Dollar’s Week Starts with a Potential Fiscal Crisis, Ends with NFPs
The dollar and underlying risk trends ended the week under extraordinary duress – as they should. The deficit impasse that the markets have been ringing their hands over for the past few weeks is now heading into the final stretch with two days of market down-time to shorten the trading calendar. Through a tumultuous final 24 hours of the week, the Dow Jones FXCM Dollar Index (ticker = USDollar) managed yet another record low close (at 9,346) after carving out an exceptionally volatile day. The primary catalysts for the greenback at this point are well known; but their respective outcomes are wholly unpredictable. As we head into a week where both the US budget deadline and non-farm payrolls stand out on the docket, one thing is certain: we are in for incredible volatility.
Without doubt, the most prominent concern for those trading the dollar, equities, commodities, bonds or any other asset is whether the US government can find a compromise on its budget policy by the Tuesday deadline. According to the Treasury, the country will likely fall short on its payments come August 2nd after exhausting all of their short-term facilities. Through Friday’s market close, the Republican-led House of Representatives managed to win enough votes to pass the Boehner-led bill only to see it immediately shot down when it was brought up to vote in the Senate. Debate is expected to continue over the weekend; but there seems to be little headway in compromise. In the event that Tuesday passes without a solution; it has been suggested that the timeline can be pushed back a few days with help from the Fed and Treasury. That said, the confidence impact such a move would have on capital markets and credit ratings would certainly leverage the likelihood of a downgrade. If the markets open Monday without an agreement on the table, volatility will swell as investors look to retreat to safety (a problem given US Treasuries and money market funds usually fill that role). And, should this end with an air of ambiguity (perhaps just a debt ceiling increase, or a flimsy deficit plan); the relief will be seen for capital markets but the dollar will almost certainly tumble as its reserve prospects dim.
There is little doubt as to what the headline concern will be going forward; but there will be further event risk to follow the debt wave next week. Coming in at second place, we have the July non-farm payrolls. This particular reading will be colored by the unexpectedly weak 18,000 reading from June, the exceptionally weak 0.1 percent increase in personal consumption reported with the 2Q GDP figures and building stubborn rumors of QE3. Is a third quantitative easing program any more probable now than it was the day after its expiration – absolutely.
Euro Docket Heavy with EU Crisis, ECB Decision, Italian GDP on Deck
If we rolled back the clock two weeks, the financial headlines were dedicated to the European Union’s sovereign debt troubles. Given the lack of coverage we have seen recently, some would assume that the EU’s aggressive program to stabilize the region (a second bailout program for Greece, lower rates and longer maturities on rescue funds, the ability of the EFSF to recapitalize banks as well as purchase government bonds on the secondary market) has solved the problem. Yet, the more probable scenario is that the focus has shifted over to the dollar’s financial problems and thereby leveled the playing field with the greenback’s most appropriate reserve alternative. This will continue to be the case in the coming week as the dollar faces a definitive countdown. Nevertheless, we should keep a close eye on developments. Further downgrades are an ongoing threat – especially after Spain was put on review by Moody’s this past Friday. We will finally see an economic review on whether troubles are spreading to the EU core with the Italian 2Q GDP figures. And, the ECB will indicate whether they will exacerbate the problem.
British Pound Will Find Little Encouragement from BoE Meeting
We have come to expect little from the Bank of England as they have shown extraordinary consistency in their lax monetary policy stance. Yet, no change is a development in its own right. And, when we color it against the weak 0.7 percent annualized pace of growth the economy reported earlier this week; no change can be interpreted as economic support and further reason to move away from the sterling.
Australian Dollar will Put Inflation Figures to the Test with RBA Decision
In their last meeting, the Reserve Bank of Australia saw little scope for a near-term change to their monetary policy. On the other hand, they did say that the future was contingent upon inflation pressures. This past week, headline 2Q CPI rose to a 3.6 percent clip while the ‘core’ reading accelerated to a 2.7 percent clip. So, while there may be no hike this time around; there is a good chance of a change to future intentions.
New Zealand Dollar Rally Continues Sans Risk Trends, Rate Potential
Through the end of this past week, RBNZ Governor Alan Bollard undermined the outlook for rate hikes beyond a return of the 50 bps that was cut in March and risk appetite tumbled. Despite this unfavorable mix, though, the New Zealand dollar charged to a fresh record high against the greenback. We could say that is a reflection of greenback weakness; but the kiwi similarly rallied against its Australian counterpart.
Japanese Yen Tapped into Anti-Dollar Sentiment, Ignoring BoJ Decision
Yet another rate decision in the coming week, the Bank of Japan is scheduled to announce its monetary policy decision sometime Friday morning. There is very unlikely that they change anything given their tentatively encouraging outlook for economic activity the past few months against the backdrop of long-term hardships ahead. Instead, yen traders should look at the currency as a funding currency in risk currents.
Gold Ready for Definitive Breakout with Deficit Clock Running Out
With the weekend draining the markets and investors biting their nails as they await a clear sign from the US budget debate; the appeal of gold as a safe haven and alternative reserve for wealth looked particularly appealing. The metal absorbed a considerable amount of the capital fleeing the greenback to close at a fresh record high. If a deficit agreement isn’t reached soon; expect to see the metal much hiver very quickly.
ECONOMIC DATA
Next 24 Hours
GMT | Currency | Release | Survey | Previous | Comments |
23:01 (Sun) | GBP | Lloyds Business Barometer (JUL) | 36 | Gauge has been declining due to further government tightening | |
23:30 (Sun) | AUD | AiG Performance of Manufacturing Index (JUL) | 52.9 | Preliminary figure could suggest direction of AU economy | |
1:00 | NZD | ANZ Commodity Price (JUL) | -1.2% | Could be capped by stronger NZD | |
1:00 | CNY | PMI Manufacturing (JUL) | 50.9 | Reading below 50 would mean shrinking | |
1:00 | AUD | HIA New Home Sales (MoM) (JUN) | -0.2% | Home sales continues to be in decline | |
2:30 | CNY | HSBC Manufacturing PMI (JUL) | 50.1 | Expected to follow official data | |
5:00 | JPY | Vehicle Sales (YoY) (JUL) | -23.3% | Retail demand may not translate to sales | |
7:30 | CHF | SVME-Purchasing Managers Index (JUL) | 53.4 | Swiss PMI indicates domestic health | |
7:45 | EUR | Italian PMI Manufacturing (JUL) | 49.9 | New PMI Manufacturing readings suggests EU economy cautiously slugging along | |
7:50 | EUR | French PMI Manufacturing (JUL F) | 50.1 | 50.1 | |
7:55 | EUR | German PMI Manufacturing (JUL F) | 52.1 | 52.1 | |
8:00 | EUR | Italian Unemployment Rate (SA) (JUL P) | 8.1% | Increase may cause more concern | |
8:00 | EUR | Euro-Zone PMI Manufacturing (JUL F) | 50.4 | 50.4 | Total manufacturing also shows uncertain |
8:30 | GBP | PMI Manufacturing (JUL) | 51.3 | Slows slight, careful growth | |
9:00 | EUR | Euro-Zone Unemployment Rate (JUL) | 9.9% | Unemployment expected to be stable | |
14:00 | USD | Construction Spending (MoM) (JUL) | -0.1% | -0.6% | Slight recovery could help real estate |
14:00 | USD | ISM Manufacturing (JUL) | 55.4 | 55.3 | Mixed prices, continued weakness may put less pressure on Fed to raise rates in the near term |
14:00 | USD | ISM Prices Paid (JUL) | 63.5 | 68 | |
16:00 | EUR | Italian New Car Registrations (YoY) (JUL) | -1.7% | Correlated with consumer spending | |
17:00 | EUR | Italian Budget Balance (euros) (YTD) (JUL) | -43.5B | Current balance expected to have surplus on aggressive austerity measures | |
17:00 | EUR | Italian Budget Balance (euros) (JUL) | 1.3B | ||
22:45 | NZD | Labor Cost Private Sector (QoQ) (Q2) | 0.3% | New Zealand labor changes could point to direction of economy, rate hikes | |
22:45 | NZD | Average Hourly Earnings (QoQ) (Q2) | 0.4% | ||
22:45 | NZD | Private Wages ex Overtime (QoQ) (Q2) | 0.4% | ||
23:50 | JPY | Monetary Base (YoY) (JUL) | 17.0% | Base could decrease as economy slows |
SUPPORT AND RESISTANCE LEVELS
CLASSIC SUPPORT AND RESISTANCE - 18:00 GMT
Currency | EUR/USD | GBP/USD | USD/JPY | USD/CHF | USD/CAD | AUD/USD | NZD/USD | EUR/JPY | GBP/JPY |
Resist 2 | 1.5160 | 1.6600 | 86.00 | 0.8900 | 1.0275 | 1.1800 | 0.9020 | 118.00 | 146.05 |
Resist 1 | 1.5000 | 1.6475 | 81.50 | 0.8550 | 1.0000 | 1.1000 | 0.8750 | 113.50 | 140.00 |
Spot | 1.4310 | 1.6340 | 77.79 | 0.8017 | 0.9510 | 1.0985 | 0.8685 | 111.32 | 127.11 |
Support 1 | 1.4000 | 1.5935 | 77.50 | 0.8000 | 0.9425 | 1.0400 | 0.7745 | 109.00 | 125.00 |
Support 2 | 1.3700 | 1.5750 | 76.25 | 0.7900 | 0.9055 | 1.0200 | 0.6850 | 106.00 | 119.00 |
CLASSIC SUPPORT AND RESISTANCE –EMERGING MARKETS 18:00 GMTSCANDIES CURRENCIES 18:00 GMT
Currency | USD/MXN | USD/TRY | USD/ZAR | USD/HKD | USD/SGD | Currency | USD/SEK | USD/DKK | USD/NOK | |
Resist 2 | 13.8500 | 1.8235 | 7.4025 | 7.8165 | 1.3650 | Resist 2 | 7.5800 | 5.6625 | 6.1150 | |
Resist 1 | 12.5000 | 1.7425 | 7.3500 | 7.8075 | 1.3250 | Resist 1 | 6.5175 | 5.3100 | 5.7075 | |
Spot | 11.7252 | 1.6769 | 6.7454 | 7.7922 | 1.2022 | Spot | 6.3342 | 5.2055 | 5.4144 | |
Support 1 | 11.5200 | 1.6500 | 6.5575 | 7.7490 | 1.2000 | Support 1 | 6.0800 | 5.1050 | 5.3040 | |
Support 2 | 11.4400 | 1.5725 | 6.4295 | 7.7450 | 1.1800 | Support 2 | 5.8085 | 4.9115 | 4.9410 |
INTRA-DAY PIVOT POINTS 18:00 GMT
Currency | EUR/USD | GBP/USD | USD/JPY | USD/CHF | USD/CAD | AUD/USD | NZD/USD | EUR/JPY | GBP/JPY |
Resist 2 | 1.4469 | 1.6404 | 78.22 | 0.8075 | 0.9546 | 1.1106 | 0.8780 | 112.69 | 127.79 |
Resist 1 | 1.4389 | 1.6372 | 78.00 | 0.8046 | 0.9528 | 1.1046 | 0.8732 | 112.00 | 127.45 |
Pivot | 1.4322 | 1.6333 | 77.82 | 0.8018 | 0.9493 | 1.1014 | 0.8707 | 111.42 | 127.09 |
Support 1 | 1.4242 | 1.6301 | 77.60 | 0.7989 | 0.9475 | 1.0954 | 0.8659 | 110.73 | 126.75 |
Support 2 | 1.4175 | 1.6262 | 77.42 | 0.7961 | 0.9440 | 1.0922 | 0.8634 | 110.15 | 126.39 |
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 | 1.4497 | 1.6496 | 78.68 | 0.8121 | 0.9604 | 1.1126 | 0.8803 | 112.93 | 128.64 |
Resist. 2 | 1.4450 | 1.6457 | 78.45 | 0.8095 | 0.9581 | 1.1090 | 0.8774 | 112.53 | 128.26 |
Resist. 1 | 1.4403 | 1.6418 | 78.23 | 0.8069 | 0.9557 | 1.1055 | 0.8744 | 112.13 | 127.87 |
Spot | 1.4310 | 1.6340 | 77.79 | 0.8017 | 0.9510 | 1.0985 | 0.8685 | 111.32 | 127.11 |
Support 1 | 1.4217 | 1.6262 | 77.35 | 0.7965 | 0.9463 | 1.0915 | 0.8626 | 110.51 | 126.35 |
Support 2 | 1.4170 | 1.6223 | 77.13 | 0.7939 | 0.9439 | 1.0880 | 0.8596 | 110.11 | 125.97 |
Support 3 | 1.4123 | 1.6184 | 76.90 | 0.7913 | 0.9416 | 1.0844 | 0.8567 | 109.71 | 125.59 |
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