• Dollar Responds to Crisis Fears, Liquidity Crunch with Massive Rally
• Euro’s Troubles Turn from Political Uncertainty to Market-based Crisis
• British Pound Outpaces all but the Dollar and Yen ahead of the BoE
• Japanese Yen: Officials Have to Weigh USDJPY against Other Crosses
• Australian Dollar Finds an Effective Bearish Accelerant in Risk Trends
• New Zealand Dollar Drops Against all its Counterparts, Aside from Aussie
• Gold Drops a Second Day Despite Crisis Backdrop as Liquidity Comes Out on Top

Dollar Responds to Crisis Fears, Liquidity Crunch with Massive Rally

For the first time in months, investors and the speculative masses are seriously contemplating the risk of another global financial crisis. Naturally, the shift in sentiment pushes capital from the high yielding, risk-inherent assets to the certifiable safe havens. Yet, there is a fundamental difference in this particular change in tone and those that we have seen in previous tides this year. This time around, there is a clear risk of contagion with the consequences of an evaporation of liquidity readily visible. This is exactly the right mix of conditions that highlights the greenback’s value amongst its safe haven peers: risk aversion to the point that yield doesn’t even come into the equation (because there is virtually no return to be had with dollar exposure). This particular slant on risk was so intense in fact that the Dow Jones FXCM Dollar Index (ticker =USDollar) managed a 1.5 percent rally – the third largest rally for the benchmark in over a year.

What makes the current market bearings so remarkable though is the risk that we transition from a mere risk aversion slide into a full-blown capital withdrawal trend is the highest we have seen in many months. To appreciate this risk, we have to look beyond the immediate pressure in the more risk-sensitive assets. If we were to reference our favored S&P 500 as the barometer for underlying financial conditions, we would be led to believe that this is more benign a setback for optimism than it truly is. The 3.7 percent plunge through Wednesday’s close may be remarkable; but it doesn’t compare to the consistent tumble through late July / early August nor does it compete with the instances of 4.5 percent-plus tumbles during that period…yet. Crises take time to spread; and the symptoms are often not fully appreciated until it is well underway. For those looking for a line in the sand, an S&P 500 move below 1,220 and above 9,900 for the Dollar Index may cue the next waves.

In the meantime, we can monitor the progress of this deteriorating fundamental picture. Where the current risks look more severe than the downdraft back in August are in the underlying structure of the funding and capital markets. Three months ago, the market finally shed a significant portion of passive longs that didn’t fit economic and yield expectations as market activity stalled. This time around, we have reason to believe a freeze in liquidity can accelerate the crisis spread beyond Europe’s boarders. This threat was raised initially with MF Global’s bankruptcy; but the impact on credit markets never reached critical mass. That won’t be the case if Italy falters.

Related:Discuss the Dollar in the DailyFX Forum,John’sVideo:EURUSD and S&P 500 Watch as Italian Trouble turns into Global Crisis

Euro’s Troubles Turn from Political Uncertainty to Market-based Crisis

Heading into Wednesday’s open, it seemed that European officials had bought themselves time to come up with a lasting resolution to the region’s problems. The Greek vote was hitting a snag; but the country’s next tranche of aid isn’t needed until mid-December. And, closer to the Euro Zone core, there was a sense of relief inPrime Minister Berlusconi’s announced resignation as it was considered conditional on the passage of further austerity measures – progress that could help stem fear that the country would fall victim to investor fear. Yet, both of these efforts are meant only to buy time and fall well short of actually encouraging confidence. What was needed was a catalyst to remind the market of the ongoing trouble in the backdrop and the importance of the market in this scenario. We received exactly that when LCH.Clearnet (a large clear house for government debt and CDS trading) raised the margin on Italian debt – leading to an unwinding of the debt before margin calls set in. In turn, the Italian 10 year yield soared above the 7 percent threshold – putting the EU’s third largest country under bailout conditions. The trouble is that Italy is too large for the EFSF or other routine programs. At this point, countries leaving the EU is seen as the most likely outcome.

British Pound Outpaces all but the Dollar and Yen ahead of the BoE

There is little doubt that the British pound will absorb significant blowback from Euro-area trouble as the financial and economic ties are substantial. However, the sterling does confer some benefit as its position as a global financial center is boosted. Looking to the upcoming session, we will measure theBoE policy decision against crisis sentiment. A lack of guidance in no change could unnerve UK investors.

Japanese Yen: Officials Have to Weigh USDJPY against Other Crosses

Risk aversion impacts the US dollar and Japanese relatively evenly. So, with the market turning to risk aversion, it would seem that the yen would advance against its US counterpart as the higher real rate return unwinds the intervention effort. Yet, this time around, conditions were different as the question of liquidity developed. This relationship makes USDJPY a unique gauge of the extremes of risk aversion.

Australian Dollar Finds an Effective Bearish Accelerant in Risk Trends

Given the sharp move in equities, speculative commodities, yields and all other things growth and yield-dependent; the Australian dollar’s drop across the board this past session shouldn’t surprise. However, as this sentiment trend gains traction, this particular currency risks an amplified reaction as expectations for further rate cuts further tips the risk/reward balance. There is now 55 percent probability of a December 50bp cut.

New Zealand Dollar Drops Against all its Counterparts, Aside from Aussie

A currency whose place in the upper echelon of the most liquid fiats comes through its position as an investment currency would naturally succumb to the risk unwinding we have seen. However, this pair is an interesting contrast to the Aussie dollar as we have recently seen in Finance Minister English’s speech that they will abstain from intervention and don’t expect rate cuts. Growth may sabotage this stance though.

Gold Drops a Second Day Despite Crisis Backdrop as Liquidity Comes Out on Top

Risk aversion was in full swing Wednesday; so why was the ultimate safe haven asset in the red for a second day? Fundamental traders should know the answer to this already. The source of this recent slump in sentiment was borne from a need for liquidity – a touchy subject for the expensive and margined metal. This view of gold is best observed against the US dollar – the favored asset for market depth.

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**For a full list of upcoming event risk and past releases, gotowww.dailyfx.com/calendar

ECONOMIC DATA

Next 24 Hours

GMT	Currency	Release	Survey	Previous	Comments
0:30	AUD	Employment Change (OCT)	10.0K	20.4K	Major data of the morning: unemployment rate expected to rise, though secondary full time employment change will be closely watched as a future indicator of economic health
0:30	AUD	Unemployment Rate (OCT)	5.3%	5.2%
0:30	AUD	Full Time Employment Change (OCT)		10.8K
0:30	AUD	Part Time Employment Change (OCT)		9.6K
5:00	JPY	Consumer Confidence (OCT)	39	38.6	Index bucks expectations on hope
6:00	JPY	Machine Tool Orders (YoY) (OCT P)		20.1%	Machine tools continue to increase
6:30	EUR	French CPI - EU Harmonized (MoM) (OCT)	0.1%	0.0%	French inflation data not expected to move markets, though small increase could cause some concerns
6:30	EUR	French CPI - EU Harmonized (YoY) (OCT)	2.5%	2.4%
6:30	EUR	French CPI (MoM) (OCT)	0.2%	-0.1%
6:30	EUR	French CPI (YoY) (OCT)	2.3%	2.2%
7:00	EUR	German Wholesale Price Index (MoM) (OCT)		0.3%	Wholesale price indexes could see weakness as domestic investment drops lower
7:00	EUR	German Wholesale Price Index (YoY) (OCT)		5.7%
7:00	EUR	German CPI (MoM) (OCT F)	0.0%	0.0%	Major data of Euro session: expected stagnant inflation data may open gates to further ECB cut as Draghi focuses on growth rather than price stability
7:00	EUR	German CPI (YoY) (OCT F)	2.5%	2.5%
7:00	EUR	German CPI - EU Harmonized (YoY) (OCT F)	2.8%	2.8%
7:00	EUR	German CPI - EU Harmonized (MoM) (OCT F)	0.0%	0.0%
7:45	EUR	French Industrial Production (MoM) (SEP)	-0.7%	0.5%	French industrial data expected weaker, confirming extended EU slowdown
7:45	EUR	French Industrial Production (YoY) (SEP)	3.9%	4.4%
7:45	EUR	French Manufacturing Production (MoM) (SEP)	-0.6%	0.7%
7:45	EUR	French Manufacturing Production (YoY) (SEP)	5.0%	5.1%
12:00	GBP	Bank of England Rate Decision	0.50%	0.50%	Bank of England not expected to change again after recent asset purchase increase; commentary will drive sterling movement
12:00	GBP	BOE Asset Purchase Target	275B	275B
13:30	CAD	International Merchandise Trade (CAD) (SEP)	-0.57B	-0.62B	Expected to fall again as trade weak
13:30	USD	Import Price Index (MoM) (OCT)	0.1%	0.3%	US trade data showing import prices continuing to increase, though largely due to weak dollar; does not prompt FOMC actions
13:30	USD	Import Price Index (YoY) (OCT)	12.3%	13.4%
13:30	USD	Trade Balance (OCT)	-$46.2B	-$45.6B
13:30	USD	Initial Jobless Claims (NOV 4)	400K	397K	Weekly data could follow NFP data from last Friday
13:30	USD	Continuing Claims (NOV 6)	3680K	3683K
14:45	USD	Bloomberg Consumer Comfort (NOV 6)		-53.2	Own index continues to drop
19:00	USD	Monthly Budget Statement (OCT)	-$105.0B	-$140.4B	Small decrease could continue as congress continues austerity fight
21:45	NZD	Food Prices (MoM) (OCT)		-1.0%	Falling food prices may pressure rate reversal still expected
23:50	JPY	Tertiary Industry Index (MoM) (OCT)	-0.5%	-0.2%	Services sector continues to be weak on no support
23:50	JPY	Domestic Corporate Goods Price Index (YoY) (SEP)	2.2%	2.5%	DCGPI fall expected to be due to lower demand
23:50	JPY	Domestic Corporate Goods Price (MoM) (SEP)	-0.2%	-0.1%
	CNY	Trade Balance (USD) (OCT)	$26.05B	$14.51B	Slower exports could be leading indicator of overall global decline, though affects Chinese industries greatly as well
	CNY	Exports (YoY) (OCT)	16.2%	17.1%
	CNY	Imports (YoY) (OCT)	23.0%	20.9%

GMT	Currency	Upcoming Events & Speeches
9:00	EUR	ECB Publishes Nov. Monthly Report
10:00	EUR	European Commission Releases Economic Growth Forecasts

SUPPORT AND RESISTANCE LEVELS

CLASSIC SUPPORT AND RESISTANCE - 18:00 GMT

Currency	EUR/USD	GBP/USD	USD/JPY	USD/CHF	USD/CAD	AUD/USD	NZD/USD	EUR/JPY	GBP/JPY
Resist 2	1.4250	1.6445	81.50	0.9300	1.0675	1.1080	0.9020	112.00	131.00
Resist 1	1.4000	1.6100	79.50	0.9150	1.0675	1.0770	0.8750	109.35	128.30
Spot	1.3546	1.5925	77.82	0.9092	1.0220	1.0147	0.7817	105.43	123.94
Support 1	1.3500	1.5900	77.50	0.8500	0.9950	1.0100	0.7500	105.00	122.35
Support 2	1.3350	1.5700	75.50	0.7800	0.9750	1.0000	0.6850	102.00	116.00

CLASSIC SUPPORT AND RESISTANCE–EMERGING MARKETS 18:00 GMTSCANDIES CURRENCIES 18:00 GMT

Currency	USD/MXN	USD/TRY	USD/ZAR	USD/HKD	USD/SGD		Currency	USD/SEK	USD/DKK	USD/NOK
Resist 2	16.5000	2.0000	8.5800	7.8165	1.3650		Resist 2	7.5800	5.6625	6.1150
Resist 1	14.3200	1.9000	8.1025	7.8075	1.3250		Resist 1	6.5175	5.3100	5.7075
Spot	13.6650	1.8010	8.0423	7.7738	1.2891		Spot	6.6943	5.4948	5.7340
Support 1	12.6000	1.6500	6.5575	7.7490	1.2000		Support 1	6.0800	5.1050	5.3040
Support 2	11.5200	1.5725	6.4295	7.7450	1.1800		Support 2	5.8085	4.9115	4.9410

INTRA-DAY PIVOT POINTS 18:00 GMT

Currency	EUR/USD	GBP/USD	USD/JPY	USD/CHF	USD/CAD	AUD/USD	NZD/USD	EUR/JPY	GBP/JPY
Resist 2	1.3979	1.6198	78.10	0.9230	1.0331	1.0488	0.8048	108.46	125.81
Resist 1	1.3762	1.6062	77.96	0.9161	1.0276	1.0317	0.7933	106.94	124.87
Pivot	1.3643	1.5983	77.75	0.9042	1.0177	1.0228	0.7871	106.10	124.25
Support 1	1.3426	1.5847	77.61	0.8973	1.0122	1.0057	0.7756	104.58	123.31
Support 2	1.3307	1.5768	77.40	0.8854	1.0023	0.9968	0.7694	103.74	122.69

INTRA-DAY PROBABILITY BANDS 18:00 GMT

\Currency	EUR/USD	GBP/USD	USD/JPY	USD/CHF	USD/CAD	AUD/USD	NZD/USD	EUR/JPY	GBP/JPY
Resist. 3	1.3773	1.6102	78.64	0.9258	1.0364	1.0341	0.7968	107.30	125.72
Resist. 2	1.3716	1.6057	78.44	0.9217	1.0328	1.0293	0.7930	106.83	125.27
Resist. 1	1.3659	1.6013	78.23	0.9175	1.0292	1.0244	0.7893	106.37	124.83
Spot	1.3546	1.5925	77.82	0.9092	1.0220	1.0147	0.7817	105.43	123.94
Support 1	1.3433	1.5837	77.41	0.9009	1.0148	1.0050	0.7741	104.49	123.04
Support 2	1.3376	1.5793	77.20	0.8967	1.0112	1.0001	0.7704	104.03	122.60
Support 3	1.3319	1.5748	77.00	0.8926	1.0076	0.9953	0.7666	103.56	122.15

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

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