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Euro: Officials Scramble to Stabilize Spain Before Greece Returns

By , Chief Currency Strategist
09 June 2012 05:38 GMT
  • Dollar Traders Await Risk Trends to Decide Further Lift
  • Euro: Officials Scramble to Stabilize Spain Before Greece Returns
  • British Pound Holds Steady as Upstream Inflation Pressure Drops
  • Japanese Yen at the Mercy of Crisis Current, BoJ On Deck Again
  • New Zealand Dollar Could Find Boost in RBNZ Hold, But Risk Trends Dominant
  • Swiss Franc: Will the SNB Use its Policy Meeting to Take New Tack?
  • Gold Recovers Late Friday as Euro Stimulus Compensates for QE3

Dollar Traders Await Risk Trends to Decide Further Lift

It was an appropriate way for the dollar to close Friday’s session – virtually unchanged through the close. However, the shift in momentum was clearly visible with the weekly performance. The first weekly lose in six weeks throws the breaks on best run for the Dow Jones FXCM Dollar Index since a similar length move through May of 2007. This is not a full blown shift in sentiment; rather it is a pause for another fundamental catalyst to decide the next leg. If it were for speculators weighing the possibility of stimulus guidance this past week, we would most likely not have had this trend break. Alas, we must trade what is in front of us and the sentiment of the masses chooses our direction and pace.

Through the last 24 hours of this past week, there was little on the US newswires stirring the market. Instead, the greenback was taking its cues from equities and other growth-sensitive markets. Transitioning from an open that was still feeling the withdrawal from Fed Chairman Bernanke’s refusal to reassure stimulus expectations, the markets eventual moved on to reports that Spain would officially seek external support for its banking sector over the weekend. For the safe haven dollar, the possibility that one of the most pressing threats to market stability could find short-term resolution means that the heavy market-wide risk aversion current that provides lift could evaporate – potentially drawing a correction.

Beyond the weekend headlines, there are few other key, fundamental catalysts that can move the behemoth that is the consensus on risk trends. Gaining traction and building momentum over the entire capital and credit markets is especially difficult knowing that there is far more bombastic event risk in the following weeks (the Greek election, EU Summit, G20 meeting and the Fed rate decision). Yet, a curb on cross-market correlations and dramatic shifts in speculative expectations doesn’t mean we won’t be find meaningful volatility. Aside from keeping tabs on risk trends, the US docket will provide a range of policy officials’ speeches as well as media-friendly data (retail sales, TIC flows and CPI).

Euro: Officials Scramble to Stabilize Spain Before Greece Returns

The euro’s progress this past week was a mixed bag. Where the currency recovered lost ground against key safe havens (the US dollar and Japanese Yen), the investment currencies outpaced the currency. In this observation we find that the perceived improvement in Europe’s financial disorder did not outpace primal risk appetite trends – though it likely opened the door for short-covering and opportunistic bottom-picking. Spain was the main topic Friday and it will remain so over the weekend and likely into the following week. Speculation that the country will formally request assistance for its banking system has clearly captured the attention of the masses. That there is a call for support isn’t particularly surprising – the nation’s budget minister essentially led the call days before. Yet, the need for assistance has been leveraged recently with Fitch’s downgrade and Moody’s warning. If a program is not hammered out over the weekend, or if the market deems it insufficient, it could leave the euro far more sensitive to speculation of trouble in Spain, Greece or perhaps others EZ members like Italy. A few other scheduled highlights to keep a leery eye on: the €1.25 billion Greek bill auction Monday and ECB Draghi’s speech Friday.

British Pound Holds Steady as Upstream Inflation Pressure Drops

While we wait to see if the Euro crisis indeed is contagious (because the UK has the greatest exposure to the region’s troubles outside of the actual Euro Zone), sterling traders are assessing whether policy officials will try to stabilize and devalue the currency through further easing. Notable, but largely overlooked, on Friday was the sharp drop in input (read upstream) produce prices. Another subtle piece of evidence to encourage the MPC members to be more sensitive to growth and financial stability risks. In the upcoming week, monetary policy will remain on the mind. Of particular interest is the prepared speaking engagement for BoE member Adam Posen Monday. The dramatic change in stance from this persistent dove took the market by surprise not long ago, but data is no doubt pulling him back to the dark side.

Japanese Yen at the Mercy of Crisis Current, BoJ On Deck Again

The yen crosses are finally starting to rebound, but it has nothing to do with the threats or even actions of the Ministry of Finance or Bank of Japan. This is a straightforward rebound in risk appetite that draws a little carry interest. It should be said, however, that taking on a carry trade is not naturally a short-term market position. Therefore, to truly build selling pressure behind the yen, risk appetite trends need to find serious tailwind. In the meantime, expectations for the Bank of Japan rate decision due late in the week are set low. The consensus is for no change in policy, but the market belief is that it wouldn’t have an impact even if they did move. Will they start to entertain uncommon policy?

New Zealand Dollar Could Find Boost in RBNZ Hold, But Risk Trends Dominant

Of the three rate decisions this coming week, the RBNZ seems to be the least critical. Both the BoJ and SNB are facing difficulties with their currencies which generates market interest whether they move or not. For the high-yield kiwi dollar, a hold is a boon. Recently we have a moderate pressure in expectations for rate cuts significantly abate (there is now an 18 percent chance of a 25bp cut at this meeting and 21bps worth of cuts priced in over 12 months). It should be said, the most unexpected events generate the biggest reaction.

Swiss Franc: Will the SNB Use its Policy Meeting to Take New Tack?

Over the past few weeks, we have seen the SNB report that its FX reserves have surged in its fight to maintain the 1.2000 EURCHF floor and that the group is considering alternative methods for relieving the pressure. If there was ever a good opportunity to announce new efforts so that there wasn’t too much shock, it would be the official rate decision. Does that make it a more likely outcome? Not really.

Gold Recovers Late Friday as Euro Stimulus Compensates for QE3

Through the first half of Friday, gold extended its aggressive reversal – at one point leveraging the reversal from Wednesday’s high to more than a five-percent drop. Yet, through the end of the day, the metal recovered all of its Friday losses. It is interesting that this occurs at the same time that Spain is expected to find relief – drawing stimulus to do so. While Fed QE has more sway on gold, EU stimulus should weigh here too.

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

ECONOMIC DATA

Next 24 Hours

GMT

Currency

Release

Survey

Previous

Comments

1:30 SAT

CNY

Consumer Price Index (YoY) (MAY)

3.2%

3.4%

1:30 SAT

CNY

Producer Price Index (YoY) (MAY)

-1.1%

-0.7%

5:30 SAT

CNY

Industrial Production (YoY) (MAY)

9.8%

9.3%

5:30 SAT

CNY

Industrial Production (YTD) (MAY)

10.8%

11.0%

5:30 SAT

CNY

Retail Sales (YoY) (MAY)

14.2%

14.1%

5:30 SAT

CNY

Retail Sales (YTD) (MAY)

14.6%

14.7%

5:30 SAT

CNY

Fixed Assets Investment excl Rural (YTD) (MAY)

20.0%

20.2%

CNY

Trade Balance (USD) (MAY)

$16.25B

$18.43B

CNY

Exports (YoY) (MAY)

7.1%

4.9%

CNY

Imports (YoY) (MAY)

5.5%

0.3%

22:45

NZD

Manufacturing Activity (1Q)

1.2%

22:45

NZD

Manufacturing Activity Volume s.a. (QoQ) (1Q)

1.3%

23:50

JPY

BSI Large All Industry (QoQ) (2Q)

-2.7

23:50

JPY

BSI Large Manufacturing (QoQ) (2Q)

-7.3

5:00

JPY

Consumer Confidence (MAY)

39.8

40.0

6:00

JPY

Machine Tool Orders (YoY) (MAY P)

0.4%

6:45

EUR

French Industrial Production (MoM) (APR)

0.0%

-0.9%

6:45

EUR

French Industrial Production (YoY) (APR)

-0.2%

-0.9%

6:45

EUR

French Manufacturing Production (MoM) (APR)

-0.7%

1.4%

6:45

EUR

French Manufacturing Production (YoY) (APR)

-0.9%

-0.3%

8:00

EUR

Italian GDP s.a. and w.d.a. (QoQ) (1Q F)

-0.8%

-0.8%

8:00

EUR

Italian GDP s.a. and w.d.a. (YoY) (1Q F)

-1.3%

-1.3%

22:45

NZD

Card Spending (MoM) (MAY)

0.6%

22:45

NZD

Card Spending - Retail (MoM) (MAY)

0.8%

23:01

GBP

RICS House Price Balance (MAY)

-17%

-19%

GMT

Currency

Upcoming Events & Speeches

-:-

EUR

Spain Expected to Make Formal Request for Bank Support

13:30

EUR

ECB Announces Bond Purchases (SMP)

14:15

GBP

BoE's Adam Posen Speaks on U.K. Economy

16:00

USD

Fed's Dennis Lockhart Speaks on U.S. Economy

16:00

USD

Fed's John Williams Speaks on U.S. Banking System

22:00

USD

Fed's Sandra Pianalto Speaks on Education

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 GMTSCANDIES CURRENCIES 18:00 GMT

Currency

USD/MXN

USD/TRY

USD/ZAR

USD/HKD

USD/SGD

Currency

USD/SEK

USD/DKK

USD/NOK

Resist 2

15.5900

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

14.0908

1.8287

8.3880

7.7582

1.2807

Spot

7.1662

5.9339

6.0677

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

1.2685

1.5645

80.20

0.9714

1.0402

0.9995

0.7754

101.01

124.75

Resist. 2

1.2645

1.5607

80.01

0.9683

1.0377

0.9961

0.7727

100.63

124.33

Resist. 1

1.2606

1.5570

79.82

0.9651

1.0351

0.9927

0.7700

100.26

123.91

Spot

1.2527

1.5494

79.43

0.9587

1.0301

0.9860

0.7645

99.51

123.08

Support 1

1.2448

1.5418

79.04

0.9523

1.0251

0.9793

0.7590

98.76

122.25

Support 2

1.2409

1.5381

78.85

0.9491

1.0225

0.9759

0.7563

98.39

121.83

Support 3

1.2369

1.5343

78.66

0.9460

1.0200

0.9725

0.7536

98.01

121.41

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

To be added to John’s email distribution list, send an email with the subject line “Distribution List” to jkicklighter@dailyfx.com.

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09 June 2012 05:38 GMT