Dollar Wins Critical Break Against Euro, Other Crosses To Follow?

By John Kicklighter, Currency Strategist
  • Dollar Wins Critical Break Against Euro, Other Crosses to Follow?
  • Euro Tumbles as Greek Situation Nears Unsalvageable, Dexia Troubles Bloom
  • Australian Dollar Ready for a Volatile Reaction to RBA Decision
  • British Pound Stumbles Alongside Euro, Won’t Wait for BoE
  • Swiss Franc Appreciating after SNB Release of Bailout Costs
  • Japanese Yen: Are There Fundamentals Other than Intervention?
  • Gold Wins its Highest Close in a Week, But Tame Expectations

Dollar Wins Critical Break Against Euro, Other Crosses to Follows?

The US Dollar surgedMonday under the kind of schadenfreude that only theworld’s most liquid currency can appropriately appreciate.With worrying financial headlines crossing the wires throughout theweekend and into Monday’s session, it should come as littlesurprise that risk appetite would falter and leverage thegreenback’s unique safe haven role. At first blush, thiscould be labeled the standard, ‘risk aversion’ move.However, when we take a look across the financial markets, we cansee that the collapse ran deeper than a mere shift to safe havens.Not only did benchmarks for sentiment like the S&P 500, AUDJPYand EURUSD falter; but we would further see evidence that themarket was starting to gasp for liquidity. In turn, traders andinvestors would return to the benchmarks that they know couldweather another financial crunch: the US dollar and Treasuries.Reflecting this surge in demand, the Dow Jones FXCM Dollar Index(ticker = USDollar ) easily cleared, the10,000 figure to close at its highest level since January 20 th while the 10-yearTreasury Note’s yield dropped to its lowest level since thefinal day of 2008.

The critical questionfrom here is whether the fear is amplified going forward. As wewell know, the dollar is not a simple safe haven currency; butrather a stability provider during the most troubled of times. Onthis point, there should be ample level of caution. As a simplegauge of risk appetite trends; we can point to the critical,bearish break on the S&P 500. The key equities index closedbelow the 1,100 figure for the first time since September 8 th of last year. That moveis as conclusive as EURUSD’s headline-worthy move below 1.34(the 50 mid-point of the 2010 to 2011 advance). However, just asthe index falls short of defining the greenback’s position onsentiment; so too does this most liquid pair fall outside of themark when representing the dollar. Considering the world’scurrent fundamental and financial headwinds are originating fromthe Euro-area; the pair’s tumble could be more a factor ofcounterpart weakness than dollar strength. On some level, thisdistinction doesn’t matter; but to sustain a trend, itabsolutely does.

To keep the dollar moving and to further build momentum; the broader market needs to come to believe that the US currency and government debt is the only reliable option for harboring capital. That can be accomplished if financial troubles continue to escalate – and that is exactly what we are starting to see. While Dexia is at the top of the panic list at the moment (more on that below); we see that credit default swaps for Bank of American and Morgan Stanley are at record and three-year highs respectively. Furthermore, we see in volatility indicators, credit spreads and other measures of financial strain that liquidity is beginning to evaporate. Should a bank succumb to these conditions, we have a true crisis.

Related : Discuss the Dollar in the DailyFX Forum , John’s Video : EURUSD and S&P 500 Take a Major Step to Revive Bear Trends

Euro Tumbles as Greek Situation Nears Unsalvageable, Dexia Troubles Bloom

Whether you approach itfrom a technical or fundamental perspective , the euro marked acritical break through Monday’s session. With EURUSD closingjust below the 1.3400 level through Friday, it was clear theworld’s second most liquid currency was under significantpressure. Global investors have grown exceptionally concerned overthe financial health of the region’s banking sector and theEU members. Both found fresh headlines to stir concern to startthis week. Over the weekend, Greece approved an additional 6.6billion euro austerity package; but said it would fall short of its2012 deficit target of 7.6 percent of GDP. More immediate toliquidity, we would also see strains in the European banking sectorfreeze up. Dexia in particular was facing trouble withMoody’s placing the firm on downgrade watch. CDS are just offrecord highs.

Austra lian Dollar Ready for a Volatile Reaction to RBA Decision

Over the coming 24 hours,the top scheduled event risk is – without question– the RBA rate decision . The market has backedoff on its predictions that there will be a 25 bp cut at thismeeting (it is now at 25 percent versus a near certainty two weeksago); but the 12 month forecast is still exceptionallydovish/bearish. The projected 143 bp of cuts seen over the coming12 months is excessive given the restrained shift from the policyauthority. Yet, will the market read cautious words asconfirmation of their extreme position or a moderatinginfluence?

British Pound Stumbles Alongside Euro, Won’t Wait for BoE

Expectations for the Thursday’s BoE rate decision are high. It is highly likely that the central bank expands its stimulus effort and puts the sterling on par with US and European efforts. That said, the market is a little more concerned with more ambiguous scenarios. The UK Treasury recently suggested it has plans to purchase billions in bonds of small and medium-size companies – a possibly late buffer to the Euro crisis spread?

Swiss Franc Appreciating after SNB Release of Bailout Costs

Over the weekend, the SNB released its balance sheet for August; and the results were not encouraging. Though the EURCHF floor wasn’t officially in play that month, the central bank would still report an increase in its foreign currency holdings from 189 billion to 281 bln francs. It was an expensive venture before it even started. That doesn’t turn any tides when the question is Europeans looking for regional safety though.

Japanese Yen: Are There Fundamentals Other than Intervention?

There are two primaryconcerns when it comes to the Japanese yen: the direction of riskappetite trends (as it feeds into carry positioning) and the threat of intervention . These are constantconcerns. However, there are other factors that we should consideras well, such as the weak 2Q business sector health gauge and lackof support Prime Minister Noda has for his proposed tax hike.Consider the long-term issues as well.

Gold Wins its Highest Close in a Week, But Tame Expectations

Risk aversion was flipped on; so it should make sense that gold was up Monday – right? Not so fast. While the precious metal was up on the day; the alternative store of wealth was rallying alongside the US dollar – an unusual situation. The deciding factor here was the concern that an unstable euro was sending capital outside the fiat realm. Yet, if we get into liquidity concerns, the commodity will lose its drive.

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ECONOMIC DATA

N ext 24 Hours

GMT

Currency

Release

Survey

Previous

Comments

0:30

AUD

Trade Balance (AUD) (AUG)

2000M

1826M

Surplus increase may be due to less imports as domestic economy weakens

0:30

AUD

Building Approvals (MoM) (AUG)

1.0%

1.0%

Steady MoM increase in approvals could point to flattening demand

0:30

AUD

Building Approvals (YoY) (AUG)

-15.1%

-15.0%

1:30

JPY

Labor Cash Earnings (YoY) (AUG)

-0.2%

Decline may prompt additional pressure on Noda administration/BoJ

3:30

AUD

Reserve Bank of Australia Rate Decision

4.75%

4.75%

Main data of Asian session; AUD commentary will suggest direction of future hikes; remains wait-and-see

5:30

AUD

RBA Commodity Price Index (SEP)

113.3

Sharp commodities fall may show on SDR index

5:30

AUD

RBA Commodity Index SDR (YoY) (SEP)

25.2%

8:30

GBP

Purchasing Manager Index Construction (SEP)

51.6

52.6

Construction expected to near stalling

9:00

EUR

Euro-Zone Producer Price Index (MoM) (AUG)

-0.2%

0.5%

Major data of Euro session: decrease may put rate hawks at bay as economy falters

9:00

EUR

Euro-Zone Producer Price Index (YoY) (AUG)

5.8%

6.1%

14:00

USD

Factory Orders (AUG)

0.0%

2.4%

Expected to be reflection of durables

22:30

AUD

AiG Performance of Service Index (SEP)

52.1

Tertiary economy may weaken into Autumn months

23:01

GBP

BRC Shop Price Index (YoY) (SEP)

2.7%

Shop prices continue to rise despite weaker economy

GBP

Halifax Plc House Prices s.a. (MoM) (SEP)

-2.1%

-1.2%

Mixed data may not result in BoE tightening, could result in additional stimulus for the UK

GBP

Halifax House Price (3MoY) (SEP)

0.2%

-2.6%

GMT

Currency

Upcoming Events & Speeches

14:00

USD

Fed Chairman Bernanke to Testify Before JEC

SUPPORT AND RESISTANCE LEVELS

CLASSIC SUPPORT ANDRESISTANCE -18 :00GMT

Currency

EUR/USD

GBP/USD

USD/JPY

USD/CHF

USD/CAD

AUD/USD

NZD/USD

EUR/JPY

GBP/JPY

Resist 2

1.4050

1.5900

86.00

0.9400

1.0675

1.0750

0.9020

112.00

126.50

Resist 1

1.3900

1.5775

81.50

0.9250

1.0550

1.0375

0.8750

106.50

123.00

Spot

1.3232

1.5482

76.66

0.9176

1.0491

0.9601

0.7574

101.44

118.69

Support 1

1.3385

1.5300

76.35

0.8500

1.0150

0.9600

0.7500

102.00

116.00

Support 2

1.3025

1.5180

75.50

0.7800

0.9950

0.9545

0.6850

100.00

114.00

CLASSIC SUPPORT ANDRESISTANCE EMERGING MARKETS 18 :00GMT SCANDIES CURRENCIES 18:00GMT

Currency

USD/MXN

USD/TRY

USD/ZAR

USD/HKD

USD/SGD

Currency

USD/SEK

USD/DKK

USD/NOK

Resist 2

16.5000

2.0000

8.5800

7.8165

1.3650

Resist 2

7.5800

5.6625

6.1150

Resist 1

14.3200

1.9000

8.1025

7.8075

1.3250

Resist 1

6.5175

5.3100

5.7075

Spot

13.9509

1.8848

8.2248

7.7880

1.3156

Spot

6.9071

5.6245

5.8948

Support 1

12.6000

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 PIVOT POINTS 18:00 GMT

Currency

EUR/USD

GBP/USD

USD/JPY

USD/CHF

USD/CAD

AUD/USD

NZD/USD

EUR/JPY

GBP/JPY

Resist 2

1.3468

1.5661

77.57

0.9273

1.0581

0.9775

0.7694

104.04

121.15

Resist 1

1.3350

1.5571

77.12

0.9225

1.0536

0.9688

0.7634

102.74

119.92

Pivot

1.3271

1.5508

76.81

0.9151

1.0484

0.9614

0.7583

101.93

119.14

Support 1

1.3153

1.5418

76.36

0.9103

1.0439

0.9527

0.7523

100.63

117.91

Support 2

1.3074

1.5355

76.05

0.9029

1.0387

0.9453

0.7472

99.82

117.13

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

1.3463

1.5674

77.55

0.9345

1.0647

0.9800

0.7736

103.40

120.64

Resist. 2

1.3405

1.5626

77.33

0.9303

1.0608

0.9750

0.7695

102.91

120.15

Resist. 1

1.3347

1.5578

77.10

0.9261

1.0569

0.9701

0.7655

102.42

119.66

Spot

1.3232

1.5482

76.66

0.9176

1.0491

0.9601

0.7574

101.44

118.69

Support 1

1.3117

1.5386

76.22

0.9091

1.0413

0.9501

0.7493

100.46

117.72

Support 2

1.3059

1.5338

75.99

0.9049

1.0374

0.9452

0.7453

99.97

117.23

Support 3

1.3001

1.5290

75.77

0.9007

1.0335

0.9402

0.7412

99.48

116.74

v

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

To contact John , email jkicklighter@dailyfx.com . Follow me on twitter athttp://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.
DailyFX is the forex news and research arm of FXCM, Inc (NYSE: FXCM), which provides currency trading and brokerage services and is an advertiser on TheStreet websites. Any opinions, news, research, analyses, prices, or other information is provided as general market commentary, and does not constitute investment advice. Dailyfx will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Currency trading involves significant risk of loss. Individual authors may hold positions in the currencies discussed in the article.

Original Article: http://www.dailyfx.com/forex/fundamental/daily_briefing/session_briefing/daily_fundamentals/2011/10/04/Dollar_Wins_Critical_Break_Against_Euro_Other_Crosses_to_Follow.html

DailyFX is the forex news and research arm of FXCM (NYSE: FXCM), which provides currency trading and brokerage services and is an advertiser on TheStreet websites. Any opinions, news, research, analyses, prices, or other information is provided as general market commentary, and does not constitute investment advice. Dailyfx will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Currency trading involves significant risk of loss. Individual authors may hold positions in the currencies discussed in the article.

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