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Dollar Reengages its Bear Trend as Risk Trends, Euro Steady

By , Chief Currency Strategist
24 January 2012 05:04 GMT
  • Dollar Reengages its Bear Trend as Risk Trends, Euro Steady
  • Euro Traders Weary of Speculation Ignore Confirmation of No Greek Deal
  • British Pound Nervous on Profit Warnings, A Return to Recession
  • Japanese Yen: Bank of Japan Maintains Policy, Growth Forecasts
  • Australian Dollar Shows Little Preparation ahead of CPI Data
  • New Zealand Dollar has Another Data of Uninterrupted Risk Reaction
  • Gold Extends Month-Long Advance as Traders See Risk Rising, EU Crisis, QE3

Dollar Reengages its Bear Trend as Risk Trends, Euro Steady

Unless we see the persistent (but restrained) bid for ‘risky’ assets and the nascent rise in the euro reverse, the dollar will extend is extend its decline. The greenback has two sources of serious strength – fear of a breakdown in global financial stability and a wholesale transfer of capital away from the Euro-region, and neither is working in favor of the safe haven. In its performance, the dollar was notably lower against Euro and commodity bloc yet little changed against the Japanese yen and sterling. Looking at the Dow Jones FXCM Dollar Index, the currency posted its sixth consecutive daily decline – looking to compete with the nine-day decline through October 14th. All of the notable fundamental highlights through Monday’s session were outside of the dollar’s purview. In fact, the negative implications behind the Euro’s event risk (more on that below) should have theoretically bolstered the greenback, but sentiment is well engrained. In the upcoming session, we’ll continue to monitor risk and euro-based trend. Wednesday, we’ll once again watch the US newswires for the Fed’s rate decision, rate forecast and growth outlook.

Euro Traders Weary of Speculation Ignore Confirmation of No Greek Deal

It was a wild ride for the euro in the opening hours of trade for the new week. Heavy speculation over the weekend led the masses to seesaw between the belief that a palatable solution was found for the Greek bond-swap with investors and fear that the initiative had collapsed like so many other efforts before it. The pent up stress led the euro to a remarkable, bearish gap on the open. The anomaly (gaps of any meaningful size are unusual with the most liquid pairs) didn’t last for long however as EURUSD turned positive in the Asian session and really gained bullish momentum in its eventual 198-pip rally through the European / New York crossover. What was truly remarkable about this performance was that the advance developed despite confirmation that the Private Sector Investment (PSI) negotiations did in fact stall.

Euro traders – and those generally concerned about the European financial crisis – will keep an eye on the health of the Euro Zone’s most at-risk member. Greek officials have reportedly set a deadline of February 13th for a resolution (always trying to buy time) while EU Commissioner Olli Rehn suggested it could be reconciled “in the coming days.” Meanwhile, we’ll watch PMI figures and the ECB’s call for three month loans.

British Pound Nervous on Profit Warnings, A Return to Recession

The sterling was the biggest loser through the opening 24 hour period of this fresh trading week. Its performance was so bearish that the currency would actually close in the red against both the US dollar and Japanese yen – currencies that themselves lost ground as underlying risk appetite advanced. This is even more remarkable given the fact that the euro managed to outperform on the day (as the pound often takes guidance from its more liquid counterpart). For fundamental watchers, the Ernst & Young profit warning report for the UK was particularly interesting as ‘alerts’ rose to their highest levels since the first quarter of 2001 (not encouraging for a country tipped into an austerity-induced economic slowdown). We can also gain some insight from Bank of England (BoE) member Adam Posen who stated the policy authority is right to consider further debt purchases (though he also admitted inflation is stubbornly high). We are looking forward to Wednesday’s fireworks to see how the BoE is positioning for monetary policy with the release of its minutes as well as take the temperature of the economy with 4Q GDP.

Japanese Yen: Bank of Japan Maintains Policy, Growth Forecasts

If there is a better example of a central bank that has no influence over market volatility than the Bank of Japan, I haven’t come across it. The central bank would catch no one by surprise in its decision to hold its benchmark lending rate unchanged at 0.10 percent (only technically avoiding the ‘ZIRP’ label) while maintaining the extracurricular stimulus programs (the 20 trillion yen Asset-Purchase Fund, the 35 trillion yen Credit Loan Program and 1.8 trillion yen JGB portfolio) at their pre-approved levels. What demands a little more attention are the GDP forecasts. The 2012 outlook lowers the growth call to 2.0 percent from 2.2 percent while the 2013 actually upticks from 1.5 to 1.6 percent. Optimistic…

Australian Dollar Shows Little Preparation ahead of CPI Data

Running at a better pace than its equity market counterpart, the carry favorite AUDUSD managed to hold onto its Monday gains better than the S&P 500 was. In the end, both would close the day in the green and thereby press to new highs (the currency pair testing levels not seen in two-and-a-half months). However, there is an unappreciated anchor for the Aussie dollar: its negative interest rate outlook. Since we are in the lull between Reserve Bank of Australia (RBA) policy decisions, traders are deferring the tides in underlying risk trends. Yet, rate watchers could take the yoke in the upcoming session (Tuesday evening / Wednesday morning) as 4Q CPI is due. Expectations are tame, but we should recall NZ.

New Zealand Dollar has Another Data of Uninterrupted Risk Reaction

The Reserve Bank of New Zealand’s (RBNZ) rate decision is scheduled for Thursday morning (Asian session), providing us with a clear countdown to a possible influx of volatility. Another common impact of event risk is that the lead up encourages retrenchment (or a downshift on volatility). There is a good probability that the kiwi doesn’t live by these historical norms, however, as there is limited speculation that the central bank will changes its monetary policy tune. Yet, it is in the absence of expectations that we are left with meaningful surprise. With the tremendous drop in 4Q CPI reported last week, there is decent probability of a dovish miss and therefore bearish currency reaction.

Gold Extends Month-Long Advance as Traders See Risk Rising, EU Crisis, QE3

The advance continues. Gold has started this week off with the same bearing that these past three weeks have offered up – a meaningful bullish bush to mid-December highs. In fact, technical traders will recognize that with Monday’s advance, the precious metal has cleared stubborn resistance from last week that happens to coincide with a trendline that connects the swing highs from September 6th to November 8th and December 2nd (a prominent trendline). From a fundamental perspective, the consistency comes from two, seemingly opposing states: capital market stability and underlying concerns that economic and financial markets are deteriorating. Quiet markets (not dependent on direction) encourage demand for safe havens that are more expensive (gold). Risk aversion and the possibility of further stimulus provide the demand.

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

ECONOMIC DATA

Next 24 Hours

GMT

Currency

Release

Survey

Previous

Comments

8:00

EUR

French PMI Manufacturing (JAN P)

48.6

48.9

PMI fluctuating in these two powerhouse countries as markets want to see pivot

8:00

EUR

French PMI Services (JAN P)

50

50.3

8:30

EUR

German PMI Manufacturing (JAN A)

49

48.4

8:30

EUR

German PMI Services (JAN A)

52.5

52.4

9:00

EUR

Euro-Zone PMI Composite (JAN A)

48.5

48.3

Overall PMI expected to be similar to previous as growth may be coming back

9:00

EUR

Euro-Zone PMI Manufacturing (JAN A)

47.3

46.9

9:00

EUR

Euro-Zone PMI Services (JAN A)

49

48.8

9:30

GBP

Public Finances (PSNCR) (DEC)

19.0B

10.6B

British public spending expected to slow on tightening credit, though government spending still robust

9:30

GBP

PSNB ex Interventions (DEC)

14.9B

18.1B

9:30

GBP

Public Sector Net Borrowing (DEC)

12.1B

15.2B

10:00

EUR

Euro-Zone Industrial New Orders (YoY) (NOV)

-2.7%

1.6%

Weaker export demand pressuring industrial demand

10:00

EUR

Euro-Zone Industrial New Orders s.a. (MoM) (NOV)

-2.2%

1.5%

13:30

CAD

Retail Sales (MoM) (NOV)

0.2%

1.0%

Canadian retail sales continues to grow, may allow for rate hike scope in future

13:30

CAD

Retail Sales Less Autos (MoM) (NOV)

0.2%

0.7%

15:00

USD

Richmond Fed Manufacturing Index (JAN)

7

3

Eastern manufacturing stronger

23:30

AUD

Westpac Leading Index (MoM) (NOV)

-

0.1%

Australian economy treading water

23:50

JPY

Merchandise Trade Balance Total (DEC)

-¥154.9B

-¥687.6B

Japanese trade continues to weaken on strong yen and inability for Noda government to push through fiscal reforms

23:50

JPY

Adjusted Merchandise Trade Balance (DEC)

-¥376.5B

-¥537.9B

23:50

JPY

Merchandise Trade Exports (YoY) (DEC)

-7.4%

-4.5%

23:50

JPY

Merchandise Trade Imports (YoY) (DEC)

8%

11.4%

JPY

Bank of Japan Rate Decision

0.10%

0.10%

Expected to hold

GMT

Currency

Upcoming Events & Speeches

8:00

EUR

EU Finance Ministers Meet in Brussels

9:00

EUR

Netherlands to Sell 1.75% 2013 Bonds

9:00

EUR

Netherlands to Sell 3.75% 2042 Bonds

9:30

EUR

Spain to Sell 84-Day Bills

14:00

EUR

EU’s Van Rompuy Meets With Hungary’s Orban

14:05

EUR

ECB’s Gonzalez-Paramo Speaks in New York

16:15

CHF

SNB’s Danthine Speaks in Zurich

16:30

EUR

EFSF’s Regling Testifies at European Parliament Hearing

18:15

EUR

ECB’s Mersch Speaks in Luxembourg

20:00

GBP

BoE’s King Speaks in Brighton, England

23:00

EUR

Italy’s Monti Briefs Italian Senate on EU Finance Ministers Meeting

SUPPORT AND RESISTANCE LEVELS

To see updated SUPPORT AND RESISTANCE LEVELS for the Majors, visit Technical Analysis Portal

To see updated PIVOT POINT LEVELS for the Majors and Crosses, visit our Pivot Point Table

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

9.2080

7.8165

1.3650

Resist 2

7.5800

5.6625

6.1150

Resist 1

14.3200

1.9000

8.5800

7.8075

1.3250

Resist 1

6.5175

5.3100

5.7075

Spot

13.1676

1.8183

7.9411

7.7609

1.2684

Spot

6.7539

5.7170

5.8690

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 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

1.3173

1.5708

77.62

0.9397

1.0184

1.0642

0.8209

101.42

121.04

Resist. 2

1.3132

1.5671

77.46

0.9368

1.0161

1.0608

0.8183

101.10

120.73

Resist. 1

1.3090

1.5633

77.31

0.9339

1.0137

1.0574

0.8157

100.78

120.41

Spot

1.3007

1.5559

76.99

0.9280

1.0090

1.0506

0.8104

100.13

119.78

Support 1

1.2924

1.5485

76.67

0.9221

1.0043

1.0438

0.8051

99.48

119.15

Support 2

1.2882

1.5447

76.52

0.9192

1.0019

1.0404

0.8025

99.16

118.83

Support 3

1.2841

1.5410

76.36

0.9163

0.9996

1.0370

0.7999

98.84

118.51

v

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

To contact John, email jkicklighter@dailyfx.com. Follow me on twitter at http://www.twitter.com/JohnKicklighter

To be added to John’s email distribution list, send an email with the subject line “Distribution List” to jkicklighter@dailyfx.com.

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24 January 2012 05:04 GMT