By John Kicklighter, Currency Strategist
  • Dollar Breaks Critical Support, Focus Returns to Risk Ahead of NFPs
  • Euro: An ECB Hold on Rates Won’t Provide Lift for Long Against Financial Crunch
  • British Pound Tumbles Despite Market’s Expectations for BoE Bond Purchases
  • Canadian Dollar Trades Prepare for Employment Data-based Volatility
  • Japanese Yen: Main Opposition Party Calls for More Active Yen Intervention
  • Swiss Franc: Record SNB Holdings a Sign of an Effective Floor?
  • Gold Manages a Slow Advance between Stimulus and Crisis Measures

Dollar Breaks Critical Support, Focus Returns to Risk Ahead of NFPs

The standard-bearers for sentiment improved through Thursday’s close despite a notable deterioration in the European financial situation. Regardless, an advance from both our favored gauge for risk appetite (S&P 500) and the greenback’s primary counterpart (the Euro); there was enough pressure on the extreme safe haven to push it back below the same key support that had stood as resistance through the final weeks of September. If we were to look at EURUSD, that technical boundary would be the 1.3400 level; and for the Dow Jones FXCM Dollar Index (ticker = USDollar ), the support was in the big 10,000 figure. From a purely technical approach; this reads like a false breakout that is transitioning into a reversal. Having forged an impressive rally against its fundamentally-troubled counterparts (like the euro) and more risk-attuned alternatives (like the Australian and New Zealand dollars); a correction seems logical. Yet, fundamentals are critical to this equation.

Relative positioning (references to overbought or oversold) are important to establishing the future bearing of any currency or market; but if we were to remove this historical perspective for a moment, we would be left with a fundamental picture that would still support the dollar. Until US interest rate expectations turn positive and competitive; the benchmark currency will be prized for its liquidity. So, while there are extenuating drivers that can encourage dollar volatility; fear will be its primary driver. That being the case, we are still monitoring the spread of the European crisis and what it means to the functioning of the financial system. In the past session, headlines suggested that Europe is facing its own ‘Bear Stearns’ situation in the quick descent of Dexia. While this particularly troubled bank may be bailed out or nationalized; the issue is far more pervasive and intrinsic. As the 3Q earnings season starts up next week, the drop in dividends and performance will remind us of that fact.

In the meantime, we are on the lookout for sentiment catalysts. The September NFPs figures could play its role for volatility. Expectations for a 55,000 increase in net payrolls last month following the initial August reading of no change will not meaningfully improve the economic forecast or investor optimism. It is habitual to expect the US labor report to generate high levels of volatility and sharp moves in price; but that hasn’t necessarily been the case recently. We have to remember why this indicator is so market-moving historically. As the Fed’s dual mandate is stable prices and full employment, this particular reading was seen as a guide for rate decisions. However, we know the central bank is on hold until mid-2013 and growth is clearly slowing; so the impact this reading will have will be naturally limited. Nevertheless, if there is a substantial surprise and it fits the prevailing sentiment trend (bullish / bearish); we can get a substantial Friday move out of it.

Related : Discuss the Dollar in the DailyFX Forum , John’s Video : Have EURUSD and GBPUSD Confirmed Reversal ahead of NFPs?

Euro: An ECB Hold on Rates Won’t Provide Lift for Long Against Financial Crunch

Heading into the ECB rate decision ; there was the expectation that the ECB would both introduce a covered bond purchasing program and cut rates. Like the dollar’s response to its own stimulus expansion a year ago; the impact of this twofold move would have been a significant burden on a currency that is seeing its risk rise and return fall. Therefore, there was a sense of relief when the central bank announced that it was pursuing the unorthodox route rather than go for rate cuts. Yet, if we consider the 40 billion euro covered bond purchase program, the unlimited 12 and 13-month loan programs and unlimited refinancing operations through July of next year together; it is arguable that this is far more stimulus than a cut. This is also a big boost for restoring capital market stability. We’ll see if it curbs Greek and Dexia fears very soon.

British Pound Tumbles Despite Market’s Expectations for BoE Bond Purchases

Where the ECB’s policy decision was on the hawkish side of expectations, the BoE’s stimulus shift was seemingly more aggressive than what the market had prepared for. The MPC announced they would purchase 75 billion sterling in over the coming four months alongside warnings that the global slowdown and spreading EU crisis were threats to the UK recovery. A quick retracement of much of the sterling’s losses suggests this wasn’t too shocking. However, the suggestion that the BoE is keeping an open mind to additional stimulus will keep a bearish tone.

Canadian Dollar Trades Prepare for Employment Data-based Volatility

Though the masses will be watching the US jobs report; those that want to see a more profound economic impact from data should keep a closer eye on the Canadian labor stats. The Canadian market and economy have been slower to fall under the influence of global troubles; but policy officials have been more vocal about pre-emptive efforts. This indicator could sync trader to policy officials (for better or worse).

Japanese Yen: Main Opposition Party Calls for More Active Yen Intervention

The Bank of Japan is scheduled to announce its policy decision during this session; but expectations for the event are passive. Having already adopted so many initiatives in the past months; the markets feel the central banks influence is naturally limited. There is certainly a possibility of another purchasing program; but it is unlikely. Even less likely is the announcement of a more active intervention - but it is still a possibility...

Swiss Franc: Record SNB Holdings a Sign of an Effective Floor?

The SNB updated its September balance sheet numbers; and the increase from 253 billion to a record 282 billion francs worth of assets speaks to the effort the central bank has put in to keep the currency from continuing its (economically) destructive course. Is it a sign of success that EURCHF has risen off that 1.20 level? We should save that assessment until the next market-wide euro-sell off.

Gold Manages a Slow Advance between Stimulus and Crisis Measures

Metal’s traders and safe haven seekers seem to be very weary of gold after its sharp correction this past month. Given the expansion of stimulus programs in the Euro Zone and UK (naturally value depressors for currencies) and the bombastic headlines surrounding the health of the financial markets; we would have expected the anti-currency safe haven to gain more ground. Caution is everywhere.

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ECONOMIC DATA

N ext 24 Hours

GMT

Currency

Release

Survey

Previous

Comments

5:00

JPY

Coincident Index (AUG P)

107.4

107.1

Preliminary leading index continues to show drop as new administration slow with growth policies

5:00

JPY

Leading Index (AUG P)

103.5

104.6

5:30

AUD

Foreign Reserves (AUD) (SEP)

43.8B

Foreign reserves may drop as investors sell risk for US dollars

5:45

CHF

Unemployment Rate (SEP)

2.8%

2.8%

Swiss unemployment expected stagnant, not expected to move markets

5:45

CHF

Unemployment Rate s.a. (SEP)

3.0%

3.0%

6:45

EUR

French Central Government Balance (euros) (AUG)

-105.0B

-86.6B

French data showing moderate recovery in trade, most likely due to less imports

6:45

EUR

French Trade Balance (euros) (AUG)

-5950M

-6460M

8:30

GBP

PPI Input n.s.a. (MoM) (SEP)

1.2%

-1.9%

Producer prices showing continued growth as low benchmark rates helping growth; BoE remains dovish to not impede any recovery efforts

8:30

GBP

PPI Input n.s.a. (YoY) (SEP)

17.1%

16.2%

8:30

GBP

PPI Output n.s.a. (MoM) (SEP)

0.2%

0.1%

8:30

GBP

PPI Output n.s.a. (YoY) (SEP)

6.2%

6.1%

8:30

GBP

PPI Output Core n.s.a. (MoM) (SEP)

0.1%

0.2%

8:30

GBP

PPI Output Core n.s.a. (YoY) (SEP)

3.7%

3.6%

10:00

EUR

German Industrial Production n.s.a. (YoY) (SEP)

6.4%

10.1%

German industries expected weaker on lower exports

10:00

EUR

German Industrial Production s.a. (MoM) (SEP)

-2.0%

4.0%

11:00

CAD

Participation Rate (SEP)

66.7

Canadian labor expected to improve in September on stronger domestic economy

11:00

CAD

Full Time Employment Change (SEP)

25.7K

11:00

CAD

Part Time Employment Change (SEP)

-31.2K

11:00

CAD

Unemployment Rate (SEP)

7.3%

7.3%

11:00

CAD

Net Change in Employment (SEP)

15.0K

-5.5K

12:30

USD

Average Weekly Hours All Employees (SEP)

34.2

34.2

US labor data may show improvement after President Obama’s jobs plan, though sustainability may be challenged

12:30

USD

Change in Non-farm Payrolls (SEP)

50K

0K

12:30

USD

Change in Private Payrolls (SEP)

90K

17K

12:30

USD

Change in Manufacturing Payrolls (SEP)

-3K

-3K

12:30

USD

Unemployment Rate (SEP)

9.1%

9.1%

12:30

USD

Average Hourly Earnings (MoM) (SEP)

0.2%

-0.1%

12:30

USD

Average Hourly Earnings (YoY) (SEP)

1.9%

1.9%

12:30

USD

Change in Household Employment Survey (SEP)

331

14:00

USD

Wholesale Inventories (AUG)

0.6%

0.8%

Wholesale assets decrease on less orders

19:00

USD

Consumer Credit (AUG)

$7.500B

$11.965B

Consumer credit may tighten as banks retain capital

USD

ICSC Chain Store Sales (YoY) (SEP)

4.6%

Store sales growing at steady pace

GBP

New Car Registrations (YoY) (SEP)

7.3%

Registrations improve despite slower economy

JPY

Bank of Japan Rate Decision

0.1%

Bank of Japan expected to hold rates steady, though commentary will hint at any monetary policy support for new government

GMT

Currency

Upcoming Events & Speeches

14:45

USD

Fed's Lockhart Speaks on Economy in Atlanta

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

1.0785

1.0750

0.9020

112.00

126.50

Resist 1

1.3900

1.5775

81.50

0.9250

1.0675

1.0375

0.8750

106.50

123.00

Spot

1.3434

1.5442

76.70

0.9210

1.0376

0.9744

0.7716

103.05

118.45

Support 1

1.3150

1.5300

76.35

0.8500

1.0150

0.9400

0.7500

102.00

116.00

Support 2

1.3025

1.5180

75.50

0.7800

0.9950

0.9125

0.6850

100.00

114.00

CLASSIC SUPPORT AND RESISTANCE

EMERGING MARKETS & 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

13.4443

1.8472

7.9419

7.7813

1.2989

Spot

6.8149

5.5415

5.8291

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

1.3585

1.5635

76.97

0.9367

1.0522

0.9857

0.7790

103.96

119.97

Resist 1

1.3509

1.5539

76.84

0.9289

1.0449

0.9801

0.7753

103.50

119.21

Pivot

1.3376

1.5405

76.70

0.9237

1.0410

0.9711

0.7689

102.60

118.09

Support 1

1.3300

1.5309

76.57

0.9159

1.0337

0.9655

0.7652

102.14

117.33

Support 2

1.3167

1.5175

76.43

0.9107

1.0298

0.9565

0.7588

101.24

116.22

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

1.3653

1.5637

77.53

0.9371

1.0523

0.9930

0.7868

104.95

120.28

Resist. 2

1.3598

1.5589

77.32

0.9331

1.0486

0.9883

0.7830

104.48

119.82

Resist. 1

1.3543

1.5540

77.11

0.9291

1.0449

0.9837

0.7792

104.00

119.36

Spot

1.3434

1.5442

76.70

0.9210

1.0376

0.9744

0.7716

103.05

118.45

Support 1

1.3325

1.5344

76.29

0.9129

1.0303

0.9651

0.7640

102.10

117.53

Support 2

1.3270

1.5295

76.08

0.9089

1.0266

0.9605

0.7602

101.62

117.07

Support 3

1.3215

1.5247

75.87

0.9049

1.0229

0.9558

0.7564

101.15

116.61

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/2011/10/07/Dollar_Breaks_Critical_Support_Focus_Returns_to_Risk_Ahead_of_NFPs.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.