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Euro Rallies after ECB Talks Greek Bond Swap, Germany Reassures

By , Chief Currency Strategist
17 February 2012 04:10 GMT
  • Dollar Recovery in Jeopardy as Hope and S&P 500 Levels Swell
  • Euro Rallies after ECB Talks Greek Bond Swap, Germany Reassures
  • Australian Dollar Clears New Highs for the Week, What About Follow Through?
  • Japanese Yen: BoJ Minutes Show Officials Will Continue Easing, Watching EURJPY
  • Canadian Dollar: Inflation Figures May Bring BoC Closer to a Cut
  • Gold Posts Last Minute Recovery to Pull it Back from Breakdown

Dollar Recovery in Jeopardy as Hope and S&P 500 Levels Swell

Just when it seemed that the dollar was starting to find some traction in its rebound from a four-week bear trend, the currency showed significant signs of flagging through this past trading day. Yet, what makes this particularly unfavorable for the benchmark currency is that correlations and fundamentals provide greater weight behind the risk that this could be a sustainable risk run rather than a temporary leveling off period. With the S&P 500 Index marking its highest close since the early March peak (itself a three-year high), it wouldn’t be difficult to draw speculators in on the hopes of another bull leg in a much larger advance. As a safe haven asset (an extreme safe haven at that), the dollar would naturally suffer under a renewed push for capital gains. With the focus turned to Monday’s Greek vote (more on that below), Friday will be tense and indecisive.

Euro Rallies after ECB Talks Greek Bond Swap, Germany Reassures

EURUSD won its first positive close in five consecutive trading days Thursday, and the move seemed to lift general risk trends along with it. In fact, when we compare the intraday momentum between EURUSD and the S&P 500, or if we note that EURGBP and EURAUD actually slipped on the day; we realize that underlying sentiment has outperformed the Euro. That wouldn’t be such a surprise if it weren’t for the fact that the rebound in sentiment seemed to be a product of an improved outlook for Greece. The improved outlook was a combination of two factors: unconfirmed reports that the ECB would swap its Greek bond holdings and headlines from both Greek and German officials suggesting tensions were cooling between the two members.

Given the number of promises and deadlines that have fallen through over the past two years, market participants have grown exceptionally skeptical of rhetoric. That is why reports that the European Central Bank is planning to swap out its current holdings of Greek bonds for new issue carries more weight. Such a move would further help the central bank avoid losses if Greece plans to add means to deliver losses to holders of the existing paper. This is sign of progress towards restructuring, but it is also a sign that a voluntary private swap could end up mandatory and therefore trigger a default.

More definitive in its positive implications for the euro and the ongoing crisis was the reconciliatory commentary coming from Germany and Greece. Pulling back from expressions of doubt and skepticism, Germany lawmakers said they expect a bailout approval on Monday and will seek a Greek swap window between February 22nd and March 9th. On the opposite side of the battle lines, Greece’s New Democratic Party leader Samaras (most likely to take over with the new election) remarked that what needed to be accomplished for Greece to receive its second recue was done (and that would seem to include a guarantee that austerity measures would be adhered to). However, the assurance of severe recession should render us skeptical of Greece’s adherence. Nevertheless, that is an issue for further down the line. If we are on track for a second bailout program approval on Monday, it could lift a significant weight from the Euro’s shoulders through the short-term.

Australian Dollar Clears New Highs for the Week, What About Follow Through?

The shine from Australia’s January employment report wore off pretty quickly Thursday morning (despite a notable downtick in the jobless rate to 5.1 percent and 46,300-net job increase that was more than four times larger than consensus), but the Aussie dollar found a second wind in the New York trading session. With the remarkable run from the S&P 500 through the active trading session, the 0.81 correlation between AUDUSD and equity index ensured a significant bullish boost. Speaking to the antsy market conditions (thin and volatile), the aforementioned pair managed to break above a range high that has curbed bullish ambitions over the past week at 1.0775. However, where breakouts are easier to accommodate in these conditions, follow through is particularly difficult.

Japanese Yen: BoJ Minutes Show Officials Will Continue Easing, Watching EURJPY

We haven’t seen a rally like this from USDJPY in months. In fact, this may be the biggest, non-intervention run from the pair since November of 2009 – if indeed the Ministry of Finance or Bank of Japan hasn’t taken to stealth intervention once again. Technical traders should revel in the progress that has been made through February. With Thursday’s performance, USDJPY has either advanced or limited its losses to less than 10 pips for 13 consecutive trading days. The last daily close is the highest we have seen since July 19th. And, perhaps most encouraging, we are now starting to overtake a long-term trendline that has defined the bear trend going back to 2007. All around, this is a remarkable performance. Yet, we shouldn’t banish all concerns of a sea change just yet. There is always the lingering threat of a change in risk trends. Should the European crisis flare up or some other unforeseen concern arise, carry unwinding could light a bid under the yen. Policy officials are certainly weary. According to the BoJ’s minutes, the central bank is leaning towards more easing and is watching EURJPY closely.

Canadian Dollar: Inflation Figures May Bring BoC Closer to a Cut

Given the Canadian dollar’s connection to sentiment trends (lending a remarkable correlation to Aussie-based pairs and equity benchmarks), the currency’s rally through Thursday’s ‘risk on’ performance shouldn’t catch anyone off guard. However, as discussed above, anticipation for developments next week may curb the loonie’s ambitions through the final hours of this trading week. A possible catalyst to offer some consistency to an otherwise directionless session, though, is the upcoming CPI data. The BoC has stood pat with its interest rate agenda, but their outlook has been consistently dovish. If inflation pressure ease enough, growth concerns could finally encourage a rate cut.

Gold Posts Last Minute Recovery to Pull it Back from Breakdown

Through the European session Thursday, gold was diving into a breakdown that seemed almost inevitable after weeks of congestion. Yet, just when the move seemed assured, a risk rally pulled the metal up from its hole. An advance in risk might not seem a fitting driver for a safe haven assets, but gold’s play on this drive was the shared advantage of a drop from the US dollar. On a technical basis, this could very well have turned the short-term congestion trend to a mild bullish one, but low volume and restrained implied (expected) volatility measures don’t suggest this is the immediate charging of a overwhelming bull trend.

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ECONOMIC DATA

Next 24 Hours

GMT

Currency

Release

Survey

Previous

Comments

1:35

CNY

MNI Flash Business Sentiment Survey (FEB)

48.8

Sentiment may recover on easing

7:00

EUR

German Producer Prices (MoM) (JAN)

0.3%

-0.4%

German producer prices expected to fall on a YoY basis, ECB not expected to ease

7:00

EUR

German Producer Prices (YoY) (JAN)

3.2%

4.0%

9:00

EUR

Euro-Zone Current Account n.s.a. (euros) (DEC)

1.0B

Capital outflows still contributing greatest to change

9:00

EUR

Euro-Zone Current Account s.a. (euros) (DEC)

-1.8B

9:30

GBP

Retail Sales ex Auto Fuel (MoM) (JAN)

-0.3%

0.6%

Retail sales expected to drop again as consumer save; will have to wait for further confirmation before expected BoE action

9:30

GBP

Retail Sales ex Auto Fuel (YoY) (JAN)

-0.1%

1.7%

9:30

GBP

Retail Sales w/Auto Fuel (MoM) (JAN)

-0.2%

0.6%

9:30

GBP

Retail Sales w/Auto Fuel (YoY)(JAN)

0.6%

2.6%

10:00

EUR

Euro-Zone Construction Output s.a. (MoM) (DEC)

0.8%

Eurozone construction change still relatively quiet

10:00

EUR

Euro-Zone Construction Output w.d.a. (YoY) (DEC)

0.2%

12:00

CAD

CPI (MoM)(JAN)

0.3%

-0.6%

Inflation expected to be at-levels, though BoC Governor Carney has mentioned rate hikes on the horizon

12:00

CAD

CPI (YoY)(JAN)

2.3%

2.3%

12:00

CAD

Bank of Canada CPI Core (MoM)(JAN)

0.0%

-0.5%

12:00

CAD

Bank of Canada CPI Core (YoY)(JAN)

1.9%

1.9%

12:00

CAD

CPI(JAN)

120.2

13:30

CAD

Leading Indicators (MoM)(JAN)

0.6%

0.8%

Economy still expected to grow

13:30

USD

CPI (MoM)(JAN)

0.3%

0.0%

US domestic inflation pressures still continuing; only large gain in prices may shift Fed policies

13:30

USD

CPI Ex Food & Energy (MoM)(JAN)

0.2%

0.1%

13:30

USD

CPI (YoY)(JAN)

2.8%

3.0%

13:30

USD

CPI Ex Food & Energy (YoY)(JAN)

2.2%

2.2%

13:30

USD

CPI n.s.a.(JAN)

226.573

225.672

13:30

USD

CPI Core Index s.a.(JAN)

227.166

15:00

USD

Leading Indicators(JAN)

0.5%

0.4%

US economy recovering

GMT

Currency

Upcoming Events & Speeches

15:00

USD

American Petroleum Institute Monthly Report

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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17 February 2012 04:10 GMT