Dollar Trades Fading QE Influence For Risk Aversion To Fuel Run

By John Kicklighter, Currency Strategist
  • Dollar Trades Fading QE Influence for Risk Aversion to Fuel Run
  • Euro Shaky with the ECB’s Lack of Hawkish Progress, Weak on Spanish Auction
  • Australian Dollar Takes Another Hit as Sentiment, Chinese Trade Weigh
  • Canadian Dollar Traders Finally Have a Clear Shot at Jobs Data
  • British Pound: Don’t Set Expectations too High for BoE Decision
  • Swiss Franc Growing Ever more Conspicuous a Threat to SNB
  • Gold Suffers a Second, Aggressive Drop as Global Stimulus Levels Off

Dollar Trades Fading QE Influence for Risk Aversion to Fuel Run

The fundamentals behind the dollar have had two good days of improvement, and the currency has certainly benefited from the unusual, positive outlook. Between an improved rate standing and revived risk trend consideration, can the greenback find a sustainable bull trend? That is a question that carries implications not just for the single currency but for speculative positioning across all assets in the global financial web. Tuesday evening, FX traders were running on the news that the Fed was not drawing up immediate plans to expand its stimulus effort – curbing expectations for a large buyer to float capital markets ever higher and stabilizing the unnatural decrease in value for the US currency through inflating the money supply. This certainly has deeper implications over time, but the volatility impact through the short-term was bound to be short (it will be some time before US rates really pick up). Another catalyst was needed to keep the US dollar moving: risk aversion.

Sentiment trends are a constant force in the currency market, but its influence waxes and wanes with the intensity of its change. In other words, to play to the dollar’s risk aversion appeal, we needed a deleveraging drive. That is what we found this past session. The S&P 500 (my favored benchmark for risk trends – especially since it seems to be outperforming other sentiment-sensitive barometers), notched its second largest daily loss this year in a move that pulled the index back below 1400 . Now, a step closer to truly provoking a true bear phase, market participants are forced to entertain a scenario where rapid deleveraging kicks in. To ensure that trend is engaged, we need a clear driver – so there is no ambiguity and the majority deems it time to book profit. This past session held the disappointing Chinese trade figures and IMS service sector activity report, but it was likely he combination of the Fed’s and ECB’s hold on support that really unnerved traders.

That said, closing the tap on two large buyers may not be enough to transition us from a market ‘levels off’ to one that unwinds. We need catalysts and volume to supply that . The NFPs is something of a lackluster draw on the volatility front and speculative interest will thin out for the extended holiday weekend. Without a panicked drive, we may have to wait until next week’s 1Q US earnings and Chinese GDP numbers.

Euro Shaky with the ECB’s Lack of Hawkish Progress, Weak on Spanish Auction

After the fireworks that followed the FOMC minutes, FX traders were no doubt tuned into monetary policy developments. As such, expectations for the ECB rate decision and President Draghi’s press conference were riding high… too high. At the previous meeting, the central bank took a meaningful change in course by suggesting financial conditions had stabilized and inflation was a growing concern. It was unlikely after such a distinct shift, that further progress would be made. That was indeed the case. Where the central bank chatter was a modest surprise on over extended expectations, the region’s financial health was an exposed point of contention. A Spanish bond auction sold only €2.59 billion in bonds maturing October 2016, barely meeting the minimum (we’ll have to see if the ECB bought in) and at significantly worse rates to the last auction of the same tenor. In the meantime, European Commissioner Rehn felt it a good time to suggest Portugal may need a ‘bridge’ in 2013.

Australian Dollar Takes Another Hit as Sentiment, Chinese Trade Weigh

With risk aversion kicking in, there was little doubt as to what direction a high-yield currency that is expected to face rate cuts in the near future would take. The Australian dollar dropped against both the primary safe haven set as well as fellow investment currencies Wednesday. Helping with additional fundamental fuel to the poor performance, Australia’s trade balance printed an unexpected deficit of A$480mln in February (the first back-to-back outflow in two years). Perhaps more concerning though was the report of the biggest trade deficit for China since 1989.

Canadian Dollar Traders Finally Have a Clear Shot at Jobs Data

Loonie traders will finally have a chance to trade local event risk with the chance of finding true volatility and follow through. Normally, the influence of the Canadian labor statistics is dampened by the release of the US NFPs (which are normally scheduled 30 minutes after the Canadian data hits). With the US data still on Friday (despite the holiday), we have a clear view to the employment change for March. The forecast of a 10,500 net addition and steady read on the 7.4 percent jobless rate offers decent opportunity for surprise.

British Pound: Don’t Set Expectations too High for BoE Decision

The markets have come down from their Fed high with the ECB helping to remind traders what an inline central bank decision really looks like. The Bank of England’s policy decision in the upcoming London session will likely stand as the epitome of a non-event. There is virtually no chance of a rate change and the last boost to the asset purchase program (their version of QE) still being worked out, there is unlikely to be any changes made. That said, the MPC doesn’t usually issue a statement after no change – so no guidance. Of course, we can always be surprised.

Swiss Franc Growing Ever more Conspicuous a Threat to SNB

Multi-month lows on EURCHF are growing stickier . And, given the SNB’s very public vow to keep a 1.2000 floor intact, the tension is palpable. The smaller the buffer to that fixed level, the greater the risk that a speculative swell can set off an epic market fight. It should be appreciated that there is no doubt a deep layer of stops for long positions set just below that unnaturally-determined figure, so even a temporary trip could cause a lot of damage. If those orders are hit, it would likely generate a swell that the central bank would take some time absorbing and overriding. If it becomes known that the SNB could falter in its effort, their ability to bully the market by threats alone will be permanently marred.

Gold Suffers a Second, Aggressive Drop as Global Stimulus Levels Off

Gold dropped another 1.5 percent Wednesday (following the previous day’s 1.9 percent tumble). That has drug the metal to its lowest close since January 9th. The dollar’s advance no doubt plays a role here. However, we could be seeing something more influential. With the Fed banishing QE3 speculation and ECB President Draghi talking about the possible need for tightening monetary reins, we are seeing the big players on the stimulus scene curbing their active effort to devalue currencies. And, ‘alternative store of wealth’ is a big selling point of gold…

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ECONOMIC DATA

Next 24 Hours

GMT

Currency

Release

Survey

Previous

Comments

2:00

JPY

Tokyo Avg Office Vacancies (%) (MAR)

9.15

Vacancies continue to rise

2:30

CNY

China HSBC Services PMI (MAR)

53.9

HSBC estimate weaker data

7:00

CHF

Foreign Currency Reserves (MAR)

224.9B

SNB reserves growing slower as Euro purchases slow; how bank using EUR reserves more impt

7:15

CHF

CPI (MoM) (MAR)

0.4%

0.3%

Swiss prices expected to decline further, though SNB actions may be limited

7:15

CHF

CPI (YoY) (MAR)

-1.1%

-0.9%

7:15

CHF

CPI - EU Harmonized (MoM) (MAR)

0.1%

7:15

CHF

CPI - EU Harmonized (YoY) (MAR)

-1.2%

8:30

GBP

Industrial Production (MoM) (FEB)

0.4%

-0.4%

British industries still weaker, will factor into BoE decisions later

8:30

GBP

Industrial Production (YoY) (FEB)

-2.1%

-3.8%

8:30

GBP

Manufacturing Production (MoM) (FEB)

0.1%

0.1%

8:30

GBP

Manufacturing Production (YoY) (FEB)

0.1%

0.3%

10:00

EUR

German Industrial Production (MoM) (FEB)

-0.5%

1.6%

Month-to-month data diverging from factory orders, long term weaker

10:00

EUR

German Industrial Production (YoY) (FEB)

0.3%

1.8%

11:00

GBP

BOE Asset Purchase Target

325B

325B

Bank of England expected to keep easing as domestic economy faces additional headwinds; room to ease becoming limited

11:00

GBP

Bank of England Rate Decision

0.50%

0.50%

11:30

USD

Challenger Job Cuts (YoY) (MAR)

2.0%

Not expected to move markets

12:30

CAD

Unemployment Rate (MAR)

7.4%

7.4%

Canadian labor expected to continue growth on US economy, commodity demand; rise largely seen as manufacturing driven

12:30

CAD

Net Change in Employment (MAR)

10.0K

-2.8K

12:30

CAD

Full Time Employment Change (MAR)

9.1

12:30

CAD

Part Time Employment Change (MAR)

-12

12:30

CAD

Participation Rate (MAR)

66.5

66.5

12:30

USD

Continuing Claims (MAR 24)

3345K

3340K

Weekly data continuing to show better numbers; NFP still in focus

12:30

USD

Initial Jobless Claims (MAR 31)

356K

359K

12:30

CAD

Building Permits (MoM)

1.5%

-12.3%

Supports construction-driven recovery in Canadian markets

14:00

CAD

Ivey Purchasing Managers Index s.a.

67

66.5

CA industries still strengthening

14:00

GBP

NIESR Gross Domestic Product Estimate

0.1%

Estimate may show that British economy near stalling levels

23:30

AUD

AiG Performance of Construction Index

35.6

Domestic construction falling

USD

ICSC Chain Store Sales (YoY)

4.1%

Retail spending still growing

GMT

Currency

Upcoming Events & Speeches

13:10

USD

Fed's Bullard Speaks on Economy

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 / 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

13.1813

1.8298

7.9516

7.7618

1.2719

Spot

6.7826

5.7501

5.9324

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

1.3096

1.5727

77.65

0.9464

1.0227

1.0620

0.8168

100.92

121.26

Resist. 2

1.3055

1.5689

77.49

0.9434

1.0203

1.0586

0.8142

100.59

120.94

Resist. 1

1.3014

1.5652

77.33

0.9405

1.0179

1.0552

0.8116

100.27

120.61

Spot

1.2931

1.5576

77.01

0.9345

1.0132

1.0484

0.8063

99.62

119.97

Support 1

1.2848

1.5500

76.69

0.9285

1.0085

1.0416

0.8010

98.97

119.32

Support 2

1.2807

1.5463

76.53

0.9256

1.0061

1.0382

0.7984

98.65

119.00

Support 3

1.2766

1.5425

76.37

0.9226

1.0037

1.0348

0.7958

98.32

118.67

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/2012/04/05/Dollar_Trades_Fading_QE_Influence_for_Risk_Aversion_to_Fuel_Run.html