Dollar’s Impressive Breakout Needs Follow Through – Risk Trends?

By John Kicklighter, Currency Strategist
  • Dollar’s Impressive Breakout Needs Follow Through – Risk Trends?
  • Euro Traders Hungry for FOMC Minutes-Like Volatility from ECB
  • Australian Dollar Shudders on RBA Rate Cut Warning, Not That Surprising
  • Japanese Yen: Long-Term Decline Paused by Short-Term Risk, JGB Boost
  • British Pound May Find a Sizable Boost if Services as Strong as Construction
  • New Zealand Dollar: Does the IMF’s Assessment of More Room for Cuts Matter?
  • Gold Tumbles Across the Board as FX Devaluation on Hold

Dollar’s Impressive Breakout Needs Follow Through – Risk Trends?

Sometimes the absence of a fundamental development can have a greater impact than its manifestation on the newswires. Clearly, a large enough segment of the currency market was expecting commentary on fresh Fed stimulus from the FOMC minutes because when it failed to show, the dollar posted an impressive rally. In fact, the Dow Jones FXCM Dollar Index (ticker = USDollar ) put in for its best daily showing in nearly a month with a 0.8 percent rally. If the magnitude of the index doesn’t convince you, the consistency of its gains across the majors and the meaningful technical progress that was made on various pairs should. Perhaps the most conspicuous showing was from EURUSD which called an end to a three-week rising trend channel with a dramatic break below 1.3300.

The question that should be asked now is whether this volatile turn is a true trend shift with immediate momentum potential to back a meaningful drive. When we approach the assessment from that angle, the scenario is not as bullish and convincing as recent volatility has suggested . The turning point for the greenback over the past 24 hours was hard to miss. Minutes after the Fed released the minutes of its last monetary policy meeting, the currency started its run. The fuel for the move arises from preconceptions by high profile market participants (Goldman Sachs among others) who were expecting the group to satisfy speculation that there would be some kind of confirmation that another round of easing would be just around the corner. Nothing of the sort was found in the text. In fact, the statement noted that there was no need for further loosening unless growth slowed. In the meantime, growth was said to be improving, labor markets firmed and housing was starting to recover.

We have seen speculators become stimulus addicts – rallying capital markets when their hopes for additional government buying is fulfilled and deleveraging when opportunities for further injections are missed. However, we should note something interesting from this particular neutral outcome: where the dollar held onto its gains, the S&P 500 (as a measure of risk appetite) regained its losses. For the greenback, curbing stimulus expectations undermines the currency’s funding status; but it doesn’t make it a high-yielder. We need risk aversion to add momentum.

Euro Traders Hungry for FOMC Minutes-Like Volatility from ECB

Fresh off the volatility following the FOMC minutes, it shouldn’t surprise anyone that the FX ranks may be leveraging their expectations for a similar level of activity to follow the ECB rate decision. However, we should run through the tacit market consensus to deduce whether we will indeed garner similar levels of excitement. With the FOMC minutes, there was a significant argument arising to contrast the consensus for no change to the neutral stance the group projected. With the ECB, we are once again overlooking the benchmark rate (which will almost certainly remain unchanged) to gauge the time frame for the next move. At the last meeting, President Draghi was surprisingly hawkish with suggestions that the economy was firming, financial troubles were past and inflation could become a problem sooner rather than later. Since that last press conference, nothing has exploded – but we haven’t had robust recovery signs either. Expectations are variable and he likely remains neutral.

Australian Dollar Shudders on RBA Rate Cut Warning, Not That Surprising

It’s ironic that the minutes of the Fed meeting should be market-moving than the actual rate decision for the RBA. That is the power of market positioning and expectations. For Aussie dollar traders, there was a notable segment of speculators projecting a rate cut against economists’ expectations (overnight swaps had the probability set at around 35 percent prior to the release). In fact, rates were held unchanged, and the Aussie popped for it. But bears didn’t run back up too far. Governor Stevens hinted that a cut was likely if 1Q CPI offered greater scope.

Japanese Yen: Long-Term Decline Paused by Short-Term Risk, JGB Boost

The yen crosses certainly reflected some level of the volatility and risk aversion that the dollar amplified in the wake of the FOMC decision, but there was a clear lack of progress comparatively. This comparison between the dollar’s advance and relatively restrained progress of carry unwind tells us the deferment of QE3 doesn’t necessarily spell market-wide risk aversion. That said, a bigger risk aversion move is a constant threat to medium to long-term depreciation potential for the Japanese currency. Another complicating factor: rising JGB rates.

British Pound May Find a Sizable Boost if Services as Strong as Construction

We are starting to get a good sense of what the UK’s economy was looking like through the first quarter. After a 10-month high in the March manufacturing PMI reading and 21-month high from the construction activity survey for the same period, we now await the service sector gauge. This represents the largest segment of the UK economy so a significant deviation from the previously released data can undermine building optimism that the austerity / growth balance will pull in Prime Minister Cameron’s favor and make the pound uniquely stable.

New Zealand Dollar: Does the IMF’s Assessment of More Room for Cuts Matter?

There weren’t any official central bank announcements from the RBNZ this past 24 hours, but the IMF did weigh in. In its annual review, the fund suggested that the central bank had the capacity to lower rates further if export demand faded or global financial issues derailed its “modest” recovery. These are discouraging words, but do they boost the threat of a dovish move on the central bank’s part? Not really. Governor Bollard is notorious for his hawkish bias and general transparency (if last minute). That said, his term does expire this year…

Gold Tumbles Across the Board as FX Devaluation on Hold

With the greenback on the rise, gold found itself retreating. However, this was more than just a case of direct valuation as the precious metal fell heartily against most of its counterparts. With the Fed’s decision not to pursue plans for further stimulus, the world’s most aggressive printer is remaining firmly on the breaks and preventing a wholesale search for alternative stores of value outside of the traditional fiat assets. We haven’t dropped through serious support yet, but the risk rises if the rest of the world shows the stimulus binge is coming to an end.

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ECONOMIC DATA

N ext 24 Hours

GMT

Currency

Release

Survey

Previous

Comments

1:30

AUD

Trade Balance (AUD) (FEB)

1100M

-673M

Australian trade balance may return to yearly highs as CN, NZ demand still strong

7:45

EUR

Italian PMI Services (MAR)

44.4

44.1

European services industries relatively flat; manufacturing data continues to be in play

7:50

EUR

French PMI Services (MAR F)

50

50

7:55

EUR

German PMI Services (MAR F)

51.8

51.8

8:00

EUR

Euro-Zone PMI Services (MAR F)

48.7

48.7

8:00

EUR

Euro-Zone PMI Composite (MAR F)

48.7

48.7

May be pressured by weak manufacturing PMIs

8:00

EUR

Italian Deficit to GDP (YTD) (4Q)

4.3%

Deficit helped by Monti austerity

8:30

GBP

Official Reserves (Changes) (MAR)

$746M

Reserve assets stable

8:30

GBP

PMI Services (MAR)

53.4

53.8

Services following construction lower; sectors usually first to decline in recession

9:00

EUR

Euro-Zone Retail Sales (MoM) (FEB)

-0.2%

0.3%

Retail sales still showing consumer reluctance to spend

9:00

EUR

Euro-Zone Retail Sales (YoY) (FEB)

-1.1%

0.0%

10:00

EUR

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

-5.5%

-4.9%

MoM factory orders still showing improvement on spending, though still weaker than last year

10:00

EUR

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

1.4%

-2.7%

11:00

USD

MBA Mortgage Applications (MAR 30)

-2.7%

Weekly data showing effects of higher yields during last month

11:45

EUR

European Central Bank Rate Decision

1.00%

1.00%

Expected to hold; ECB Monti’s commentary will drive markets as sovereign debt still problem.

12:15

USD

ADP Employment Change (MAR)

200K

216K

Data may change Friday’s NFP perceptions

14:00

USD

ISM Non-Manufacturing Composite (MAR)

56.9

57.3

US services could moderate after sharp recovery

14:30

USD

DOE U.S. Crude Oil Inventories (MAR 30)

7102K

Primary crude and gasoline levels continuing to growing, may support downtrend in major energy prices

14:30

USD

DOE Cushing OK Crude Inventory (MAR 30)

1043K

14:30

USD

DOE U.S. Distillate Inventory (MAR 30)

-711K

14:30

USD

DOE U.S. Gasoline Inventories (MAR 30)

-3537K

14:30

USD

DOE U.S. Refinery Utilization (MAR 30)

2.30%

GMT

Currency

Upcoming Events & Speeches

15:00

USD

Fed's Williams Speaks in San Francisco

15:55

CAD

Bank of Canada's Boivin Speaks in Toronto

SUPPORT AND RESISTANCE LEVELS

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

To see updated PIVOT POINT LEVELS for the Majors and Crosses, visit our Pivot Point Table

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

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

12.7834

1.7823

7.7522

7.7655

1.2557

Spot

6.6468

5.6251

5.7242

Support 1

12.5000

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

1.3366

1.6027

83.80

0.9206

0.9996

1.0426

0.8279

111.07

133.30

Resist. 2

1.3331

1.5993

83.57

0.9181

0.9976

1.0395

0.8253

110.71

132.90

Resist. 1

1.3296

1.5959

83.34

0.9156

0.9957

1.0364

0.8228

110.34

132.50

Spot

1.3227

1.5891

82.87

0.9106

0.9917

1.0302

0.8176

109.62

131.69

Support 1

1.3158

1.5823

82.40

0.9056

0.9877

1.0240

0.8124

108.90

130.88

Support 2

1.3123

1.5789

82.17

0.9031

0.9858

1.0209

0.8099

108.53

130.48

Support 3

1.3088

1.5755

81.94

0.9006

0.9838

1.0178

0.8073

108.17

130.08

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

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Original Article: http://www.dailyfx.com/forex/fundamental/daily_briefing/session_briefing/daily_fundamentals/2012/04/04/Dollars_Impressive_Breakout_Needs_Follow_Through_Risk_Trends.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.