FOREX: Dollar May Rise As Traders Rethink Cental Banks’ Swap Rate Cut

By Ilya Spivak, Currency Strategist

Talking Points

• US Dollar Consolidates as FX Markets Digest Yesterday’s Volatility Surge
• Australian Dollar Falls as Chinese PMI Shows Manufacturing Contracted
• Risk Aversion to Return as Traders Rethink Central Banks’ Swap Rate Cut
• S&P 500 Stock Index Futures Lower, Hinting Sentiment Turning Defensive

The US Dollar was little changed against the major currencies as markets consolidated after yesterday’s breakneck volatility . The Australian Dollar underperformed, sliding as much as 0.8 percent against its top counterparts after Chinese Manufacturing PMI data fell short of expectations, showing the bellwether factory sector shrank for the first time since February 2009. China is Australia’s top export partner and a dent in demand for the country’s coal and iron ore foreshadowed by a contraction in the East Asian giant’s industrial sector naturally bodes ill for economic growth, interest rates, and thereby the exchange rate.

Looking ahead, a re-evaluation of recent news-flow seems likely to put the brakes on the surge in risk appetite witnessed over the preceding 24 hours. Needless to say, the top catalyst for investors’ optimism was the announcement of a multilateral 50bps reduction in major central banks’ swap rates . Traders initially cheered the announcement, but its subtext seems altogether negative.

A reduction in swap rates allows the ECB to borrow Dollars from the Federal Reserve at a lower cost and pass on those savings to banks thirsting for liquidity. Presumably, this reduces the threat of a credit shortage in event that a Eurozone member state defaults and banks scramble to raise cash to cover losses on their holdings of the failed country’s debt, withholding loans and sapping funding access for the real economy (complete with all the negative growth implications therein).

While this seems positive at first blush, the central banks’ decision to explicitly prepare for the default of a Eurozone member state is hardly encouraging. Indeed, if the world’s leading monetary policy authorities were confident in the ability of the currency bloc’s officials to get their house in order, the swap rate reduction would be unnecessary. While its certainly better to be safe than sorry – meaning the move was likely precautionary rather than indicative of the certainty that the worst-case scenario will transpire – the lack of confidence in Eurozone policymakers that it implies begs the question. After all, if the G10 central bankers see a credible-enough threat that Europe fails, why shouldn’t investors?

With this in mind, it seems reasonable that some of the pro-risk sentiment witnessed yesterday is unwound. Indeed, S&P 500 stock index futures are ticking lower (albeit slightly so) in late Asian trade, hinting optimism is already fading and suggesting the safe-haven US Dollar may mount a deeper recovery against its sentiment-linked counterparts . On the economic data front, Manufacturing PMI figures from Switzerland and the UK are expected to show the factory sector in both continued to deteriorate in November, reminding investors of the negative regional impact of the Eurozone debt crisis as exporters in both countries feel the pain of slowing growth in the currency bloc.

Asia Session : What Happened

GMT	CCY	EVENT	ACT	EXP	PREV
21:45	NZD	Terms of Trade Index (QoQ) (3Q)	-0.7%	1.1%	2.4% (R+)
22:30	AUD	AiG Perf of Manufacturing Index (NOV)	47.8	-	47.4
0:00	NZD	ANZ Commodity Price (NOV)	-1.0%	-	-3.5%
0:30	AUD	Retail Sales s.a. (MoM) (OCT)	0.2%	0.4%	0.4%
0:30	AUD	Building Approvals (MoM) (OCT)	-10.7%	3.3%	-14.2% (R-)
0:30	AUD	Building Approvals (YoY) (OCT)	-29.8%	-14.4%	-12.6% (R-)
1:00	CNY	PMI Manufacturing (NOV)	49.0	49.8	50.4
2:30	CNY	HSBC Manufacturing PMI (NOV)	47.7	-	51
5:00	JPY	Vehicle Sales (YoY) (NOV)	24.1%	-	28.3%
5:30	AUD	RBA Commodity Price Index (NOV)	107.7	-	107.6 (R+)
5:30	AUD	RBA Commodity Index SDR (YoY)(NOV)	18.1%	-	19.6% (R+)

E uro Session: What to Expect

GMT	CCY	EVENT	EXP	PREV	IMPACT
6:30	EUR	French ILO Mainland Unemployment Rate (3Q)	9.3%	9.1%	Low
6:30	EUR	French Mainland Unemployment Change (3Q)	-	-12K	Low
6:30	EUR	French ILO Unemployment Rate (3Q)	9.7%	9.6%	Low
6:45	CHF	Gross Domestic Product (QoQ) (3Q)	0.1%	0.4%	High
6:45	CHF	Gross Domestic Product (YoY) (3Q)	1.8%	2.3%	High
8:15	EUR	French PMI Manufacturing (NOV F)	47.6	47.6	Low
8:30	CHF	PMI Manufacturing (NOV)	46.6	46.9	Medium
8:45	EUR	Italian PMI Manufacturing (NOV F)	42.8	43.3	Low
8:55	EUR	German PMI Manufacturing (NOV F)	47.9	47.9	Medium
9:00	EUR	Euro Zone PMI Manufacturing (NOV F)	46.4	46.4	Medium
9:30	GBP	PMI Manufacturing (NOV)	47.0	47.4	Medium

Critical Levels

CCY	SUPPORT	RESISTANCE
EURUSD	1.3292	1.3566
GBPUSD	1.5560	1.5814

Complete Table of Support and Resistance Levels: www.dailyfx.com/technical_analysis/pivot_points/

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

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Original Article: http://www.dailyfx.com/forex/fundamental/daily_briefing/session_briefing/euro_open/2011/12/01/FOREX_Dollar_May_Rise_as_Traders_Rethink_Cental_Banks_Swap_Rate_Cut.html

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