Forex Analysis: Dollar Will Struggle to Climb with Fed, Fiscal Cliff Ahead



Dollar_Will_Struggle_to_Climb_with_Fed_Fiscal_Cliff_Ahead_body_Picture_1.png, Forex Analysis: Dollar Will Struggle to Climb with Fed, Fiscal Cliff Ahead

Fundamental Forecast for US Dollar: Neutral

The dollar’s performance this past week – like the broader capital and FX markets – was uneven. Nevertheless, the first three-day rally from the Dow Jones FXCM Dollar Index (ticker = USDollar) in three weeks and an impressive reversal from the benchmark EURUSD have called traders attention for what could happen over the coming week. In the scheduled and unscheduled event risk over the coming trading week, we see the fundamental heft that could activate underlying trends. The Federal Reserve’s final monetary policy decision of the year, key milestones on the Euro-area crisis and the ongoing discussions over the Fiscal Cliff are the type of items that can tap elemental considerations like risk appetite trends. The impact from these fundamental highlights alone looks good for a breakout, but what about the year-end liquidity drain? And how do we reconcile the likely outcomes of these events with the heavy technical levels in view?

There are three facets of the market to consider moving forward, and all three point to a very different outcome for sentiment and the greenback. First, there is the technicalaspect. Looking to the charts, positioning and volume for various markets; we see a common resistance in ‘risk’ and particular exhaustion in exposure. Of particular interest are the impressive rallies in US, European and Asian equity indexes into their respective trendlines and Fibonacci retracements. On the FX side, we find high risk-profile pairs like AUDUSD and NZDJPY anchored to the top of multi-year wedge patterns. Pair that with declining volume and over-saturation in risk holdings (COT figures show net long futures interest in the Aussie dollar hit a record high this past week), and it seems we are ripe for reversal.

However, every technical barrier can also be an opportunity for triggering a breakout. Fundamentals will certainly play a critical part in deciding our bearings and whether we can unite enough of the market behind the same cause and force a breakout or lasting trend. As it happens, the aforementioned three major events carry a probable outcome that doesn’t support the safe haven dollar. Most immediate – chronologically and psychologically – is the Fed decision. This gathering is already unique in that it comes with quarterly updated forecasts and Chairman Bernanke press conference. What makes it truly special though is the likelihood of ‘new’ stimulus being introduced.

This month, the central bank’s extension of the Operation Twist program (selling short-term Treasuries and using the proceeds to buy longer dated maturities) will expire. From a balance sheet perspective, the ending of this program would count a modest tightening effort. As such, the leading consensus in the market is that the group will replace the expiration of this $45 billion-per-month program with a comparable, new initiative. The composition of the replacement program is where the market reaction lies. An ‘unsterilized’ buying of Treasury, MBS (mortgage-backed securities) or agency debt is expected for the same size as the previous effort. That is sizable, but then again, it is theoretically priced in. Furthermore, the introduction to the QE3 program back in September essentially marked a top in risk.

The other two headline events carry similar consensus and doubts over influence. For the Eurozone’s vote on paying Greece the next round of aid, the buyback program seems to be on course and the alternative would be disastrous for everyone. It would hardly surprise euro traders – much less risk trends – to see it confirmed. As for the Fiscal Cliff, the timing is still up in the air for when and whether it will be resolved. Yet, US politicians are unlikely to let automatic cuts and tax hikes trigger. This won’t likely see progress until the following week.

So, even though we have influential fundamental events on the horizon and they are seen as most likely ending with a positive bearing on risk trends, a forward-looking market has likely undermined the impact. That not only curbs an unfavorable (for the dollar) risk-on trend, it also dampens the potential for a serious breakout and move in either direction. Heavy trading is what we need, though, if we have any hope at jump starting a trend. Speculative interest is at its lowest level since 1997 (according to S&P 500 futures open interest) and there is a natural drain into year end. While we may have volatility this week, we shouldn’t bank on structural trends. - JK

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.
Learn forex trading with a free practice account and trading charts from FXCM.


Get stories like this on the Yahoo app and discover more every day.
Download it now.
  • Malaysia's closing tin prices for Aug 30 Reuters - 39 minutes ago

    KUALA LUMPUR, Aug 30 (Reuters) - Following is a table of Kuala Lumpur tin market prices provided by a Malaysian trader. (Prices in $/tonne, and volumes in tonnes unless stated) Date KL Premium/ Spot Bid ... … More »

  • Hanjin Shipping Plunges After Report Creditors Won’t Back Plan Bloomberg - 53 minutes ago

    The creditors made the decision after meeting Tuesday morning, Yonhap said, citing unidentified creditors and the financial regulator. Korea Development Bank, the main lender, and Hanjin Shipping declined to comment. Shipping lines worldwide have … More »

  • 4 Jobs That Could Cease To Exist In The Future - 53 minutes ago

    About 47% of today’s jobs could be automated in the next 20 years The post 4 Jobs That Could Cease To Exist In The Future appeared first on … More »

  • Anti-whalers enlist fast ship to fight off Japanese
    Anti-whalers enlist fast ship to fight off Japanese AFP News - 55 minutes ago

    Marine conservationists announced Tuesday they will for the first time be able to outrun the Japanese whaling fleet in the upcoming annual battle to protect the giant mammals in the icy Southern Ocean. Sea Shepherd Global is adding a fast new … More »

  • KKR’s Most Senior China Executives Exit as Firm Plans Third Fund Bloomberg - 1 hour 11 minutes ago

    David Liu, head of China and co-head of Asia private-equity, and Julian Wolhardt, a partner in the firm, are leaving at the end of this year to form a China-focused investment firm, the company said in a release Tuesday. Ming Lu, previously co-head … More »

  • AirAsia May Sell Leasing Unit as Early as December to Pare Debt Bloomberg - 1 hour 30 minutes ago

    Proceeds from the sale may be used to reduce debt or pay a dividend, Group Chief Executive Officer Tony Fernandes said in a Bloomberg Television interview with Yvonne Man Tuesday. AirAsia’s board approved the sale process for all or a substantial … More »

  • Design flaws led to deadly Brazil mine disaster: report
    Design flaws led to deadly Brazil mine disaster: report AFP News - 1 hour 36 minutes ago

    Design flaws and a series of problems over six years led to the collapse of a mine dam and the loss of 19 lives in Brazil's worst environmental disaster, mining giant BHP Billiton said on Tuesday. A technical report commissioned by the world's … More »

  • Tokyo shares flat by break, soft data offsets weak yen AFP - 1 hour 38 minutes ago

    Tokyo shares ended the morning session flat on Tuesday as tepid data and profit-taking from the previous day's jump offset a weaker yen and a rally on Wall Street. The three major US indices gained on ... … More »

  • China’s Credit Party Winds Down in Headwind for GDP Growth (2) Bloomberg - 1 hour 45 minutes ago

    The amount of local yuan bond sales minus maturities fell 39 percent in August from a year earlier for non-financial firms to 124 billion yuan ($18.6 billion), data compiled by Bloomberg show. China must balance cutting corporate debt, which more … More »

  • Asia markets track Wall St up, US jobs in focus
    Asia markets track Wall St up, US jobs in focus AFP News - 2 hours 1 minute ago

    Asian markets rose on Tuesday, with Tokyo recovering from initial losses as expectations of a US interest rate hike and talk of more Japanese monetary easing pushed the yen down against the dollar. Bets on a rate hike this year have soared after … More »

  • Exclusive: Six U.S. senators urge Obama to prioritize cyber crime at G20 summit
    Exclusive: Six U.S. senators urge Obama to prioritize cyber crime at G20 summit Reuters - 2 hours 9 minutes ago

    Six U.S. senators have urged President Barack Obama to prioritize cyber crime at this weekend's Group of 20 summit in China, in the wake of the theft of $81 million from Bangladesh's central bank, according to a letter obtained by Reuters. The … More »

  • Why you should ignore Federal Reserve noise
    Why you should ignore Federal Reserve noise Truewealth Publishing - 2 hours 13 minutes ago

    Over this past weekend, a group of old people met at a remote mountain resort in the middle of nowhere in the U.S. and talked about money. And judging from the way the financial media treated the event, it may well have been the Greek mythological … More »

  • Gold holds overnight gains; U.S. data back in focus Reuters - 2 hours 35 minutes ago

    Gold held steady early on Tuesday as bargain hunters swooped in after the metal fell to near five-week lows, while investors wait to see how U.S. nonfarm payroll data due later this week will play into the timing of any rate hike. * Spot gold was … More »

  • Oil down 1 percent, pressured by glut, dollar, Nigeria outlook
    Oil down 1 percent, pressured by glut, dollar, Nigeria outlook Reuters - 2 hours 44 minutes ago

    Oil prices settled down more than 1 percent on Monday, snapping two consecutive days of gains, on renewed concerns about an oil glut, a stronger dollar and expectations that Nigerian rebels will stop hampering that country's crude output. … More »

  • Wynn’s $4.2 Billion Macau Casino Is Seen Off to Slow Start (1) Bloomberg - 2 hours 51 minutes ago

    The part of the casino floor catering to mass market customers at the Wynn Palace “felt slow” relative to other recent openings, Union Gaming analyst Grant Govertsen said in a research note Monday. The new casino has led to a marginal increase in … More »

  • Yuan Bears Emerge From Hibernation as Fed Imperils G-20 Calm (2) Bloomberg - 2 hours 58 minutes ago

    Derivative markets are pointing to renewed bets on yuan depreciation, with a three-month measure of expected price swings poised for the biggest monthly increase since January. The increased pessimism comes after a period of calm that sent the … More »

  • Oil prices rise as dollar retreats from two-week high Reuters - 3 hours ago

    Oil futures edged up on Tuesday as the U.S. dollar erased earlier gains, but doubts that producers would be able to agree to an output freeze continued to drag on prices. International Brent crude oil futures (LCOc1) were trading at $49.34 per … More »

  • Volkswagen decides not to sue South Korea over sales ban
    Volkswagen decides not to sue South Korea over sales ban Reuters - 3 hours ago

    Volkswagen (VOWG_p.DE) decided against suing South Korea which last month suspended sales of most of its models and slapped a fine of 17.8 billion won (12.16 million pounds)on the German carmaker. Instead, Volkswagen will try to achieve … More »

  • BOJ Needs Massive Shock & Awe, $2 Trillion Investor Says (1) Bloomberg - 3 hours ago

    “It is how much they do, and whether they can create that kind of shock and awe at this point in the cycle,” said Mark Haefele, global chief investment officer at UBS Wealth Management, in a Bloomberg Television interview, on Monday. “They could … More »

  • 5 Unheard Of Beach Destinations In Australia
    5 Unheard Of Beach Destinations In Australia - 3 hours ago

    Many of us Singaporeans dream of visiting the land down under, which is surrounded by the ocean and... … More »

  • Japan’s Household Spending and Unemployment Fall in July (1) Bloomberg - 4 hours ago

    Household spending fell 0.5 percent in July from a year earlier, the statistics bureau said on Tuesday (forecast -1.5 percent). Retail sales fell 0.2 percent from a year earlier (forecast -0.9 percent), according to a trade ministry report. The … More »

  • Asian Stocks Gain Amid U.S. Rebound While Japan Shares Retreat Bloomberg - 4 hours ago

    The MSCI Asia Pacific Index climbed 0.3 percent to 138.33 as of 9:16 a.m. in Tokyo. The index fell Monday after Federal Reserve Chair Janet Yellen indicated the case for an interest-rate hike is getting stronger. Investors are watching data … More »

  • Asia ex-Japan Stocks Advance After U.S. Rally as Oil Near $47 Bloomberg - 4 hours ago

    South Korea’s won strengthened and crude oil was little changed. The MSCI Asia Pacific Excluding Japan Index rose as equity benchmarks advanced in Australia, New Zealand and South Korea. Japanese shares retreated following their biggest jump in … More »

  • Tokyo shares open lower despite Wall Street gains AFP - 4 hours ago

    Tokyo shares opened modestly lower on Tuesday following a jump the previous day, despite a positive lead from Wall Street. The benchmark Nikkei 225 index fell 0.28 percent, or 46.51 points, to 16,690.98 ... … More »

  • EU to hand Apple Irish tax bill of over 1 billion euro, source says
    EU to hand Apple Irish tax bill of over 1 billion euro, source says Reuters - 4 hours ago

    The European Commission will rule against Ireland's tax dealings with Apple (AAPL.O) on Tuesday, two source familiar with the decision told Reuters, one of whom said Dublin would be told to recoup over 1 billion euros in back taxes. The Commission … More »

Recent Quotes
Symbol Price Change % Chg 
Your most recently viewed tickers will automatically show up here if you type a ticker in the "Enter symbol/company" at the bottom of this module.
You need to enable your browser cookies to view your most recent quotes.
to view quotes in your portfolios.


  • Most Actives
    Most Actives
    NamePriceChange% Chg
  • % Gainers
    % Gainers
    NamePriceChange% Chg
  • % Losers
    % Losers
    NamePriceChange% Chg

Market Data

  • Currencies
    NamePriceChange% Chg
  • Commodities
    NamePriceChange% Chg
  • Bonds
    TreasuryYield (%)Yield Change