By John Kicklighter, Currency Strategist 18 November 2010 03:22 GMT 
Dollar Rally Cools Post Breakout as Investors Mull Financial Cracks, US Inflation Euro Buys Time with Irish Bailout Rebuke but Region-Wide Troubles will Force the Issue British Pound Traders Find Little Confidence in Employment Figures, What about Deficit Progress? Canadian Dollar Prepares for Capital Flows, Growth Forecast and BoC Quarterly Review New Zealand Dollar Boosted by Accelerated Inflation and Improved Consumer Confidence Dollar Rally Cools Post Breakout as Investors Mull Financial Cracks, US Inflation
Most experienced traders are familiar with the concept that a significant breakout is often followed by a short-term correction whereby the market makes it ultimate decision to catalyze the new-found trend or reverse the move to draw price back into a comfortable trading range. Both the dollar and risk appetite trends are currently in this transition period. Looking for the logic behind this pause during a period that many would think is a clear signal to plow into a new trend, there is both a technical and fundamental motivation. From the technical side of things, former support is often treated as new resistance (and vice versa) as the initial breakout flashes through momentum by clearing nearby entry and stop orders. As this accelerant is burnt off, the many speculators used to the old trend will attempt to jump back in on what they think is a ‘cheap’ price. Yet, as it becomes evident that the market is struggling to overtake that former floor, reality begins to set in and the eager traders capitulate. That said, a false breakout is the scenario where there is enough participation to push beyond the technical boundary and put the market back on its original path. We can see that most market benchmarks are in the process of determining which scenario will prevail. The Dollar Index, is pulling back towards the five-month trend and 50-day moving average that it just recently overtook. Reflecting on a broader theme, the S&P 500 marked a very tentative and modest bounce after posting its biggest drop in months to break a preternaturally consistent, two-month bull trend. The fundamental aspect of this trading phenomenon is unique to our current situation. There are still very serious reasons to doubt the outlook for economic activity, financial stability and the prospect for returns; but it is difficult for market participants to throw in the towel on the impressive trend of the past few months. Since the beginning of September, considerable leverage was dedicated to taking part of the steady climb ahead of the Fed’s second stimulus program. Eventually, investors in equities, corporate debt and other risky assets will submit to the troublesome forecast; but there is currently a lull that is allowing traders to ignore reality. The most prominent threat, European financial stability, has recently found a temporary period of calm after Ireland refused stimulus at Tuesday’s EU meeting. However, this doesn’t improve the situation in the country’s banking system. In fact, it merely postpones a solution while financing costs across the region continue to balloon and the lines of support start to breakdown. Another building threat to risk appetite trends exists in China’s threats to curb inflation. This may seem a prudent economic policy; but the side effect is curbed speculation in one of the market’s favorite trading destinations. The US is providing its own contribution to the global risk scheme. Adding credence to the Fed’s decision to add a second round of stimulus this month, the core measure of annualized CPI growth slowed to its weakest pace on record at 0.6 percent. This doesn’t really diminish the dollar any further because the expansionary policy has been largely priced in at this point; but it does remind us that there are lasting economic and market troubles related to deflation or stubborn disinflation. The data that we should pay more attention to is the housing starts data. Construction on new developments plunged 11.1 percent to its second lowest level on record owing largely to multi-home dwellings. Yet, this data should be put into context of the larger US housing sector problems. Not only is construction activity anemic; the wealth in home prices is further curbing confidence, a backlog of reposed properties is threatening to keep this sector from contributing to a recovery and ongoing issues with foreclosures threaten to trigger the financial mess tied up in real estate-based mortgages. US housing may pose a second wave crisis. Related:Discuss the Dollar in the DailyFX Forum, John’s Analyst Picks: AUDUSD and AUDCHF offer Short-Term Setups in Eerily Quit Markets Euro Buys Time with Irish Bailout Rebuke but Region-Wide Troubles will Force the Issue Have conditions improved in Europe? It would seem so with the euro slowly retracing its steps after its significant decline of the past week. However, this tentative recovery is more accurately attributed to a pause in more pervasive financial concerns. Ireland is still the most immediate threat to the future of the shared currency. Finance Minister Lenihan’s decision to snub financial support from the EU at the group’s monthly meeting late Tuesday has not improved the situation. In fact, the uncertainty increases the risk for instability for the broader region. However, as the market awaits the EU, ECB and IMF’s assessment of the country’s ability to stabilize its own banking sector, there is time for reflection. Yet, the market may not simply wait for policymakers to give them the official assessment of the market’s health. It was reported Wednesday that LCH.Clearnet – one of the largest clearing houses for European fixed income – raised its margin on Irish government debt by 15 percent for the second time in a week. The steps to smother confidence are progressive in this way. In the meantime, Ireland isn’t our only concern. Following up on its threat to withhold its next tranche of support to bailout Greece, Austrian officials said the EU was pushing back its December payment to January. Elsewhere, Portugal struggled in its recent bond auction; and it was rumored that the ECB had to buy Portuguese and Greek bonds. British Pound Traders Find Little Confidence in Employment Figures, What about Deficit Progress? Even though risk appetite took a slow turn north, the British pound was still struggling to gain traction. This was particularly surprising given a surprise decline in jobless claims through October; though the noncommittal BoE minutes help offset that fundamental marker. Perhaps speculation of a future stimulus program will carry more weight as we look ahead to public borrowing figures. Canadian Dollar Prepares for Capital Flows, Growth Forecast and BoC Quarterly Review The Canadian dollar has merely been following risk appetite and US dollar-based trends the past few days; but perhaps the currency’s own fundamental backdrop will carry more weight over the coming 24 hours. On the docket for Thursday are the Leading Indicators index and capital flows figures. For actual market influence though, the BoC’s quarterly review will likely carry the most weight for policy and growth forecasts. New Zealand Dollar Boosted by Accelerated Inflation and Improved Consumer Confidence It certainly helps that risk appetite trends were bullish; but the New Zealand dollar found an extra push through its own fundamental docket early Thursday morning. For interest rate hawks, the 1.2 percent reading on the 3Q producer price index output doesn’t necessarily promise future hikes; but it sets up the CPI numbers for the occasion. Also, consumer confidence would show relief in a bounce from a year low. Tell us what you think of this article! For Real Time Forex News, visit: http://www.dailyfx.com/real_time_news/ **For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar ECONOMIC DATA Next 24 Hours Average Weekly Wages (QoQ) (AUG) Average weekly wages rose in May by the smallest amount since 2006. Average Weekly Wages (YoY) (AUG) ANZ Consumer Confidence Index (NOV) Sits at lowest reading since 2009. Trade Balance (Swiss franc) (OCT) Swiss exports declined in September, as European slowdown and strong franc hurt exports. Euro-Zone Current Account s.a. (euros) (SEP) Euro-Zone posted a current account deficit in the last 8 months. Euro-Zone Current Account n.s.a. (euros) (SEP) Retail Sales ex Auto Fuel (MoM) (OCT) U.K. retail sales unexpectedly fell in September for a second month as consumers braced for the deepest budget squeeze since World War II. Retail Sales ex Auto Fuel (YoY) (OCT) Retail Sales inc Auto Fuel (MoM) (OCT) Retail Sales inc Auto Fuel (YoY) (OCT) Public Finances (PSNCR) (Pounds) (OCT) U.K. posted the largest budget deficit for any September since modern records began in 1993. Public Sector Net Borrowing (Pounds) (OCT) Public Sector Net Borrowing ex Interv. (OCT) Fell to six-month low in October. Leading Indicators (MoM) (OCT) Fell in Sept. for first time since '09. International Securities Transactions (C$) (SEP) Increased in the last two months. Sales beat expectations in August. Initial Jobless Claims (NOV 13) Jobless claims fell last week to the lowest level in four months. Increased in the last three months. Likely rose for a third month in Nov. RPX Composite 28 Day (YoY) (SEP) RPX composite declined annually in August for a second straight month. RPX Composite 28 Day Index (SEP) ECB's Yves Mersch Speaks at Euro Finance Week ECB's Trichet, Gonzalez-Paramo, Bini Smaghi Speak on Policy BoE's Adam Posen Speaks on Monetary Policy Bank of Canada Publishes Quarterly Review Fed's Kevin Warsh Speaks on Financial Markets Fed's Narayana Kocherlakota Speaks on Monetary, Fiscal Policy Fed's Charles Plosser Speaks on Monetary Policy SUPPORT AND RESISTANCE LEVELS CLASSIC SUPPORT AND RESISTANCE - 18:00 GMT CLASSIC SUPPORT AND RESISTANCE –EMERGING MARKETS 18:00 GMTSCANDIES CURRENCIES 18:00 GMT INTRA-DAY PIVOT POINTS 18:00 GMT INTRA-DAY PROBABILITY BANDS 18:00 GMT v Written by: John Kicklighter, Currency Strategist for DailyFX.com To receive John’s reports via email or to submit Questions or Comments about an article; email jkicklighter@dailyfx.com
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18 November 2010 03:22 GMT
Nov, 17 02:36 GMT FOREX: Dollar Rally Fortified by Crucial Reversal in S&P 500, Risk AppetiteNov, 16 02:36 GMT FOREX: Dollar Index Scores a Meaningful Bullish Breakout but European Issues, Risk Trends Still BlurredNov, 13 04:27 GMT FOREX: Dollar Ready to Rally as Europe Devolves into Crisis, G20 Sanctions Speculative Capital CurbsNov, 12 02:36 GMT FOREX: Dollar Finds Traction but Momentum Requires Risk Trends, G20 Surprises or Euro WeaknessNov, 11 02:36 GMT FOREX: Dollar Climb Winded as Reserve Diversification Calls Grow ahead of G20, Fed Reminds of QE2
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Chart generated using FXCM Strategy Trader Commodities - Metals Gold Little Moved After Critical Break as Investors Wait for the Next Shoe to Drop Spot Gold - $1,336.00 // -$3.70 // -0.28% Though it would put in for a fourth consecutive loss, gold was still looking at a far more reserved decline through Wednesday’s close. This tempered pace fits both a fundamental pause from the speculative ranks and a meaningful technical backdrop. For guidance on the supply and demand course, the ‘alternative asset’ value for the metal was little changed as other gauges for sentiment trends were similarly little changed for the day. From price action, the break of the three-and-a-half month rising trend channel yesterday doesn’t mean the market is in free fall. The past month, the metal has developed a frequented level of support around 1,320 and there is still a range of short-term term rising trendlines to fall back on. Yet, despite the technical levels that exist, fundamental and sentiment concerns can easily drive this market to resume its plunge or otherwise completely reverse the losses of the past week. There are many general financial and economic concerns that quickly puts the metal’s safe haven appeal and alternative asset value back to work. European developments are still at the forefront. However, with Ireland’s decision to not ask for financial aid at the monthly EU meeting, the region is floating in limbo. Nevertheless, EU, IMF and ECB members are scheduled to travel to Ireland and comb the nation’s finances to see if its banking system can stand up by itself. A passing or failing grade will be delivered soon. In the meantime, clearing housings for investors that are trading Ireland’s debt are boosting margin and there is concern that support for Greece’s bailout program is disintegrating. State-side, the US saw inflation trends cool to the lowest level on records going back half a century. This curbs the appeal of gold as an inflation hedge on the one hand but confirms the devaluing effects of Fed stimulus on the other hand. And, in Asia, investors are waiting to see what measures China will take towards cooling rampant inflation. This could curb speculative turnover globally and lower the risk of financial crisis from this particular region. In addition to the big, intangible themes, we can see there is still a supply and demand influence on price. The World Gold Council released its 3Q market outlook with projections for demand growing through jewelry use, institutions, central banks and industrial. At the same time, the supply trend is also seen rising in the months ahead. One highlight for demand however shows India’s imports have through the first three quarters already overtook the total consumption of 2009 at 624 tons. Meanwhile, total ETF demand was little changed for the day. Spot Silver - $26.17 // $0.53 // 2.07% Wednesday’s performance for silver was essentially a mirror of the previous day. There was little progress made as volume on the active December contract dropped to its lowest level since November 2nd. Momentum has slowed on this metal’s decline for a number of days; yet it is still early to say whether this is simply a reduction in speculative interests after the increase in margin by the CME or a shift back towards optimism. Spot Gold Chart (Daily) 
Chart generated using FXCM Strategy Trader Discuss gold and oil trading with other traders in the DailyFX Forum Written by John Kicklighter, Strategist To receive John’s reports via email or to submit Questions or Comments about an article; email jkicklighter@dailyfx.com