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Dollar Posts First Two-Day Drop in a Month, Risk Slow to Confirm

By , Chief Currency Strategist
17 July 2012 04:10 GMT
  • Dollar Posts First Two-Day Drop in a Month, Risk Slow to Confirm
  • Euro Faces IMF Growth Downgrade, ECB Talk of Dropping Seniority, Merkel Push Back
  • British Pound Best Performer Monday without Data and Record Low Yield
  • New Zealand Dollar Briefly Slides after CPI Hits a 12-Year Low
  • Japanese Yen Tumbling Early Tuesday as Risk Advances, Azumi Speaks
  • Canadian Dollar: Data Shows the Largest Net Investment in Canadian Assets on Record
  • Gold Fails to Take Advantage of Dollar’s Unique Weakness

Dollar Posts First Two-Day Drop in a Month, Risk Slow to Confirm

The Dow Jones FXCM Dollar Index (ticker = USDollar) dropped for the second consecutive trading day Monday. This is the first back-to-back decline for the benchmark currency since the hefty, two-day drop through June 15 – a move that notably deflated the currency’s bullish ambitions. Normally, we would expect a slide of this magnitude to match a risk-based run that actively undermines the currency’s safe haven status. That said, the major equity indexes – across all three sessions – were notable mixed and quiet for the day. This would suggest a unique weakness for the US dollar itself.

Looking to the traditional sources of fundamental drive, we had a pretty busy economic docket and rather active newswire. For data, the top headline was the tumble in June retail sales. The 0.5 percent contraction in domestic consumption through the month extends the series to three consecutive contractions (the most consistent contraction since December 2008). Yet, weakness for the world’s largest consumer and economy is generally bullish for a currency that represents the US Treasury and stands as the top global reserve. That said, neither dollar nor equities responded along the expected risk lines. In headline news, the IMF downgraded its global growth forecast for 2013 to 3.9 percent (from 4.1) and warned the Euro Zone crises posed a severe risk to the system. Again, this would normally cater to risk aversion. Then there was continuation of the 2Q US earnings season with Citigroup’s better-than-expected EPS which left US stocks unimpressed.

With risk trends withholding guidance, what was pushing the dollar? Without active encouragement one way or the other, the dollar finds itself in a naturally exposed position. Technically, we can point to EURUSD’s bounce from an extreme low (a more than two-year low and the midpoint of its historical range). Fundamentally, we find that without rise in implied volatility (risk); the negative real rates of return from the greenback put it under pressure. In the upcoming session, the headlines will pick up in importance. Earnings and June inflation figures are noteworthy, but those hoping for a stimulus boost will be watching Fed Chairman Bernanke’s testimony on policy to the Senate.

Euro Faces IMF Growth Downgrade, ECB Talk of Dropping Seniority, Merkel Push Back

There was nothing tangible this past session to flatter the euro. The IMF’s update shaped the region as the greatest threat to global stability and downgraded its 2013 GDP forecast (0.7 percent, previously 0.9 percent while the 0.3 percent expected contraction for 2012 was left unchanged). Moving back to the day-to-day viewing of the slow-motion-train-wreck that is the crisis fight, reports Monday reflected a supposed fundamental shift in the ECB’s bailout position. Originally against delivering senior bond holders losses when a bailout is offered (as with Ireland’s banking sector bailout), unnamed officials have said the policy body is now willing to accept a distribution of losses that would very likely weigh investor confidence. That said, Euro Zone Finance Ministers supposedly opposed the call. Also worth noting was German Chancellor Merkel’s reiteration that she would not tolerate sharing liability without common oversight – reiterating the gridlock in implementing the EU Summit vows. In the upcoming session, Euro traders should watch the bond auctions and investor confidence figures. Though don’t bank on trend development.

British Pound Best Performer Monday without Data and Record Low Yield

Though it was an extremely tight race (with the yen) the sterling was the best performer through Monday’s session. That is a rather remarkable turn for the sterling given the lack of fundamental support and even a lack of correlation to risk trends (themselves virtually unmoved). What was the pound’s source of strength? The euro. A notable rise for the shared currency against the dollar suggests the figurative bleeding from the region’s financial crisis has been staunched. That isn’t likely a lasting state for the euro however; and the sterling needs active encouragement. Otherwise, we will turn back to a reality where the 10-year Gilt yield has closed at a recent historical low. Tuesday, watch for King and CPI.

New Zealand Dollar Briefly Slides after CPI Hits a 12-Year Low

In fundamental FX trading, we need to follow what is most important to the market. Risk trends – whether they be stationary and act as an anchor or in motion and catalyst – seem to have curbed a kiwi dollar reaction to an important economic release. The year-over-year 2Q CPI figures expectations were already set low, but the 1.0 percent reading printed under the consensus and pegged the slowest rise in price pressures since 1999. RBNZ Governor Bollard (soon to be replaced) has maintained a neutral stance, but will we start to see capitulation?

Japanese Yen Tumbling Early Tuesday as Risk Advances, Azumi Speaks

With a sharp rally for the Hang Seng on Tuesday’s open, we have seen a proactive push on risk trends that was completely absence on the opening trading day of the week. In turn, we have seen a market-wide rally for the yen yesterday turn into an early wholesale tumble today. Risk appetite will guide the yen though its carry connections. Another factor that may filter through (though limit expectations here) was a warning from Finance Minister Azumi. He stated that he would contemplate the need for further stimulus after the 2Q GDP figures were released.

Canadian Dollar: Data Shows the Largest Net Investment in Canadian Assets on Record

The Canadian dollar continues to position itself fundamentally as one of the most attractive currencies amongst the majors. Between the roles as an investment currency and safe haven, we learned from Stats Canada that there was a net C$26.1 billion investment capital inflow into Canada in May. That is a notch for the currency’s position as an investment currency. In the upcoming session, the nation’s benchmark rate and economic/financial forecasts will receive an update from the Bank of Canada. Will they further support the loonie?

Gold Fails to Take Advantage of Dollar’s Unique Weakness

With the dollar diving against its most liquid counterparts, it is natural to expect the currency’s primary, non-fiat alternative (gold) to climb. That wasn’t the case Monday however. The precious metal was notably flat across the board. The anti-dollar advantage comes when there is a proactive move to look for an alternative to the traditional reserve. The greenback’s move didn’t support that drive however.

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ECONOMIC DATA

Next 24 Hours

GMT

Currency

Release

Survey

Previous

Comments

22:45

NZD

NZD Consumer Prices Index (QoQ)

0.5%

0.5%

Over the past 12 months inflation has fallen over 4%.

22:45

NZD

NZD Consumer Prices Index (YoY)

1.1%

1.6%

08:30

GBP

GBP DCLG UK House Prices (YoY)

1.4%

3rd month above zero since the UK contraction began.

08:30

GBP

GBP Consumer Price Index (YoY)

2.8%

2.8%

Inflation was almost cut in half over the past eight months.

08:30

GBP

GBP Core Consumer Price Index (YoY)

2.5%

2.2%

08:30

GBP

GBP Retail Price Index (YoY)

3.%

3.1%

08:30

GBP

GBP Retail Price Index Ex Mort Int. Payments (YoY)

3.1%

3.1%

09:00

EUR

EUR German ZEW Survey (Current Situation)

30.0

33.2

Medium-term outlook for the Euro-Zone looking bleaker.

09:00

EUR

EUR Euro-Zone ZEW Survey (Economic Sentiment)

-20.1

09:00

EUR

EUR German ZEW Survey (Economic Sentiment)

-20.0

-16.9

12:30

USD

USD Consumer Price Index (MoM)

0.0%

-0.3%

Despite inflation remaining under 2%, Fed has stated that QE3 is not probable without significant deterioration in the US economy.

12:30

USD

USD Consumer Price Index Ex Food & Energy (MoM)

0.2%

0.2%

12:30

USD

USD Consumer Price Index (YoY)

1.6%

1.7%

12:30

USD

USD Consumer Price Index Ex Food & Energy (YoY)

2.2%

2.3%

13:00

CAD

CAD Bank of Canada Rate Decision

1.00%

1.00%

Held at 1.00% since 2010.

13:00

USD

USD Total Net TIC Flows

-$20.5B

Will aid in judging the level of risk aversion in the markets.

13:00

USD

USD Net Long-term TIC Flows

$25.6B

13:15

USD

USD Industrial Production

0.3%

-0.1%

Over 20% of the U.S. manufacturing capacity not employed.

13:15

USD

USD Capacity Utilization

79.2%

79.0%

14:00

USD

USD NAHB Housing Market Index

30.0

29.0

More price moving housing data to be released on Wednesday.

GMT

Currency

Upcoming Events & Speeches

-:-

USD

US Earnings – Goldman Sachs and Intel

-:-

EUR

Greece to sell €1.5 Bln in 3-month Bills

01:30

AUD

AUD Reserve Bank Board July Minutes

08:30

EUR

Spain to Sell 12 and 18-month Bills

10:00

EUR

EFSF to Sell €1.5 Bln in 6-month Bills

14:00

USD

USD Fed's Bernanke Delivers Monetary Policy Report to Senate

17:15

USD

USD Fed's Pianalto speaks on economy in Pennsylvania

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

13.2020

1.8062

8.1889

7.7561

1.2623

Spot

7.0252

6.0498

6.0762

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

1.2430

1.5794

79.57

0.9873

1.0211

1.0403

0.8085

98.38

125.12

Resist. 2

1.2397

1.5763

79.41

0.9847

1.0191

1.0375

0.8063

98.05

124.76

Resist. 1

1.2364

1.5731

79.25

0.9820

1.0172

1.0347

0.8040

97.72

124.39

Spot

1.2298

1.5668

78.92

0.9767

1.0133

1.0291

0.7994

97.06

123.65

Support 1

1.2232

1.5605

78.59

0.9714

1.0094

1.0235

0.7948

96.40

122.91

Support 2

1.2199

1.5573

78.43

0.9687

1.0075

1.0207

0.7925

96.07

122.54

Support 3

1.2166

1.5542

78.27

0.9661

1.0055

1.0179

0.7903

95.74

122.18

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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17 July 2012 04:10 GMT