Dollar Risks Heavy Selloff as EURUSD, USDJPY Face Critical Levels

Dollar Risks Heavy Selloff as EURUSD, USDJPY Face Critical Levels
British Pound: BoE Spurs Most Active Trading Day in Over 3 Years
Australian Dollar Ready for Another Shock of Volatility on Jobs Data
Japanese Yen: Will the BoJ Move to Curb the Yen’s Rally?
Canadian Dollar Drops Across the Board as Manufacturing Survey Plummets
New Zealand Dollar Has Exercised its ‘Recovery’ Momentum after Fonterra Scare
Gold Finally Leverages an Advance Out of the Dollar’s Decline

Dollar Risks Heavy Selloff as EURUSD, USDJPY Face Critical Levels
The US dollar is seriously wounded, but it has yet to escalate its current drop into a full-scale plunge. That can change, however, before the week is out. Through Wednesday’s close, the Dow Jones FXCM Dollar Index has dropped for four consecutive trading days. In the past 20 months, there have been only four other instances where the benchmark currency has shown such bearish persistence, and each of those instances ended with a return to the dominant bull trend – and often with considerable momentum. Yet, as the saying goes ‘past performance is not indicative of future results’. These statistics will not necessarily continue ad infinitum. Fundamentals will play a key role from here as the index eyes 10,700 and EURUSD faces 1.3350. A committed unwinding of dollar longs can develop out of a delayed Taper outlook. However, that doesn’t seem the expected path. Instead, the S&P 500 ease starting to retreat – and risk aversion is distinctly dollar bullish.

British Pound: BoE Spurs Most Active Trading Day in Over 3 Years
Bank of England (BoE) Governor Mark Carney did not disappoint Wednesday. Traders saw the potential volatility that could erupt following the central bank’s scheduled Quarterly Inflation Report, and that is what it delivered. There were two elements to the report that investors were particularly interested in interpreting from the report: stimulus plans and growth forecasts. Proportionate to the rebound we have seen in monthly and quarterly economic readings this year, the BoE significantly upgraded its GDP forecasts for 2014 from a previous forecast of 1.9 percent to 2.7 percent (the 2013 forecast was nudged up to 1.4 percent). That is a considerable shift from the fear of a ‘Triple Dip’ recession expected towards the beginning of the year. As for the eventual change in accommodation, a stimulus ramp seems wholly unlikely after Carney deferred to guidance on timing the eventual rate hike, tyingit to a threshold of a 7.0 percent unemployment rate. That level isn’t expected to be reached until well into 2016, but inflation pressures – already a problem – can move that time frame up quickly. This significantly strengthens the sterling’s recovery potential from the 1Q, 1,500-pip GBPUSD tumble. And, the biggest daily range since May 2010 confirms that potential.

Australian Dollar Ready for Another Shock of Volatility on Jobs Data
Australian dollar traders are ready for another busy day for the already overheated fundamental newswires. Having already progressed through a service sector activity report, 2Q retail sales update, trade balance data, home activity figures and the RBA rate decision; the upcoming session offers another high-potential indicator for release. The labour data is a well-known volatility spark for the Aussie dollar when the data prints with enough of a surprise. Given the uneasy positioning of the currency after the cautious rebound following the central bank’s shift in tone away from an open-ended rate cut regime, bulls need something tangible to rally behind. A strong labor report can provide a foundation for the market to run on. However, a weak showing can halt a technical rebound especially as risk trends fade.

Japanese Yen: Will the BoJ Move to Curb the Yen’s Rally?Even before the recent slump in global equities, the yen crosses were edging back. With Fed-insured US indexes painted red, there is real pressure on those holding yen-based carry positions. From last fall until June this year, the Japanese currency was on a non-stop plunge fed by a central bank bent on devaluing its high exchange rate and a market that was reaching for any level yield that it could find. Yet, these conditions have clearly stalled, and it is exposing the ‘expensive’ yen crosses. Without a steady bid on ‘risk’ assets, the market is left to a carry trade that is exceptionally expensive and providing a record low yield (for AUDJPY specifically). The other leg of that consideration is the BoJ. Will the central bank maintain its drive to keep the yen down to promote trade and inflation? Since the group announced its open-ended stimulus program in April, they have made it clear that they have shifted to a ‘wait and see’ mode. If they confirm that today, it could further dim hope.

Canadian Dollar Drops Across the Board as Manufacturing Survey Plummets
Though there were more prolific themes on the day like the retreat in stimulus-propped US equities, a heavy bear trend from the dollar and market-wide carry unwind; the biggest mover amongst the majors on the day was the Canadian dollar. The currency dropped against all counterparts, helped along significantly by two very poor readings from key economic sector. The Ivey manufacturing activity survey for July reported a surprise contraction for the industry – only the fifth time in four years the important sector has shrunk. Meanwhile, murmurs of a Canadian housing bubble over the past months likely amplified the impact of the hefty 10.3 percent drop in building permits for June. The next 48 hours holds two more indicators to reflect on the housing sector, but it is Friday’s jobs data that threatens the real volatility.

New Zealand Dollar Has Exercised its ‘Recovery’ Momentum after Fonterra Scare
Having dramatically reversed its fortunes since the bearish gap at the start of the week, the New Zealand dollar has just closed out its third daily advance against the US dollar and most of its counterparts. This is a remarkably performance considering the all began with a trade scare after China announced it would halt imports of some products from New Zealand dairy giant Fonterra. The implications for the relationship between New Zealand and its largest trade partner (accounting for more than NZ$7 billion in export revenues) is recognizable but not immediately threatening. Yet, that doesn’t mean a skeptical rebound of a preceding gap can continue to rally on what is still a fundamental problem. Meanwhile, the 12-month rate forecast has leveled off around 70 bps of hikes, foreign bond demand is steady and the 2Q jobless rate rose.

Gold Finally Leverages an Advance Out of the Dollar’s Decline
The US dollar has dropped for four consecutive, hearty days. And yet, despite the gold’s position as the benchmark currency’s foil, the precious metal has maintained a bearish trajectory…that is until this past trading session. The biggest drop in two weeks for the greenback leveraged a close in the green for the commodity – the first advance for the active futures contract in seven consecutive trading days. However, the 0.2 percent advance is hardly convincing of a market that is ready to stage a dramatic recovery. Furthermore, volume across gold funds and futures remains anemic, ETF holdings of the metal have fallen to a fresh two-and-a-half year low of 62.9 mln ounces and the CBOE’s volatility index continues to hover 10 percentage points above its pre-April crash at 23.5 percent. If the dollar’s selloff intensifies to a committed bear-trend, buoyancy will increase. Though, without a firm probability of deferred Taper, it won’t advance easily.

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

ECONOMIC DATA

GMT

Currency

Release

Survey

Comments

JPY

Bank of Japan Interest Rate Decision

0.10%

Event risks will contribute to JPY volatility in the session.

JPY

Bank of Japan 2014 Monetary Base Target

270T

0:00

NZD

QV House Prices (YoY) (JUL)

7.6%

NZ house price data is becoming extremely important as the central bank deals with a strong Kiwi, record low interest rates and a possible housing bubble.

1:30

AUD

Employment Change (JUL)

6.0K

10.3K

As the Aussie flirts with key resistant levels following an RBA interest rate cut, employment data may trigger some volatility to push short term momentum. The unemployment rate has been ticking higher since the spring of 2011.