Dollar Sees Critical Surge Higher As S&P 500 Bull Trend Collapses

By John Kicklighter, Currency Strategist
  • Dollar Sees Critical Surge Higher as S&P 500 Bull Trend Collapses
  • Euro Performance Uneven as Greek PSI Fears Swell
  • Australian Dollar Hammered by Risk Trends, Not 4Q GDP Figures
  • New Zealand Dollar Traders Weigh the RBNZ Scenarios
  • Japanese Yen Puts in for Biggest Rally Since its Tumble Began
  • Swiss Franc Showing More Difference for Euro Link than Safe Haven
  • Gold Looking to Confirm Bear Trend as Dollar Firms

Dollar Sees Critical Surge Higher as S&P 500 Bull Trend Collapses

It’s difficult toappreciate the fundamental scope of the dollar’s rally thispast session from the Dow Jones FXCM Dollar Index or any individual pairalone. Sure, the Index rallied to a six-week high and the greenbackmanaged remarkable rallies against both the euro and Australiandollar (the most fundamentally-active and yield-intensivecurrencies respectively), but a full appreciation for thecurrency’s performance requires a market-wide analysis. Thegreenback rallied 0.7 to 1.1 percent against all of its liquidcounterparts with the exception of USDJPY. That is a remarkablemove for the single currency and the holdout of the FXmarket’s other preferred safe haven / funding currency shouldtell us what the impetus for the move was: risk aversion. There wasno missing the plunge from equities this past session.

The European equitybenchmarks posted the largest decline Tuesday, but it was the S&P 500’s 1.5 percent plunge (the deepest sinceDecember 8 th ) that stood out.Having developed an incredibly consistent bull trend since beforethe beginning of the year, this was a symbolic shift for broaderunderlying sentiment. A sustained unwinding of overwrought riskexposure would certainly play to the dollar’s advantage, butsentiment will either need to run under its own momentum orwe’ll need something to encourage the move along. In fact, wemay have difficulty leveraging the break into a definable trendthrough the immediate future. With the Greek PSI results dueThursday, the EU Ministers vote to release the rest ofGreece’s second rescue package Friday and NFPs also onFriday; market participants may be frozen in the fundamentalheadlights.

Euro Performance Uneven as Greek PSI Fears Swell

The euro was sharplylower against the yen and US dollar (a clear reflection of riskaversion to the safe haven contingent) this past session, but thecurrency would struggle to make any progress against the morerisk-sensitive counterparts (the Australian, New Zealand andCanadian currencies). There are two primary fundamental themes at play currently: inthe struggle of pairs like EURAUD we find that uncertainty in theEuropean financial situation carries as much weight as thetraditional risk trends tides. Were there any major, tangibledevelopments surrounding the regional crisis this past session? Notreally. Yet, the Financial media did its best to stir speculationabout possible, troubled outcomes for the Euro-region’sfinancial and sovereign issues. There were plenty of headlinesabout the private Greek bond holders that planned to hold out,while Irish and Portuguese issues with deficits were also popularfodder. That said, the latter issue is one for that won’tpresent an immediate risk for some time and the PSI results willhave confirmation Thursday. As for final 4Q GDP figures, there waslittle change thereby little surprise.

Australian Dollar Hammered by Risk Trends, Not 4Q GDP Figures

We have run through two of the Australian dollar’s meaningful fundamental drivers for this week. The RBA rate decision didn’t really alter the course of monetary policy going forward, but the market seems to have been hoping for a more definitive shift towards neutrality – in other words less scope for further rate cuts. However, Governor Glenn Stevens and crew left the door open to further cuts should domestic demand ease and expose softening inflation expectations. This maintenance of the dovish regime started to push the Aussie dollar down before its dive really kicked in with the risk aversion move on the day. With the 4Q GDP figures, we had an opportunity to add to the Aussie’s drop even as sentiment leveled off. However, the 0.4 percent reading (though half the forecast) wasn’t enough to shake the currency loss. Now on to jobs figures.

New Zealand Dollar Traders Weigh the RBNZ Scenarios

Even before this recentrisk aversion move kicked in, the kiwi dollar was under pressure.Leading the Aussie dollar (typically the most sensitive currency torisk trends thanks to its yield) is a feat. That may leave the NewZealand currency in a relatively oversold condition that the rightfundamental development can help exploit. Of course, if riskaversion picks back up in the coming session where it left off, arebound will be exceptionally difficult to encourage even with afundamental push from region’s top event risk: the RBNZ rate decision . Anything short of awarning to an upcoming rate hike would fall short in offsettingdeeper risk trends. Alternatively, if basic risk trends are flat,it would be ripe ground for the market to cover short-termspeculative shorts with the realization that the central bank plansto keep its rate competitively elevated.

Japanese Yen Puts in for Biggest Rally Since its Tumble Began

There was only onecurrency that managed to gain ground against theliquidity-favorite, US dollar – the Japanese yen . Having suffered amassive tumble across the board between February 2 nd and March 2 nd , the funding currencywas in a good position to generate a natural (if temporary)correction. With risk aversion underway, carry unwinding wouldreverse the flow of capital from the high yield currencies back tothe constant funding player. It’s in this anti-carry flowthat the yen would leverage its correction potential against itsfellow safe haven.

Swiss Franc Showing More Difference for Euro Link than Safe Haven

Just referencing the Euro and franc’s performance against most third party counterparts gives us a sense of where the fundamental guidance for the latter comes from. Despite the clout that the Swiss franc has enjoyed as a safe haven for the global capital markets over the decades, the currency is now more sensitive to Euro-Zone developments that pure sentiment trends. This link has always been there, but the SNB has certainly exacerbated its influence. Speaking of the central bank, foreign currency reserve figures for February are due in the upcoming session.

Gold Looking to Confirm Bear Trend as Dollar Firms

Last Wednesday’s tumble for gold has not only proven sticky, but we find the metal is extending its dive to fresh five week lows. Why is one of the market’s most renowned safe havens sliding with a distinct ‘risk off’ move on the day? In a simple answer: the US dollar. The metal is certainly a safe haven play, but its particular brand of risk aversion is the type that benefits from manipulation and stimulus. And, despite all the headlines pertaining to the Greek PSI, we really didn’t have any headway on rescue programs. That said, there was a real risk aversion move, and that led to clear gains for the US dollar. The US dollar is very often gold’s kryptonite.

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ECONOMIC DATA

N ext 24 Hours

GMT

Currency

Release

Survey

Previous

Comments

0:30

AUD

Gross Domestic Product (QoQ) (4Q)

0.7%

1.0%

Australian 4Q output expected to grow slower, additional easing may be unlikely

0:30

AUD

Gross Domestic Product (YoY) (4Q)

2.3%

2.5%

5:00

JPY

Coincident Index (JAN P)

93.4

93.6

Preliminary data showing mixed data

5:00

JPY

Leading Index (JAN P)

95

94

6:45

CHF

Unemployment Rate s.a. (FEB)

3.1%

3.1%

Swiss unemployment expected stable, inflation data key

6:45

CHF

Unemployment Rate (FEB)

3.4%

3.4%

8:00

CHF

Foreign Currency Reserves (FEB)

227.2B

National reserves still increasing

11:00

EUR

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

0.6%

1.7%

Expected to slow as exports demand decrease

11:00

EUR

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

-1.7%

0.0%

13:15

USD

ADP Employment Change (FEB)

210K

170K

Preliminary labor data not expected to shift markets before Friday’s NFPs

13:30

USD

Non-Farm Productivity (4Q F)

0.8%

0.7%

13:30

USD

Unit Labor Costs (4Q F)

1.2%

1.2%

20:00

USD

Consumer Credit (JAN)

$12.000B

$19.308B

Credit seeing improvement

20:00

NZD

Reserve Bank of New Zealand Rate Decision

2.50%

2.50%

RBNZ widely expected to hold rate as retail sales improve

21:45

NZD

Manufacturing Activity (4Q)

0.0%

New Zealand manufacturing may strengthen on higher demand

21:45

NZD

Manufacturing Activity Volume s.a. (QoQ) (4Q)

-1.4%

23:50

JPY

Gross Domestic Product Deflator (YoY) (4Q F)

-1.6%

-1.6%

Japanese GDP expected to continue drop, deflation continue to persist. 4Q data unlikely to move markets as BoJ reforms are for Jan, Feb

23:50

JPY

Nominal Gross Domestic Product (QoQ) (4Q F)

-0.3%

-0.8%

23:50

JPY

Gross Domestic Product (QoQ) (4Q F)

-0.2%

-0.6%

23:50

JPY

Gross Domestic Product Annualized (4Q F)

-0.6%

-2.3%

23:50

JPY

Bank Lending Banks ex-Trust (FEB)

0.7%

Credit growing moderately, should be helped by February reforms

23:50

JPY

Bank Lending incl Trusts (YoY) (FEB)

0.6%

23:50

JPY

Current Account Total (Yen) (JAN)

-¥320.0B

¥303.5B

Japanese trade data expected to continue drop, will be up to government for reforms

23:50

JPY

Adjusted Current Account Total (Yen) (JAN)

¥322.3B

¥752.3B

23:50

JPY

Current Account Balance (YoY) (JAN)

-151.3%

-74.7%

23:50

JPY

Trade Balance - BOP Basis (Yen) (JAN)

-Â¥145.8B

GBP

New Car Registrations (YoY) (FEB)

0.0%

Large purchases at standstill

SUPPORT AND RESISTANCE LEVELS

To seeupdated SUPPORT AND RESISTANCE LEVELS for the Majors, visit Technical Analysis Portal

To seeupdated PIVOT POINT LEVELS for the Majors and Crosses, visitour Pivot Point Table

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

9.2080

7.8165

1.3650

Resist 2

7.5800

5.6625

6.1150

Resist 1

14.3200

1.9000

8.5800

7.8075

1.3250

Resist 1

6.5175

5.3100

5.7075

Spot

12.9949

1.7899

7.6346

7.7630

1.2625

Spot

6.7829

5.6603

5.6944

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 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

1.3291

1.5862

81.61

0.9289

1.0093

1.0681

0.8266

107.55

128.60

Resist. 2

1.3252

1.5828

81.40

0.9261

1.0071

1.0647

0.8239

107.18

128.20

Resist. 1

1.3213

1.5793

81.18

0.9233

1.0048

1.0612

0.8211

106.81

127.79

Spot

1.3134

1.5725

80.75

0.9177

1.0003

1.0543

0.8156

106.06

126.99

Support 1

1.3055

1.5657

80.32

0.9121

0.9958

1.0474

0.8101

105.31

126.18

Support 2

1.3016

1.5622

80.10

0.9093

0.9935

1.0439

0.8073

104.94

125.77

Support 3

1.2977

1.5588

79.89

0.9065

0.9913

1.0405

0.8046

104.57

125.37

v

--- Written by: JohnKicklighter, 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 toJohn’s email distribution list, send an email with thesubject line “Distribution List” to jkicklighter@dailyfx.com .

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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/2012/03/07/Dollar_Sees_Critical_Surge_Higher_as_SP_500_Bull_Trend_Collapses.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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