By John Kicklighter, Currency Strategist
  • Dollar Facing Two High Hurdles: Risk Trends and Euro Yield
  • Euro Dominant Trend May be Bearish but ECB Bias May Lean Bullish
  • British Pound Has an Easier Time Pricing in BoE Rate Decision
  • Swiss Franc Fight Will Face Trouble in Euro’s ECB Reaction
  • Japanese Yen: Officials Growing More Creative in Effort to Depreciate
  • Gold is More Focused on the Risk Aspect of the Euro Experience

Dollar Facing Two High Hurdles: Risk Trends and Euro Yield

The wave of fear that washed over the markets this past month is starting to recede; and the return to stability and tinge of confidence starting to show through is weighing on the US dollar. As the market’s go-to safe haven asset when investors need liquidity and are putting their capital ‘in cash’; the greenback naturally retraces as volatility and panic settle. For the Dow Jones FXCM Dollar Index (ticker = USDollar), this shift has translated into the biggest decline in three weeks. Now, hovering above the 10,000 level; it wouldn’t take much to drive the dollar to the next phase of a larger, bearish correction. All that is needed is mere stability to undermine the currency’s primary fundamental role. For more, distinctly risk-sensitive assets like the S&P 500 though; a break in the financial storm does not translate into a strong recovery.

It is important to draw the distinction between level and climbing investor sentiment regardless of whether we are referring to standard capital markets or the benchmark dollar. We are seeing a pullback from both the equities and FX market standard bearers; but these moves could quickly run out of momentum if this is a mere lull in a broader deterioration in financial conditions. Sentiment is the guiding force of the markets; but the fundamental backdrop can amplify or dampen a prevailing market run. As it stands, conditions continue to push forward a global crisis state. Looking at financial market functioning, we see that liquidity measures (like the three-month Libor / overnight index swap spread) continue to widen. Forecasts for growth are doing their part to undermine demand for assets that require expansion for capital gains. Despite the stable ISM service sector reading (53.0) and ADP employment reading (93,000 jobs added), the larger trend is still in place. The same skepticism will reign over the NFPs due Friday. And then there is the yield expected from the market. Global benchmark rates are universally pointing lower and dividend expectations are in the early stages of their downfall (with the 2Q earnings season scheduled to start soon).

So, while we can certainly see some reprieve in the risk selloff (dollar bid) of the past weeks; the risk / reward balance is already leaning heavily.

Related : Discuss the Dollar in the DailyFX Forum , John’s Video : EURUSD and GBPUSD Positioned for Breakouts Ahead of ECB, BoE

Euro Dominant Trend May be Bearish but ECB Bias May Lean Bullish

For event risk this week, the European Central Bank’s (ECB) rate decision was undeniably the most heavily anticipated event on the docket. It is therefore fitting that the EURUSD has returned to the critical 1.3400 level (the mid-point of the 2010 to 2011 range) after having just recently slipping below the milestone. On the verge of an easily identifiable figure for the world’s most liquid currency; we have an easy catalyst to send the euro to a bullish or bearish run. However, the logic behind these scenarios may not be so easy to interpret as the techncials would suggest.

Identifying first the dominant theme, months of steady decline clearly puts the euro under the bear’s influence. The fundamental influence of a building financial and fiscal crisis in the region offers the tinder for the fire. That is the backdrop that we need to remember when we approach the analysis of this event. Even if the ECB holds rates (the most optimistic and hawkish of the reasonable scenarios); the steady ‘reward’ reading wouldn’t effectively offset the growing risks. Therefore, any bullish response to the either no change in the benchmark rate (now at 1.50 percent) and or no announcement as to an effort to revive bond purchases would play out quickly as the market returned to its monitoring of the crisis management. That said, the popular consensus is that the central bank will make some sort of dovish effort; so relief is easy to imagine.

Alternatively, the euro-bearish scenario comes with more elevated standards. Expectations of a 25 bp cut have backed off; but are still present. There is also heavy speculation that bond purchases will be announced. Meeting both points would likely weigh the euro. Should there by commentary to suggest steady efforts going forward, it will significantly deteriorate the risk/reward balance.

British Pound Has an Easier Time Pricing in BoE Rate Decision

Far less controversial is the Bank of England’s (BoE) meeting scheduled for the London session. The first of the two European policy decisions, this particular event should induce more volatility as the policy group has released few official guidelines for policy bearings at past meetings (they typically do not offer comments after meetings that end in no change). However, the past few statements have shown enough of a shift in sentiment and data has deteriorated sufficiently to lead the speculative masses to believe a revival of the bond purchasing program is in store. If this isn’t the case, then it could certainly leverage the pound to a meaningful rally. However, merely meeting expectations may not be enough to extend the currency’s already-impressive tumble this past month and a half. It comes does to commentary and the backdrop for risk trends.

Swiss Franc Fight Will Face Trouble in Euro’s ECB Reaction

Swiss authorities are unabashed euro-bulls. As long as the shared currency is under financial pressure, capital will naturally be attracted to the Swiss franc; which keeps the strain on the independent economy. While a drop in the yield potential of the Swissie’s primary counterpart is more of a speculative consideration (speculators have lost a lot of interest in EURCHF); euro selling elsewhere could still spill over to the key pair.

Japanese Yen: Officials Growing More Creative in Effort to Depreciate

Before Japanese officials resort to an outright trade war and proactively attempt to manipulate the Japanese yen to find some economic relief; they will try whatever other controversial effort they can to pull the currency down. An interesting one was the announcement that the government was extending a net $43 billion to the three largest banks to finance foreign takeovers – an type of one-off intervention effort.

Gold is More Focused on the Risk Aspect of the Euro Experience

Though every asset and trade is concerned with the balance of risk and reward; gold is one of those players that is far more reliant on one side of the balance: risk. As one of the most prominent safe havens and the key anti-currency; the ECB decision will carry limited impact here. The issue remains whether Euro financial trouble undermines a key currency and regional market, boosting the need for a new store of wealth.

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

ECONOMIC DATA

N ext 24 Hours

GMT

Currency

Release

Survey

Previous

Comments

7:00

CHF

Foreign Currency Reserves (SEP)

253.4B

Reserves may rise with balance sheet on SNB Peg on Sep 6th

7:15

CHF

Consumer Price Index (MoM) (SEP)

0.1%

-0.3%

Short term CPI may show first increase since may on SNB peg

7:15

CHF

Consumer Price Index (YoY) (SEP)

0.3%

0.2%

7:15

CHF

CPI - EU Harmonized (MoM) (SEP)

-0.6%

7:15

CHF

CPI - EU Harmonized (YoY) (SEP)

-0.3%

8:30

GBP

BoE Housing Equity Withdrawal (Q2)

-£6.0B

-£5.8B

Decrease in withdrawals may be due to low benchmark rates

8:30

GBP

Index of Services (MoM) (JUL)

-0.1%

-0.1%

British services sector could slow surprising 3MoM growth

8:30

GBP

Index of Services (3Mo3M) (JUL)

0.9%

0.5%

10:00

EUR

German Factory Orders n.s.a. (YoY) (AUG)

4.7%

8.7%

YoY German orders expected to grow weaker as global demand slows

10:00

EUR

German Factory Orders s.a. (MoM) (AUG)

0.0%

-2.8%

11:00

GBP

BOE Asset Purchase Target

200B

200B

BoE expected to keep policies steady, though could hint at additional easing

11:00

GBP

Bank of England Rate Decision

0.5%

0.5%

11:45

EUR

European Central Bank Rate Decision

1.5%

1.5%

Trichet’s last decision before Draghi could reveal a shift from focusing on price stability and on growth

12:30

CAD

Building Permits (MoM) (AUG)

-0.3%

-0.6%

Canadian demand falling slower

12:30

USD

Initial Jobless Claims (SEP 30)

410K

391K

Weekly claims data expected to increase; trades will be watching US NFPs

12:30

USD

Continuing Claims (SEP 24)

3725K

3729K

13:45

USD

Bloomberg Consumer Comfort (OCT 2)

-53

Index continues to trend lower

14:00

CAD

Ivey Purchasing Managers Index s.a. (SEP)

55

56.4

Canadian PMI shows slower recovery

14:30

USD

EIA Natural Gas Storage Change (SEP 30)

111

Storage may decrease as climate cools

22:30

AUD

AiG Performance of Construction Index (SEP)

32.1

Construction may follow permits lower

SUPPORT AND RESISTANCE LEVELS

CLASSIC SUPPORT AND RESISTANCE - 18 :00 GMT

Currency

EUR/USD

GBP/USD

USD/JPY

USD/CHF

USD/CAD

AUD/USD

NZD/USD

EUR/JPY

GBP/JPY

Resist 2

1.4050

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

1.3408

1.5617

77.07

0.9059

1.0448

0.9691

0.7632

103.34

120.37

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 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

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

13.8435

1.8577

8.0706

7.7845

1.3058

Spot

6.8429

5.5501

5.8480

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

1.3667

1.5738

77.62

0.9157

1.0537

0.9856

0.7753

105.07

121.77

Resist 1

1.3538

1.5678

77.35

0.9108

1.0493

0.9774

0.7693

104.20

121.07

Pivot

1.3471

1.5605

76.92

0.9037

1.0422

0.9727

0.7650

103.62

120.10

Support 1

1.3342

1.5545

76.65

0.8988

1.0378

0.9645

0.7590

102.75

119.40

Support 2

1.3275

1.5472

76.22

0.8917

1.0307

0.9598

0.7547

102.17

118.43

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

1.3634

1.5805

77.97

0.9220

1.0601

0.9886

0.7791

105.30

122.32

Resist. 2

1.3578

1.5758

77.74

0.9179

1.0563

0.9837

0.7751

104.81

121.83

Resist. 1

1.3521

1.5711

77.52

0.9139

1.0525

0.9788

0.7712

104.32

121.34

Spot

1.3408

1.5617

77.07

0.9059

1.0448

0.9691

0.7632

103.34

120.37

Support 1

1.3295

1.5523

76.62

0.8979

1.0371

0.9594

0.7552

102.36

119.40

Support 2

1.3238

1.5476

76.40

0.8939

1.0333

0.9545

0.7513

101.87

118.91

Support 3

1.3182

1.5429

76.17

0.8898

1.0295

0.9496

0.7473

101.38

118.42

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.
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/2011/10/06/Dollar_Facing_Two_High_Hurdles_Risk_Trends_and_Euro_Yield.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.