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Forex: Dollar Would be the Primary Benefactor of Volatility or a Market-Wide Risk Reversal Next Week

Forex: Dollar Would be the Primary Benefactor of Volatility or a Market-Wide Risk Reversal Next Week

2011-02-12 05:58:00
John Kicklighter, Chief Currency Strategist
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  • Dollar Would be the Primary Benefactor of Volatility or a Market-Wide Risk Reversal Next Week
  • British Pound Virtually Guaranteed a Breakout as Rate Speculators Find Hard Evidence
  • Euro’s Passive Gains Could be Wiped Out if GDP Figures Remind Investors of a Struggle Ahead
  • Japanese Yen Faces Immediate Event Risk to Start the Week with Monday’s 4Q GDP Release
  • Canadian Dollar’s Week-End Rally Will Require Immediate Support Next Week to Prevent a Reversal
  • Australian Dollar Falters after RBA Governor Stevens Brushes off Floods Inflation Influence

Dollar Would be the Primary Benefactor of Volatility or a Market-Wide Risk Reversal Next Week

The benchmark dollar has plenty of event risk over the coming week; but compared to some of the highlights on other dockets, its listings are far from critical. Even so, the greenback will remain at the center of any momentous changes in the FX market derived from underlying shifts in speculative expectations thanks to its principle role as the world’s most liquid currency and begrudgingly-accepted safe haven status. Taking stock of the pressure that has built up behind the capital markets in general; we find many pairs and assets closed this past Friday’s trading session on the verge of trend-defining reversals. Acting as the benchmark for the majors, EURUSD closed just above a well-worn pivot see at 1.35. If sentiment is at risk, then the threat of reversal on a nine-month bull trend for the yield-heavy AUDUSD and NZDUSD should come as little surprise. Yet, giving greater credence to the dollar’s own intrinsic strength; the safe-haven balanced USDJPY and USDCHF pairs are both standing at the threshold of another phase of its February rally. What decides whether this is a short-lived live FX-based correction or a true speculative reversal, though, is complicity from the other asset classes. The 10-year Treasury note looks ready to rebound from nine-month lows, the S&P 500 is well-passed overbought and even gold is looking dangerously speculative. What we need is a catalyst and conviction.

If we want a genuine and pervasive transformation in the backdrop for speculative appetites, the tipping point will most likely be a deterioration in confidence in Europe’s financial conditions, concern that China’s inflation fight will panic global speculators or that the Bank of England’s austerity experiment will prove an disastrous example to the rest of the world. Compared to these looming threats, the dollar’s qualities are relatively benign and its positive characteristics require outside encouragement. That said, the docket will offer a thorough update on the economy’s progress towards recovery. Retail sales, housing starts, industrial production and capital flows are all critical to economic performance. The CPI data will play a unique role in shaping expectations for the eventual rate hike, and potentially before that, the withdrawal of the economy’s record stimulus.

And, though there is a dense round of predictable event risk ahead of us to threaten a near-term drive in risk appetite trends; we should also keep perspective of those fundamental developments that are further down the road. Though largely overlooked on Friday, the Treasury released a report offering up the proposal to wind down Freddie Mac and Fannie Mae. Essentially inevitable, there are far deeper connotations to this eventual effort than just exit of a stopgap for future disruptions in the housing market. These two GSEs hold a tremendous amount of toxic mortgage-backed debt that the market seems to have believed simply disappeared after the worst of the financial crisis. When market participants start to speculate on the influence of this transfer of assets back to the public space, the effects could be crippling.

Related:Discuss the Dollar in the DailyFX Forum, John’s Analyst Picks: EURUSD and AUDUSD Top a Long List of Trading Opportunities

British Pound Virtually Guaranteed a Breakout as Rate Speculators Find Hard Evidence

In a week that has prominent event risk for nearly every one of the majors, the sterling is arguably looking at the most ominous wave of releases. This past week, the Bank of England announced its decision to keep the benchmark lending rate unchanged and the bond purchasing program at 200 billion pounds as expected without a disarming statement to give insight into the reasons behind their assessment. This would be a non-event were it not for rampant speculation by market participants that the central bank will be forced to respond to unmanageable inflation. These rate watchers will be presented with definitive data that will either justify or dispute their hawkish expectations. The CPI data will stir the markets with the annual headline figure seen hitting a 4.0 percent clip while the core reading is expected to hit 3.1 percent. The following day (Wednesday), the central bank will give a sense of their concern about price pressures and the timing for any response with the quarterly inflation report. In contrast to this primary focus, consumer confidence, jobs figures and retail sales data will take a backseat for influence.

Euro’s Passive Gains Could be Wiped Out if GDP Figures Remind Investors of a Struggle Ahead

Through January, the euro was able to recover a significant portion of the ground that it had lost over the preceding months. Yet, rather than an active catalyst ushering this currency higher; this buoyancy was a relief move as fear that a continually devolving financial crisis for the region would drag the euro down. Confidence may be too high, though, if we were to review the blatant disputes that continue to plague the bailout discussions. We are still weeks away from the scheduled special summit; but in the meantime, speculators could be reminded of the underlying issues that persist with imbalances in debt and stimulus. The 4Q GDP readings for Portugal and Greece specifically will be interesting reads.

Japanese Yen Faces Immediate Event Risk to Start the Week with Monday’s 4Q GDP Release

Monday’s Asian session is not often an active time for trading. Without holdover US and European trading to amplify volatility, activity is usually pretty stiff. However, with the 4Q Japanese GDP figures due first thing in the morning; the yen may find itself primed for volatility while the rest of the market is anchored. While the deflator measure improving from its staunch deflation; growth is also expected to have contracted.

Canadian Dollar’s Week-End Rally Will Require Immediate Support Next Week to Prevent a Reversal

The Canadian dollar ended this week off with a remarkable rally. The strongest performer on the day, the loonie was driven higher by a surge in the nation’s trade surplus – backed by the largest jump in exports since 1982. This offers an encouraging boost to 4Q growth predictions; but this single indicator won’t likely hold up carry through. The tendency will be for a correction unless oil, risk trends or data can keep it elevated.

Australian Dollar Falters after RBA Governor Stevens Brushes off Floods Inflation Influence

Through it would end the day back above psychological level, AUDUSD was solidly below parity Friday. General concern over the Egyptian situation wasn’t nearly as important in this move as was RBA Governor Stevens’ remark that the flood was unlikely to alter growth or inflation materially. While this doesn’t exactly threaten yields; it offers rationale for the central bank to hold on further rate hikes for the foreseeable future.

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

21:45

Retail Sales (MoM) (DEC)

-0.4%

1.5%

New Zealand retail sales rose 1.5% in November after falling by the most in 13 years in the month prior.

NZD

21:45

Retail Sales Ex-Auto (MoM) (DEC)

-0.3%

-0.2%

NZD

21:45

Retail Sales Ex Inflation (QoQ) (4Q)

-0.5%

0.7%

JPY

23:50

Gross Domestic Product (QoQ) (4Q P)

-0.5%

1.1%

Japan’s economy expanded more than the government initially calculated in the third quarter because of a bigger-than-reported increase in capital spending.

JPY

23:50

Gross Domestic Product Annualized (4Q P)

-2.0%

4.5%

JPY

23:50

Gross Domestic Product Deflator (YoY) (4Q P)

-1.5%

-2.4%

JPY

23:50

Nominal Gross Domestic Product (QoQ) (4Q P)

-0.5%

0.6%

AUD

0:30

Home Loans (DEC)

1.0%

2.5%

Australian home-loan approvals unexpectedly rose in November, reaching the highest level of 2010.

AUD

0:30

Investment Lending (DEC)

-2.3%

AUD

0:30

Value of Loans (MoM) (DEC)

2.9%

CNY

2:00

Trade Balance (USD) (JAN)

$11.30B

$13.08B

China reported a less-than-forecast trade surplus for December, as imports surged over 25% YoY and outpaced export gains.

CNY

2:00

Exports (YoY) (JAN)

22.5%

17.9%

CNY

2:00

Imports (YoY) (JAN)

27.0%

25.6%

EUR

10:00

Euro-Zone Industrial Production s.a. (MoM) (DEC)

0.0%

1.4%

Euro-Zone industrial production was likely unchanged in December after a 2-month rise.

EUR

10:00

Euro-Zone Industrial Production w.d.a. (YoY) (DEC)

8.0%

7.9%

Currency

GMT

Upcoming Events & Speeches

USD

15:00

Fed's William Dudley Speaks on U.S. 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

1.3547

1.5999

83.46

0.9733

0.9868

1.0019

0.7601

113.07

133.53

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

12.0229

1.5880

7.2766

7.7955

1.2820

Spot

6.4870

5.5046

5.8529

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

I

NTRA-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

1.3679

1.6174

83.92

0.9826

1.0028

1.0092

0.7690

113.76

134.64

Resist 1

1.3613

1.6087

83.69

0.9780

0.9948

1.0056

0.7645

113.41

134.09

Pivot

1.3555

1.6025

83.45

0.9729

0.9906

1.0008

0.7600

113.10

133.67

Support 1

1.3489

1.5938

83.22

0.9683

0.9826

0.9972

0.7555

112.75

133.12

Support 2

1.3431

1.5876

82.98

0.9632

0.9784

0.9924

0.7510

112.44

132.70

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

1.3712

1.6165

84.35

0.9847

0.9961

1.0151

0.7704

114.46

135.11

Resist. 2

1.3671

1.6124

84.13

0.9819

0.9937

1.0118

0.7678

114.11

134.72

Resist. 1

1.3629

1.6082

83.91

0.9790

0.9914

1.0085

0.7652

113.76

134.32

Spot

1.3547

1.5999

83.46

0.9733

0.9868

1.0019

0.7601

113.07

133.53

Support 1

1.3465

1.5916

83.01

0.9676

0.9822

0.9953

0.7550

112.38

132.74

Support 2

1.3423

1.5874

82.79

0.9647

0.9799

0.9920

0.7524

112.03

132.34

Support 3

1.3382

1.5833

82.57

0.9619

0.9775

0.9887

0.7498

111.68

131.95

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

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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