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Dollar Suffers Biggest Drop in Two Months, Is this a Reversal?

John Kicklighter
  • Dollar Suffers Biggest Drop in Two Months, Is this a Reversal?
  • Euro Officials Tread Bullish Line as Effort Shifting Towards Growth
  • British Pound: BoE Governor Mervyn King Says Pound at Fair Value
  • New Zealand Dollar Restrained Despite RBNZ 10-15% Overvalued Comment
  • Australian Dollar: RBA Rate Outlook Most Optimistic in 19 Months After Data
  • Japanese Yen Moves Beyond a Serious Barrier to Further Declines
  • Gold Recovers from Sharp Drop as Volume Recovers


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Dollar Suffers Biggest Drop in Two Months, Is this a Reversal?

The dollar dove this past session – leading FX traders to wonder whether this was just a sharp response to big moves from EURUSD, GBPUSD and AUDUSD or the establishment of a bigger trend. That assessment should be made on the merits of the fundamental drive be behind this tentative swell in volatility as well as the themes that are likely to control the herd moving forward. First, an assessment of performance. The Dow Jones FXCM Dollar (ticker = USdollar) drop measured 0.5 percent for the biggest decline since January 10. The pace of the decline isn’t as important to the story as where this decline has occurred. With Thursday’s stumble, the USDollar Index has dropped back below 10,500 and in doing so has finally broken from a consistent rising trend channel that has focused bulls since late January. And, for the technically inclined, this has all happened after the currency failed to overtake the midpoint of the past decade’s range.


From a fundamental perspective, the situation is less clear-cut than the technicals would suggest. Through recent history, we look for two particular fundamental themes to offer meaningful support for the greenback: risk trends and an improvement in the fiscal outlook or the US government. In Washington, conversations between the White House, House Republicans and Senate Democrats are ongoing; but we haven’t seen serous progress. Alternatively, we can look to risk trends for an explanation. The Dow Jones Industrial Average (ticker = US30) has rallied for 10 consecutive days – the longest consecutive period of gains since November 1996. We haven’t had an 11-day move since January 1987. However, measuring risk trends through the stimulus-fluffed equity markets isn’t particularly reliable considering the dollar and Dow have run the same course for a number of months.


Yet, where US equities advance isn’t a solid means of support for a sustained dollar decline; the reverse could very well tighten up the recently ignored fundamental correlation. Low volume and extreme consistency in stocks’ drive to a record high speak to winded conditions that could encourage profit taking and deleveraging. It isn’t difficult to tip a state of ‘panic’ in these conditions, and investors don’t think twice when bidding the dollar during such conditions. Meanwhile, keeping an eye on the health of the banking system 14 of the 18 banks the Fed stress tested had their capital plans (dividends, share buybacks) approved without conditions. Unloading a cash reserve at these heights is very risky…


Euro Officials Tread Bullish Line as Effort Shifting Towards Growth

The financial and economic outlook for the Eurozone took a divergent path this past session. Keeping track of the leading edge of a possible crisis revival, the story that Troika representatives left Greece without an agreement for the next (€2.8 billion) aid disbursement has generated some concern over the perpetually needy and economically devastated county’s health. Elsewhere, Spain’s surprise, ultra-long dated bond auction seemed to draw relatively weak demand and the Bank of Italy suggested national banks in the red should not pay dividends (no better way to see a capital flight). However, that may all be trumped by signs that the EU is making a shift from cracking the whip on austerity to supporting stimulus and jobs. If that is the case, this would build on a bullish euro case with the ECB still seeing its balance sheet contract.


British Pound: BoE Governor Mervyn King Says Pound at Fair ValueWhile there are concerns about the balance between budget restraint and frequented recession in the United Kingdom; for FX traders, the more immediate concern has been the threat that the Bank of England (BoE) is preparing to expand its stimulus effort materially sometime over the next three to six months. That is something of a distant concern, however, and the more than 1300-pip drop from the cable (GBPUSD) so far this year seems to be somewhat excessive. Well, that realization may have dawned on traders this past session as the pair posted its biggest daily rally (nearly 1.6 percent) since July 1, 2010. Yet, be cautious on expectations of consistency if risk trends start to falter.


New Zealand Dollar Restrained Despite RBNZ 10-15% Overvalued Comment

We have seen ineffectual monetary policy threats and efforts in the past (Japan could write volumes on the topic), but it is still surprising to see exchange rates ignore increasingly blatant warnings. For the New Zealand dollar, the Reserve Bank of New Zealand’s warning that all rate hikes were off was supplemented by Governor Wheeler’s remark in Testimony that the currency is around 10 to 15 percent overvalued against its primary counterpart. The US currency’s own trouble this past session certainly complicates that reaction. Furthermore, bond auctions like the one we have seen this morning (demand between 6 to 7 times the offer) speaks to investment capital flows remaining in place.


Australian Dollar: RBA Rate Outlook Most Optimistic in 19 Months After Data

Given the exceptional amount of easing the Reserve Bank of Australia has done over the past few years, policymakers are no doubt looking for evidence that it is time to put a cap in rate cuts – as are FX traders. While it may not be the decisive indicator, the blowout employment report from yesterday certainly tips a scale that was already moving back towards balance. How has this impacted speculators? We see in overnight swaps less than a 50 percent chance of another rate cut from the RBA over the next year – the most hawkish read since July 2011.


Japanese Yen Moves Beyond a Serious Barrier to Further Declines

This morning, Japan’s Upper House of Parliament confirmed Haruhiko Kuroda as Governor of the Bank of Japan while Hiroshi Nakaso and Kikuo Iwata were given the nod for the Deputy Governor positions. Their approval was expected, but it nevertheless removes a serious buffer to enacting the stimulus offensive that the nominees described in such color. We have days before a risk view will be buffered in the power shift.


Gold Recovers from Sharp Drop as Volume Recovers

Gold was under significant pressure through the first half of the trading session Thursday, but a return to the two-year rising trendline around $1,560 was thwarted by the dollar’s tumble. The greenback is ambassador to gold’s alternative-store-of-wealth appeal. However, it wasn’t just the dollar that the commodity advanced against. The greenback showed the same rebound against the euro, yen and pound. The first increase in Gold ETF holdings in 33 trading days and Bank of Korea’s governor mentioning diversification to gold may have helped.


**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

0:00

NZD

ANZ Consumer Confidence Index


121

Monthly changes stayed positive for 4 months, buoying kiwi

0:00

NZD

ANZ Consumer Confidence (MoM)


2.30%


EUR

ECB Publishes Monthly Report



Highlights activities of European System of Central Banks

8:15

CHF

Producer & Import Prices (MoM)

0.30%

-0.10%

Commodities sell-off in Feb likely to weigh on import prices.

8:15

CHF

Producer & Import Prices (YoY)

0.30%

0.80%

9:30

EUR

Itally General Government Debt


1988.4B

Bond yields in recent auction on the rise amid election gridlock.

10:00

EUR

Euro-Zone Consumer Price Index (MoM)

0.40%

-1.00%

Below the inflation target of 2%, lower energy cost has slower pace of inflation.

10:00

EUR

Euro-Zone Consumer Price Index (YoY)

1.80%

1.80%

10:00

EUR

Euro-Zone Consumer Price Index - Core (YoY)

1.30%

1.30%


10:00

EUR

Euro-Zone Labor Costs (YoY)


2.00%

Uptrend since 01/12.

12:30

USD

Empire Manufacturing

10

10.04

Manufacturing industry is robust based on employment data

12:30

USD

Consumer Price Index (MoM)

0.50%

0.00%

Declining in 3 consecutive reading (YoY); Increase in energy cost and CPI may consolidate markets expectation for an early exit of the Fed.

12:30

USD

Consumer Price Index Ex Food & Energy (MoM)

0.20%

0.30%

12:30

USD

Consumer Price Index (YoY)

1.90%

1.60%


12:30

USD

Consumer Price Index Ex Food & Energy (YoY)

2.00%

1.90%


12:30

USD

Consumer Price Index Core Index s.a.

232.482

232.108


12:30

USD

Consumer Price Index n.s.a.

232.102

230.28


13:00

USD

Total Net TIC Flows


$25.2B

Measure of capital inflow in short term treasury; less volatile than long term treasury. Capital inflow in US asset is higher as equity index reached record high.

13:00

USD

Net Long-term TIC Flows


$64.2B

13:00

CAD

Existing Home Sales (MoM)


1.30%

Increasing after a dip on 11/12.

13:15

USD

Industrial Production

0.40%

-0.10%

A stronger industrial and manufacturing industry could lower unemployment rate and prompt the Fed to halt the asset purchase program at the end of 2013.

13:15

USD

Capacity Utilization

79.40%

79.10%

13:15

USD

Manufacturing (SIC) Production

0.50%

-0.40%


13:55

USD

U. of Michigan Confidence

78

77.6




GMT

Currency

Upcoming Events & Speeches

1:05

NZD

New Zealand Sells 6 and 10-Year Bonds

-:-

EUR

EU Leaders Hold Meeting

-:-

EUR

New Italian Parliament Meets for First Time

-:-

EUR

Portugal to Hold Press Conferences on Seventh Aid Review

11:00

EUR

ECB Reports Weekly LTRO Repayment

-:-

USD

Quadruple Witching




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

9.8365

7.8165

1.3650


Resist 2

7.5800

5.8300

6.1150

Resist 1

12.9000

1.9000

9.5500

7.8075

1.3250


Resist 1

6.8155

5.7955

5.8200

Spot

12.4298

1.8105

9.1697

7.7577

1.2487


Spot

6.4393

5.7339

5.7941

Support 1

12.2385

1.6500

8.7750

7.7490

1.2000


Support 1

6.0800

5.6075

5.5000

Support 2

11.5200

1.5725

8.5650

7.7450

1.1800


Support 2

5.8085

5.4440

5.3040


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

1.3116

1.5213

97.35

0.9551

1.0291

1.0448

0.8285

126.81

146.74

Resist. 2

1.3088

1.5180

97.05

0.9532

1.0275

1.0429

0.8265

126.37

146.31

Resist. 1

1.3061

1.5147

96.75

0.9512

1.0258

1.0409

0.8245

125.92

145.87

Spot

1.3006

1.5082

96.14

0.9473

1.0225

1.0370

0.8205

125.04

144.99

Support 1

1.2951

1.5017

95.53

0.9434

1.0192

1.0331

0.8165

124.16

144.12

Support 2

1.2924

1.4984

95.23

0.9414

1.0175

1.0311

0.8145

123.71

143.68

Support 3

1.2896

1.4951

94.93

0.9395

1.0159

1.0292

0.8125

123.27

143.24

v



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


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


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