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Dollar Yields to Risk Trends, Ends the Week Sharply Lower

By , Chief Currency Strategist
17 March 2012 04:47 GMT
  • Dollar Yields to Risk Trends, Ends the Week Sharply Lower
  • Euro: IMF Reminds Us not to Forget About Greece, But are Traders Concerned?
  • Japanese Yen Wavers Once Again, What Would it Take to Reverse?
  • British Pound Traders Await the Next Wave Austerity with New Budget
  • New Zealand Dollar Weighs 4Q GDP Figures for Rate Implications
  • Swiss Franc Completely Recovers Euro Losses Post SNB, What Next?
  • Gold Recovery Stalls Despite Dollar Weakness, Inflation Data Ahead

Dollar Yields to Risk Trends, Ends the Week Sharply Lower

The positive correlation between the safe haven US dollar and sentiment-tracking S&P 500 these past few weeks contradicted one of the most reliable fundamental connections in the financial markets. This has generated a lot of discussion about a long-term shift in the dollar’s position as a funding currency or safe haven, while there has been just as much speculation that risk appetite climb that has supported the equity market’s climb is running on fumes. In reality, there is likely some truth to both considerations; but between the two scenarios, the relative risk for market impact is heavily skewed. However, before we dive into that conversation, it is worth noting that the final 48 hour of this past week moved to return things to their natural order – at least temporarily. Where equities extended its move higher with another tame advance (the weekly performance was actually the best we’ve seen so far this year), the Dow Jones FXCM Dollar Index marked its biggest back-to-back tumble since the end of November. Is this a permanent restoration of traditional correlations? That depends on the underlying strength of capital markets.

Looking to both the strength of the currency and index, we have to assess which is the aberration. In truth, both are running awry of background fundamental conditions. Yet, the one has been more consistent in that endeavor. For the dollar’s rally, we haven’t seen the traditional risk aversion theme divert capital back to the deep end of the global pool. Instead, we have a notable shift in expectations relating US rates and monetary policy. A slow creeping of realization that near-term QE3 expectations were overblown gave way to consideration that the central bank may actually move up its timeline for the return to hikes. That follows the Fed’s boosted growth assessment and inflation concerns. Of course, FOMC dissenter Lacker’s comments that a hike would be needed in 2013 further the belief. That said, that first hike is still a long ways off, so the positive draft for the dollar and Treasury yields will be difficult to sustain. Conversely, the equity markets have beaten the odds on persistent optimism for far longer. That said, the threat of a tremendous risk unwind hangs heavy in the air, and stands as a beacon for dollar bulls.

Euro: IMF Reminds Us not to Forget About Greece, But are Traders Concerned?

Before the end of the week, the IMF reminded us (unnecessarily) that the help provided to Greece wasn’t guaranteed to stabilize the country or the region. According to the fund, the country’s “disorderly Euro exit” would be “unavoidable” without ongoing support. That means that the other European Union members, ECB and IMF would need to remain in the troubled nation’s corner for years. In turn, Greece itself would also have to meet the tough requirements given by its rescuers – not an easy proposition given the deep recession and impending election in April. There are a lot of variables in this equation and it is still highly likely that the disorderly default and perhaps exit is in the cards. Yet, for traders, we need to determine whether this is a concern that will affect the markets now, near-term. If positive PMI figures come in next week, fear could dissipate.

Japanese Yen Wavers Once Again, What Would it Take to Reverse?

The Japanese yen continued to charge lower through the end of the weak versus most of its counterparts. In fact, taking stock of the bigger picture performance, we find that currency’s crosses have charged higher for the better part of two months now (the pairs with the higher yield differentials having started earlier and moved further). However, our focus should remain with USDJPY – as that is where policy officials are looking. Through the final 48 hours, the dollar itself was under pressure, pressure that would counteract the yen’s own decline. Looking ahead, the yen’s bearish trend has good fundamental and technical traction. A slide from the dollar would more likely temper the pair’s performance rather than lead to a true and deep reversal. For that, the yen itself would have to rally – a scenario that requires carry unwinding.

British Pound Traders Await the Next Wave Austerity with New Budget

Sterling traders have spent more time looking at gilt rates this past week than the euro’s strength – a good sign. However, government bond yields in the UK are likely to slow in their assent just as surely as they are the world over. What matters is how sticky UK rates are compared to its counterparts. For that, we may actually find some guidance from the economic docket. The BoE minutes will tell us what the central bank’s assessment was at the same time the ECB took a more hawkish tack. Carrying more weight however for the fiscal / monetary balance they are trying to strike though will be the budget proposal due on Wednesday. Will Cameron and Osborne offer relief or tighten the screws further?

New Zealand Dollar Weighs 4Q GDP Figures for Rate Implications

For big-ticket event risk next week, the kiwi probably has the most clear-cut binary release on deck. The fourth quarter GDP reading is due Thursday morning (Wednesday evening for the Western world), and expectations are for figures that are relatively buoyant. An encouraging reading would do well to offset the voiced concern with Euro Zone crisis spill over and the recent downgrade in Chinese growth expectations. That said, to maximize the impact of the data, we want to see the data surprise in the same direction as underlying risk trends.

Swiss Franc Completely Recovers Euro Losses Post SNB, What Next?

The franc put in for its biggest fundamental move this past week in months. And, as is to be expected, the source of that drive was speculation. Specifically, speculation that the Swiss National Bank could use the opportunity of its policy meeting to announce a chance to its unusual methods of manipulation. Yet, since learning the central bank stood pat (and soundly slightly less committed to driving the currency lower), the Swissie regain all of its lost ground against the Euro. From here, the SNB will either have to be forced to move the floor or it will be a long wait.

Gold Recovery Stalls Despite Dollar Weakness, Inflation Data Ahead

With the dollar sharply lower through Friday’s session, we would naturally expect gold to extend its rebound. Instead, the precious metal would end the final trading day virtually unchanged. We could interpret this perhaps as a sign that the dollar’s tumble will come to an end, that the metal is separating from its currency connection or that another of its roles has taken over. That said, it is more likely that there simply wasn’t enough conviction behind the dollar, risk trend, inflation and stimulus expectations to offer consistent trend.

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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

21:00

NZD

Westpac NZ Consumer Confidence (1Q)

101.3

Rising on global improvements

21:30

NZD

Performance Services Index (FEB)

53.6

Services indices expanding

JPY

Supermarket Sales (YoY) (FEB)

-1.2%

Still shows consumer weakness

9:00

EUR

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

2.0B

Eurozone trade still weaker on lack of demand, overall world economy still weak

9:00

EUR

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

16.3B

10:00

EUR

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

7.8%

Domestic output may grow at a slower pace as investment wanes

10:00

EUR

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

0.3%

12:30

CAD

Wholesale Sales (MoM) (JAN)

0.9%

Sales still trending higher

14:00

USD

NAHB Housing Market Index (MAR)

29

Housing index moderating

23:00

AUD

Conference Board Leading Index (JAN)

0.2%

Index sees slight growth

GMT

Currency

Upcoming Events & Speeches

4:00

USD

New York Fed's Dudley to Speak on Long Island

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 & SCANDIES 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 March 2012 04:47 GMT