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FOREX: Dollar Rallies Across the Board but the Absence of a Clear Driver Could Drain Momentum

FOREX: Dollar Rallies Across the Board but the Absence of a Clear Driver Could Drain Momentum

2011-02-11 02:36:00
John Kicklighter, Chief Currency Strategist
Share:
  • Dollar Rallies Across the Board but the Absence of a Clear Driver Could Drain Momentum
  • British Pound Rallies as Quiet BoE Event Considered a Hawkish Response after 4Q GDP
  • Euro Drops against Dollar, Pound as ECB Reportedly Forced to Buy Portuguese Bonds
  • Australian Dollar Breaks Down Well After Employment Data as Yields Ease
  • Japanese Yen Plunges as Threat of Early Election Threatens to Delay Fiscal Resolutions
  • Swiss Franc Tumbles after Inflation Data Further Depresses Rate Expectations

Dollar Rallies Across the Board but the Absence of a Clear Driver Could Drain Momentum

The dollar posted its biggest rally in five weeks through Thursday’s session. This has ushered the currency what many speculators would agree could be the verge of a meaningful reversal against a number of its counterparts. A quick rundown of the list of liquid majors gives us a good sense of what is at stake. EURUSD has dropped back to the floor of the past three weeks’ congestion at 1.3550 and could finally retrace more of that aggressive, January rally. GBPUSD has similarly settled back towards 1.60, leading many to wonder whether its five-week and nearly 1,000-point run will finally crack. USDJPY and USDCHF enjoyed their biggest rally in three weeks in a move that transcends the risk-appetite debate. And, even AUDUSD has stumbled back to the market-friendly and psychologically influential parity level. After a terrible performance for the greenback for January, the currency looks poised to make its recovery. The only concern is where this sudden strength originated.

From a speculative perspective, it is easy to convince ourselves that the dollar is simply oversold and is ready to reverse. However, history has shown us that without a meaningful fundamental catalyst; nascent trends quickly turn into failed trends. Looking forward, there are more than a few notable drivers that could accelerate (or stunt) the dollar’s run; but what was the impetus for the past session’s catalyzing performance? It has been suggested by a large swatch of the financial media that the initial jobless claims figures for the period ending February 5th were responsible for the climb. That said, a closer look at the currency and broader financial markets’ reaction to the release of this data shows that this is not the case. Historically, this indicator has shown very little influence over price action as the indicator is considered an unqualified complement to monthly NFPs and the underlying trend on this weekly reading generally prevents significant surprises. So, while the 36,000-claim drop in jobless benefits is an encouraging sign for the more comprehensive, monthly statistics; it does little to excite volatility on its own. The same is generally true for the 1.0 percent increase in wholesale inventories and the smaller than expected $49.8 billion January deficit.

What then encouraged the dollar Thursday? One prominent feature was notable underperformance by many of its counterparts. For its own part, though, the US saw rates rise in a number of venues: Libor, Treasury yields and swaps. This improvement was tame; but set against the drop in yields seen in European and Asia, such performance is magnified. On the other hand, a modest turn such as this does not possess the necessary influence to keep the greenback rallying. A true fundamental drive is needed. The long-awaited risk aversion move could certainly fit the bill; but there is no evidence that this overdue shift is about to occur. That doesn’t mean, however, that global uncertainty can’t bolster the dollar’s safe haven value without impacting artificially inflated assets like the S&P 500. Should conditions deteriorate in Europe for example, it will drive considerable liquidity the benchmark’s way. Another predicable threat to a calm market is scheduled event risk. Friday brings the December trade balance figures and the first reading of February’s University of Michigan consumer confidence survey. Both are important to the economic backdrop; but the specter of true volatility holds with next week’s global calendar.

Related: Discuss the Dollar in the DailyFX Forum, John’s Analyst Picks: AUDCHF Offers a Short-Term Setup, EURUSD Covers Medium-Term

British Pound Rallies as Quiet BoE Event Considered a Hawkish Response after 4Q GDP

How would the efficient market theory hypothesis explain the pound’s rally after the Bank of England’s policy meeting passed without a tangible change? The true of the matter is that speculation plays a far larger role in guiding the capital markets than simple economic theorem allows for. And, for the rate decision Thursday morning, the reality that rates were held, the bond purchasing program was unchanged and there would be no clear explanation as to the group’s reasoning tells perceptive fundamental traders something. On the one hand, a very few people would be disappointed that the central bank didn’t move immediately on raised inflation pressures and forecasts. On the other, there is material relief that the unexpected 0.5 percent drop in the UK economy through the fourth quarter didn’t necessitate an increase in the stimulus program. There was volatility Thursday; but real action is seen next week with the quarterly inflation report, labor statistics and confidence figures.

Euro Drops against Dollar, Pound as ECB Reportedly Forced to Buy Portuguese Bonds

European officials have bought themselves time before they have to make the hard decision about what to do to ensure the sovereign debt and banking crisis doesn’t sweep over the region again. Yet, this temporary paint job isn’t holding up too well. Portuguese yields surged to a record reportedly necessitating the ECB’s first government bond purchase in nearly three weeks. Banter and disagreement looms for Europe.

Australian Dollar Breaks Down Well After Employment Data as Yields Ease

The employment data was big-ticket event risk for the Aussie dollar; but the immediate reaction was limited. Given time, the masses would eventually look beyond the headline figures to see the disappointment in the report; the real driver for the day wasn’t on the docket. Looking at CS overnight index swaps, the 12 month yield outlook plunged the most in two weeks while two-year Treasuries yields suffered a similar fate.

Japanese Yen Plunges as Threat of Early Election Threatens to Delay Fiscal Resolutions

There are few options for Japan. Long-standing deflation (over two-decades), debt that is seen ballooning to two-times GDP and a surprisingly buoyant currency have backed the economy into a corner. Yet, the bold reform that many officials believe is necessary to correct the problem is struggling to make it through the necessary channels. This raises the threat of an early election which will only push back the needed change.

Swiss Franc Tumbles after Inflation Data Further Depresses Rate Expectations

The franc is slowly bleeding its fundamental strength. Through 2010, the currency was considered one of the strongest currencies in the market due to its anti-euro appeal and the development of hawkish interest rate speculation. Today, we see the euro stabilizing having bought itself time and inflation has printed a tepid 0.3 percent annual clip through CPI. Without that euro catalyst, the franc will continue to give up gains.

For Real Time Forex News, visit: http://www.dailyfx.com/real_time_news/

**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

NZD

2:00

Non Resident Bond Holdings (JAN)

62.1%

Dec. holdings highest in 3 months.

EUR

7:00

German Consumer Price Index (MoM) (JAN F)

-0.5%

-0.5%

German inflation unexpectedly accelerated in December as hotel prices surged 5.6% and heating oil rose 5.4%.

EUR

7:00

German Consumer Price Index (YoY) (JAN F)

1.9%

1.9%

EUR

7:00

German Consumer Price Index - EU Harmonised (MoM) (JAN F)

-0.5%

-0.5%

EUR

7:00

German Consumer Price Index - EU Harmonised (YoY) (JAN F)

2.0%

2.0%

EUR

7:00

German Wholesale Price Index (MoM) (JAN)

1.8%

Wholesale prices increased in December for a fourth time in 5 months.

EUR

7:00

German Wholesale Price Index (YoY) (JAN)

9.5%

EUR

7:45

French Non-Farm Payrolls (QoQ) (4Q P)

0.1%

French non-farm payrolls increased in the last three quarters.

EUR

7:45

French Wages (QoQ) (4Q P)

0.3%

0.3%

EUR

7:45

French Current Account (euros) (DEC)

-4.2B

Deficit widened in November.

GBP

9:30

Producer Price Index Input n.s.a. (MoM) (JAN)

1.4%

3.4%

U.K. producer prices increased 0.5% in December, higher than 0.4% expected, on higher costs for food and fuel. Prime Minister Cameron said that recent gains in consumer prices was “concerning” and policy makers faced a “difficult task.”

GBP

9:30

Producer Price Index Input n.s.a. (YoY) (JAN)

12.7%

12.5%

GBP

9:30

Producer Price Index Output n.s.a. (MoM) (JAN)

0.5%

0.5%

GBP

9:30

Producer Price Index Output n.s.a. (YoY) (JAN)

4.4%

4.2%

GBP

9:30

Producer Price Index Output Core n.s.a. (MoM) (JAN)

0.3%

0.2%

GBP

9:30

Producer Price Index Output Core n.s.a. (YoY) (JAN)

3.0%

2.9%

CAD

13:30

International Merchandise Trade (Canadian dollar) (DEC)

-0.3B

-0.1B

Unexpectedly narrowed on energy.

USD

13:30

Trade Balance (DEC)

-$40.5B

-$38.3B

Deficit likely widened to 3-month high.

USD

14:55

U. of Michigan Confidence (FEB P)

75.0

74.2

Probably rose to an 8-month high.

Currency

GMT

Upcoming Events & Speeches

EUR

11:15

ECB's Axel Weber, Christian Noyer Speak on European Economy

EUR

17:30

ECB President Jean-Claude Trichet Speaks on European Economy

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

1.3600

1.6093

83.32

0.9700

0.9956

1.0046

0.7638

113.31

134.08

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

12.0813

1.5895

7.2612

7.7901

1.2786

Spot

6.4714

5.4825

5.8336

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

1.3797

1.6207

84.04

0.9787

1.0015

1.0191

0.7761

113.91

135.36

Resist 1

1.3698

1.6150

83.68

0.9744

0.9985

1.0119

0.7700

113.61

134.72

Pivot

1.3638

1.6081

83.01

0.9659

0.9959

1.0064

0.7662

113.11

133.62

Support 1

1.3539

1.6024

82.65

0.9616

0.9929

0.9992

0.7601

112.81

132.98

Support 2

1.3479

1.5955

81.98

0.9531

0.9903

0.9937

0.7563

112.31

131.88

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

1.3765

1.6259

84.21

0.9813

1.0052

1.0177

0.7740

114.71

135.67

Resist. 2

1.3724

1.6217

83.99

0.9785

1.0028

1.0144

0.7715

114.36

135.27

Resist. 1

1.3683

1.6176

83.77

0.9757

1.0004

1.0112

0.7689

114.01

134.87

Spot

1.3600

1.6093

83.32

0.9700

0.9956

1.0046

0.7638

113.31

134.08

Support 1

1.3517

1.6010

82.87

0.9643

0.9908

0.9980

0.7587

112.61

133.29

Support 2

1.3476

1.5969

82.65

0.9615

0.9884

0.9948

0.7561

112.26

132.89

Support 3

1.3435

1.5927

82.43

0.9587

0.9860

0.9915

0.7536

111.91

132.49

v

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

To receive John’s reports via email or to submit Questions or Comments about an article; email jkicklighter@dailyfx.com

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