- Dollar Tempts Traders as Technical Break Belies Fundamental Risk
- Euro: Greek Election Promises Volatility but Not Direction
- British Pound Faces an Upgrade in Stimulus, but Focus on Euro Crisis
- Swiss Franc Doesn’t Flinch After SNB Hold
- Japanese Yen Beholden to Carry Flow, Officials Offer Nothing
- Australian, Canadian and New Zealand Dollars Linked to Risk
- Gold Positioned to be the Most Straight Forward Winner in Liquidity Support
Dollar Tempts Traders as Technical Break Belies Fundamental Risk
The Dow Jones FXCM Dollar Index slipped below a well-worn 10,150 support Thursday. There is little chance that the masses missed this blatant technical development given the intense concentration amongst the speculative ranks. And yet, break would not translate into trend. Given the incredible risk the market has associated to a negative outcome for the upcoming Greek election (despite a lower probability of occurring as well as the presence of multiple opportunities to introduce liquidity/stimulus), most investors remain sidelined. As such, volatility remains prevalent but direction and momentum will be critically absent until after the big event risk clears.
For the dollar – as with nearly every other currency and asset – the Greek election will be a critical hurdle to surpass before we can find any progress. The more probably outcome will curb speculation of an immediate exit from the Euro Zone (more on that below) and thereby offer respite from May’s aggressive risk deleveraging. That doesn’t mean that risk aversion will return full force, but the withdrawal of impending doom will curb demand for an extreme liquidity provider. Furthermore, there is the risk that policy official step up their fight against the spread of financial malaise with a series of events that are ripe for adding stimulus and/or guarantees.
The first level of support general risk trends could find is the Euro Zone ministers meeting scheduled for Sunday. Finding action here is likely contingent upon a negative outcome with the election. In contrast, the G20 meeting on Monday and Tuesday can certainly pony up support. A coordinate effort was made at the summit back in April 2009 to proactively support the market – arguably to considerable success. And, then there is the Fed rate decision on Wednesday. There is heavy speculation of fresh stimulus – whether it have meaningful economic return or not.
Euro: Greek Election Promises Volatility but Not Direction
We have come to many crossroads for the euro and Euro Zone over the past few years as the region’s financial health has come under stress, but no other development has carried as much weight as the upcoming Greek election. This is the second vote following the impasse back in May. Though there is a more probable path for this complex event, speculation is so heavy and expectations for fallout so extreme that there will likely be an extreme volatility response shortly after the market opens. It is best to reduce exposure substantially in both euro and risk exposure to avoid potentially erratic price action.
As for the election itself, the vote takes place on Sunday with polls opening at 04:00 GMT and closing at 16:00 GMT. There are initial estimates of the final number due two-and-a-half hours later, but speculation will begin immediately after the early numbers start coming in after polls close. All of this happens before the Asian markets come online for Monday trading, meaning the open will see extreme volatility. The market sees this vote as being a binary event: a Syriza win could fast track a Greek exit while a New Democracy victory offers relief and business as usual. The situation is not as simple as that however as it is unlikely that either wins a majority. That said, polls have shown 75-80 percent of Greeks want to stay in the Euro Zone, and Syriza’s anti-bailout platform has been increasingly associated to an exit. If Syriza managed a coalition win, we still have plenty of stimulus opportunities to follow. Those same policy meets could feed a (temporary) risk rebound.
British Pound Faces an Upgrade in Stimulus, but Focus on Euro Crisis
Where the G20 leaked a threat that it could supply coordinated liquidity efforts in response to market dislocation and EU ministers said they would meet to determine the market pressure after the Greek election, UK officials acted. The Bank of England and Chancellor of the Exchequer announced in a joint meeting two new support schemes that could proactively buffer the country from the Euro Zone’s troubles and help stimulate growth. An emergency liquidity facility for six month funds and multi-year loans to banks to encourage lending are remarkable steps.
Swiss Franc Doesn’t Flinch After SNB Hold
A notable disappointment against the backdrop of so much stimulus, the SNB decided Thursday to repeat the same vows made at previous policy meetings. Some believe President Jordan escalated his verbal support of the EURCHF floor, but saying the franc is still expensive, that the group is ready to act and that further capital controls are being contemplated is in fact not new. They need to meaningfully escalate their efforts to offset the euro’s relentless troubles. Or, in the short-term, perhaps a relief rally for the euro can lift EURCHF as well.
Japanese Yen Beholden to Carry Flow, Officials Offer Nothing
The Bank of Japan’s rate decision resulted in no change to policy – a painful contrast to the constant threats made against the currency’s exaggerated highs. Even amid the round of global central bank announcements for further stimulus support, Japanese officials did little more than voice their readiness – something that the market now fully ignores. As we move forward into the swell of volatility, the yen will fall into its carry trade lines. That said, the more likely ‘positive’ outcome for the Greek election and stimulus opportunities for other could push carry higher.
Australian, Canadian and New Zealand Dollars Linked to Risk
All high-yield and investment currencies will be looking to the upcoming wave of event risk with sweat on their brows. With the highest-level of sensitivity to capital flows, we don’t necessarily need a full ‘risk on’ backdrop to push the Aussie, kiwi and loonie higher. All that is needed is a relief rally as the speculative shorts unwind and perhaps feed interest in a quick bounce.
Gold Positioned to be the Most Straight Forward Winner in Liquidity Support
We have to weigh the sensitivities to risk trends, the outcome of key event risk and the overlap of multiple stimulus opportunities to assess the paths of different currencies and capital market benchmarks. For gold, nearly every road leads to strength. If the Greek election stirs fear, stimulus is more likely. If the vote is positive the dollar will ease. Both scenarios are bullish for gold.
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Next 24 Hours
Business NZ Performance of Manufacturing Index (MAY)
Bank of Japan Interest Rate Decision
No change since 2008.
ANZ Consumer Confidence Index (JUN)
N.Z. unemployment rose last quarter which could discourage consumption.
ANZ Consumer Confidence (MoM) (JUN)
Non Residential Bond Holdings (MAY)
Italian Trade Balance (Total) (euros) (APR)
Expect to see trade balances decline as Euro crisis escalates.
Italian Trade Balance EU (euros) (APR)
Visible Trade Balance (Pounds) (APR)
Trade Balance Non EU (Pounds) (APR)
Total Trade Balance (Pounds) (APR)
Euro-Zone Employment (QoQ) (1Q)
Second consecutive decline in employment, there is likely to be a third due to rising unemployment in Spain.
Euro-Zone Employment (YoY) (1Q)
Euro-Zone Trade Balance s.a. (euros) (APR)
Top exports, USA and China, have seen recent signs of economic decline.
Euro-Zone Trade Balance (euros) (APR)
Manufacturing Shipments (MoM) (APR)
Empire Manufacturing (JUN)
Total Net TIC Flows (APR)
Higher volatility, in the equities market, for the month of April likely discouraged foreign investors.
Net Long-term TIC Flows (APR)
Industrial Production (MAY)
Manufacturing added 12,000 job in may. Down from the Q1 average of 41,000.
Capacity Utilization (MAY)
Manufacturing Production (SIC) (MAY)
U. of Michigan Confidence (JUN p)
Recent rise in unemployment can lead to lower consumer confidence this month.
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