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Dollar Extends Longest Rally Since Before 2000, Can Risk Extend it?

By , Chief Currency Strategist
02 March 2013 04:31 GMT
  • Dollar Extends Longest Rally Since Before 2000, Can Risk Extend it?
  • Euro Already Showing Market Fear of an ECB Stimulus Shift
  • British Pound Takes Recession Fear Hit Friday, BoE Up Next Week
  • Japanese Yen Easing Losses Much of Week’s Gains on BoJ Expectations
  • Australian Dollar Faces Heavy Event Risk and a Tight Range
  • Canadian Dollar Shudders after GDP Data, Market Watches Slow BoC
  • Gold Sets Lowest Weekly Week in 8 Months, ETF Holds Drop 2.4 Percent

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Dollar Extends Longest Rally Since Before 2000, Can Risk Extend it?

It is finally upon us. Friday night, after failing to come to a last-minute agreement, US President Obama issued an order putting the automated spending cuts (‘sequester’) into action. The question moving forward is whether the market will respond to the negative economic implications of this action with a sharp change in speculative confidence that finally undermines equities’ bullish commitment or simply overlooks this development to focus on something more savory – like stimulus. The natural reference is to the speculation and reaction surrounding the Fiscal Cliff at the beginning of the year. After the 11th hour deal to forestall the round of automatic tax hikes and budget cuts, both the S&P 500 and dollar rallied – due to a relief from risk aversion and downgrade potential respectively. The sequester would seem to be the realization of the negative outcome to the Fiscal Cliff that never happened.

We will find out just how ruinous this is for sentiment when the markets open Monday, but the lead-in to the event suggests the wholesale deleveraging threat that has long incubated in the market’s psyche will not be triggered on this news alone. The fact that US equities advanced through Friday despite the high probability of these spending cuts being passed suggests the masses are far more economical in their evaluation of how this change will measure up to stimulus and an otherwise steady pace of growth. Forecasts by the CBO project cuts of approximately $1.2 trillion through the coming 9 years if fully realized. Yet, the first year is expected to suffer $85 billion through October 1; and the effort can be halted at any time by Congress as long as they have a deal to supplant the automatic program.

Risk appetite retains my attention heading into the new trading week, and it is increasingly important for the greenback winning further gains. Many believe that the benchmark currency is still inherently ‘oversold’, but the Dow Jones FXCM Dollar Index’s (ticker = USDollar) performance would refute that assumption. With Friday’s close, the index has advanced for five consecutive weeks – that’s the longest series of gains since historical price action is available going back to 1999. A currency that has run such an impressive drive while its central bank continues to pump more dollars into the market necessitates a meaningful catalyst. And, while a relative depreciation of its primary counterparts is a possible driver; it is risk aversion that carries the greatest hope. If we have to hold out through to NFPs for a sentiment stir, the opportunity will likely be lost.

Euro Already Showing Market Fear of an ECB Stimulus Shift

EURUSD dropped for a fourth consecutive week through Friday’s close – and that has more to do with euro losses than dollar gains. The currency’s fundamental health took a serious turn for the worst this past week after the outcome of the Italian election. As one of the ‘core’ members of the Eurozone, Italy is integral to the assumed strength of the entire region – especially when it comes to keeping with the commitment of reducing deficits at the expense of growth. Through Friday, DP party leader Bersani has stated that there will be no grand coalition with Berlusconi; while Five Star Movement party leader Grillo has said refused an alliance that conflicts with his anti-austerity platform. Trouble in Italy adds to a general negative sentiment that is never too far away from reviving financial crisis fears. With the Eurozone jobless rate hitting a fresh record high this past week, will the ECB be encouraged to action to offer relief at its upcoming meeting?

British Pound Takes Recession Fear Hit Friday, BoE Up Next Week

It doesn’t take much to remind investors of the threat of a triple dip recession in the United Kingdom – so the unexpected drop in the region’s February manufacturing survey was an effective catalyst. Nevertheless, the 150-pip drop from GBPUSD still seemed excessive. There is something more to this reaction than just a fear of economic contraction. Pound traders likely interpreted this data as a clear signal for the Bank of England (BoE) to add stimulus in its meeting this coming week. Yet, even if realized, does 25 billion pounds validate a 1300 pip plunge?

Japanese Yen Easing Losses Much of Week’s Gains on BoJ Expectations

The yen crosses advanced further through the end of the past week to recover lost ground and balance fears that the yen is in the midst of a significant rebound. Stubborn risk trends are the enabler of the end-of-week rebound – measuring 280 pips for USDJPY from its lows on the week. Yet, actual depreciation of the yen through its own momentum is going to struggle to provide an active bullish drive on the yen crosses. The next BoJ meeting with the dovish upgrade isn’t until April. The market will watch closely to see if nominee Kuroda talks policy Monday.

Australian Dollar Faces Heavy Event Risk and a Tight Range

AUDUSD is trading in a 100-pip range at this point and we are heading into one of the heaviest fundamental weeks for the Australian dollar in recent history. We may not need risk trends to complete a break for this pair. Without doubt, top event risk for the high-yield currency is the RBA rate decision. The swaps market is only pricing in a 17 percent probability of a 25bp cutat this meeting, but the group has remained consistently bearish and recently issued a report suggesting the currency was possibly overvalued. If that doesn’t get things moving, 4Q GDP might.

Canadian Dollar Shudders after GDP Data, Market Watches Slow BoC

Growth data printed close to the consensus forecasts offered up by economists Friday. The 0.2 percent contraction in GDP through December met expectations, as did the annualized 4Q print of 0.6 percent growth. The loonie was temporarily jolted by the data, but didn’t take to trend. The week ahead is loaded with a BoC rate decision, trade report, manufacturing survey and jobs data.

Gold Sets Lowest Weekly Week in 8 Months, ETF Holds Drop 2.4 Percent

Having lost much of its recovered ground, gold closed out this past week in the red – extending its short-term bearish performance to a four-week decline. The close for the higher time frame was the worst in 8 months and keeps that threat of a true reversal through a break of $1,525 dangerously close. Though less significant than the Fiscal Cliff, the sequester presents a possible credit and sentiment risk for the US; so there may be some anti-dollar interest to be found. Yet, the weekly 2.4 percent drop in gold holdings by ETFs – biggest in 18-months – is serious.

**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

BoE/GfK Inflation Next 12 Mths

3.5%

5Q downtrend in inflation expectations show low economic growth forecasts

0:00

NZD

ANZ Commodity Price

0.3%

Higher commodity prices could hurt trade balance

0:01

GBP

Lloyds Business Barometer

15

Business sentiment had been on upturn prior to last month’s fall

0:01

GBP

Hometrack Housing Survey (MoM)

0.0%

Steady incline in home prices (YoY) beginning mid-2000 appears to have tapered off

0:01

GBP

Hometrack Housing Survey (YoY)

-0.3%

0:30

AUD

Building Approvals (MoM)

2.8%

-4.4%

Building approvals leading indicator or GDP growth, previous month (YoY) highest level in 2Y

0:30

AUD

Building Approvals (YoY)

8.1%

9.3%

0:30

AUD

Company Operating Profit (QoQ)

-2.9%

Indicative of economic growth, 2Y avg. growth of 1.1%

0:30

AUD

Inventories

-1.0%

1.1%

Unpredictable indicator of recent due to high volatility

0:30

AUD

ANZ Job Advertisements (MoM)

0.6%

-0.9%

Negative growth over last 11M, indicative of weakening job market

8:00

EUR

Spain Unemployment Change (FEB)

With Italy under pressure, negative sentiment may revive targeted fears of revived crisis from Spain

9:30

EUR

Euro-Zone Sentix Investor Confidence

-4.3

-3.9

Strong growth trend in 8/12, implying greater confidence in EU growth

9:30

GBP

Purchasing Manager Index Construction

49

48.7

Swings above and below 50, showing stagnation in UK construction

10:00

EUR

Euro-Zone Producer Price Index (MoM)

0.5%

-0.2%

YoY and MoM multi-month downtrend in prices indicative of weak growth

10:00

EUR

Euro-Zone Producer Price Index (YoY)

1.9%

2.1%

14:45

USD

ISM New York

56.7

NY PMI expansionary 6 of last 7 months, strong regional growth

22:30

AUD

AiG Performance of Service Index

45.3

12M straight of bust in AU service sector, may mean slowing overall economy

GMT

Currency

Upcoming Events & Speeches

(S) 8:00

EUR

Greece Finance Minister Meets Troika Delegation

00:30

JPY

Confirmation Hearing for BoJ Gov Nominee Kuroda

10:00

EUR

EU, Euro Commission, ECB Officials Meet Labor Leaders

13:00

USD

Fed’s Yellen Speaks in Washington

14:00

EUR

Eurozone Finance Ministers Hold Regular Meeting

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 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

12.7584

1.7975

9.0642

7.7548

1.2404

Spot

6.4362

5.7262

5.7543

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

1.3142

1.5176

94.77

0.9512

1.0345

1.0290

0.8338

123.82

142.57

Resist. 2

1.3112

1.5141

94.48

0.9491

1.0326

1.0268

0.8316

123.33

142.12

Resist. 1

1.3082

1.5107

94.18

0.9471

1.0306

1.0246

0.8295

122.84

141.66

Spot

1.3022

1.5038

93.59

0.9429

1.0268

1.0203

0.8252

121.87

140.75

Support 1

1.2962

1.4969

93.00

0.9387

1.0230

1.0160

0.8209

120.90

139.83

Support 2

1.2932

1.4935

92.70

0.9367

1.0210

1.0138

0.8188

120.41

139.37

Support 3

1.2902

1.4900

92.41

0.9346

1.0191

1.0116

0.8166

119.92

138.92

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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02 March 2013 04:31 GMT