Dollar Ready to Break 10,555 if the Dow Relinquishes 16,325

Talking Points:

• Dollar Ready to Break 10,555 if the Dow Relinquishes 16,325
• British Pound: Next Week’s Docket Can Offer Driver Where the BoE Decision Couldn’t
• Euro Traders Hear Threats and Forecasts from the ECB

Dollar Ready to Break 10,555 if the Dow Relinquishes 16,325

The Dow Jones Industrial Average has affixed itself to multi-year support, FX volatility measures are rising and haven demand is showing through in Treasuries. Yet, that doesn’t seem to be enough to drive the US Dollar to the next stage of its progressive advance…yet. Whether we reference the Dow Jones FXCM Dollar Index (ticker = USDollar), the ICE DXY or even individual pairs like EURUSD; we see the hesitation. For the USDollar, that is a tight range below 10,555. And, if we consider that the bull’s holdout – US equities – has yet to turnover, it makes sense that this last resort safe haven currency hasn’t put in for a preemptive break. Through the coming session, ‘risk aversion’ will remain the market’s undisguised trigger phrase for the dollar. That will be the case through next week as well. Alternatively, interest rate speculation will take a backseat through releases like the 2Q labor costs, TICs flows and retail sales data. Rate speculation is naturally tempered by fading speculative appetite, but it may seem unnaturally exaggerated if we use US yields as a guide as they play double duty as haven assets.

British Pound: Next Week’s Docket Can Offer Driver Where the BoE Decision Couldn’t

Short-end Gilt yields and swaps hit eight-week lows Thursday. That means expectations built on the Bank of England’s timing and pace for the triumphant return to a hawkish rate regime are tempering. Once again, the tangible event risk to breed doubt was rather light this past session. The only item on the docket was the BoE rate decision which doesn’t offer up any guidance when rates or stimulus go unchanged (which they were). However, once the pendulum starts to swing the other way for rate speculation, it is difficult to stop. For Friday event risk, trade and construction statistics cover important areas of the economy. The real market fodder however comes next Wednesday though when the central bank releases its Quarterly Inflation Report (QIR) and the market recalibrates its rate timetable all at once.

Euro Traders Hear Threats and Forecasts from the ECB

Having already pulled out most stops in its meeting just a few months back (rate cuts, negative deposit rates, Targeted-LTRO programs, etc), there was little chance of a new policy implementation from the ECB. However, after events like the failure of Portugal’s Banco Espirito Santo and Italy tipping back into recession, the market was looking more intensely for cues of intent. President Draghi seems to be whipping the doves forward by suggesting there is unanimous support for nonstandard tools if/when necessary and they were looking at procedure for an asset purchase program. It may be some ways down the line, but even Draghi noted the diverging paths and potential between EZ and US.

Yen Crosses Slipping Supports, Threatening Full-Scale Bear Trend

The Yen crosses are in varying degrees of deterioration. USDJPY is still well off of its range low from 2014 (100.75) while EURJPY is this morning slipping to new lows. Yet, one thing is proving universal this morning: a persistence of bearish volatility. Through much of Thursday, the market spent the day atoning for its erratic tumble the previous day. Yet, the calm didn’t last long. With each pair that clear serious levels of support (EURJPY 136.25, GBPJPY 171.50, NZDJPY 86.30, etc) the more definitive conviction becomes. For drive, US actions in Iraq, reports of a possible break in the Gaza seize fire, and escalating sanctions over Ukraine add a geopolitical tone to an already-tangible shift in sentiment amongst market participants. Keep an eye on Nikkei 225 moment and USDJPY’s proximity to 100.

Canadian Dollar Traders Prepared for an Aussie-Level Jobs Reaction

Top event risk through the final trading day of the week goes to Canada’s trading statistics for July. Historically, deviations from consensus from this data generate hefty market swings. And, divergences are relatively common. What makes this data particularly interesting for traders though is the recent rise in volatility measures (the one-month expected volatility level for USDCAD has risen from 4.00 to 5.17 percent in less than two months) and the impact of yesterday’s Australian jobs data. A meaningful disappointment in the Aussie report triggered heavy selling for the local currency. Could a miss or beat around the 20,000-net increase and 7.1 percent jobless rate consensus do the same?

Emerging Markets: The Sanctions Increase and Russia Prepares 2Q GDP Data

Fresh monthly lows for the MSCI Emerging Market ETF tracks the risk inherent in this otherwise high-return market segment. Thursday’s performance was a 0.4 percent decline on another trend of increasing volume. The Bloomberg Index of sovereign bond interest behind EM dropped to a 7-week low and the EM volatility index rose to levels last seen in early June – when it was still in the midst of a 10-month decline. In the currency ranks, very nearly the entire list was lower against the dollar. The top story – though its 0.4 percent decline didn’t make it top mover – remains the Russian Ruble. Building on reports that Russian troops were building on the Ukrainian border, Russia announced an increase in sanctions – on US fruit imports. If the market is already nervous about ‘risk’ assets, disconcerting news will become selling news.

Gold Responding to Financial Fear, Stimulus Upgrades, Dollar Hesitation…But Where the Volume?

Though its momentum was notably tempered this past session, gold nevertheless advanced for a third consecutive session. Fundamentally, it seems to have all the right reasons to find a bid. The retreat in equity markets continues with volatility readings finding permanent buoyancy to fulfill a ‘safe haven’ demand. Meanwhile, the ECB’s policy decision shows that one of the world’s largest central banks is contemplating upgrading its stimulus effort, thereby leveraging the alternative-store-of-wealth appeal of the metal. Through this fundamental push, though, something is noticeably missing – volume. Neither futures nor ETF markets see a growing appetite. The question here is whether traders want the dollar as an alternative to the Euro and as a safe haven or the gold for the same role.**Bring the economic calendar to your charts with the DailyFX News App.

ECONOMIC DATA

SUPPORT AND RESISTANCE LEVELS

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CLASSIC SUPPORT AND RESISTANCE

INTRA-DAY PROBABILITY BANDS 18:00 GMT

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--- Written by: John Kicklighter, Chief Strategist for DailyFX.com

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