  • Australian Dollar: Rate Outlook Most Promising in Five Months, Equities Rising
  • US Oil Closes Above 95, Reports Israel Open to Bombing Iranian Nuclear Facilities
  • Gold: World Gold Council Reports Demand Down 7 Percent, Hedge Funds Buying

Dollar Suffers First Drop this Week as S&P 500 Hits New Highs

The markets offered us a considerable swell in trading activity this past session, but the pickup only looks impressive because recent conditions have been so extremely quiet. Nevertheless, risk appetite trends took a notable lunge forward as the S&P 500 posted its biggest daily rally (0.7 percent) in nearly two weeks along with the highest daily close since the four-year high was set back on April 2. Furthermore, the Risk-Reward Index (an indicator that I have created that compares the aggregate 10-year government bond yields of the majors to FX market volatility) has advanced to its most encouraging position since early May. Naturally, the stable backdrop and improved investment outlook further diminishes the appeal of a pure liquidity provider like the dollar. As such, the Dow Jones FXCM Dollar’s (ticker = USDollar) first slide in four trading days is an expected fundamental outcome. That said, it is important to appreciate the currency’s general susceptibility to the questionable improvement in trading conditions. While US equities are just off multi-year highs, the USDollar has refused to break 10,000 its year-long bullish trend.

A clear contrast between fresh highs from risk-based assets and stubborn buoyancy from the FX market’s preferred safe haven begs the question: which will yield. Any suggestion that the dollar will change its stripes to trade with its other more popular carry currencies is undermined by the Fed’s vow to keep rates exceptionally low and the central bank’s effort to absorb the a hefty portion of the Treasuries market. One side will cede. The critical factor is (and has been) the balance and intensity of risk appetite trends. While we have seen equities and the Risk-Reward Index rise, the move has been fully dependent on these abnormally quiet market conditions. That level of inactivity is an anomaly that will eventually correct (volatility rises –and greater activity levels is generally translated as a sign of greater risk). Given the drought of big-ticket event risk over the next two weeks, it is a tempting call for a quiet and steady climb in risk assets until US and European officials discuss support efforts again in September, but maintaining this level of quiet is extremely difficult to manage. All it takes is an errant headline to add tension to thin liquidity or spark a rush for the exits.

Euro Rallies and Spanish Yields Drop on Neglect, Not Optimism

Perhaps more impressive than the rise in risk trends this past session was the advance for the euro. Though the this currency’s advance was hardly impressive on a historical basis, the fact that it managed gains against currency’s more suited to Thursday’s rise in equity markets and other risk sensitive assets (like the Aussie and Kiwi dollars) makes it particularly impressive. This broad advance would suggest that there was an inherent fundamental strength that overwhelmed the influence of risk trends. Indeed, the Spanish 10-year government bond yield (perhaps the best individual barometer of financial stability in the Eurozone currently) broke its six-month advancing trend and subsequently closed at a six-week low, while European shares took won a sizable advance. Those are consequences however – not causes. The top headlines for Europe were updates that German Chancellor Merkel was in agreement with the ECB’s demand for conditionality for future bond purchases and rumors that the Spain would soon receive funds for the bank bailout program to stabilize Bankia. Neither of these is particularly encouraging. Conditionality on ECB bond purchases slows the stimulus wave and funds for Bankia doesn’t spell out a full rescue.

Canadian Dollar Hits Fresh Three Month High Despite Report of Capital Outflow

USDCAD dove to a three-month low Thursday, further extending the Canadian currency’s run beyond parity with the greenback. There is little doubt that the underlying burn of risk appetite contributed to the move, but there are additional fundamental developments that we must take into consideration to assess potential follow through. The global of a hawkish BoC Governor is still a notable positive for the loonie; but that means little if global investors aren’t investing in the country. According to Stas Canada, there was a net investment capital outflow of C$7.89 billion through June – the largest debit since October 2007 and second largest in a decade. That said, the record net inflow the previous month sets a precedence of volatility which dampens the figures impact. In the upcoming session, CPI data will set the tone for interest rate expectations.

British Pound Rallies after BoE Eases Rate Cut Talk, Data Rises

Things have started to look materially better for the British pound over the past 48 hours. With the market happily disregarding the Euro-area’s long-term uncertainties, pound traders are free to appreciate the BoE minute’s conspicuous absence of previous suggestions of an impending rate cut (something that would lower the sterling’s yield without significantly improving its economic strength). As for the economic docket, the 0.3 percent increase in retail sales was a pleasant surprise, but hardly a game changer for the broader economy.

Australian Dollar: Rate Outlook Most Promising in Five Months, Equities Rising

For a day where global equities rallied across the board, the Australian dollar was showing an unexpected weakness this past session. The high-yield currency posted notable losses against financially-troubled and lesser-yielding currencies alike (gaining only against the dollar and yen). This underperformance of general risk trends especially as the12-month rate forecast climbed to its best position in five months is very disconcerting. If sentiment collapses, the Aussie dollar will find itself in a very exposed position.

US Oil Closes Above 95, Reports Israel Open to Bombing Iranian Nuclear Facilities

Oil prices made another push higher Thursday to close above $95. While this most recent push came on a significant downgrade in futures volume (484,000 contracts versus Wednesday’s two-and-a-half month high 747,000) there is a distinct fundamental, supply-and-demand push to the move. In an interview, Isreal’s ambassador to the US confirmed bombing Iran’s nuclear facilities was definitely on the table.

Gold: World Gold Council Reports Demand Down 7 Percent, Hedge Funds Buying

Gold put in for a 0.8 percent advance Thursday – the most ambitious move since August 3. The anemic volume on the day (futures and ETFs) and exceptionally low volatility measure however suggest this is not a move with greater aspiration. In the meantime, the World Gold Council reported global demand dropped 7 percent in 2Q while a few hedge funds reported buying large ETF interest over the same period.

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

ECONOMIC DATA

Next 24 Hours

GMT

Currency

Release

Survey

Previous

Comments

22:45

NZD

Producer Prices- Inputs (QoQ) (2Q)

-

0.3%

Q2 CPI: 1.0% vs. more than 5% a year ago.

22:45

NZD

Producer Prices- Outputs (QoQ) (2Q)

-0.2%

-0.1%

6:00

EUR

German Producer Prices (MoM) (JUL)

0.3%

-0.4%

July CPI at 1.7%,

6:00

EUR

German Producer Prices (YoY) (JUL)

1.2%

1.6%

8:00

EUR

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

-

10.9B

A negative print signals a net capital outflow.

8:00

EUR

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

-

-2.5B

9:00

EUR

Euro-Zone Trade Balance s.a. (euros) (JUN)

-

6.3B

Global trend of lower demand for trade.

9:00

EUR

Euro-Zone Trade Balance (euros) (JUN)

9.8B

6.9B

12:30

CAD

Consumer Price Index (MoM) (JUL)

0.2%

-0.4%

Canadian inflation has been declining over the past year.

12:30

CAD

Consumer Price Index (YoY) (JUL)

1.5%

1.5%

12:30

CAD

Bank Canada Consumer Price Index Core (MoM) (JUL)

0.2%

-0.4%

Crude rose during the month of July. Up 11.14% year over year

12:30

CAD

Bank Canada Consumer Price Index Core (YoY) (JUL)

2.0%

2.0%

12:30

CAD

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

0.1%

-0.2%

Bank of Canadian’s target inflation is between the range of 1%-3%.

12:30

CAD

Consumer Price Index Core s.a. (MoM) (JUL)

0.2%

0.1%

12:30

CAD

Consumer Price Index (JUL)

-

121.6

13:55

USD

U. of Michigan Confidence (AUG P)

72.0

72.3

Report notes that consumers expect continued economic stagnation.

14:00

USD

Leading Indicators (JUL)

0.2%

-0.3%

Figure has been less volatile compared to the last two year.

GMT

Currency

Upcoming Events & Speeches

0:00

USD

Fed's Narayana Kocherlakota Speaks on Central Banking

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

13.1830

1.7945

8.2118

7.7567

1.2498

Spot

6.6957

6.0254

5.9443

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

1.2482

1.5861

80.01

0.9823

0.9935

1.0622

0.8201

99.26

126.22

Resist. 2

1.2450

1.5829

79.85

0.9797

0.9918

1.0593

0.8178

98.96

125.87

Resist. 1

1.2419

1.5798

79.68

0.9772

0.9900

1.0565

0.8154

98.65

125.53

Spot

1.2356

1.5735

79.35

0.9721

0.9865

1.0507

0.8108

98.04

124.85

Support 1

1.2293

1.5672

79.02

0.9670

0.9830

1.0449

0.8062

97.43

124.17

Support 2

1.2262

1.5641

78.85

0.9645

0.9812

1.0421

0.8038

97.12

123.83

Support 3

1.2230

1.5609

78.69

0.9619

0.9795

1.0392

0.8015

96.82

123.49

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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