• Dollar Strength Requires a Fundamental Shove – Such as a Clear Risk Aversion Move
  • Euro’s Future Up in the Air as Politicians Postpone a Much-Anticipated Fix to Financial Troubles
  • British Pound at the Top of the Fundamental Heap Next Week with the BoE on Deck
  • Canadian Dollar Rallies after Employment Data, Tumbles after Business Activity
  • Australian Dollar Traders will Have to Gauge a Jobs Report Reaction against Rate Expectations
  • Japanese Yen won’t be able to Hold onto its Premium for Long as Yield Spreads Widen

Dollar Strength Requires a Fundamental Shove – Such as a Clear Risk Aversion Move

Rewind the clock back; and the dollar seems to be in exactly the opposite position it was a month ago. Back then, the greenback was just starting to retrace from near-four month highs even though fundamentals scarcely supported the shift. And, now as we head into a new trading week, the currency is just starting to recover from a month-long tumble – again, without solid support from the speculative backdrop. The precedence for last month’s reversal plays to our human inclination to spot patterns and expect similar results; while a pure look at fundamentals gives us reason to doubt that a meaningful drive for the dollar is feasible. However, if we are to first simply look at the unit’s performance over the last 24 hours of trading this past week; we should at least be open to the risk of bullish follow through. The benchmark pairing for the dollar, EURUSD, slid for its third consecutive session to extend its best run since the opening rally to the new trading year. Taking stock of the risk-appetite angle, AUDUSD would retrace from a high for the month and NZDUSD cleared general declines. Perhaps most remarkable of all, though, was the strong drive against the Japanese yen and Swiss franc (fellow safe-haven currencies). Definitively, a dollar move.

The encouraging move for the greenback over the second half of the week was especially surprising because of the data that crowded the headlines and the uncomplimentary bearing in investor sentiment. Few were in the dark about the release of the January nonfarm payrolls (NFP) report from the Bureau of Labor Statistics. The headline net change figure fell well-short of the consensus forecast with a 36,000 addition; but optimists attributed this weak performance to the unusual weather during the period. The jobless rate would offer the bigger surprise by unexpectedly dropping to 9.0 percent – its lowest level in 21 months. Yet, here too, there was something beneath the surface. Perhaps far more important to the overall picture, labor force participation through the month dropped to its lowest level since March of 1984 (at 64.2 percent) while the number of people that exited the labor force but still wanted a job rose sharply to its highest level on record. For the long-term view, this reminds us that though there is a firm pace of growth, it is founded on dynamics (inventory, trade, business investment) that cannot survive without a hand-in-hand recovery for the US recovery. That said, what was particularly interesting for us traders is that such a disappointing round boosted the dollar but wouldn’t weigh the risk-sensitive S&P 500.

As we head into the new trading week, it will be important to gauge the dollar’s performance against the benchmarks for investor sentiment. Not often do the two diverge for long. However, anyone looking for easily identifiable catalysts to rally or crush optimism will come up short. The economic docket is exceptionally light over the next week; but that doesn’t mean the bigger themes cannot be massaged. Concerns surrounding Europe’s financial stability, China’s asset inflation, Japan’s debt fight, Middle Eastern tensions or the proximity of the US deficit cap quickly block out all other concerns. When equities, commodities, yields and currencies start moving in concert; a bigger move will be upon us.

Related:Discuss the Dollar in the DailyFX Forum, John’s Analyst Picks: EURUSD Tops the List for Trade Potential Next Week

Euro’s Future Up in the Air as Politicians Postpone a Much-Anticipated Fix to Financial Troubles

The influence that preconceived market expectations can have on price action was demonstrated Thursday when an otherwise unchanged ECB President Trichet statement led the euro to tumble. Perhaps the market learned its lesson and decided to entertain less extraordinary expectations for the meeting for EU officials. There has been considerable interest paid to proposals thrown out by various lawmakers about expanding the EFSF program, using the funds to purchase government debt and lowering emerging fund rates amongst other boons. Yet, more than one person warned that no decisions would be made until the March summit. Indeed, the attendees deferred a meaningful outcome and vowed to revisit the proposals for a draft to bring to vote sometime between March 7th and 24th. That said, they are taking a gamble in assuming the market will simply hold tight until then. In the meantime, next week brings the first of the European fourth quarter GDP readings: Spain.

British Pound at the Top of the Fundamental Heap Next Week with the BoE on Deck

The British pound offered up a mixed performance Friday after the Halifax home price indicator a monthly advance out of diminished supplies and former BoE member Kate Barker called the central bank out for losing credibility in its inflation fight. Next week, sterling traders will have the benefit of dealing with the fullest economic docket of its peers. At the top of the list will be the NIESR GDP estimate for January, industrial production, factory level inflation and the BoE rate decision. There is no change expected in either the stimulus program or the benchmark rate; but the previous 6-2-1 vote (two members calling for a hike) will no doubt encourage speculation before this month’s decision is announced.

Canadian Dollar Rallies after Employment Data, Tumbles after Business Activity

If all of the Canadian dollar’s catalysts lined up, USDCAD may have held onto two-and-half year lows. The Canadian employment figures set a strong tone for the morning. While the jobless rate rose from a two-year low to 7.8 percent, it was more an influx of participation given the 69,200 increase in payrolls. A full on rally was curbed though when the Ivey business activity survey unexpectedly plunged to a two-year low.

Australian Dollar Traders will Have to Gauge a Jobs Report Reaction against Rate Expectations

While the Australian dollar has been fundamentally shaken these past few weeks, the currency’s inclination is still a bullish one. The last update we would have from the economic wellspring was the RBA’s upgrade to growth and inflation forecasts for 2011. That said, these projections will mean little if data keeps chipping away at the economy. As such, Aussie traders will keep a close eye on next week’s employment data.

Japanese Yen won’t be able to Hold onto its Premium for Long as Yield Spreads Widen

It should strike any fundamental trader as unusual that the yen is holding up so well considering the nation was downgraded, policymakers are discussing a sharp increase in taxes and benchmark risk measures are pushing new highs. Another abnormality to watch: the US and Japanese 10-year government bond differential has shifted sharply in the dollar’s favor. USDJPY historically follows this spread very closely.

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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

Currency

GMT

Release

Survey

Previous

Comments

AUD

23:30

AiG Performance of Construction Index (JAN)

43.8

Construction fell in the last 7 months.

JPY

23:50

Official Reserve Assets (JAN)

$1096.2B

Reserves fell in the last two months.

AUD

0:30

Retail Sales s.a. (MoM) (DEC)

0.5%

0.3%

Retail sales rebounded in November as spending at department stores increased.

AUD

0:30

Retail Sales Ex Inflation(QoQ) (4Q)

0.1%

0.7%

AUD

0:30

ANZ Job Advertisements (MoM) (JAN)

2.0%

Advertisements rose in the last 8 months.

JPY

5:00

Leading Index (DEC P)

101.4

100.6

Japanese leading index rose to a seven-month high in November.

JPY

5:00

Coincident Index (DEC P)

103.1

102.4

AUD

5:30

Foreign Reserves (Australian dollar) (JAN)

41.6B

Last reading was lowest since March.

EUR

9:30

Euro-Zone Sentix Investor Confidence (FEB)

14.0

10.6

Confidence likely rose for second month.

EUR

11:00

German Factory Orders s.a. (MoM) (DEC)

-1.5%

5.2%

German factory orders probably fell in December after a two-month rise.

EUR

11:00

German Factory Orders n.s.a. (YoY) (DEC)

21.3%

20.6%

CAD

13:30

Building Permits (MoM) (DEC)

2.0%

-11.2%

Permits fell in 4 of the past five months.

USD

20:00

Consumer Credit (DEC)

$2.500B

$1.346B

Credit likely rose for a 3rd month in Dec.

Currency

GMT

Upcoming Events & Speeches

JPY

3:30

BoJ Governor Masaaki Shirakawa Speaks on Japanese Economy

EUR

14:00

ECB's Axel Weber Speaks on The Euro

EUR

17:15

ECB's Yves Mersch Speaks on European Financial System

SUPPORT AND RESISTANCE LEVELS

CLASSIC SUPPORT AND RESISTANCE - 18:00 GMT

Currency

EUR/USD

GBP/USD

USD/JPY

USD/CHF

USD/CAD

AUD/USD

NZD/USD

EUR/JPY

GBP/JPY

Resist 2

1.4025

1.6420

89.00

1.0000

1.0922

1.0600

0.8230

127.60

146.05

Resist 1

1.3875

1.6300

86.00

0.9775

1.0750

1.0200

0.8000

120.00

140.00

Spot

1.3581

1.6111

82.18

0.9550

0.9873

1.0138

0.7701

111.62

132.40

Support 1

1.3425

1.5750

80.00

0.9300

0.9800

0.9600

0.6850

103.80

125.00

Support 2

1.2900

1.5315

75.00

0.9000

0.9700

0.9375

0.6585

100.00

119.00

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

13.8500

1.6575

7.4025

7.8165

1.4945

Resist 2

7.7500

5.7800

6.2750

Resist 1

12.5000

1.6300

7.2825

7.8075

1.4655

Resist 1

7.5800

5.6625

6.1150

Spot

11.9863

1.5851

7.2531

7.7860

1.2750

Spot

6.4813

5.4891

5.7558

Support 1

11.7200

1.5300

6.9900

7.7490

1.2700

Support 1

6.2850

5.2625

5.7030

Support 2

11.4400

1.4725

6.8000

7.7450

1.2500

Support 2

6.1250

5.1000

5.5200

INTRA-DAY PIVOT POINTS 18:00 GMT

Currency

EUR/USD

GBP/USD

USD/JPY

USD/CHF

USD/CAD

AUD/USD

NZD/USD

EUR/JPY

GBP/JPY

Resist 2

1.3736

1.6241

83.27

0.9673

1.0036

1.0238

0.7784

112.76

133.93

Resist 1

1.3658

1.6176

82.73

0.9612

0.9954

1.0188

0.7743

112.19

133.16

Pivot

1.3601

1.6106

81.90

0.9531

0.9893

1.0149

0.7704

111.48

131.97

Support 1

1.3523

1.6041

81.36

0.9470

0.9811

1.0099

0.7663

110.91

131.20

Support 2

1.3466

1.5971

80.53

0.9389

0.9750

1.0060

0.7624

110.20

130.01

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

1.3750

1.6280

83.08

0.9664

0.9971

1.0273

0.7806

113.06

134.02

Resist. 2

1.3708

1.6238

82.86

0.9636

0.9946

1.0239

0.7780

112.70

133.62

Resist. 1

1.3666

1.6196

82.63

0.9607

0.9922

1.0205

0.7753

112.34

133.21

Spot

1.3581

1.6111

82.18

0.9550

0.9873

1.0138

0.7701

111.62

132.40

Support 1

1.3496

1.6026

81.73

0.9493

0.9824

1.0071

0.7649

110.90

131.59

Support 2

1.3454

1.5984

81.50

0.9464

0.9800

1.0037

0.7622

110.54

131.18

Support 3

1.3412

1.5942

81.28

0.9436

0.9775

1.0003

0.7596

110.18

130.78

v

Written by: John Kicklighter, Currency Strategist for DailyFX.com

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