Dollar Rally Stalls as Traders Await S&P 500’s Fate to Commit

Dollar Rally Stalls as Traders Await S&P 500’s Fate to Commit
Japanese Yen Wins its Largest Weekly Rally Since July 2010
Euro Back in the Forefront as Policy Talks, Slovenia GDP on Tap
Canadian Dollar: GDP and BoC to Offer Fundamental Workup
Australian Dollar Tips into the Abyss as Futures Point to Trouble
US Oil Price Action Shows Unusual Market Conditions
Gold Holds Near $1,400 but Speculative and Investment Capital Fleeing

Dollar Rally Stalls as Traders Await S&P 500’s Fate to Commit
It was a tense way to end the week. The S&P 500 – the benchmark for speculative appetites – tempered a third consecutive daily drop from record highs, while the Dow Jones FXCM Dollar Index (ticker = USDollar) failed to overtake 10,800. One of these two is likely to find its way into a steep decline over the coming week. A tentative shift towards fear and risk aversion was perceptible recently with speculation surrounding the Fed’s plans to ‘taper’ its QE3 purchases in the near future verified by high-profile comments by Fed Chairman Ben Bernanke and the minutes from the last FOMC rate decision. However, ensuring commitment to deleveraging has proven very difficult these past months and years; and what momentum we have developed towards this theme could be cooled by the holiday weekend. We fear cannot take hold, the satisfaction of realizing the QE3 taper time frame will likely wear off for the dollar and find the dollar overbought compared to higher yielding counterparts.

Japanese Yen Wins its Largest Weekly Rally Since July 2010
Japan’s financial markets and currency were a mess this past week – and the trouble is unlikely to simply dissipate moving forward. Taking stock of the situation: USDJPY posted its biggest drop since July 2010, the Nikkei 225 collapsed over 1,000 points in a single day and volatility in the Japanese Government Bond (JGB) market surged to crisis levels. A surface level assessment of the situation would be that a market-wide shift in sentiment towards a ‘flight to quality’ would obliterate the yen crosses and equity benchmark. Both have surged largely on the back of competitive stimulus efforts in a rapid appreciation that has deviated far from fundamentals (like historically-low yield differentials). However, a collapse in sentiment isn’t the only threat to these markets. Stimulus itself could prove the undoing of this carefully crafted market. Volatility in the JGB market is particularly troubling for a banking sector that is heavily invested. The BoJ may be forced to regularly intervene.

Euro Back in the Forefront as Policy Talks, Slovenia GDP on Tap
While the euro spent the past week in the wake of more active counterparts, the currency is likely to develop its own trends moving forward. There are a few topical items to tap into the dual interests of Eurozone recession and financial instability. On the former topic, Germany employment data and an annual report from the Bank of France are noteworthy, but it will be the OECD’s growth forecasts and Slovenian 1Q GDP figures that have the better chance of actually moving the market. Given Slovenia’s trouble troubled banking sector and EZ pressure, a weak growth reading could leverage the pressure for the country to seek a rescue. If that is the case, the propensity for ‘bail-ins’ can work double duty to stir investor fears of financial stability. Along with Spanish and Portuguese items that can send tremors in confidence, there will also be interest in the EU’s annual policy recommendations – with extra time needed on budget shortfalls for France, Spain and Slovenia on the line.

Canadian Dollar: GDP and BoC to Offer Fundamental WorkupIn a week better marked for its broader themes and intangible drivers, the Canadian dollar has the most defined fundamental offerings of the majors. We will weigh in on both economic activity and monetary policy for the country. Too bad neither is particularly contentious… That being said, it is when the masses have their guard down that the biggest data shocks are realized. On the growth side, first quarter current account (trade including capital flows) and GDP are on tap. A modest improvement for the country’s historically-large deficit is expected – offering a view of the currency’s influence – but it is the sizable 2.3 percent jump in the annualized growth pace that holds more bulls’ interest. As for the BoC policy decision, a last minute shift before Governor Carney’s exit would be unlikely – but if they did turn dovish, it would mean even more.

Australian Dollar Tips into the Abyss as Futures Point to Trouble
Though it has slowed its pace of decent, the Australia dollar nevertheless tumbled yet again this past week. For AUDUSD, the bear phase for the past month is now tallying over 700 pips of descent. The highest yielding of the majors has dropped against every one of its liquid counterparts in that same period (even falling 1.6 percent against the New Zealand dollar). The hopeful and opportunistic may see the drop as ‘overdone’ with pairs like AUDUSD upon easily recognizable support (0.9600), but there are two significant headwinds facing bulls: risk trends and reserves diversification. If the hiccup in equities proves serious, the Aussie has little chance to hold back a deep decline. Meanwhile, there are tangible signs that funds that sought out higher yielding Aussie sovereign debt are starting to unwind.

US Oil Price Action Shows Unusual Market Conditions
This past week, a sharp decline for US oil was tempered by very unusual intraday price action. ‘Tails’ (the difference between the high or low of the day as compared to the closing price) can often times be quite large in this market. However, the recent prevalence of large, intraday reversals against the backdrop of a smaller overall range for this commodity is striking and unusual. Given much of the sudden change in direction is in favor of bulls and volume in the futures market has been relatively restrained, suggestions of oil exporters looking to stabilize price may not be so farfetched. That being said, net long speculative interest in the futures market is also just off record a record highs. Without a market-wide risk aversion move or sudden ‘demand’ slump, a manufactured move towards $100 could prove successful.

Gold Holds Near $1,400 but Speculative and Investment Capital Fleeing
Gold managed to close this past week in the green – a considerable feat given the previous close was a more than two-year low. However, a bullish candle doesn’t translate into a serious trend. In fact, the precious metal has established a well-defined congestion pattern between $1,400 as resistance and $1,350 as support. Considering we are trading over 20 percent off the highs from last September, it would be a stretch to set expectations to an upside breakout that carries on through $1,500. If we look at the market’s positioning during this stabilization period, there is little to comfort ambitious bulls. Looking at the futures market, net long interest has dropped to its lowest level since late 2008. Meanwhile exchange traded funds (ETF) holdings have marked a 15th consecutive week of unwinding. The metal’s best bet for a recovery move would be a serious ramp in stimulus that undermines the value of ‘currencies’. We are already seeing that and it is having no material influence. Therefore, bulls will have to rely on a sharp dollar drop to win a cheap rally. Meanwhile, talk of a QE3 taper will plague this market.

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

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

1:30

CNY

Industrial Profits YTD (YoY)

12.1%

Service sectors outpaced manufacturing from Jan-Mar; Industrial output (YoY) rose less-than-expected in Apr, lower profit is likely.

23:50

JPY

Corporate Service Price (YoY)

-0.2%

Service sector accounts for 70% of Japan’s GDP; May come in line with the higher-than-expected domestic corporate goods prices.

GMT

Currency

Upcoming Events & Speeches

4:50

JPY

BoJ Governor Kuroda Speaks

23:50

JPY

BoJ Minutes from April 26 Meeting

-:-

EUR

EU Foreign Ministers Meet

6:30

EUR

ECB’s Asmussen Speaks on Euro Themes

-:-

EUR

Eurogroup’s Dijsselbloem to Speak in Lisbon

15:00

EUR

German Fin Min Schaeuble Conference after Stability Meet

15:00

EUR

EU’s Fin Serv Comm Barnier Speaks to Euro Parliament

17:25

CAD

Canada Fin Min Flaherty to Speak

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

15.0000

2.0000

9.8365

7.8165

1.3650

Resist 2

7.5800

5.8950

6.1150

Resist 1

12.9000

1.9000

9.7000

7.8075

1.3250

Resist 1

6.8155

5.8300

5.8620

Spot

12.5410

1.8468

9.5762

7.7629

1.2643

Spot

6.6456

5.7632

5.8320

Support 1

12.0000

1.6500

8.9500

7.7490

1.2000

Support 1

6.0800

5.6075

5.5000

Support 2

11.5200

1.5725

8.7750

7.7450

1.1800

Support 2

5.8085

5.4440

5.3040

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

1.3046

1.5256

102.65

0.9719

1.0401

0.9758

0.8198

132.84

155.11

Resist. 2

1.3018

1.5223

102.31

0.9693

1.0380

0.9732

0.8172

132.38

154.64

Resist. 1

1.2989

1.5191

101.98

0.9667

1.0359

0.9705

0.8147

131.92

154.17

Spot

1.2932

1.5127

101.31

0.9615

1.0318

0.9652

0.8096

131.01

153.22

Support 1

1.2875

1.5063

100.64

0.9563

1.0277

0.9599

0.8045

130.10

152.27

Support 2

1.2846

1.5031

100.31

0.9537

1.0256

0.9572

0.8020

129.64

151.80

Support 3

1.2818

1.4998

99.97

0.9511

1.0235

0.9546

0.7994

129.18

151.33

— Written by: John Kicklighter, Chief 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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