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Dollar Finds Relief in Dows Restraint after Friday’s Drive

By , Chief Currency Strategist
07 February 2012 05:25 GMT
  • Dollar Finds Relief in Dows Restraint after Friday’s Drive
  • Euro: Another Day, Another Delay for Greece’s Reconciliation
  • Australian Dollar Rallies after the RBA Unexpectedly Holds Rates at 4.25 Percent
  • British Pound: Will the Drive to Austerity Push the UK into Recession?
  • Swiss Franc Awaits SNB Jordan’s Comments on Growth, Really Want Intervention News
  • Japanese Yen Traders Show Little Reaction to News of ‘Stealth Intervention’ in 4Q MoF Data
  • Gold Slips for a Second Session but Selling Volume Temperate

Dollar Finds Relief in Dows Restraint after Friday’s Drive

Hope was high for those looking for risk trends to find momentum after Friday’s impressive close. With the Dow Jones Industrial Average closing at a near, four-year high and AUDUSD (representing carry interest) overtaking a multi-month of its own, it seemed as if capital markets were charged for the next bull phase. Yet, on the open Monday, there was no immediate follow through to be found. For the US dollar, the hesitation on sentiment trends prevented an escalation of the selling pressure that has been command for the past few weeks. In fact, though the morning of the previous session, the Dow Jones FXCM Dollar Index was significantly in the green – a side effect of the euro’s own troubles and a lack of direction from the other majors. The greenback is beholden to risk trends, however, and the equity benchmarks have not backed off of their very headline-grabbing highs. For event risk in the coming session, we have credit numbers and Bernanke speaking; but keep an eye on the Dow.

Euro: Another Day, Another Delay for Greece’s Reconciliation

Over the past weekend, there were supposedly deadlines for the private investment deal on Greek debt as well as the coalition government to come to some agreement on further austerity measures to win approval for the second bailout program. Yet, those vows seemed to carry little weight as no resolution was reached once again. Luckily for policy officials, the market is used to these blown timelines and pays little attention when they falter. What would command the market’s attention? If there is a definitive cost related to a lack of progress, then there is no denying its impact. The next Greek bond payment is not due until March, so we could theoretically push a decision forward for another month. In the meantime, Prime Minister Papademos has set the Finance Ministry to assess the implications of a default and cost of an exit from the euro.

Australian Dollar Rallies after the RBA Unexpectedly Holds Rates at 4.25 Percent

Heading into the RBA’s monetary policy announcement, the market was pricing in a 72 percent chance that the central bank was going to lower the benchmark rate 25 basis points (25 bps) to 4.00 percent. At the same time, the Bloomberg survey of economists reported 23 out of 27 forecasts submitted were calling for a cut of the same magnitude. This consensus gives us a sense of the surprise quotient in the central bank’s official hold on the benchmark at its 4.25 percent level. Naturally, with a significant contingent of the market finding their speculative shorts on the wrong side of the news, a wave of reversal helped leverage the Aussie dollar across the board. That said, follow through was not as earth shattering as some may have expected. Sure, there was dovish rhetoric in the statement (saying further cuts were possible if demand flagged), but the real disconnect is underlying risk trends. If benchmarks for risk like equity futures are driving higher, carry demand isn’t advancing either.

British Pound: Will the Drive to Austerity Push the UK into Recession?

Though the first quarter GDP figures reported a contraction in the UK economy, more timely data has come across the wires modestly better than consensus. This leaves us with a mixed picture. On the one hand, we have the more lagging data feeding fears that we are already one foot into a recession. That said, more recent data has offered – if not strong readings – modest improvements in trend that could prevent a slump from turning into a contraction. There is a risk, however, that a cooling for the global economy and projected recession for the Euro Zone will overwhelm a UK economy that has steadfastly maintained its austerity efforts. There is certainly a risk that this turns out to be the case; and the worst the European financial and economic conditions are, the more likely it is that Britain is drug down. Yet, that is where the BoE comes in. It is no coincidence that PM Cameron has urged Governor King to increase their stimulus programs. Will he heed the call Thursday?

Swiss Franc Awaits SNB Jordan’s Comments on Growth, Really Want Intervention News

If we are looking at any Swiss currency-based pair that is not EURCHF, we are generally looking at a proxy for the euro. The safe haven attribute of the franc has been unnaturally counteracted by the Swiss National Bank’s (SNB) standing threat to dump its currency on the open market should the 1.2000-floor the authority drew on EURCHF be threatened. Yet, since this benchmark pair is anchored to that closely monitored level, franc crosses end up moving much like euro crosses. In the upcoming European session, the acting central bank President Thomas Jordan is scheduled to speak on the Swiss economy. Of course, FX traders aren’t interest in growth reports. They want to hear about intervention. Though an official forum to speak, the likelihood that we hear anything new from SNB on manipulation is low.

Japanese Yen Traders Show Little Reaction to News of ‘Stealth Intervention’ in 4Q MoF Data

Most sentiment and volatility readings for the Japanese yen have been as extreme as price itself. And, if conditions are extreme for an extended period of time, they eventually become the norm. Taking the temperature of the market now, the 20-day (one-month) average daily range on USDJPY is just above a recent record low at 43 pips, retail positioning reflects 11.5 longs per each short and risk reversals (one-month, 25-delta) have shown the longest period of more expensive calls than puts on record. Being at an extreme doesn’t always guarantee a reversal or even trend continuity. To wake the market up, we need a catalyst. For a sustained move, a strong return of carry interest would carry the greatest influence, but that is a ways off. Instead, the market is focused on the short-term catalysts. The most prominent of these concerns is the act of intervention (effective or not). Just this morning, the Ministry of Finance reported that it sold the yen five times over the fourth quarter- to the tune of 9.09 trillion yen. The consecutive efforts were considered ‘stealth intervention’ as the government didn’t offer an official announcement. The risk of this occurring into the future could unnerve the market if only the last effort (and those before it) hadn’t failed.

Gold Slips for a Second Session but Selling Volume Temperate

Both risk trends and the greenback were little moved through the opening day of this trading week, yet both nudged out a higher close. Gold would take the hint of a positive risk bearing and healthy alternative benchmark store of wealth to retreat a second day. This was in fact the first back-to-back decline for the precious metal since January 9th and only the second instance since the current bull phase began with the December 29th reversal. However, just as we have eyed the restricted volume in the equity benchmarks’ advance, we have to point out that there was a notable restraint to gold futures turnover Monday and Friday (204,002). For comparison, January 26th’s volume was 358,156.

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ECONOMIC DATA

Next 24 Hours

GMT

Currency

Release

Survey

Previous

Comments

0:01

GBP

BRC Sales Like-For-Like (YoY) (JAN)

-0.8%

2.2%

Fall in retail could see more QE

3:30

AUD

Reserve Bank of Australia Rate Decision

4.00%

4.25%

Widely expected to drop for the 4th consecutive month as economic uncertainty saps investment

5:00

AUD

Foreign Reserves (AUD) (JAN)

A$46.1B

Growing on AUD interest

5:00

JPY

Coincident Index (DEC P)

93.1

90.3

Indices showing some recovery on domestic spending

5:00

JPY

Leading Index (DEC P)

93.8

93.2

7:45

EUR

French Trade Balance (euros) (DEC)

-5350M

-4412M

Deficit continues to widen

11:00

EUR

German Industrial Production s.a. (MoM) (DEC)

0.0%

-0.6%

Expected to improve with confidence, export demand

11:00

EUR

German Industrial Production (YoY) (DEC)

4.3%

3.6%

13:30

CAD

Building Permits (MoM) (DEC)

0.0%

-3.6%

Market remains weaker

15:00

USD

JOLTs Job Openings (DEC)

3161

Could follow better NFPs

15:00

USD

IBD TIPP Economic Optimism (FEB)

48.1

47.5

Index steadily climbing

20:00

USD

Consumer Credit (DEC)

$7.000B

$20.374B

Credit remains relatively tight

23:50

JPY

Bank Lending Banks ex-Trust (JAN)

0.5%

Bank lending starting to show some improvement

23:50

JPY

Bank Lending incl Trusts (YoY) (JAN)

0.6%

0.4%

23:50

JPY

Current Account Total (DEC)

¥340.1B

¥138.5B

Current account balance still expected to fall – danger of trade breakdown in Japan starting to take root as yen still persistently strong

23:50

JPY

Adjusted Current Account Total (DEC)

¥625.3B

¥480.4B

23:50

JPY

Current Account Balance (YoY) (DEC)

-71.2%

-85.5%

23:50

JPY

Trade Balance - BOP Basis (DEC)

-¥135.0B

-¥585.1B

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

13.1813

1.8298

7.9516

7.7618

1.2719

Spot

6.7826

5.7501

5.9324

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

1.3096

1.5727

77.65

0.9464

1.0227

1.0620

0.8168

100.92

121.26

Resist. 2

1.3055

1.5689

77.49

0.9434

1.0203

1.0586

0.8142

100.59

120.94

Resist. 1

1.3014

1.5652

77.33

0.9405

1.0179

1.0552

0.8116

100.27

120.61

Spot

1.2931

1.5576

77.01

0.9345

1.0132

1.0484

0.8063

99.62

119.97

Support 1

1.2848

1.5500

76.69

0.9285

1.0085

1.0416

0.8010

98.97

119.32

Support 2

1.2807

1.5463

76.53

0.9256

1.0061

1.0382

0.7984

98.65

119.00

Support 3

1.2766

1.5425

76.37

0.9226

1.0037

1.0348

0.7958

98.32

118.67

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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07 February 2012 05:25 GMT