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Forex: Dollar’s Rally with EUR/USD will Fail Without Company

By , Chief Currency Strategist
08 December 2012 06:13 GMT
  • Dollar’s Rally with EUR/USD will Fail Without Company
  • Euro: The Focus Remains on Greece, But Other Worries Seeping In
  • Japanese Yen Looking Fundamentally Oversold at 9-Month Lows
  • British Pound Keys in on Short-Term Volatility Via Data
  • Canadian Dollar Rally Falters Quickly Despite Strong Jobs Figures
  • Swiss Franc: An Unexpected SNB Move Could Make EURCHF Lift Permanent
  • Gold Bulls Sounding Off on Fed Stimulus Impact

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Dollar’s Rally with EUR/USD will Fail Without Company

The Dow Jones FXCM Dollar (ticker = USDollar) managed an impressive three-day rally through the end of this past trading week – the first such run since it peaked on November 16. While this return to 10,000 looks encouraging, it will be ultimately doomed if there isn’t serious support to feed the move higher. From a face-value perspective, that performance needs to come in the form of universal strength for the dollar. This past week, the Dollar Index managed gains largely on the back of a standout performance by EURUSD. In other words, the past week’s performance was more a function of euro weakness rather than greenback strength. As for the other liquid major pairings, the greenback was largely stationary. Looking at this from a fundamental perspective, we need an outright dollar driver.

Fundamentally-speaking, there are only a few catalysts that can generate enough heat to rally the dollar. Such a driver needs to be influential enough that it can overcome the natural dampeners on progress we are currently facing. With speculative participation (measured via S&P 500 futures open interest and average volume) at a 15-year low, the year-end liquidity drain taking hold and general uncertainty surrounding the Fiscal Cliff; that hurdle has been set exceptionally high. We witnessed the extent of that trend repression this past Friday when the headline beat of a 146,000-job increase in NFPs and four-year low 7.7 percent unemployment rate print failed to lift risk. Furthermore, even the cynics that were pointing out the drop in labor force participation couldn’t muster a counter risk aversion play that would lift the dollar.

What we need is something that overrides various distractions and the anxiety that is keeping traders either rooted to their positions or out of the market altogether. We will find a few catalysts that will try their hand over the coming week. Top of the list is the Fed rate decision. This is the quarterly event where they update forecasts and Chairman Bernanke hosts a press conference, but the real interest is in an expected replacement of the expiring monthly purchases in the Operation Twist program. That being said, it’s expected. So how encouraging can it be for risk appetite (the market usually links stimulus to positive capital market gains). If we look back to the introduction of QE3, in mid-September, we essentially saw a medium-term top in risk. Even an eventual resolution to the Fiscal Cliff is expected. This isn’t a traditional ‘risk on’ build up.

Euro: The Focus Remains on Greece, But Other Worries Seeping In

Euro traders had shifted focus to next week well before Friday’s session even came online. However, there were more than a few important updates that we should keep in mind for future reference. Following up on the ECB’s critical downgrade of 2013 GDP (0.5 percent growth to 0.3 percent contraction) and CPI, the Bundesbank downgraded Germany’s growth outlook for the same period sharply (1.6 to 0.4 percent growth). Ratings Agency Standard & Poor’s downgraded its own view of Italy’s future and warned it could spell a downgrade. Most interesting though was the overlooked statement that Portugal’s Prime Minister said he may seek ‘equal treatment’ in bailout terms (to Greece). Given how difficult it is to squeeze out further support for one EZ member, that could be a serious point of contention. Speaking of Greece, the EU’s meeting after the country’s bond buyback effort is completed is on tap. A payout is already expected; so don’t assume it is an automatic bullish catalyst.

Japanese Yen Looking Fundamentally Oversold at 9-Month Lows

Following two months of broad selling, the Japanese yen is looking extended. The funding currency is at 8 and 9 month lows against most of its counterparts which is commensurate with the position of equity indexes (carry interest has a positive correlation to risk appetite). However, sentiment is constantly questioned, and the funding currency is notorious for showing strength despite risk appetites. Much of the recent yen depreciation has been a factor of policy officials’ warnings. Those threats are fully absorbed and now we await the December 16 election.

British Pound Keys in on Short-Term Volatility Via Data

The sterling doesn’t have enough fundamental weight to develop its own lasting trends owing to its relatively moderate economic slump, stimulus effort and positioning on the risk spectrum. That is good as it fits the bigger picture where the markets are struggling to build market-wide momentum behind critical fundamental themes. Therefore, sterling traders can focus on ranges and volatility surrounding particular event risk. Sympathy moves to Euro crisis progress and a risk response to the Fed should be expected, but unique to the pound will be the UK jobs data.

Canadian Dollar Rally Falters Quickly Despite Strong Jobs Figures

Most traders were watching the US docket for the release of the NFPs. That distraction diverted attention from a far more intriguing and dependable release: the Canadian labor data. According to Stats Canada, the economy added a remarkable 59,300 jobs in November – the most since March. The unemployment rate would also drop 0.2 percentage points to 7.2 percent. The most remarkable aspect of this data though was it didn’t have a questionable participation adjustment (like the US). Yet, despite this strength, the loonie’s strength was fleeting.

Swiss Franc: An Unexpected SNB Move Could Make EURCHF Lift Permanent

The rally for EURCHF from the SNB-imposed floor at 1.2000 since early September doesn’t seem to have encouraged the central bank to lighten its load of FX reserves. The group reported its holdings held steady at 424.8 billion francs. This is perhaps an effort not to undermine the key pair’s growth-supporting progress. Yet, EURCHF is once again pulling back. Will the SNB act Thursday to reinforce itsadvance?

Gold Bulls Sounding Off on Fed Stimulus Impact

With Friday’s close, gold would close lower on the week; but there was certainly no trend in the underlying performance. The metal is still anchored around the 1700 level (trading for a 15th month between the broader 1800 – 1525 range). It is difficult for the metal to catch traction either way with the dollar lacking commitment and the general effort to undermine fiat assets easing. Some bulls are thinking that latter push will resume this coming week with the Fed decision. Would an increase in stimulus lift gold’s value? Why isn’t it already rising if it’s expected…

**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

1:30(Sun)

CNY

CPI (YoY) (Nov)

2.1%

1.7%

Recovery in prices could suggest economic growth as government restrained from tightening

1:30

CNY

PPI (YoY) (Nov)

-2.0%

-2.8%

5:30

CNY

Industrial Production (YoY) (Nov)

9.8%

9.6%

Secondary data showing economy still moderating, no large problem of hard landing

5:30

CNY

Industrial Production YTD YoY (Nov)

10.0%

10.0%

5:30

CNY

Fixed Assets Inv Excl. Rural YTD YoY (Nov)

20.9%

20.7%

5:30

CNY

Retail Sales (YoY) (Nov)

14.6%

14.5%

5:30

CNY

Retail Sales YTD YoY (Nov)

14.1%

14.1%

21:45

NZD

Manufacturing Activity Volume SA (QoQ) (3Q)

0.3%

Quarterly data weaker as exports to Australia slow

21:45

NZD

Manufacturing Activity (3Q)

-1.1%

23:50

JPY

BSI Large All Industry (QoQ) (4Q)

2.2

Major indicators of Japanese economy not expected to show much change – 4Q all industry will have greatest effect on market, future policies

23:50

JPY

BSI Large Manufacturing (QoQ) (4Q)

2.5

23:50

JPY

GDP (QoQ) (3Q F)

-0.8%

-0.9%

23:50

JPY

GDP Annualized (3Q F)

-3.3%

-3.5%

23:50

JPY

Current Account Balance (YoY) (OCT)

-59.0%

-68.7%

23:50

JPY

Current Account Total (Oct)

230.9B

503.6B

23:50

JPY

Adjusted Current Account Total (Oct)

247.0B

-142.0B

Japanese trade expected to weak on October strong yen

23:50(Sun)

JPY

Trade Balance - BOP Basis (Oct)

-450.0B

-471.3B

0:01(Mon)

GBP

Lloyds Employment Confidence (Nov)

-35

Labor surveys suggest weakness

0:30

AUD

Home Loans MoM (Oct)

3.0%

0.9%

Increase in loans may be largest concern for RBA when considering weaker policies

0:30

AUD

Investment Lending (Oct)

8.6%

0:30

AUD

Owner-Occupied Home Loan Value MoM (Oct)

1.5%

4:30

JPY

Bankruptcies (YoY) (Nov)

6.0%

Consumer data stable, not expected to show large improvement in November

5:00

JPY

Consumer Confidence (Nov)

39.7

7:00

EUR

German Exports SA (MoM) (Oct)

-0.3%

-2.4%

Exports and trade expected drop as October still weaker month

7:00

EUR

German Imports SA (MoM) (Oct)

0.4%

-1.6%

7:00

EUR

German Trade Balance (Oct)

15.5B

16.9B

7:00

EUR

German Current Account (EURO) (Oct)

13.5B

16.3B

9:30

EUR

Sentix Investor Confidence (Dec)

-16.9

-18.8

December confidence may pick up as Europe improves, though US still weighs

13:15

CAD

Housing Starts (Nov)

202.0K

204.1K

Canadian real estate market robust

21:00

NZD

New Zealand Manpower Survey (1Q)

19%

Labor surveys may not fully include impacts of US, EU risks

21:00

AUD

Australia Manpower Survey (1Q)

9%

21:45

NZD

NZ Card Spending - Retail MoM (Nov)

0.5%

0.4%

Expected to be moderate; domestic economy still strong

21:45

NZD

NZ Card Spending - Total MoM (Nov)

0.4%

\

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

15.5900

2.0000

9.2080

7.8165

1.3650

Resist 2

7.5800

6.1875

6.1150

Resist 1

15.0000

1.9000

9.1900

7.8075

1.3250

Resist 1

6.8155

5.9190

5.8200

Spot

12.8505

1.7892

8.6556

7.7501

1.2209

Spot

6.6798

5.7684

5.6738

Support 1

12.5000

1.6500

8.5650

7.7490

1.2000

Support 1

6.0800

5.5840

5.6000

Support 2

11.5200

1.5725

6.5575

7.7450

1.1800

Support 2

5.8085

5.3350

5.3040

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

1.3034

1.6129

83.22

0.9419

0.9943

1.0568

0.8394

107.83

133.61

Resist. 2

1.3007

1.6107

83.04

0.9401

0.9928

1.0548

0.8377

107.54

133.28

Resist. 1

1.2980

1.6084

82.85

0.9382

0.9914

1.0528

0.8359

107.25

132.96

Spot

1.2927

1.6039

82.49

0.9345

0.9884

1.0488

0.8324

106.67

132.32

Support 1

1.2874

1.5994

82.13

0.9308

0.9854

1.0448

0.8289

106.09

131.67

Support 2

1.2847

1.5971

81.94

0.9289

0.9840

1.0428

0.8271

105.80

131.35

Support 3

1.2820

1.5949

81.76

0.9271

0.9825

1.0408

0.8254

105.51

131.03

v

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

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

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08 December 2012 06:13 GMT