Dollar Advances As The Dow Hits A New Four Year High⿦True Strength?

By John Kicklighter, Sr. Currency Strategist
  • Dollar Advances as the Dow Hits a New Four Year High…True Strength?
  • Australian Dollar Tumble has Follow Through Potential after RBA Cut
  • Euro Traders Take Note of Discord Amongst Rescue Regime, Look to Data
  • British Pound Posts a Brief Rally after Factory Activity Data
  • New Zealand Falling in Sympathy to Aussie, Despite Positive Risk Trends
  • Japanese Yen Takes a Hit Against All but the Highest Yielders
  • Gold Slips for the First Time in 5 Days, ETF Holdings Lowest Since Feb 1st

Dollar Advances as the Dow Hits a New Four Year High…True Strength?

Typically, the US dollar plays the distinct role in the currency market as the premier safe haven. Yet, in this past session, the Dow Jones Industrial Average managed a close at four-year highs while the Dow Jones FXCM Dollar Index printed its strongest performance (0.35 percent) since April 13th. Is this a sign of a fundamental shift in the dollar’s DNA? No. The US dollar has not made a miraculous shift to outperform when risk appetite and demand for yield are on the rise. Instead, unusual development is a reflection of tepid market conditions. Looking at measures of volatility (as measures of fear), we find that activity gauges for FX, equities, fixed income and commodities ticked higher; but they are firming slightly from multi-month or multi-year lows. In the meantime, larger ranges are still intact. Whether we refer to EURUSD or the even the Dow Jones Industrial Average, clear boundaries are still in place. Within these confines, it is easier to leverage volatility if it doesn’t threaten a trend.

When will we see drive with conviction? From a fundamental perspective, there are a few highlights on the upcoming docket that carry a moderate level of promise, but true market-moving potential is limited. Before we take note of those events on the docket, we should first set our frame of mind to those underlying drivers that could reasonably ramp up market-wide volatility and trend generation. Risk appetite trends that tap into the very flow of capital are always top billing but exceptionally hard to ignite. Regional financial fears seem to be inert while a ‘solid’ 1Q earnings season has failed to stimulate optimism and hope of higher returns going forward. And, if we want the dollar to perform individually would take a colossal shift in the dollar’s position in the risk spectrum – from absolute safe haven and low-yield funding candidate. Little chance.

With our expectations for the dramatic fundamental shift tuned to a reasonable channel, we can put the upcoming event risk is proper context. The top listing on the US docket is the ADP employment change report for April. This is the lead-in to Friday’s NFPs. The previous month’s BLS labor report delivered quite the surprise (120K versus 205K expected), yet EURUSD was little moved through that session despite a preceding series of hearty bearish momentum. On the speakers docket, we have Evans, Lacker and Tarullo scheduled deliver commentary.

Australian Dollar Tumble has Follow Through Potential after RBA Cut

The RBA delivered quite the surprise , and that is the only reason the Australian dollar was able to manage a significant decline (much less volatility). The consensus heavily favored a 25 bp cut and swaps were certain of the same move with a 30 percent probability given to a 50 bp cut. As such, the confirmed half-percent cut to the benchmark to 3.75 percent caught a significant contingent off guard. That larger cut was vital to the bearish follow through on the Aussie dollar after the release as the currency had already dropped significantly in the lead up to the release as the market’s speculative interested was leveraged by Governor Stevens after the last meeting and then by the CPI data that confirmed a cut was on. From here, whether we have a rebound or follow through on the deepening bear trend (take a look at AUDNZD versus AUDUSD) depends on risk trends. With the rate outlook still calling for more cuts and China slowing, a slide in sentiment will find a willing sacrifice.

Euro Traders Take Note of Discord Amongst Rescue Regime, Look to Data

In another lull for the Euro Zone’s financial crisis muckraking, officials don’t have to put on the cheerleading effort in an attempt to pacify the the markets. That has lead to increased dissonance amongst the policy making ranks. We have recently learned that Euro Zone Finance Minister head Jean Claude Juncker will step down from his post and has admitted that Germany’s influence over the rescue process was one of his points of displeasure. With the recent shift towards a growth-friendly approach (who can make tax revenue to pay deficits off in a recession?), it will be interesting to see if there is a greater rift. Further, Thursday’s ECB decision will be an interesting reflection on this concept as well. In the meantime, the German employment figures can offer some level of volatility. The biggest hit would be to erode confidence in the EZ leader.

British Pound Posts a Brief Rally after Factory Activity Data

It has been two days since GBPUSD called an end to its best bull run in two decades, and the pair has barely retraced its upswing. As history showed on the previous two examples of a 10-day run, there isn’t a precedence for an immediate and aggressive reversal just by virtue of the preceding upswing along. We need a catalyst to either revive gains or spark correction. The Manufacturing PMI for April released this past trading session was notable for its weakest reading this year, but not heavy enough. Credit figures due this session will likely fall short as well.

New Zealand Falling in Sympathy to Aussie, Despite Positive Risk Trends

Rate expectations for the New Zealand dollar are relatively modest, but they still represent a notable dovish / bearish shift for the Kiwi against the backdrop of a heavy Australian currency. The 6 bps of cumulative cuts expected from the RBNZ over the coming 12 months is the weakest reading for the series since the beginning of the year. The expectation for a rate cut at the next meeting is now hovering at 30 percent. In the upcoming Asian session, we have the release of the first quarter employment change and unemployment rate figures. Rate worth?

Japanese Yen Takes a Hit Against All but the Highest Yielders

It was an unusual day for the Japanese yen – and this currency’s performance further speaks to the strange conditions that prevailed Tuesday. With the S&P 500 advancing on the day, we saw the most of the yen crosses climb (the Japanese currency in other words fell) – that is except for the highest yielding currencies: the Australian and New Zealand dollars. We know what the disconnect was for the Aussie, but the kiwi certainly underperformed. If risk appetite trends were genuinely strong through the session, the crosses would have performed much better.

Gold Slips for the First Time in 6 Days, ETF Holdings Lowest Since Feb 1st

Gold posted its first loss in six trading days , but the correction was about as momentous as the preceding advance – lackluster. The 0.14 percent decline from the metal further lowers the one-week daily Average True Range or ATR (a measure of activity) to its lowest level since June of last year ($13.90). Gains and losses at this pace matter little. When we find a real trend, it will easily clear this congestion.

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**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar

ECONOMIC DATA

N ext 24 Hours

GMT

Currency

Release

Survey

Previous

Comments

1:30

JPY

Labor Cash Earnings YoY (MAR)

0.7%

2:30

CNY

HSBC Manufacturing PMI (APR)

48.3

HSBC PMI more weighted to private, smaller firms than official Chinese PMI

7:15

CHF

Retail Sales (Real) (YoY) (MAR)

1.1%

0.8%

Swiss economy picking up despite strong Franc

7:30

CHF

PMI Manufacturing (APR)

51.0

51.1

7:45

EUR

Italian PMI Manufacturing (APR)

47.1

47.9

Manufacturing in the largest Eurozone economies still in contraction

7:50

EUR

French PMI Manufacturing (APR F)

47.3

47.3

7:55

EUR

German Unemployment Change (000's) (APR)

-10K

-18K

German labor market remains robust, but may come under pressure as manufacturing continues to contract

7:55

EUR

German Unemployment Rate (s.a) (APR)

6.7%

6.7%

7:55

EUR

German PMI Manufacturing (APR F)

46.3

46.3

8:00

EUR

Eurozone PMI Manufacturing (APR F)

46.0

46.0

Final figure to confirm disappointing advance figure from last week

8:30

GBP

Net Consumer Credit (MAR)

0.3B

0.4B

UK fundamentals remain soft despite more hawkish BoE

8:30

GBP

Net Lending Sec. on Dwellings (MAR)

1.0B

1.2B

8:30

GBP

Mortgage Approvals (MAR)

48.0K

49.0K

8:30

GBP

M4 Money Supply (MoM) (MAR)

-1.9%

8:30

GBP

M4 Money Supply (YoY) (MAR)

-3.4%

8:30

GBP

M4 Ex IOFCs 3M Annualised (MAR)

2.5%

9:00

EUR

Italian PPI (YoY) (MAR)

3.0%

3.2%

9:00

EUR

Euro-Zone Unemployment Rate (MAR)

10.9%

10.8%

No respite in European labor markets as debt crisis resurfaces

11:00

USD

MBA Mortgage Applications (APR 27)

-3.8%

12:15

USD

ADP Employment Change (APR)

173K

209K

Comes before April nonfarm payrolls on Friday

13:45

USD

ISM New York (APR)

67.4

Manufacturing gradually being supplanted by consumer spending as main driver of US growth

14:00

USD

Factory Orders (MAR)

-1.5%

1.3%

17:00

EUR

Italian Budget Balance (APR)

-17.5B

Italy recently postponed balanced budget goal from 2013 to 2015

17:00

EUR

Italian Budget Balance (Year to date) (APR)

-28.2B

22:45

NZD

Unemployment Rate (1Q)

6.2%

6.3%

Slight improvement expected, but unlikely to lead to change in RBNZ”s position of holding rates

22:45

NZD

Employment Change (QoQ) (1Q)

0.5%

0.1%

22:45

NZD

Employment Change (YoY) (1Q)

0.9%

1.6%

22:45

NZD

Participation Rate (QoQ) (1Q)

68.3%

68.2%

GMT

Currency

Upcoming Events & Speeches

8:00

EUR

EU Finance Ministers Meet on Capital Requirements

12:00

USD

Fed’s Tarullo Speaks in New York

18:00

EUR

French Presidential Candidates’ Debate

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

13.1917

1.7882

7.8403

7.7616

1.2521

Spot

6.7493

5.6699

5.7637

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

1.3261

1.6162

82.33

0.9267

0.9990

1.0479

0.8277

108.30

132.21

Resist. 2

1.3226

1.6129

82.12

0.9241

0.9970

1.0450

0.8252

107.95

131.81

Resist. 1

1.3190

1.6096

81.91

0.9215

0.9949

1.0420

0.8228

107.61

131.42

Spot

1.3120

1.6030

81.49

0.9164

0.9908

1.0362

0.8179

106.91

130.63

Support 1

1.3050

1.5964

81.07

0.9113

0.9867

1.0304

0.8130

106.21

129.84

Support 2

1.3014

1.5931

80.86

0.9087

0.9846

1.0274

0.8106

105.87

129.44

Support 3

1.2979

1.5898

80.65

0.9061

0.9826

1.0245

0.8081

105.52

129.04

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/2012/05/02/Dollar_Advances_as_the_Dow_Hits_a_New_Four_Year_High_True_Strength.html