Dollar could be Bid on Safe-Haven Appeal

The US dollar is stronger against the majors in the Asian trading session as the shortened week will be critical for the continuation of the “risk-on” mode that was sparked last week by the passage of the Greek austerity measures and the better than expected ISM performance. Headwinds are already apparent with the rejection of the Greek debt rollover plan by S&P and a drop in some commodity prices according to a Financial Times article.

Forex Market Trends

Daily Trend no down no down no up
Weekly Trend up up down down up no
Resistance 1.4701 1.6261 81.48 0.8560 1.0890 0.9161
1.4618 1.6175 81.11 0.8519 1.0816 0.9098
1.4577 1.6125 80.94 0.8496 1.0772 0.9067
Support 1.4495 1.6039 80.57 0.8456 1.0698 0.9004
1.4453 1.6003 80.36 0.8439 1.0667 0.8973
1.4371 1.5917 79.99 0.8398 1.0593 0.8910

Economic News

USD – Dollar could be Bid on Safe-Haven Appeal

The US holiday celebrations are ending and US debt talks are set to begin between Democrats and Republicans. The two parties are at odds over how to raise the $14.3T debt ceiling. Republicans are steadfast in their refusal to raise taxes unless an increase in spending cuts accompanies the raising of the debt ceiling. A temporary solution may be reached with an increase to the debt ceiling but at a smaller amount than previously hoped for and with spending cuts the two parties have previously agreed upon. This will enable Congress to kick the can down the road and address the issue at a later date. Fitch ratings has already pre-committed to cutting the AAA US credit rating should the US miss a payment on its debt given the August 2nd deadline.

Last Friday’s stronger than expected ISM survey helped to boost risk appetite in the FX market while reducing the appeal for the USD. However, markets are facing headwinds in Greek debt crisis, a quick decline in commodity prices such as corn and wheat, as well as last week’s US equity market rally that had significantly lighter volumes. This may make the USD more appealing to traders on a safe-haven bid. With the EUR/USD rally stalling at the top of the recent consolidation pattern during today’s Asian trading, one has to wonder if the dollar has made a bottom.

EUR – S&P Says No to Greek Debt Rollover

Just as quickly as EU officials thought they were out in the clear of the Greek debt crisis, the rating agencies pull them back in. Early in the morning S&P announced that the French led Greek debt rollover plan in its current form would be considered a credit event, sending EU officials back to the drawing board.

In a release yesterday morning S&P announced it would view both French banking proposals as a “selective default.” The view by S&P is discouraging as it is the first of the three major rating agencies to comment on the proposed rollover plan. S&P cited both proposals would return a reduced value to the holders of Greek debt than previously expected under the original debt agreement. Under ECB guidelines the European Central Bank will not accept Greek debt as collateral in exchange for ECB liquidity after a default. While the decision by S&P is certainly a negative for the euro, the 17-nation currency was off its early highs versus the dollar but has been able to maintain its position above the 1.4500 level, perhaps due to expectations of an interest rate hike by the ECB this week. Initial resistance is found at the top of the consolidation pattern at 1.4520 and a solid close above here would likely target 1.4700. To the downside 1.4440 from the June 22nd high is the initial support followed by the bottom of the consolidation pattern at 1.4130.

AUD – RBA Holds Rates Steady as AUD falls

The Reserve Bank of Australia held interest Rates steady at 4.75%, in line with consensus forecasts but the Aussie dollar dropped after the RBA was more negative than expected on the Australian economy and makes for a rate hike in the near-term less certain. The AUD fell versus both the dollar and the yen after the rate decision. The downbeat forecast of the Aussie economy is not such a surprise given yesterday’s -0.6% contraction in May retail sales. The interest rate decision largely overshadowed the better than expected trade balance data which showed a widening trade surplus in the month of May due to a 3% increase in exports.

Rumors of a potential Chinese interest rate increase also weighed on the AUD. Comments yesterday from the Peoples Bank of China signaled inflationary pressures are still growing as the Chinese economy continues to expand. Though last Friday’s weaker than expected manufacturing PMI did not derail growth expectations, it did increase the chatter of a possible hard landing for the Chinese economy.

Oil – CFTC Data Hints at Crude Oil Price Declines

Spot crude oil prices were relatively unchanged from Friday’s price as many market participants were away from their trading desks due to the 4th of July holiday in the US. However, this week will have important data releases that could determine the next move in spot crude oil prices. Friday’s non-farm payrolls report will be the key report for crude oil traders as the US unemployment picture remains bleak and is not expected to show a dramatic improvement from previous reports.

Crude oil traders should be aware of the continued drop in managed money long positions in the NYMEX crude oil futures contract as shown by the most recent CFTC Commitment of Traders report. While the market continues to be net long, the shorts increased their position while open interest has steadily declined since reaching a peak in late May. This data hints at declines for spot crude oil prices.

Technical News

A bullish engulfing pattern on the weekly chart does not bode well for further declines in the pair. Combined with rising weekly and daily stochastics, a case can be made for additional gains in the EUR/USD. The first resistance level the pair should face is 1.4700 off of the June high and a move above here and the pair would encounter selling pressure at the May high of 1.4940. Should the pair fail to move outside the upper line of the triangle consolidation pattern at 1.4515 the EUR/USD would encounter support at 1.4440 and the lower leg of the triangle which comes in at 1.4130.
The monthly chart shows potential declines for sterling. Falling stochastics point to additional losses in the pair. Traders could be looking for the GBP/USD to decline to 1.5650, a level that offers long term support. Both the 20-month moving average comes in near this area but more importantly this is where the falling trend line from the 2007/2008 highs comes in and sterling could see a technical bounce in this area. This level has further significance as it coincides with the October 2010 lows on the daily. To the upside resistance is found at 1.6150, the top of the current consolidation pattern as well as the previous trend line from the May 2010 low at 1.6280.
A triangle consolidation pattern has formed on the daily chart with the legs forming from the May high and the June low. Judging from the long term trend the USD/JPY would be expected to break lower where support comes in at 80.25. A break here would likely test 79.70 and 79.55. However, a move higher may also be in the cards and a break above the initial 81.10 resistance would target 81.75.
After forming a base near the 0.8300, the pair has risen to test its falling trend line from the February high which comes in at 0.8535, not far from the resistance level at 0.8550. Further resistance awaits the pair as the 50-day moving average. A breach here and the pair could unravel to the mid-May low at 0.8750.

The Wild Card

After retracing 38% of the move from mid-April 2009 to April 2011, spot crude oil prices received a bounce at this technical level which comes in at $88.75. However, falling weekly and daily stochastics point at additional declines in the commodity. forex traders may want to target the mid-February low near $84 as the next target. This would be in line with a 38% retracement from the 2009 low as well as the rising trend line from the 2010 low.

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