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Dollar Outlook Tarnished by ECB, NFPs Offers a Risk Reprieve

By , Chief Currency Strategist
08 March 2013 07:00 GMT
  • Dollar Outlook Tarnished by ECB, NFPs Offers a Risk Reprieve
  • Euro Rallies Sharply after ECB Scoffs at Stimulus Expectations
  • British Pound Shows Mixed Reaction to Mum BoE, Don’t Look Away
  • Japanese Yen: Now on to an Era of Unprecedented BoJ Stimulus
  • Canadian Dollar Ready for Volatility on Employment Data
  • Swiss Franc: SNB May not be Buying More Euros, but It Isn’t Selling
  • Gold: Market Has Grown Extremely Quiet, Breakout Risk High

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Dollar Outlook Tarnished by ECB, NFPs Offers a Risk Reprieve

The Dow Jones FXCM Dollar Index (ticker = USDollar) retreated from its two-and-a-half year high, but the slip failed once again to turn the persistent bull trend of the past months. However, the fundamental backdrop speaks to a deterioration in the greenback’s potential forward momentum; while the label of ‘over-extended’ is looking more and more appropriate for the benchmark’s lofty heights. Doubt arises via multiple angles for the dollar – most notably through stimulus. Amongst the world’s largest central banks, the Federal Reserve is by far the most liberal group when it comes to supporting its system. The $85 billion-per-month stimulus regime the Fed has maintained since the beginning of the year (upgraded from the $45 billion-per-month mortgage backed securities and $40 billion Treasuries recycling) is expected to remain in place through the end of the year. Setting that effort in an even deeper relief, we learned this past session that the ECB would allow its own balance sheet to shrink and the BoE was holding its small holdings steady (more on that below).

We have seen periods in the past where the Federal Reserve and Treasury’s stimulus efforts were overlooked by the market and demand for the dollar and dollar-denominated assets continued to outperform its counterparts. However, that strength was supported by a secondary influence – risk aversion. Where policy easing leaves the market awash in dollars, global fear ensures there is plenty of demand for the safe haven to mop up the supply. And, while there is reason to be skeptical; it is hard to deny that speculators still have their appetite. With the Dow Jones Industrial Average hitting record highs and the VIX hovering just above a five year low, that flight to quality isn’t a factor. So, excessive stimulus and limited risk paints a troubling picture for a safe haven at multi-year highs. On the other hand, it is easy enough to offer the dollar another strong thrust forward – through a strong risk aversion move. Optimism can decay to fear easily enough in a market based on external support, but a catalyst is the best way to make the transition. Perhaps the upcoming NFPs can offer a spark.

Euro Rallies Sharply after ECB Scoffs at Stimulus Expectations

The European Central Bank (ECB) has solidified the euro’s very unique position amongst the major currencies. With the policy authority’s decision to keep thing status quo this past session, Europe sports one of the very few economies actually drawing stimulus out of the system and seeing its market rates rise because of it. That is a significant appeal to FX traders that are looking for higher yields – and more importantly a rising yield which offers further capital gains – and the alternatives are either holding rates extremely low (like the Fed) or readying to ramp their efforts even further (like the BoJ). Heading into the group’s meeting, there was a definite expectation that ECB President Mario Draghi and crew would be more sympathetic to the ongoing recession and growing fiscal threat found in developments like the complicated Italian election. The statement and President’s Q&A revealed that discussion of a cut was easily overruled and even the concerns of the euro’s influence were tempered. As long as competitive stimulus (currency manipulation) is the primary concern – and risk trends are stable – the euro is in a strong position. Of course, ignoring the region’s future growth and financial risks could come back to bite the ECB and euro later on.

British Pound Shows Mixed Reaction to Mum BoE, Don’t Look AwayAs with the ECB policy gathering, there was considerable speculation heading into the Bank of England rate decision that the Monetary Policy Committee (MPC) would move to offer further stimulus. At the previous BoE meeting, it was revealed that Governor Mervyn King and two other MPC members called for an increase to the bond purchase program but were overruled by the majority. Yet, despite the risk of a triple dip recession, the government’s vow to keep to austerity and Europe’s withdrawal of support; the central bank passed up on the opportunity to ease. What is most surprising about this event though is that the sterling didn’t recover lost ground. Expectations can hold for only so long…

Japanese Yen: Now on to an Era of Unprecedented BoJ Stimulus

Most of the focus Thursday was on the ECB and BoE policy decisions, but the Bank of Japan (BoJ) had a meeting of its own. As the last official gathering headed by Governor Masaaki Shirakawa – and given his clear disdain for government pressures – it was the running consensus that the 101 trillion yen stimulus effort would be left untouched and no additional easing would be introduced before the new regime was installed. That expectation was well founded. It is interesting to note, however, that two members – Shirai and Miyao – both voted for more easing at meeting. Considering nominees Kuroda (Governor), Nakaso and Iwata (Deputy Governors) are easing bound, that’s spells a majority in April.

Canadian Dollar Ready for Volatility on Employment Data

Trends are hard to come by in the FX market, but volatility can be found with the right fuel source and ignition. Congestion for USDCAD after a strong climb to multi-month highs sets the scene for the combination of the US nonfarm payrolls (NFP) and Canadian labor data for February. The US data has offered few misses serious enough to stock risk aversion, so the most likely outcome is to support or at least leave the loonie to define the reaction. The Canadian jobless rate is seen ticking up and a 8,000 net increase in jobs sets the bar relatively low.

Swiss Franc: SNB May not be Buying More Euros, but It Isn’t Selling

We know that the Swiss National Bank (SNB) hasn’t had to defend its 1.2000-defined, EURCHF floor for a number of months thanks to the perceived reduced Euro-area tail risks. However, the central bank clearly thinks that fear can quickly return. Aside from warnings about reinforcing stimulus, we also find they have refused to unwind their Forex reserves for a fifth month – afraid of driving the franc higher.

Gold: Market Has Grown Extremely Quiet, Breakout Risk High

Market’s always return to a level of normality. And while ‘normal’ changes with time, the fact that the average daily trading range for the past week’s worth of trading for gold is near the lulls of the past few years suggests the risks of a breakout are growing. Fundamentally speaking, the pullback in the CBOE’s gold volatility index offers some sense of permanence to the dampened price action. Alternatively, the mix between the aggressive ETF unloading of the commodity and hold on stimulus this past session presents a renewed bearish pressure.

**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

2:00

CH

Trade Balance (USD)

-$6.95B

$29.15B

Exports key to China’s economic growth. Trade balance has been positive for 11 months straight.

2:00

CH

Exports (YoY)

8.1%

25.0%

2:00

CH

Imports (YoY)

-8.5%

28.8%

4:30

JPY

Bankruptcies (YoY)

-5.2%

Growth mostly negative since mid-2009, indicating stronger business activity.

5:00

JPY

Eco Watchers Survey: Outlook

56.5

Current economic sentiment historically well predicted by outlook survey.

5:00

JPY

Eco Watchers Survey: Current

49.5

8:15

CHF

Consumer Price Index (MoM)

0.3%

-0.3%

Consistent price declines heave leading to fears of deflation. Central Bank has and may continue to take action to devalue currency.

8:15

CHF

Consumer Price Index (YoY)

-0.3%

-0.3%

8:15

CHF

CPI - EU Harmonised (MoM)

-0.5%

8:15

CHF

CPI - EU Harmonised (YoY)

-0.1%

9:30

GBP

BoE/GfK Inflation Next 12 Mths

3.5%

Inflation expectations on downtrend since 8/11, historically over/under predict actual inflation.

11:00

EUR

German Industrial Production n.s.a. and w.d.a. (YoY)

-1.2%

-1.1%

Strong downtrend since high of 15% on 2011, indicate economic slowdown within Euro-Zone’s strongest economy.

11:00

EUR

German Industrial Production s.a. (MoM)

0.4%

0.3%

13:15

CAD

Housing Starts

175.0K

160.6K

Leading indicator, may be linked to overall consumption, negative growth over last 5M.

13:30

USD

Change in Non-farm Payrolls

160K

157K

Fed plans to keep rates near 0 until unemployment threshold of 6.5% reached.

13:30

USD

Change in Private Payrolls

167K

166K

13:30

USD

Unemployment Rate

7.9%

7.9%

13:30

USD

Change in Household Employment

17

Steady decline in underemployment from high of 17.1% on 10/09 indicative of strengthening economy.

13:30

USD

Underemployment Rate (U6)

14.4%

13:30

CAD

Unemployment Rate

7.1%

7.0%

Unemployment threatening to fall below 7% for first time since 12/08, should be looked at in tandem with participation rate.

13:30

CAD

Net Change in Employment

8.0K

-21.9K

13:30

CAD

Full Time Employment Change

-20.6

13:30

CAD

Part Time Employment Change

-1.4

13:30

CAD

Participation Rate

66.7

66.6

13:30

CAD

Labor Productivity (QoQ)

0.0%

-0.5%

Growth in productivity is a key factor in economic growth.

GMT

Currency

Upcoming Events & Speeches

-:-

AUD

Australia Plans $A600 Mln in 2023 Bond Sales

5:00

JPY

Bank of Japan’s Monthly Economic Report for March

-:-

EUR

IMF’s Largarde Visits Dublin

11:00

EUR

ECB Reports Weekly LTRO Repayment Plans

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

12.7780

1.7996

9.1628

7.7572

1.2467

Spot

6.3365

5.6922

5.6773

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

1.3206

1.5137

96.59

0.9521

1.0383

1.0326

0.8340

126.75

144.82

Resist. 2

1.3179

1.5105

96.28

0.9502

1.0365

1.0305

0.8320

126.28

144.39

Resist. 1

1.3151

1.5073

95.98

0.9483

1.0347

1.0285

0.8300

125.81

143.97

Spot

1.3096

1.5009

95.36

0.9444

1.0310

1.0244

0.8259

124.88

143.12

Support 1

1.3041

1.4945

94.74

0.9405

1.0273

1.0203

0.8218

123.95

142.26

Support 2

1.3013

1.4913

94.44

0.9386

1.0255

1.0183

0.8198

123.48

141.84

Support 3

1.2986

1.4881

94.13

0.9367

1.0237

1.0162

0.8178

123.01

141.41

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 March 2013 07:00 GMT