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Dollar Strength Not as Consistent as EUR/USD Tumble Suggests

By , Chief Currency Strategist
26 February 2013 06:19 GMT
  • Dollar Strength Not as Consistent as EUR/USD Tumble Suggests
  • Euro Tumbles Versus Dollar, Yen and Pound During Italian Election
  • Japanese Yen Posts Biggest Rally Since May 2010
  • British Pound: Was the UK Downgrade Gap the End of the Plunge?
  • Australian Dollar Little Concerned with RBA Members Intervention Threat
  • New Zealand Dollar: Inflation Expectations at Four Year Lows, Rate Cut Risk Rises
  • Gold Steadily Climbs as FX Volatility Creates Tumult

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Dollar Strength Not as Consistent as EUR/USD Tumble Suggests

EURUSD posted its biggest daily drop (130 pips or 1.0 percent) since January 3 – when the greenback responded to the last minute Fiscal Cliff deal. If the world’s most liquid currency cross is showing significant dollar strength, the benchmark most be outperforming the market…right? In fact, the greenback’s performance wasn’t as awe-inspiring as its benchmark pairing would suggest. Most of the majors put in for relative restrained performances – with the exception of the biggest USDJPY drop in nearly three years (more on that below). For the Dow Jones FXCM Dollar Index (ticker = USDollar), the uneven performance translated into a sparse 2 point advance – though still the highest close since September 2010. That being said, volatility for the index was far more remarkable than the day-to-day move. The dollar-favorable gaps for USDJPY and GBPUSD on the open drove the index to 10,445. Subsequently, the strong collapse of the yen crosses would have to be offset by EURUSD’s performance to promote stability. As discussed in the weekly fundamentals, USDJPY can be a serious dollar hamper.

Moving forward, the dollar’s performance depends on the emergence of a persistent and lasting risk aversion theme. Though the opening session, volatility stoked genuine fear for FX traders and leveraged the greenback’s recently-diminished reserve appeal. The FX Volatility Index (FX VIX) extended its steady advance to an eight-month high while the equity-based VIX Index posted an incredible 34 percent surge – one of the biggest in decades. A jolt of panic caters to the dollar’s appeal; but to keep the greenback well bid should risk aversion kick in and direct capital towards the yen on carry unwind, we need persistence and perhaps an inherent bullish factor. It is unlikely, but if Fed Chairman Bernanke discusses an eventual exit from QE before the end of 2013 in his testimony Tuesday, it could be a two-pronged driver.

Euro Tumbles Versus Dollar, Yen and Pound During Italian Election

In a volatile day for the currency markets, the euro was the weakest of the majors. Initially, the shared currency opened the weak on a relatively firm footing; but that quickly fell apart as headlines devolved on the Italian election results. The first leg of the euro’s opening performance was a response to a sound win for a pro-austerity, pro-euro Nicos Anastasiades as the Cyprus’ president. While this far from resolves the issues the small island-nation faces – which draw suspicious comparisons to Greece – it does relieve it as an immediate threat. With that election out of the way, the focus turned to the far-more critical Italian election. The possibility of an outright win for an individual party never really seemed to catch, but there was some tentative expectation that a pro-euro coalition could be made. That was dashed, however, as the count continued. Now, with the vote essentially over, there is no clear winner which necessitates either a grand coalition or a reelection. Furthermore, the anti-austerity groups seemed to gain considerable traction – voters clearly showing their frustration over a deepening recession. A full resolution to Italy’s election issues may not be cleared up for a few weeks. In the meantime, speculators will start to fret over the renewed fear of fiscal tension in the Euro-area will do to bond yields. If the debt market locks up, the ECB may have to reverse its contracting balance sheet.

Japanese Yen Posts Biggest Rally Since May 2010Volatility from the Japanese yen Monday was simply incredible. USDJPY put in for its biggest dailydrop since May 2010 while EURJPY (leveraged by the euro’s troubles) carved an astounding 659-pip range through the same period. This activity level is extreme; and interestingly enough, didn’t seem to fit the fundamental developments through the session. The trading weak actually started out with a sizable gap to the upside on yen crosses. This yen drop was a response to news that there was a favored candidateto take the Bank of Japan helm by the name of Haruhiko Kuroda. With an illustrious career in the finance world, the candidate is a known advocate for beating deflation and implementing a 2 percent inflation target in a relatively short time frame. For FX traders, this means a man willing to raise the stakes for intervention. Yet, we have long-known the next BoJ leader will be more prone to easing. And so, the initial move was reversed. But with both waves, volatility was leveraged. Volatility is a fragile carry trade’s kryptonite. If risk aversion truly kicks in, the yen rally will build steam. If not, back to stimulus.

British Pound: Was the UK Downgrade Gap the End of the Plunge?

GBPUSD opened the week with a notable, 34-pip gap to the downside. Other sterling-based crosses produced bigger disparities with the beginning of official trade Monday. The sharp move down was the first opportunity for many to react to the Moody’s rating agency’s downgrade of the United Kingdom’s AAA-rating late Friday evening. This downgrade certainly undermines Prime Minister Cameron’s effort to balance his austerity push while warding off recession (already a losing fight), but it was priced in. Now the question is the BoE’s appetite for stimulus.

Australian Dollar Little Concerned with RBA Members Intervention Threat

It seems everyone is getting into the verbal intervention game – even though the G20 expressly assured us that the world’s developed nations wouldn’t engage. RBA Deputy Governor Guy Debelle remarked that the Aussie dollar was ‘somewhat high’ and that the central bank can cut rates to ‘counterbalance’ the capital inflows. Despite that and the 12-month rate forecast hanging dangerously low, AUDUSD held 1.0250.

New Zealand Dollar: Inflation Expectations at Four Year Lows, Rate Cut Risk Rises

We’ve already seen New Zealand’s most important monetary policy member – RBNZ Governor Wheeler – offer up a bearish voice and threaten the kiwi, but bearish conditions seem to have intensified even further this morning. On docket were the first quarter inflation expectations over the coming two-years surveyed by the central bank. The 2.2 percent read is the lowest in 11 years. Dovish evidence is building.

Gold Steadily Climbs as FX Volatility Creates Tumult

Gold certainly has safe haven properties, but the metal’s most prominent fundamental character nowadays is its appeal as an alternative store of wealth. Why would we want such an expensive commodity? Because it has less potential for being manipulated by central banks that are competing to devalue their currencies – while saying that they are not – and further creating volatility in exchange rates. Gold has advanced for a third day through Monday – this opening move being the biggest this month. It will continue to climb as FX volatility rises.

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

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

GBP

Hometrack Housing Survey (MoM)

0.00%

GBP

Hometrack Housing Survey (YoY)

-0.30%

2:00

NZD

RBNZ 2-Year Inflation Expectation

2.30%

Steadily declining due to a strong NZD and less commodity exports.

5:00

JPY

Small Business Confidence

44.3

Rebounded from 12/12’s low.

11:00

GBP

CBI Reported Sales

16

17

Downward trend since 11/12.

14:00

USD

S&P/CS 20 City s.a. (MoM)

0.60%

0.63%

3Y high of 7%, avg. of 2.1% and low of -0.5%

14:00

USD

S&P/Case-Shiller Home Price Index

145.82

Home prices (YoY) were on an uptrend since 01/12; (MoM) prices have picked up strength since a dip on 07/12; Typically has a lag time of roughly two months.

14:00

USD

S&P/Case-Shiller US Home Price Index (YoY)

7.00%

3.64%

14:00

USD

S&P/Case-Shiller US Home Price Index

135.67

14:00

USD

S&P/Case-Shiller Composite-20 (YoY)

6.60%

5.52%

14:00

USD

House Price Purchase Index (QoQ)

1.10%

Has declined on 06/12 after climbing for roughly 1 yr.

14:00

USD

House Price Index (MoM)

0.60%

0.60%

Has declined, following a peak on 03/12.

15:00

USD

Consumer Confidence

62

58.6

The downtrend may continue as sequester debate approaches.

15:00

USD

New Home Sales (MoM)

3.00%

-7.30%

Volatile data; 5 yr. avg. at -0.9; high of 13.6 on 12/10.

15:00

USD

New Home Sales

380K

369K

On a modest uptrend since 2011.

15:00

USD

Richmond Fed Manufacturing Index

-3

-12

Negative survey result signals manufacturers need more stimulus

21:45

NZD

Net Migration s.a.

0

3 yr. avg. at 226; high of 1810 on 01/10; low of -820 on 04/12.

21:45

NZD

Trade Balance (New Zealand dollars)

125M

486M

Trade balance and exports increased since 09/12 as import declined since 11/12. China’s demand for raw material is a key to a larger trade surplus.

21:45

NZD

Exports (New Zealand dollars)

3.60B

4.07B

21:45

NZD

Balance (YTD) (New Zealand dollars)

-897M

-1208M

21:45

NZD

Imports (New Zealand dollars)

3.50B

3.58B

23:50

JPY

Retail Trade (MoM)

0.80%

0.00%

Between -2 and 2 since 07/12. A more aggressive stimulus by the new BoJ governor may spur higher retail activities.

23:50

JPY

Retail Trade (YoY)

-1.60%

0.30%

23:50

JPY

Large Retailers' Sales

-0.80%

0.10%

GMT

Currency

Upcoming Events & Speeches

0:00

USD

Fed's Lockhart Speaks on Economy in Tennessee

8:00

GBP

BoE’s Bean, Tucker, Miles and McCafferty Testify to Parliament

15:00

USD

Fed's Bernanke Testifies at Senate Banking Committee

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

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CLASSIC SUPPORT AND RESISTANCE

EMERGING MARKETS 18:00 GMT

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

15.5900

2.0000

9.2080

7.8165

1.3650

Resist 2

7.5800

5.8300

6.1150

Resist 1

15.0000

1.9000

9.1900

7.8075

1.3250

Resist 1

6.8155

5.7350

5.8200

Spot

12.7860

1.8136

8.8379

7.7569

1.2392

Spot

6.4812

5.7173

5.7047

Support 1

12.5000

1.6500

8.5650

7.7490

1.2000

Support 1

6.0800

5.4440

5.5000

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

1.3175

1.5349

93.16

0.9385

1.0329

1.0365

0.8428

121.98

141.83

Resist. 2

1.3144

1.5313

92.86

0.9363

1.0310

1.0343

0.8406

121.48

141.33

Resist. 1

1.3112

1.5277

92.56

0.9341

1.0290

1.0321

0.8383

120.98

140.82

Spot

1.3049

1.5205

91.96

0.9296

1.0251

1.0277

0.8339

119.99

139.82

Support 1

1.2986

1.5133

91.36

0.9251

1.0212

1.0233

0.8295

119.00

138.81

Support 2

1.2954

1.5097

91.06

0.9229

1.0192

1.0211

0.8272

118.50

138.31

Support 3

1.2923

1.5061

90.76

0.9207

1.0173

1.0189

0.8250

118.00

137.81

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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26 February 2013 06:19 GMT