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FOREX: Dollar Offered Early Asian Session Reprieve on G7’s Announcement of Coordinated Intervention

FOREX: Dollar Offered Early Asian Session Reprieve on G7’s Announcement of Coordinated Intervention

2011-03-18 03:41:00
John Kicklighter, Chief Currency Strategist
Share:
  • Dollar Offered Early Asian Session Reprieve on G7’s Announcement of Coordinated Intervention
  • Japanese Yen Plunges as the BoJ, Fed, ECB, BoE and BoC Move to Advance USDJPY
  • Euro Finds More Buoyancy in Steadied Risk Trends than a Direct Threat to Push EURJPY Higher
  • British Pound Comparatively Quiet in the Asian Session Rally, Suggesting Ingrained Weakness
  • Swiss Franc Little Moved after the SNB Holds Rates and Boosts Inflation Forecasts
  • Gold Cautiously Climbing as Stability in Capital Markets Curbs Cash Liquidity Needs

Dollar Offered Early Asian Session Reprieve on G7’s Announcement of Coordinated Intervention

In dire times, it is far more likely that we see drastic policy changes passed by typically dubious officials. That was the case this morning when a special G7 meeting hosted by the Japanese Finance Minister resulted in the decision to a joint effort to sell the Japanese yen. This intervention would have two distinct effects on the greenback. The first is the direct bid that emerges with the group of central banks focusing on buying USDJPY to forcibly depreciate the yen. The second – and far more important – consequence of this effort is the positive impact on investor sentiment. In effect, these two different outcomes have conflicting impact on the dollar. Where the currency is bid by policy officials, the market will sell the safe haven off as they move into euros or Aussie dollars. This puts the greenback in a contentious position: what will give first, the central bank bid or sentiment move?

With no guidance for how much time and capital will be dedicated to the USDJPY fight, the influence this effort has on the currency market is really up to how skeptical the masses are as to the future performance of capital markets. Should global investors doubt this effort’s ability to turn Japanese equity markets (much less European and US shares) higher; then the collective influence of the capital market will overwhelm the derivative boost in risk appetite that comes through this program. Risk appetite trends are critical to the dollar’s performance going forward; and therefore the focus should remain on the underlying direction and correlation between equities, commodities, debt, yields and currencies. In the meantime, it is worth keeping an eye on timing of the eventual shift in Fed policy approach. February CPI figures bested expectations on both a headline and core basis. And, while they are still far from the pressure needed to force a near-term hike, it keeps us on the path to end QE2.

Related:Discuss the Dollar in the DailyFX Forum, John’s Pick: EURJPY, CADJPY and CHFJPY all Present High Risk / High Reward Setups

Japanese Yen Plunges as the BoJ, Fed, ECB, BoE and BoC Move to Advance USDJPY

FX traders that have grown accustomed to high volatility in Japanese yen crosses were not let down with the opening move on the open of Friday’s Tokyo session. The announcement by Japanese Finance Minister Yoshihiko Noda that the monetary policy authorities of the G7 members had agreed to intervene on the behalf of the yen is one of those events that require little deliberation as to how it will impact the currency. Selling is selling. As for the specifics of this development, they are left intentionally vague. Beyond the suggestion that the focus of the manipulation will be USDJPY and perhaps EURJPY; they really only noted the participants and the starting time (9:00 AM Tokyo time). Details like the size of the ultimate effort, amounts per action and how long they will keep up this venture are left open-ended precisely because it has a greater impact on a market that is fundamentally biased by expectations.

Looking at past interventions, by the Bank of Japan and other central banks; the impact is typically temporary and limited. In fact, the last effort to push the yen lower was attempted with one of the largest liquidity pumps on record; and yet USDJPY still made it through 85. Coordination is the key. The capital available and that can be committed is far greater when multiple large players take up the call. Furthermore, without knowing how long the central banks will be fighting the current and in what size, speculators will hesitate to buy the yen with concern that they will be caught on the opposite side of a manipulation-based swell in volatility. Yet, rogue FX traders shouldn’t be the concern for officials – regardless of what politicians think. The reason that the yen rallied after an acute financial crisis ignited in Japan was not because traders were confident in the currency. Rather, investors that had previously leveraged their carry exposure were forced to repatriate or unwind their positions to abandon losing trades or raise margin to cover other losing positions. There target shouldn’t be exchange rate volatility but rather investor sentiment.

Euro Finds More Buoyancy in Steadied Risk Trends than a Direct Threat to Push EURJPY Higher

It is nice to have a distraction to take the pressure off your own problems. At the beginning of this week, the euro seemed to be riding high after the special EU summit seemed to signal a group willing to take drastic measures to stabilize the region’s stability where previously they were starting to lean more towards national concerns. That was a fundamental flash, however, to be followed by sovereign downgrades and a rise in funding rates. Currently, the euro can find solace in the market-wide bounce in sentiment offered by the G7 effort as well as the direct risk that this group could be buying EURJPY specifically through the immediate future. However, we need to look beyond this exogenous driver to focus on the euro’s own issues. Many considered Thursday’s Spanish bond auction a success; but the modest boost in demand and nudge down in rates doesn’t offset the pressure on Portugal and other EU members. More importantly, next week bring the summit that will actually hold votes.

British Pound Comparatively Quiet in the Asian Session Rally, Suggesting Ingrained Weakness

With a boost for equities, carry interest and other risk sensitive investment a side effect from the G7 intervention effort; we should have expected to see a notable bounce from GBPUSD. That said, the pair would show no meaningful progress as the temporary bid emerged. This is a discouraging sign for the sterling and reminds us of the Aussie dollar’s deviation from pure sentiment these past few months as its rate forecast wound down to zero. A BoE survey showed Brits expect inflation to accelerate in 2011; but the central bank doesn’t look like it will budge.

Swiss Franc Little Moved after the SNB Holds Rates and Boosts Inflation Forecasts

At the end of last week, it seemed like there was a good possibility that – good, bad or unchanged – the SNB rate decision on Thursday would lead to price action. This was before risk appetite was hammered and yield expectations were culled across the board. With the 12 month rate forecast slashed earlier in the week, both the hold on the benchmark and upgrade in inflation forecasts were processed by an indifferent market.

Gold Cautiously Climbing as Stability in Capital Markets Curbs Cash Liquidity Needs

The assessment on performance for gold depends on what currency we analyze it in. If we are talking about gold on a yen basis; the currency’s specific, sharp advance undermined the immediate value of the precious metal. However, against the dollar, the commodity advanced as the need for liquidity abated and ETF holdings rose to a six-week high as safe haven and anti-currency buying has slowly risen in the background.

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ECONOMIC DATA

Next 24 Hours

Currency

GMT

Release

Survey

Previous

Comments

0:01

GBP

Nationwide Consumer Confidence

47

New conservative austerity measures could hit confidence

0:30

AUD

RBA FX Transaction (Australian dollar) (FEB)

326M

Higher demand for Aus commodities may push transactions

5:00

JPY

Coincident Index (JAN F)

106.2

Current business cycle trend upwards, could mean recovering Japanese economy in January

5:00

JPY

Leading Index (JAN F)

101.9

7:00

EUR

German Producer Prices (MoM) (FEB)

0.7%

1.20%

Lower MoM shows short term stagnation, long term recovery

7:00

EUR

German Producer Prices (YoY) (FEB)

6.3%

5.7%

7:45

EUR

French Wages (QoQ) (4Q F)

0.2%

Stagnant wages confirms continued French economic troubles

8:15

CHF

Producer & Import Prices (MoM) (FEB)

0.1%

Flat import prices could mean continued relaxed SNB policies

8:15

CHF

Producer & Import Prices (YoY) (FEB)

0.0%

9:00

EUR

Euro-Zone Current Account n.s.a. (euros) (JAN)

-0.1B

Total EU accounts still in declining trend, taking in total Eurozone

9:00

EUR

Euro-Zone Current Account s.a. (euros) (JAN)

-13.3B

9:00

EUR

Italian Trade Balance (Total) (euros) (JAN)

-2723M

Italian trade balance expected to weaken as exports slow

9:00

EUR

Italian Trade Balance EU (euros) (JAN)

-1394M

9:30

GBP

Public Finances (PSNCR) (Pounds) (FEB)

-14.4B

Cut government budgets to affect finances and borrowing

9:30

GBP

Public Sector Net Borrowing (Pounds) (FEB)

-5.3B

10:00

EUR

Euro-Zone Trade Balance s.a. (euros) (JAN)

-2.5B

-2.3B

Expected continued weakness as PIIGS nations export less

10:00

EUR

Euro-Zone Trade Balance (euros) (JAN)

-9.0B

-0.5B

10:00

EUR

Italian Industrial Orders s.a. (MoM) (JAN)

-0.8%

5.4%

Numbers important gauge on current health of Italian economy as exports fall

10:00

EUR

Italian Industrial Orders n.s.a. (YoY) (JAN)

17.4%

10:00

EUR

Italian Industrial Sales s.a. (MoM) (JAN)

-0.3%

10:00

EUR

Italian Industrial Sales n.s.a. (YoY) (JAN)

8.4%

11:00

CAD

Consumer Price Index (FEB)

117.8

Canadian price levels expected flat as slow economic growth countered by stronger Loonie

11:00

CAD

Consumer Price Index (MoM) (FEB)

0.4%

0.3%

11:00

CAD

Consumer Price Index (YoY) (FEB)

2.3%

2.3%

11:00

CAD

Bank Canada CPI Core (MoM) (FEB)

0.0%

11:00

CAD

Bank Canada Consumer Price Index Core (YoY) (FEB)

1.4%

Currency

GMT

Upcoming Events & Speeches

CNY

2:00

Conference Board China January Leading Economic Index

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

1.4019

1.6137

78.89

0.8989

0.9863

0.9809

0.7188

110.59

127.30

Support 1

1.3700

1.5750

80.00

0.9000

0.9700

0.9600

0.6850

103.80

125.00

Support 2

1.3450

1.5315

75.00

0.8800

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

12.1086

1.5894

7.1340

7.8033

1.2779

Spot

6.4078

5.3199

5.6547

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

1.4164

1.6283

81.80

0.9206

1.0002

0.9964

0.7360

114.15

131.59

Resist 1

1.4092

1.6210

80.34

0.9097

0.9932

0.9887

0.7274

112.37

129.45

Pivot

1.3980

1.6097

78.30

0.8975

0.9884

0.9796

0.7196

109.49

125.90

Support 1

1.3908

1.6024

76.84

0.8866

0.9814

0.9719

0.7110

107.71

123.76

Support 2

1.3796

1.5911

74.80

0.8744

0.9766

0.9628

0.7032

104.83

120.21

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

1.4191

1.6302

80.18

0.9105

0.9967

0.9960

0.7298

112.59

129.60

Resist. 2

1.4148

1.6260

79.86

0.9076

0.9941

0.9923

0.7270

112.09

129.02

Resist. 1

1.4105

1.6219

79.54

0.9047

0.9915

0.9885

0.7243

111.59

128.45

Spot

1.4019

1.6137

78.89

0.8989

0.9863

0.9809

0.7188

110.59

127.30

Support 1

1.3933

1.6055

78.24

0.8931

0.9811

0.9733

0.7133

109.59

126.15

Support 2

1.3890

1.6014

77.92

0.8902

0.9785

0.9695

0.7106

109.09

125.58

Support 3

1.3847

1.5972

77.60

0.8873

0.9759

0.9658

0.7078

108.59

125.00

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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