$$ Dollar’s Failure to Capitalize on S & P 500’s Tumble Concerning

Currency Strategist 05 June 2012 04:09 GMT Dollar’s Failure to Capitalize on S&P 500’s Tumble Concerning Euro Rebound Gains Momentum, Though Tangible Support Lacking Australian Dollar Traders Ready for the RBA Rate Decision Canadian Dollar: Will the Bank of Canada Rate Decision Move the Market? British Pound Steadying but Not Participating in Risk Rebound Japanese Yen: Intervention or Not, The Yen is Proving an Epic Battle Gold Rally Stalls as Euro Firms, Need for Alternative Store of Funds Eases Dollar’s Failure to Capitalize on S&P 500’s Tumble Concerning
The US dollar’s hesitation is starting to look a lot like burgeoning selling pressure. Has the backdrop for global financial and economic health taken a sudden turn for the better and subsequently negated the demand for a liquidity-renowned, safe haven greenback? Hardly. On the other hand, the risk deleveraging effort through May unfolded at an incredible pace. Though implied volatility measures are still well off their respective highs, the actual progress on risk-sensitive currency pairs (like AUDUSD) and capital market benchmarks (like the S&P 500) may have pushed us to a position where sentiment has overrun tangible fundamental developments. In this instance, ‘Over-extended’ on a fundamental basis is not a function of an actual change in the bearing of economies and financial systems but the market’s expectations for where they will go.
When risk aversion kicks in from elevated heights, there are two levels of correction: one where those with existing long-risk exposure will unwind to a neutral position (like reversing a long carry trade) and another in which fear encourages market participants to increase ‘safe haven’ exposure (as with buying US Treasuries). There is evidence of both from the past month, but the amplitude of the recent drop no doubt reflects speculative interest that has added to the short-risk position, thereby leveraging the drop. As momentum cools on the decline, those that played the decline are more inclined to book profit and thereby lead to a pullback. There is an inherently temporary aspect to profit taking on speculative shorts. Eventually, the uncommitted shorts will be exercised and all that is left is the underlying trend of true risk-deleveraging – that is unless the fundamental backdrop genuinely improves, and there is little to suggest that is the case here just yet.
Taking stock of the underlying current, the capital markets are adjusting to a global economic slowdown, the international repercussions of a European financial crisis, as well as a steady decline in yields and increase in volatility. Substantially changing the bearing of this fundamental bearing is a long-term process. There is, however, one thing sharply alter speculators’ view in the immediate future: stimulus. Those that have assumed the Fed would announce a following support scheme to fill in for the expiring ‘Operation Twist’ revamp are even more certain that the Fed’s June policy meeting will result in another operation (either extending the maturity of Treasury holdings and/or buying mortgage assets). We are still weeks away from that decision, but perhaps the rumored G7 meeting Tuesday will do something to fill the time or solve the problem?
Euro Rebound Gains Momentum, Though Tangible Support Lacking
The Euro has mounted an impressive recovery over the opening 24 hours of the week. Though its gains were most prominent against relative safe havens (the US dollar and Japanese yen), the progress made against the high-yielding subset reflects on its inherent fundamental strength. Trying to point to a single development that supports euro bulls’ cause leaves us coming up short. A meeting between the EU’s Barroso and Merkel found the German Chancellor fortifying her position against EU bonds, Portugal announced financial support for three troubled banks and Standard & Poor’s said there was a one-in-three chance Greece would leave the Eurozone. Progress against the current is risky.
Australian Dollar Traders Ready for the RBA Rate Decision
We have come upon the RBA’s rate decision and expectations have been set rather high. There is more than just a dovish bias for the central bank, the markets have priced in hearty speculation that the central bank will make another aggressive move in order to head off a weakening fundamental position. According to overnight index swaps, the market believes a 25 basis point (bps) cut is baked in and the more speculatively-inclined have pushed us to a nearly 50 percent chance that the central bank will cut by 50 bps to 3.25 percent. That sets the bar rather low. If, in turn, the RBA only shaves off 25 bps, there will be a contingent of the market that may quickly find itself over-extended on a short Aussie position. This would not necessarily translate into a bullish turn for the currency (the RBA is still easing), but it could fuel a correction.
Canadian Dollar: Will the Bank of Canada Rate Decision Move the Market?
Drawing a direct contrast to the Australian policy decision, the market has shown little favor to the Canadian dollar even though it has largely escaped the dovish pressure its Aussie and kiwi counterparts have fallen under. In fact, the Bank of Canada is the only central bank amongst the majors that is actually expected to raise rates over the coming 12 months. Currently, the market is pricing in 28 bps of hikes over the coming year (that translates into a certainty of a quarter percent hike and modest speculation of more). This might not seem much for a benchmark that is only 1.00 percent; but when we juxtapose it against the RBA’s hearty cuts and the RBNZ’s questionable bearing, it looks quite good.
British Pound Steadying but Not Participating in Risk Rebound
Where the pound has suffered for the Euro-area’s financial troubles, it hasn’t really recovered with the subsequent bounce for the euro itself. It isn’t difficult to get ahead of ourselves in fretting the fall of collective currency, but things move at a more moderated and consistent pace when the topic is the slow spread of financial crisis to the region’s most fundamentally connected, non-member. Further undermining the sterling’s performance was a sovereign downgrade by Egan-Jones (to AA- from AA). Fortunate for the pound, they don’t carry the as much weight.
Japanese Yen: Intervention or Not, The Yen is Proving an Epic Battle
Both on Friday and early Monday there were bouts of tremendous volatility for USDJPY and other yen-crosses. There is debate as to whether this was evidence of intervention. The answer doesn’t change the situation all that much however. If it was, the Finance Ministry and BoJ may have lost all influence over the market through standard manipulation (something already expected). Can they follow the SNB? No.
Gold Rally Stalls as Euro Firms, Need for Alternative Store of Funds Eases
After forging the largest, single-day rally in years this past Friday; gold bulls decided to back off the gas Monday. With the euro bouncing and the dollar unable to take traction on the equities sell-off, we would assume this was the best set of safe-haven-without-liquidity-concerns that we could hope for. Nevertheless, the metal remains in a broader construct of congestion. When will it break and what bearing will it take?
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ECONOMIC DATA
Next 24 Hours
AiG Performance of Service Index (APR)
Service activity hit the lowest level since March 2009 with the previous reading.
Australia Net Exports of GDP (1Q)
This is a good lead in to the forthcoming GDP reading. Trade is important to Aussie.
Current Account Balance (Australian Dollar) (1Q)
The official reading reported a notable slowing. Still well into growth territory.
Reserve Bank of Australia Rate Decision
Economists have come around to the bears’ forecasts of a cut, but markets still expecting more of the move.
Italian Purchasing Manager Index Services
The final readings of service sector and the Euro Zone composite PMI figures has rarely deviated from initial prints. Recently, however, second round reports have shown sizable changes.
French Purchasing Manager Index Services
German Purchasing Manager Index Services
Euro-Zone Purchasing Manager Index Composite
Euro-Zone Purchasing Manager Index Services
This lagging report is expected to report the 8th contraction in 12 months.
German Factory Orders s.a. (MoM)
Germany is the powerhouse for the Euro Zone and manufacturing its own engine.
German Factory Orders n.s.a. (YoY)
A leading read to housing health – a sector that many have speculator for a bubble.
There is no expected change but the BoC is the only Major still seen hiking over the coming 12 months.
ISM Non-Manufacturing Composite
While manufacturing has been the United States’ headline growth performer, services is its largest component.
UK Markets Closed for Queen's Diamond Jubilee
EU's Rehn, IMF's Lagarde and ECB's Asmussen Meet
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
INTRA-DAY PROBABILITY BANDS 18:00 GMT

?? Commodities Tumble Along with Stocks Before EU Leaders Summit

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Currency Strategist 23 May 2012 09:00 GMT Talking Points
Crude Oil, Copper Sink with Stocks Before EU Leaders’ Summit Gold and Silver Down as Safe-Haven Flows Buoy the US Dollar Commodities are sinking in early European hours as risk appetite evaporates ahead of today’s EU leaders’ summit. Traders are pondering an endgame to the latest debt crisis flare-up that may include Greece’s exit from the Eurozone, an unprecedented outcome with no clear-cut benchmark for its implications for the financial markets. Sentiment-driven crude oil and copper prices are following shares lower while gold and silver face de-facto selling pressure as the rout stokes safe-haven inflows into the US Dollar.
The EU sit-down is being billed as an “informal” working dinner. German officials were busy taking to the wires yesterday to pour cold water on expectations for what may emerge at its conclusion. A statement on Greece, the issuance of joint Eurobonds or any specific policy decisions in general are – according to German sources cited across the spectrum of newswires – not to be. That has left traders understandably jittery about what will in fact be accomplished.
If the German public line is taken at face value, the conversation will center on the European Investment Bank (EIB) and how it can be used more effectively to boost growth, presumably without compromising deficit-reduction efforts. If that is indeed the case, disappointed selling seems likely to descend upon the spectrum of risky assets.S&P 500 stock index futures are pointing decidedly lower, hinting current trends have scope to carry forward, though the weighty event risk ahead means things can change very rapidly in the coming hours.
WTI Crude Oil (NY Close): $91.85 // -1.01 // -1.09%
Follow-through failed to materialize after prices completed a Bullish Engulfing candlestick pattern yesterday and took out resistance at 92.51, a former support marked by the December 16 low. Crude has now slipped back below that level, exposing horizontal pivot support at 90.49 once again. Still, the Bullish Engulfing remains valid absent a daily close beneath its low at 90.90, leaving the door open for a rebound. A break back through 92.51 targets the February 2 low at 95.41.

Daily Chart - Created Using FXCM Marketscope 2.0
Spot Gold (NY Close): $1568.50 // -24.57 // -1.54%
Prices recoiled from resistance marked by the 1600/oz figure as well as the 50% Fibonacci retracement level at 1599.17, taking out support at 1582.10 marked by the 38.2% level and exposing the next downside objective at 1560.98. A break below this boundary exposes the 1522.50-1532.45 area. The 1582.10 level is once again acting as resistance.

Daily Chart - Created Using FXCM Marketscope 2.0
Spot Silver (NY Close): $28.18 // -0.29 // -1.00%
Prices are reversing lower from resistance at 28.70, with sellers once again aiming to challenge support at support at 27.06. A break lower exposes the 26.05-15 area. Alternatively, a reversal back through resistance on a daily closing basis targets the next upside barrier at 28.70.
Daily Chart - Created Using FXCM Marketscope 2.0
COMEX E-Mini Copper (NY Close): $3.488 // -0.014 // -0.40%
Prices are testing through support at 3.438, the 100%Fibonacci expansion, with a break below that exposing the 123.6% level at 3.327. Near-term resistance lines up at 3.537, the 76.4% expansion level.
Daily Chart - Created Using FXCM Marketscope 2.0

++ Commodity Currencies, US Dollar Tumble on Weak Jobs Report

Fundamental Headlines
- Employers in U.S. Added Fewer Jobs than Forecast in April – Bloomberg
- European Manufacturing, Services Output Shrank Last Month – Bloomberg
- U.S. April Hiring Slows, Jobless Rate Falls to 8.1 Percent – Reuters
- Europe’s Bank Stands Pat – WSJ
- Nasdaq to Launch New Stock-Options Trading Venue – WSJ
European Session Summary
Market conditions were relatively quiet ahead of the hallowed nonfarm payrolls report, the United States’ reading of the labor market. Nevertheless, higher yielding and risk-correlated assets generally traded lower in the overnight sessions, with the US Dollar among the top performers midway through the European session.
However, the nonfarm payrolls report threw another wrench in the US Dollar’s rally. The 115K print versus the 160K forecast brings about the second consecutive month of disappointment, setting up the Japanese Yen for another push higher. The April reading was relatively less disappointing, showing jobs growth slowed by 4.2 percent from March to April; the March reading showed that jobs growth slowed by 53.7 percent from February to March. Generally speaking, it’s of my belief that this is the continued kickback from the unseasonably warm winter experienced across much of the United States this year, and that jobs growth should return to the 160K to 200K range the next few months ahead of the November elections.
In what has been little discussed in the wake of the report has been the dip in the unemployment rate, which fell to 8.1 percent in April from 8.2 percent in March. Clearly, this has nothing to do with the NFP print, but rather, the dip in the participation rate. The United States’ labor force participation rate fell to its lowest level since 1981 at 64.3 percent. This is starting to pose an enormous structural problem for the country that’s supposed to be the global growth engine. If more Americans are out of the work force, aggregate disposable income in the economy will be lower; considering consumption accounts for approximately 70 percent of the headline GDP figure, and a drop in disposable income will hurt growth. Put another way: if this trend continues, the Federal Reserve will have all the evidence they need for another round of quantitative easing.
Taking a look at credit, it’s clear that the poor labor market reading has stoked a major shift to safety, especially in the form of German Bunds and US Treasuries. The German 10-year Bund yield dropped to 1.584 percent today, while the US 10-year Treasury Note yield fell to 1.886 percent. On the shorter-end in Europe, there’s been an improvement in the Italy, French and Portuguese 2-year notes, while the Irish and Spanish 2-year notes saw their yields climb, with the former’s hitting a fresh three-month high (in terms of yield, three-month low in terms of price.
USDJPY 5-min Chart: May 4, 2012

Charts Created using Marketscope – Prepared by Christopher Vecchio
The Japanese Yen has been the top performer thus far on Friday, with the USDJPY depreciating by 0.40 percent. The commodity currencies have been weaker overall as well, with the Australian, Canadian, and New Zealand Dollars shedding 0.70 percent, 0.45 percent, and 0.61 percent, respectively, against the US Dollar. The EURUSD was little changed on the day, up 0.04 percent after NFPs.
24-Hour Price Action


Key Levels: 13:30 GMT