Forex: Dollar Presents Greatest Breakout Risk in Four Months Ahead of NFPs

DailyFX

Talking Points:

  • Dollar Presents Greatest Breakout Risk in Four Months Ahead of NFPs
  • Japanese Yen Crosses Rally but Trend as Uncertain as Nikkei 225 Climb
  • Australian Dollar Rallies after RBA Skips ‘Scope’ Language for Further Cuts

Dollar Presents Greatest Breakout Risk in Four Months Ahead of NFPs

There is a clear divide in the dollar’s performance so far this week. Weakness against the ‘investment’ currencies and strength against the others shows us the divide. The greenback is a safe haven currency in a market that isn’t pining for liquidity. We can see that clearly enough in the Dow Jones Industrial Average’s (Dow) refusal to budge from its 150-point range perched dangerously above another feeble level of support. That said, the risk of a shift in speculative positioning is more palpable now than it was a few months ago. Not only is leverage holding at record highs while trading volume in the traditional equities market this past week drop to a 15-year low; but we have already seen a redistribution of risk around this critical benchmark. Given the tumble in the Deutsche Bank carry index, torrential outflow from the emerging market and even unwinding in Fed front-run trades (US Treasuries and mortgage-backed securities); we are looking at dry dynamite.

A potential tide change, however, is not something to be traded. The dollar has benefit from the surrounding markets’ repositioning, but the true fear that would be presented in a systemic exit from ‘risk’ is what the currency needs to extend its progress. The next serious catalyst to this theme is Friday’s labor data as the market has essentially priced in the September 18 Taper. Looking beyond the first move and realizing the OECD’s fears of the US central bank’s withdrawal of support causing panic with a consistent disarming would offer the ideal environment.

Japanese Yen Crosses Rally but Trend as Uncertain as Nikkei 225 Climb

The yen crosses are up across the board so far this week. There are two considerations to take account of for these pairs: the level of risk appetite and the level of carry the crosses provide. Following the lead of US Treasury yields, we have seen the developed world’s sovereign level rates soar over the past weeks. While this is the growth-led carry traders look for, it nevertheless provides an increase in return. The real boost though comes via risk appetite trends. The Nikkei 225’s surge Tuesday forced a bullish breakout that looks a lot like USDJPY’s

Euro: OECD Eurozone Growth Forecasts Improve but Uncertain Remains

The OECD (Organization for Economic Co-operation and Development) updated 2013 growth forecasts, and Europe was generally the benefactor. Against a moderation in expectations for the US and China, Germany and France enjoyed hearty upgrades to their growth prospects – the latter actually turning from an expected contraction to expansion. Yet, like most other Euro fundamentals, this is inert support. A true recovery to competitive levels is years away and a slip back into crisis easy to suffer. Notably, we will watch Italy’s political situation.

Australian Dollar Rallies after RBA Skips ‘Scope’ Language for Further CutsThe Australian dollar is soaring this week. Through early Wednesday trade, the currency is up between 1.2 percent (AUDNZD) and 3.4 percent (AUDJPY). Uniform performance against low yield funding and fellow ‘investment’ currencies tells us that this is a strength inherent to the Australian dollar itself. The drive began in earnings Tuesday morning with the Reserve Bank of Australia’s (RBA) monetary policy decision. The group wouldn’t actually change its policy, but the interpretation of their statement was enough to push overnight swaps to price in the first probability of a hike (approximately a 25 percent chance of a 25bp hike in 12 months) in over two years and send AUDUSD 65 points higher in the minutes after the event. The root of this performance was the absence of previous rhetoric that suggested there was further ‘scope’ for easing if warranted. It’s a modest change, but it alleviates pressure. None of that matters if risk trends collapse though.

Canadian Dollar: Will the Market Project Rate Hikes after BoC Decision?

The second of this week’s round of major central bank rate decisions is due in the upcoming session. The Bank of Canada (BoC) has found itself essentially overlooked in favor of the tangible changes measured in Australia (easing off the dovish pressure), UK (implementation of forward guidance) and US (Taper consideration) amongst others. Though the BoC stood out the past few years for its resistance to further easing its benchmark rate while fellow commodity-currency countries Australian and New Zealand were forced to capitulate; that idleness is no longer treated as bullish. Watch for anything that resembles a time frame for the first hike – the market expects 75 bps from RBNZ in 12 months.

Emerging Markets ETF Rebounds but Indian Rupee in Trouble Again

Emerging markets struggled for progress through the opening 48 hours this week, but traction was uneven. Where the Brazilian real continues to develop congestion around 2.4000 against the benchmark US currency, the Indian Rupee has reignited investors’ fears. Reflecting the group’s capital markets, the MSCI Emerging Market equity index rose another 0.6 percent through Tuesday – extending a four-day advance. Yet, confidence at this extreme end of the financial market is fragile at best. Moves like the USDINR’s 2.6 percent surge Tuesday – the second largest in over 15 years – can encourage a rush to the exits. The OECD’s remarks highlight what the fear for the region is: the prospect of the Fed easing back on its market support and thereby boosting the cost of investments made into these resource-intense areas.

Gold Ends Tumble as Syria, Central Bank Risks Come into View

With Tuesday’s 1.5 percent rally, gold brought to close a three-day tumble. However, neither bounce nor the tumble through holiday trading conditions offers up a clear trend. A strong bearing on this commodity market is difficult to derive given the backdrop of questionable and fluid fundamentals. On the other hand, there is enough interest (fear?) in the global financial markets to generate serious volatility for the precious metal. At the forefront of our concern for both activity level and trend is the escalation of an aggressive risk deleveraging. The more immediate spark, though, is Syria. Should the situation cause global financial markets to hemorrhage, expect gold’s ‘issues’ to be minimized.

The standing issues gold will carry forward will act as a constant burden on the metal and work against a rebound above $1,550 – much less reach that $2,000 goal for long-standing bulls. Key to its troubles are the recent bouts of extreme volatility. The two-day, 15 percent plunge in April in particular will be a lasting weigh that undermines any argument that it is a serious safe haven. Meanwhile, gold can gain more superficial traction through speculative repositioning. According to the COT report from last week, speculative futures positioning improved four a fourth straight week. Over that period in fact, short trades on the metal dropped by 55 percent – a buoy but not the stuff of lasting trends.

**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

1:30

AUD

Gross Domestic Product (QoQ) (2Q)

0.5%

0.6%

Although the RBA did not cut rates yesterday, Current Account Balance missed estimates. Disappointing GDP numbers could reignite negative sentiment.

1:30

AUD

Gross Domestic Product (YoY) (2Q)

2.4%

2.5%

1:45

CNY

HSBC Purchasing Manager Index Services (AUG)

51.3

China watchers will look to see whether HSBC PMI services index improves as it did with manufacturing.

6:45

EUR

French Producer Prices (MoM) (JUL)

0.2%

-0.3%

The data year over year has been on the decline since mid –June.

6:45

EUR

French Producer Prices (YoY) (JUL)

-0.2%

0.1%

7:45

EUR

Italian Purchasing Manager Index Services (AUG)

49.9

48.7

PMI numbers for the Euro-Zone have boosted sentiment lately, but more event risk surrounding the Euro will come later with Euro-Zone GDP. Italy has had an improved year with PMI services on the rise since February.

7:50

EUR

French Purchasing Manager Index Services (AUG F)

47.7

47.7

7:55

EUR

German Purchasing Manager Index Services (AUG F)

52.4

52.4

8:00

EUR

Euro-Zone PMI Services (AUG F)

51.0

51.0

8:00

EUR

Euro-Zone PMI Composite (AUG F)

51.7

51.7

8:30

GBP

Purchasing Manager Index Services (AUG)

59.7

60.2

If the print meets expectations, this will be the first lower print MoM in 2013.

8:30

GBP

Official Reserves (Changes) (AUG)

$1672M

9:00

EUR

Euro-Zone Gross Domestic Product s.a. (QoQ) (2Q P)

0.3%

0.3%

Survey’s point to continued retraction in the Euro-Area as the economy has been growing below 0.0% since early 2013. The print came in the lowest in March at -1.0%.

9:00

EUR

Euro-Zone Gross Domestic Product s.a. (YoY) (2Q P)

-0.7%

-0.7%

9:00

EUR

Euro-Zone Household Consumption (QoQ) (2Q P)

0.1%

0.0%

9:00

EUR

Euro-Zone Gross Fixed Capital (QoQ) (2Q P)

-0.2%

-1.9%

9:00

EUR

Euro-Zone Government Expenditure (QoQ) (2Q P)

0.3%

-0.2%

9:00

EUR

Euro-Zone Retail Sales (MoM) (JUL)

0.2%

-0.5%

9:00

EUR

Euro-Zone Retail Sales (YoY) (JUL)

-0.3%

-0.9%

11:00

USD

MBA Mortgage Applications (AUG 30)

-2.5%

Housing data will be critical in the days and weeks ahead of the September FOMC meeting.

11:30

USD

Challenger Job Cuts (YoY) (AUG)

2.3%

12:30

CAD

International Merchandise Trade (C$) (JUL)

-0.20B

-0.47B

Exports to global powers will be of particular interest, but the US balance will be of top concern.

12:30

USD

Trade Balance (JUL)

-$38.6B

-$34.2B

Although the deficit looks to expand, it has been shrinking since early 2012.

13:45

USD

ISM New York (AUG)

67.8

14:00

CAD

Bank of Canada Interest Rate Decision

1.00%

1.00%

21:00

USD

Total Vehicle Sales (AUG)

15.80M

15.73M

Domestic sales have been on a steady uptrend since early 2009.

21:00

USD

Domestic Vehicle Sales (AUG)

12.30M

12.20M

GMT

Currency

Upcoming Events & Speeches

8:55

EUR

ECB's Joerg Asmussen Speaks on Euro Economy

16:30

USD

Fed's John Williams Speaks on Monetary Policy

17:00

GBP

BoE's Andy Haldane Speaks on U.K. Economy

18:00

USD

Federal Reserve Releases Beige Book

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

13.5900

2.1000

10.7250

7.8165

1.3650

Resist 2

7.5800

5.8950

6.5135

Resist 1

13.4800

2.0500

10.5000

7.8075

1.3250

Resist 1

6.8155

5.8475

6.2660

Spot

13.3959

2.0607

10.3447

7.7554

1.2774

Spot

6.6229

5.6645

6.0702

Support 1

12.8900

1.9750

9.3700

7.7490

1.2000

Support 1

6.0800

5.5600

5.8700

Support 2

12.6000

1.9075

8.9500

7.7450

1.1800

Support 2

5.8085

5.4440

5.7400

INTRA-DAY PROBABILITY BANDS 18:00 GMT

CCY

EUR/USD

GBP/USD

USD/JPY

USD/CHF

USD/CAD

AUD/USD

NZD/USD

EUR/JPY

Gold

Res 3

1.3286

1.5694

100.84

0.9465

1.0625

0.9210

0.7909

132.75

1451.18

Res 2

1.3256

1.5662

100.50

0.9440

1.0603

0.9181

0.7883

132.31

1441.85

Res 1

1.3227

1.5629

100.16

0.9416

1.0582

0.9152

0.7858

131.88

1432.53

Spot

1.3169

1.5564

99.48

0.9366

1.0539

0.9095

0.7807

131.01

1413.88

Supp 1

1.3111

1.5499

98.80

0.9316

1.0496

0.9038

0.7756

130.14

1395.23

Supp 2

1.3082

1.5466

98.46

0.9292

1.0475

0.9009

0.7731

129.71

1441.85

Supp 3

1.3052

1.5434

98.12

0.9267

1.0453

0.8980

0.7705

129.27

1451.18

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

Sign up for John’s email distribution list, here.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.
Learn forex trading with a free practice account and trading charts from FXCM.

Rates

View Comments (0)