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FOREX: Dollar Puts in a Bullish Reversal after a Three-Week Decline but Fundamental Support is Lax

FOREX: Dollar Puts in a Bullish Reversal after a Three-Week Decline but Fundamental Support is Lax

2011-03-09 05:10:00
John Kicklighter, Chief Currency Strategist
Share:
  • Dollar Puts in a Bullish Reversal after a Three-Week Decline but Fundamental Support is Lax
  • New Zealand Dollar Volatility Virtually Guaranteed, Direction Ambiguous
  • Euro: Balance Between Yield Expectations and Financial Uncertainty Tipping Steadily Towards Selling
  • British Pound Will Coast through Event Risk as Speculation over Thursday’s BoE Decision Heats Up
  • Australian Dollar Flirts with a Major Reversal Against the Greenback as Sentiment Data Sours
  • Japanese Yen’s Slide against the Dollar May Reverse Should Risk Trend Become More Volatile

Dollar Puts in a Bullish Reversal after a Three-Week Decline but Fundamental Support is Lax

Tuesday was an impressive day for the US dollar. On a trade-weighted basis, the greenback posted its biggest rally in a month and subsequently broke free of a three-week bear trend. That said, the actual advance would only carry the currency 0.4 percent higher and would develop on a day that the Dow was 1.0 percent higher and the S&P 500 advanced 0.9 percent. So, while the beleaguered dollar put in for a technical correction; it wasn’t the fundamental reversal that has long loomed with the threat of a market-wide collapse in consistently inflated premiums. Nonetheless, the near-uniform performance across the board speaks to an implicit strength beyond the normal lines of activity. Specifically the greenback’s climb against the euro and British pound contradict wide differentials in interest rate expectations. This has just as much to do with the market overrunning the possibilities for European rates; but it is also a sign that US-based rates will offer some level of counterbalance over the foreseeable future. Less contentious was the decline in AUDUSD as this pair is less afflicted by risk expectations and more reflective of current sentiments. With the benchmark US equity indexes placing potential topping patterns and threatening reversal; it isn’t difficult to understand why this particular pair is anchored. Perhaps the most interesting performance comes from USDCHF and USDJPY. The threat of a risk reversal is high; and the yen and franc have traits that would shine in such a scenario. Perhaps extreme positioning is kicking in.

In essence, sentiment trends carries the highest level of potential for the US dollar as the turn in Fed rate expectations are too far off and relative growth expectations are too easy to see coming. However, that does not mean that we should simply ignore all other fundamental developments. One interesting event was the POMO (application of QE2 stimulus) saw the Fed buy back nearly half of its recently auctioned off seven-year Treasury note; which is essentially monetizing debt. Also, small business confidence hit a three-year high.

Related:Discuss the Dollar in the DailyFX Forum,

New Zealand Dollar Volatility Virtually Guaranteed, Direction Ambiguous

Over the coming 24 hours, the biggest threat to calm markets is the RBNZ rate decision. For those trading New Zealand equities or bonds, this is troublesome event risk; but for the currency trader, it provides the volatility necessary to place make trades. Heading into this specific event risk, our first order of business is to determine whether this will indeed be market-moving. Indeed, over the past two years, there have only been one or two occasions where the market has shown any significant interest in the New Zealand central bank’s musings; but this isn’t our standard policy gathering. Given the devastation of the Christchurch earthquake, there is good reason to believe RBNZ Governor Alan Bollard and crew will deliver a rate cut to support an economic recovery that is expected to have a 1.5 percent point divot knocked out by the natural disaster. Dour forecasts by the central bank itself as well as Prime Minister Key’s vague request for a cut have fed market-based speculation for this particular meeting. Ahead of the decision (due at 20:00 GMT), the market is pricing in a 124 percent probability of a 25 basis point (bps) rate cut. That means a quarter-percent reduction is fully priced in and there is speculation of a 50 bps cut. The outlook from economists is even more contentious with a near equal mix of speculation for no change, a quarter-percent cut and a half-percent cut.

Before we speculation which scenario is the correct one, it is important to recognize that this wide array of outcomes means there will be some level of surprise one way or the other; and therefore, there is a high probability of volatility as some portion of the market is caught off guard. As for the reaction itself, a hold would carry the most weight as the kiwi has already plunged in anticipation; an there is heavy speculation that there will be some effort to assist the economy. Some believe this would be detrimental to the economy over the medium-term; but as an investment currency, the immediate impact would most likely be bullish. A 50 bps isn’t at all unreasonable; but the selling effort likely hasn’t fully accounted for such an outcome. And, finally, the quarter-percent hike would meet the most restrained reaction as economic implications quickly take over.

Euro: Balance Between Yield Expectations and Financial Uncertainty Tipping Steadily Towards Selling

Shortly after the ECB’s tone shifted this past Thursday, rate expectations would hit their highest relative levels until the central bank actually votes through its first hike. In the meantime, the uncertainty element in this risk/reward scenario is highly fluid (unstable). Fundamentally, the risk now is for a bearish outlook for the region to undermine the shared currency’s gains, and that is exactly what we are seeing. We would follow up on the Greek downgrade Monday with Standard & Poor’s warning that a default by the Mediterranean state was a “possibility” and that further EU member sovereign downgrades were likely. Naturally, 10-year government bond yields for Greece, Ireland and Portugal hit record highs. And, something to watch further down the line, we are starting to see discussion about the second bank stress test. This will weigh in the future.

British Pound Will Coast through Event Risk as Speculation over Thursday’s BoE Decision Heats Up

Event risk for the pound was mixed over the past 24 hours. Where the RICS house price balance improved and BRC shop inflation indicator accelerated; the BRC retail sales figures would offset the bullish influence. Ultimately, this data and the upcoming trade numbers will provide little meaningful momentum as sterling traders are zeroed in on Thursday’s BoE decision. There is now only a 9 percent chance of a hike.

Australian Dollar Flirts with a Major Reversal Against the Greenback as Sentiment Data Sours

This is an important observation to make: though global equities were posting respectable gains through Tuesday’s trading session and into Wednesday, the Australian dollar is now putting in for its fifth consecutive decline. This denotes a softening of confidence in the currency’s fundamental strength that will require greater, underlying support (in other words a strong rally in risk trends) – which we are unlikely to get.

Japanese Yen’s Slide against the Dollar May Reverse Should Risk Trend Become More Volatile

Just as unusual as the Aussie dollar’s divergence from equities is the yen’s break from its safe haven role. Though equities have not definitively reversed, there is a clear stain of uncertainty that has anchored the market and shaken confidence going forward. And yet, the favored funding currency continues to decline against high yielder and comparable safe haven alike. This will change when risk trends pick up speed.

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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

AUD Westpac Consumer Confidence

1.9%

Confidence likely to continue rebound as economy recovers from floods.

AUD

23:30

AUD Westpac Consumer Confidence Index

106.6

JPY

23:50

JPY Machine Orders (MoM)

3.0%

1.7%

Orders fell first time YoY since June last month.

JPY

23:50

JPY Machine Orders (YoY)

5.1%

-1.6%

GBP

00:01

GBP BRC Shop Price Index

2.5%

Inflationary pressures continue to build, reading likely to rise.

AUD

00:30

AUD Home Loans

-1.0%

2.1%

Drop in lending suggests rate hikes being priced in price pressures rise.

AUD

00:30

AUD Value of Loans (MoM)

-4.5%

AUD

00:30

AUD Investment Lending

3.0%

CHF

08:15

CHF Consumer Price Index (MoM)

0.3%

-0.4%

Inflation could remain subdued for a third consecutive month on a stronger Franc.

CHF

08:15

CHF Consumer Price Index (YoY)

0.4%

0.3%

CHF

08:15

CHF CPI - EU Harmonised (MoM)

0.0%

CHF

08:15

CHF CPI - EU Harmonised (YoY)

0.2%

GBP

09:30

GBP Visible Trade Balance (Pounds)

-£8500

-£9247

An increase in the deficit would not be surprising as higher Pound weighed on exporters' margins.

GBP

09:30

GBP Trade Balance Non EU (Pounds)

-£5150

-£5817

GBP

09:30

GBP Total Trade Balance (Pounds)

-£4000

-£4831

EUR

12:00

EUR German Ind Prod n.s.a. and w.d.a. (YoY)

11.1%

10.0%

German economy continues to power European growth.

EUR

12:00

EUR German Industrial Production s.a. (MoM)

1.7%

-1.5%

USD

12:00

USD MBA Mortgage Applications

-6.5%

Demand could rise on falling rates.

CAD

13:30

CAD New Housing Price Index (MoM)

0.1%

0.1%

Rise in housing starts in February precedes rising house prices.

CAD

13:30

CAD New Housing Price Index YoY

1.9%

2.1%

USD

15:00

USD Wholesale Inventories

0.9%

1.0%

Rising inventories for 14th straight month would indicate that consumption component of GDP remains depressed.

USD

15:30

USD DOE U.S. Crude Oil Inventories

1000K

-364K

Inventories could fall as political tensions in MeNa have created a temporary supply shock.

USD

15:30

USD DOE U.S. Distillate Inventory

-500K

-751K

USD

15:30

USD DOE Gasoline Inventories

-1500K

-3590K

Currency

GMT

Upcoming Events & Speeches

- -

- -

- -

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

1.4280

1.6420

89.00

1.0000

1.0275

1.0600

0.8230

127.60

146.05

Resist 1

1.4025

1.6300

86.00

0.9775

1.0000

1.0200

0.8000

120.00

140.00

Spot

1.3902

1.6160

82.65

0.9357

0.9714

1.0103

0.7392

114.90

133.56

Support 1

1.3700

1.5750

80.00

0.9200

0.9700

0.9600

0.6850

103.80

125.00

Support 2

1.3450

1.5315

75.00

0.9000

0.9500

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

7.3500

7.8075

1.4655

Resist 1

7.5800

5.6625

6.1150

Spot

12.0072

1.5894

6.8935

7.7883

1.2680

Spot

6.3749

5.3649

5.5845

Support 1

11.7200

1.5300

6.7600

7.7490

1.2700

Support 1

6.2850

5.2625

5.5550

Support 2

11.4400

1.4725

6.5575

7.7450

1.2500

Support 2

6.1250

5.1000

5.5125

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

1.4045

1.6248

83.22

0.9430

0.9765

1.0177

0.7443

115.55

134.17

Resist 1

1.3973

1.6204

82.94

0.9393

0.9739

1.0140

0.7418

115.23

133.87

Pivot

1.3918

1.6165

82.57

0.9328

0.9724

1.0097

0.7392

114.89

133.49

Support 1

1.3846

1.6121

82.29

0.9291

0.9698

1.0060

0.7367

114.57

133.19

Support 2

1.3791

1.6082

81.92

0.9226

0.9683

1.0017

0.7341

114.23

132.81

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

1.4060

1.6315

83.47

0.9462

0.9798

1.0224

0.7487

116.24

135.11

Resist. 2

1.4020

1.6276

83.27

0.9436

0.9777

1.0194

0.7463

115.91

134.72

Resist. 1

1.3981

1.6237

83.06

0.9410

0.9756

1.0164

0.7440

115.57

134.33

Spot

1.3902

1.6160

82.65

0.9357

0.9714

1.0103

0.7392

114.90

133.56

Support 1

1.3823

1.6083

82.24

0.9304

0.9672

1.0042

0.7344

114.23

132.79

Support 2

1.3784

1.6044

82.03

0.9278

0.9651

1.0012

0.7321

113.89

132.40

Support 3

1.3744

1.6005

81.83

0.9252

0.9630

0.9982

0.7297

113.56

132.01

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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