Dollar Suffers Biggest Hit Since In Seven Weeks As Risk Perks Up

By John Kicklighter, Currency Strategist
  • Dollar Suffers Biggest Hit Since in Seven Weeks as Risk Perks Up
  • Australian Dollar Rallies after Employment Boost, Awaits Chinese GDP
  • Japanese Yen Volatility Belongs to Carry, Trend to BoJ Stimulus Pressure
  • Euro: With Global Sentiment Steadying, EU Crisis Fears Subside
  • British Pound Strength Should be Monitored Through EURGBP
  • Swiss Franc: SNB has a Distinct Interest in Risk Trends, Global Stimulus
  • Gold Gains Serious Traction Against Dollar, Struggles Against Aussie Dollar

Dollar Suffers Biggest Hit Since in Seven Weeks as Risk Perks Up

Though the dollar didn’t stick to its correlation with risk trends while sentiment waned through the first half of this week, it certainly did react as capital markets came roaring back these past 48 hours. The Dow Jones FXCM Dollar Index put in for its worst one-day tumble (0.57 percent) since February 23 rd and subsequently found itself at the threshold of a new bear trend. This is a concerning position for the benchmark currency to be in considering its propensity to leverage its reaction to ‘risk off’ scenarios and the notable trouble it had in overtaking its 10,100 range high over the past six months. Now that we find the dollar has discounted much of the very early, hawkish Fed policy expectations that were priced in through previous weeks, the rebound in the currency’s safe haven role looks perfectly timed to cause more trouble than benefit.

Monitoring risk trends should be a primary concern for all traders regardless of their market, and especially so for those involved with the majors. For risk guidance, we saw the S&P 500 reverse half of the loses over its five-day decline through Tuesday that set the tone for an underlying trend change. Through the past session, the catalysts for ‘risk on’ came through multiple sources. Heading into this week, concerns had built up that US corporate earnings would slow to their weakest levels since 2009 – though they would generally expand to new highs. This seems to have set the bar remarkably low, and the better-than-expected reports from Alcoa and Google have helped to retrace some of those negative expectations. Another outside catalyst is the moderation of fear surrounding the Euro Zone financial troubles. Fundamentally, the situation has not changed dramatically, but the drop in important sovereign debt yields (Spain and Italy) helps set the speculative tone.

The catalyst with potentially the most far-reaching and persistent influence on sentiment, however, are stimulus expectations. There were mild murmurs through the past trading day about QE3 looking more likely (likely in the wake of comments made by Fed members Yellen and Dudley), but the consensus seems generally set in winding down the expansive stimulus belief. If there were a means to boost support, it would likely come through a program more like the recent ‘Operation Twist’-style effort where the balance sheet is held steady but the portfolio composition is changed. That said, the focus has seemed to move beyond a mere reaction to Fed efforts only. In the absence of support from the world’s largest central bank, support from the Chinese, Euro Zone and Japanese groups have stepped in. Whose devaluing the currency now…

Australian Dollar Rallies after Employment Boost, Awaits Chinese GDP

The Aussie dollar was the stand out performer Thursday against the backdrop of strong risk appetite sentiment. Positive risk trends plays an influential role for this currency in particular as its sensitivity to rate changes has been leveraged through a deteriorating interest rate forecast. We would surprisingly see an improvement on that front as well however this past session. Following the surprising jump in employment growth for the month of March (44,000 jobs added), the 12-month rate forecast jumped 10 bps up from the two-month low (94 bps) set just the previous day. Further for risk trends, the strong Chinese lending figures would also boost the positive sentiment towards the currency. As a guide for those looking for the fundamental catalysts for the Aussie dollar, there are three themes that can be followed through three different pairs. The risk trends are best seen in AUDJPY. The Chinese economic influence shows through better in AUDUSD. And, rate forecasts show in AUDNZD.

Japanese Yen Volatility Belongs to Carry, Trend to BoJ Stimulus Pressure

Policy officials in Japan continue to do their best to taking the currency down – though this has very little influence on price action. Where the yen has found relief is through risk appetite trends itself. With the rebound in speculative interests over the past 48 hours, the carry trade interest has firmed up. Of course, those pairs with the larger carry differential (AUDJPY, NZDJPY) have enjoyed the larger upside swing; yet they will also be the most sensitive to big swings back and forth. If this risk rebound proves solid and progressive, the BoJ will find relief in the pressure to further expand stimulus. Yet, if we fall back into a ‘risk off’ scenario, the central bank will be scrambling again.

Euro: With Global Sentiment Steadying, EU Crisis Fears Subside

Have fundamentals improved for the Euro? Not really. However, as we have seen many times before, a positive turn in sentiment tends to cast the shared currency in a positive light and overshadows the fears that the FX market would otherwise dwell on. For an objective review of the developments that matter to the region’s underlying fundamental health, we start off on the government bond front. Italy sold €4.88 billion in debt (below the €5 billion maximum and with some maturities that fall outside the LTRO coverage), to relatively modest increases in yields – modest compared to the pained Spanish auction earlier this week. Meanwhile IMF head Lagarde stated that Spain shouldn’t be compared to any of the other periphery EZ countries that have sought bailouts and ECB member Paramo further charged speculation the SMP program is revived.

British Pound Strength Should be Monitored Through EURGBP

We’ve seen a lot of volatility in the sterling pairs, but much of this activity can be attributed to the cross currency rather than the pound. While the pound can take the role of a safe haven or yield currency given its middle-of-the-road benchmark, its intrinsic strength has been relatively unmoved recently. To see a true representation of strength for this currency specifically, a good read is EURGBP to monitor crisis spread.

Swiss Franc: SNB has a Distinct Interest in Risk Trends, Global Stimulus

The Swiss franc has appreciated alongside the Euro when we measure its performance against the yen or US dollar. But the focus for traders and policy officials when it comes to this pair remains on EURCHF. And, on that front, we have seen no meaningful progress to offer relief for SNB officials looking to maintain the integrity of the 1.2000 level they vowed to defend. In the changing seas of risk appetite trends, we see a lot of activity for yen crosses and dollar-based pairs; but the SNB is no doubt carrying high hopes for a risk recovery to usher the euro higher.

Gold Gains Serious Traction Against Dollar, Struggles Against Aussie Dollar

That test of the multi-year rising trendline proved influential for gold. The metal has put in for another impressive rally this past session to expand on raise the tally to a 68 point run. However, what has helped drive the commodity higher? A prime factor here is the US dollar’s remarkable weakness. However, outside of that drive, the drive has been relatively weak. In fact, if we look at gold in Australian dollar terms (which itself has capitalized on positive risk trends), we find that gold actually closed slightly lower on the day.

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ECONOMIC DATA

N ext 24 Hours

GMT

Currency

Release

Survey

Previous

Comments

2:00

CNY

Industrial Production YTD (YoY) (MAR)

11.3%

11.4%

Stable rate of industrial production showing that China could see soft landing

2:00

CNY

Industrial Production (YoY) (MAR)

11.5%

21.3%

2:00

CNY

Fixed Assets Inv Excl. Rural YTD (YoY) (MAR)

20.8%

21.5%

Investments still strong

2:00

CNY

Real GDP YTD (YoY) (1Q)

8.4%

9.2%

GDP falling towards 7.0% target as economy cools

2:00

CNY

Real GDP (QoQ)(1Q)

1.9%

2.0%

2:00

CNY

Real GDP (YoY) (1Q)

8.4%

8.9%

2:00

CNY

Retail Sales YTD (YoY) (MAR)

14.8%

14.7%

Domestic consumers still spending, though government still targeting inflation

2:00

CNY

Retail Sales (YoY) (MAR)

15.0%

18.1%

6:00

EUR

German CPI (MoM) (MAR F)

0.3%

0.3%

German inflation may give more scope for easing, monetary support

6:00

EUR

German CPI (YoY) (MAR F)

2.1%

2.1%

6:00

EUR

German CPI - EU Harmonised (MoM) (MAR F)

0.4%

0.4%

6:00

EUR

German CPI - EU Harmonised (YoY) (MAR F)

2.3%

2.3%

8:30

GBP

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

1.4%

2.1%

British input prices dropping, may put less pressures on consumer prices

8:30

GBP

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

0.5%

0.6%

8:30

GBP

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

3.5%

4.1%

8:30

GBP

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

0.2%

0.5%

8:30

GBP

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

2.6%

3.0%

8:30

GBP

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

4.8%

7.3%

9:00

EUR

Italian CPI NIC Incl Tobacco (YoY) (MAR F)

3.3%

3.3%

Italian inflation expected stable, data may not move markets

9:00

EUR

Italian CPI NIC Incl Tobacco (MoM)(MAR F)

0.5%

0.5%

9:00

EUR

Italian CPI EU Harmonized (MoM) (MAR F)

2.5%

2.5%

9:00

EUR

Italian CPI EU Harmonized (YoY) (MAR F)

3.8%

3.8%

12:30

USD

CPI Ex Food & Energy (MoM) (MAR)

0.2%

0.1%

US headline inflation expected to weaken somewhat on drop in energy prices, could allow for easing

12:30

USD

CPI Core Index s.a. (MAR)

227.907

12:30

USD

CPI n.s.a. (MAR)

229.327

227.663

12:30

USD

CPI (YoY) (MAR)

2.7%

2.9%

12:30

USD

CPI Ex Food & Energy (YoY) (MAR)

2.2%

2.2%

12:30

USD

CPI (MoM) (MAR)

0.3%

0.4%

13:55

USD

U. of Michigan Confidence (APR P)

76.5

76.2

Preliminary April number still showing improvement, though Fed still focused on labor

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

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/2012/04/13/Dollar_Suffers_Biggest_Hit_Since_in_Seven_Weeks_as_Risk_Perks_Up.html