DailyFX | April 27 2012 11:26 EDT
The dollar was backed into a corner this past week, and a decision had to be made. Yet, despite the (dollar) favorable shift in tone and forecasts from the Fed as well as the disappointing round of data and headlines that dominated the headlines through the period, the break was decisively bearish.
Dollar Plunge Accelerates Despite Risk Implications of Weak GDP
The dollar was backed into a corner this past week, and a decision had to be made. Yet, despite the (dollar) favorable shift in tone and forecasts from the Fed as well as the disappointing round of data and headlines that dominated the headlines through the period, the break was decisively bearish. As we have seen many times before over the weeks, the resolved technical pattern could have simply turned out to be a false breakout and thereby stalled immediately after the technical push was made. Instead, the greenback took its divergence to the next level and mustered the greatest level of momentum amongst all of its most liquid counterparts. The dollar is defying the standard fundamental lines and underlying market conditions. Is it a leader amongst its counterparts or is this an errant deviation that will be hammered back into place?
To make a reasonable outlook for where we are going to head, we need to appreciate how significant the divergence has been to this point. The two highlights that have really made the dollar’s move remarkable were the not-so-subtle shift in the Fed’s tone as well as the weaker readings for US and global data. Not only does the Fed’s upgraded employment and inflation forecasts draw a favorable outlook for the money supply (the expansion of which was a key factor in the dollar’s tumble these past year), but European and Asian central banks have taken a more dovish tack to further shift the balance. Over the final trading session this past week, the US 1Q GDP reading rounded out a global round of disappointing developments with a 2.2 percent annualized reading that fell well short of expectations. Though, dollar traders should recognize that the disconnect was not specifically the dollar’s problem on this front as risk trends (the S&P 500) actually pushed to three week highs.
Given the path of risk trends themselves, the dollar’s slump doesn’t stray from expected roles. Rather it is the level of activity the currency has mustered that stands out. If general congestion on other currencies (Euro, sterling, yen) and assets (S&P 500, crude oil, Treasuries) hold next week, expect the dollar’s run to dry out quickly. Otherwise, a market-wide capital shift could keep the greenback running; but at that point we could better gauge its bearing. Just don’t expect May 4th NFP reading to be the decisive factor. It’s a Friday release and well-known trend.
Euro Drops Against All but Greenback after Spanish Downgrade, Data Pain
If our assessment of the Euro was isolated to EURUSD, it would have seemed the shared currency had defied gravity and advanced despite a swell of disappointing news the final 36 hours of this past trading week. Yet, if we adjust for the dollar’s exceptional weakness, we find that the Euro actually took a hit through the close – a modest hit, but one that fits the general conditions of the broader market (sparse follow through, limited volatility). Spain has taken up the torch for the region’s and will likely be the currency’s immediate fundamental problem for the near future. After the unexpected downgrade for the country (by Standard & Poor’s to BBB+), data showed that the jobless rate surged to 24.4 percent, inflation picked up and retail sales plunged. How bad of a state is the country really in? We’ll find out Monday morning with 1Q GDP.
Japanese Yen: Bank of Japan May have Rendered Itself Impotent
After the yen marked its trend-changing bearish break and entered its most aggressive-decline in years following Bank of Japan’s announcement that it had increased its asset purchases by 10 trillion yen in mid-February, the market has lived under the fear that the central bank was deciding the currency’s fate. Yet, the market should have been a little more skeptical considering prior to that incident the group had attempted and failed consistently to manipulate exchange rates. That doubt may have returned and the BoJ may once again unable to influence the yen crosses after this past week’s 10 trillion yen increase in purchase plans without effect. If it is back to risk trends, the yen is in trouble.
Australian Dollar Traders Should Manage Expectations for RBA Decision
Traders have been speculating on the outcome of the May RBA rate decision since Governor Glenn Stevens signaled that the central bank would cut if inflation cooled after the last meeting. Well, the 1Q CPI reading is in the books and the weaker-than-expected, 1.6 percent annual reading clearly sets the tone for 25bp slash to 4.00 percent on May 1st. Yet, look at what that certainty translated to in Aussie dollar price action. The currency shed 75 pips, but quickly returned to strength against the dollar afterwards. The market has fully priced in the next cut. Furthermore, swaps suggest that there is hearty speculation of a 50 bp cut – though it contrasts their general pace. Could a mere cut be bullish?
Canadian Dollar Standing Out from the Rate Crowd as Rate Hike Seen
Over the past few weeks, the Bank of Canada took a notably hawkish shift in its policy standing, Canadian data improved and the forecasts for the US economy suggested its recovery – though restrained – was stabilizing. All of this translates into a more attractive Canadian dollar. That has led to loonie strength against the dollar, euro and yen; but the currency is still bleeding against its higher-yield counterparts. That may soon change as rate swaps show a 46 percent probability of a 25 basis point hike next month – a stark contrast to expected RBA and RBNZ cuts.
Swiss Franc: Monitoring the SNB’s Worries for Signs of Action
It is easy to write off Swiss policy officials repeated warnings that their currency is overvalued and has to come down because they have stated as much for many months to no avail. However, the risk of action from the central bank grows with each day. The reality is that merely keeping the tide back on the EURCHF at 1.2000 is becoming costly. Furthermore, anchored that level, the central bank has no buffer room to sudden Euro-region shocks. From a technical perspective, Jordan is likely more comfortable in his Presidential confirmation. Enough to raise the floor?
Gold Advanced Four Days this Past Week, Friday Breaks Bear Trend
After briefly testing a break of a multi-year bull trend, gold went on to rally for four consecutive days through Friday. That is an impressive run, but it isn’t particularly remarkable this year – especially not when measured in progress. With Friday’s extension however, it looks like the short-term bear trend (which pushed the metal into a make-or-break situation) has faltered. Fundamentally, this run is supported by the dollar’s weakness and the ECB / BoJ lean towards additional stimulus. Yet, we can quickly turn this situation on its head if the dollar reverses.
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Next 24 Hours
Building Permits MoM (MAR)
Trade Balance (MAR)
NZ expected to report second consecutive monthly trade surplus
Trade Balance 12 Mth YTD (MAR)
TD Securities Inflation MoM% (APR)
A soft print could add to speculation of RBA rate cut on May 1
TD Securities Inflation YoY% (APR)
NBNZ Activity Outlook (APR)
Both gauges on the rise since start of 2012
NBNZ Business Confidence (APR)
Private Sector Credit MoM% (MAR)
Another variable to be considered by RBA
Private Sector Credit YoY% (MAR)
Money Supply M3 YoY (MAR)
Spain GDP (QoQ) (1Q P)
Downgrade and record jobless rate don’t stoke fear. Would an ongoing recession?
Spain GDP (YoY) (1Q P)
Euro-Zone M3 s.a. 3 mth ave. (MAR)
Eurozone inflation generally expected to continue to ease, though ECB has recently increased warnings of price pressures.
Euro-Zone M3 s.a. (YoY) (MAR)
Euro-Zone CPI Estimate (YoY) (APR)
Gross Domestic Product MoM (FEB)
Data to test BoC’s new projection of return to full-employment by 1Q 2013
Gross Domestic Product YoY (FEB)
Personal Income (MAR)
Spending expected to be slower in March amid weaker labor-market figures
Personal Spending (MAR)
PCE Deflator (MoM) (MAR)
Core PCE deflator is the Fed’s preferred gauge of inflation
PCE Deflator (YoY) (MAR)
PCE Core (MoM) (MAR)
PCE Core (YoY) (MAR)
Chicago Purchasing Manager (APR)
US regional activity indices showing signs of weakness
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--- Written by: John Kicklighter, Senior Currency Strategist for DailyFX.com
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