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Dollar Completely Reverses its Gains as Risk Aversion Questioned, Investors Turn to Chinese GDP British Pound Eying Larger Bear Trend as the Governor Slashes Spending, BoE Leans Towards Stimulus Euro Dodges a Bullet as EU Pushes Back Greek Deficit Revision, Growth Readings Set for Thursday Canadian Dollar Slides after BoC Policy Report Lowers Growth Forecasts just as Risk Appetite Recovers Australian Dollar Particularly Exposed to Chinese Wave of Data as the Nation’s Resource Provider New Zealand Dollar Traders Look to Confidence Data and Risk Trends to Establish Fundamental Reactions Dollar Completely Reverses its Gains as Risk Aversion Questioned, Investors Turn to Chinese GDP As quickly as the short-covering effort for the dollar swept in, it would just as quickly be retracted. Setting essentially the mirror performance of the previous day, trade-weighted Dollar Index would completely retrace Tuesday’s gains. Interestingly enough, this sharp decline was actually the worst performance for the currency since July 1st (whereas the preceding rally was the sharpest since August 11th). Ultimately, volatility begets volatility; and the ramped up trading activity in the FX market and behind general risk appetite yesterday would amplify the subsequent correction. With that in mind, the actual retracement should not come as a surprise to either technical or fundamental traders. For those that watch the charts, we can see that outside of the dollar’s performance, other benchmarks would fail to produce a critical break. Most notable in this column is the S&P 500 which tested – but never broke – the floor on its month-long rising trend channel. However, that is not to say that the initial move will be completely ignored. Looking at EURUSD, GBPUSD and AUDUSD, it is quite clear that a major trend has been broken. And, often times, there is an effort to test former technical levels before finding continuation on new trends. The defining factor here is fundamentals. When considering the fundamentals of an extension or reversal on the dollar selling effort, the critical factor is speculation. The health of the economy, revenues from US firms, rates on bonds and other critical objective measurements of performance and returns are not what is driving price action. Instead, the market’s collective opinion on the potential future of these drivers along with an ever-evolving consensus on which factor is the most influential at any one point determines the course of the dollar, equities and every other freely-traded asset. This is perhaps why the dollar was able to rally Tuesday in the face of a greater detail and support on an expansion of the Fed’s stimulus efforts come November 3rd. The market was already heavily pricing in a second injection of capital; so the influence this selling catalyst could have had was diminished. The same could be said about today’s subsequent central bank updates. The Beige Book (a review of economic conditions released two weeks prior to a rate decision) reported that the US economy was expanding at a “modest” pace through the past two months and offered a slight upgrade to optimism. More noteworthy were the comments from Fed Presidents Lacker and Plosser. The former said it was a “hard case to make” to justify further asset purchases while the latter said it didn’t seem a necessary step at this point. These remarks wouldn’t help the dollar. At this point, the more critical driver (as it is more vague and thereby further mispriced than stimulus forecasting) is risk appetite. Wednesday’s session was a balancing period for the extreme shift in the taste for risk the previous session. Yet, there were developments through the day that may support a shift in investor optimism. For the 3Q earnings season, US Bancorp and Wells Fargo reported better-than-expected earnings; but skepticism - like that surrounding the weak showing from Morgan Stanley – will eventually find its tipping point. In the meantime, the pace and vitality of optimism will likely be heavily influenced by the Chinese 3Q GDP reading. This is the first of the largest economies to report the period’s growth; and this nation in particular is considered the benchmark for a strong economy and market. What happens if it disappoints? Related: Discuss the Dollar in the DailyFX Forum, John’s Analyst Picks: Short EURUSD and GBPUSD on Dollar Pullback British Pound Eying Larger Bear Trend as the Governor Slashes Spending, BoE Leans Towards Stimulus To establish a meaningful assessment of the British pound’s fundamental health, we need to look beyond GBPUSD. This dollar-based pair would put in for an aggressive rally that would reflect broad dollar selling; and the subsequent bid for the sterling would spill over. However, the life of this fundamental wave is short-lived. What has a little more staying power is the balance between growth, fiscal stability and yield in the country. The most remarkable and underrated development for the day was Chancellor of the Exchequer George Osbourne’s Comprehensive Spending Review. The policymaker laid out the most aggressive spending cuts (81 billion pounds) in the economy’s history. Balancing one’s fiscal books is certainly important; but such severe cut backs can very well threaten a still weak recovery. This being the case, the BoE’s minutes, in which there was modestly more support for additional stimulus, makes a much stronger case for bond purchases and hold rates. Euro Dodges a Bullet as EU Pushes Back Greek Deficit Revision, Growth Readings Set for Thursday Following its typical inverse relationship to the US dollar, the euro spent Wednesday’s trading hours in a steady advance. For support, the shared currency would buy time in facing a looming threat when the EU announced it was pushing back the release of the Greek debt revisions for the 2006-2009 period a month. Looking ahead to the next European session, we have PMI data – considered a timely proxy to GDP. Canadian Dollar Slides after BoC Policy Report Lowers Growth Forecasts just as Risk Appetite Recovers Following up on the previous days’ rate decision, the Bank of Canada released its quarterly Monetary Policy report. The tone of the report extended the effort to lower the market’s opinion of the economy and the Canadian dollar. According to the group, GDP this past quarter likely running 1.6 percent (previously forecasted to be 2.8 percent) and core inflation will hold below 2.0 percent through 4Q of 2012. Australian Dollar Particularly Exposed to Chinese Wave of Data as the Nation’s Resource Provider When looking for the beneficiary of a positive risk move, it is usually pretty safe to assume that the Aussie dollar has rallied. That was certainly the case Wednesday. In the coming 24 hours, the Australian dollar will be fully engaged in the strength or weakness of the Chinese economy. As the largest provider of coal and other vital commodities for the engine of the East, the Aussie dollar is probably the most sensitive major. New Zealand Dollar Traders Look to Confidence Data and Risk Trends to Establish Fundamental Reactions The New Zealand needs every point of support it can find. When risk appetite trends are strong (or at the least volatile) it is easy to ignore the kiwi’s actual role as a high-yielding currency. For event risk early Thursday, the New Zealand dollar is facing consumer confidence and credit card spending – important readings on domestic consumption and lending conditions in the economy. 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 CBAHIA House Affordability (3Q) Sits at lowest level since 2Q 2008. 10%+ growth in last 3 quarters. Credit Card Spending s.a. (MoM) (SEP) New Zealand credit card spending rose in each of the past 10 months. Credit Card Spending (YoY) (SEP) ANZ Consumer Confidence Index (OCT) Sits at highest level since June. Gross Domestic Product (YTD) (YoY) (3Q) Retail sales likely increased by over 18% for a second month in Sept. Overall, China's growth momentum is slowing, but it remains robust. Retail Sales (YTD) (YoY) (SEP) Industrial Production (YoY) (SEP) Industrial Production (YTD) (YoY) (SEP) Consumer Price Index (YoY) (SEP) Chinese inflation was over 3% in the past two months, prompting policy makers to raise rates yesterday. Purchasing Price Index (YoY) (SEP) Producer Price Index (YoY) (SEP) Fixed Assets Investments (YTD) (YoY) (SEP) Slowed in the last ten months. All Industry Activity Index (MoM) (AUG) July rise was highest in 3 months. Trade Balance (Swiss franc) (SEP) Swiss trade surplus narrowed in August from record high the month prior. Real Estate Index Family Homes (3Q) Rose to historic high in 2Q 2010. French PMI Manufacturing (OCT P) French manufacturing rose last month to highest level since April. German PMI Manufacturing (OCT A) German manufacturing fell in September for a second month. Euro-Zone PMI Manufacturing (OCT A) Europe's services, manufacturing industries grew at slowest pace in seven months in September. Euro-Zone PMI Services (OCT A) Euro-Zone PMI Composite (OCT A) Major Banks Mortgage Approvals (SEP) Likely fell for a fourth month. Retail Sales ex Auto Fuel (MoM) (SEP) U.K. retail sales ex auto fuel declined in August, following a three-month rise. Retail Sales ex Auto Fuel (YoY) (SEP) Retail Sales inc Auto Fuel (MoM) (SEP) Retail Sales inc Auto Fuel (YoY) (SEP) ZEW Survey (Expectations) (OCT) Negative first time since May '09. Leading Indicators (MoM) (SEP) Increased in last fifteen months. Initial Jobless Claims (OCT 16) Jobless claims rose by 13,000 in the week ended October 8. Euro-Zone Consumer Confidence (OCT A) Unexpectedly improved in Sept. Increased in 3 of past 4 months. Negative reading in past 2 months. BoE's Adam Posen Speaks on Economy Fed's James Bullard Delivers Open Remarks at St. Louis Fed 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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