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Euro Traders Disappointed by ECB Efforts, Will the EU Compensate?

Euro Traders Disappointed by ECB Efforts, Will the EU Compensate?

2011-12-09 06:16:00
John Kicklighter, Chief Currency Strategist
Share:
  • Dollar Mounts Big Intraday Rally, Market Sensitive to Risk Hits New Level
  • Euro Traders Disappointed by ECB Efforts, Will the EU Compensate?
  • British Pound Ignores BoE Hold, Falls in Sympathy to Euro Tumble
  • Canadian Dollar Tumbles Alongside Risk, BoC’s Financial Warnings
  • Swiss Franc Playing Safe Haven but EU Connections Too Concerning
  • Japanese Yen Volatility Against USD a Sign of BoJ Intervention?
  • Gold Pulls Back after ECB Decision as Liquidity Wavers

Dollar Mounts Big Intraday Rally, Market Sensitive to Risk Hits New Level

We have finally seen a trading day that has offered something in the way of clear direction and perhaps even a little conviction. However, follow through is just as sidelined as it has been on any of the preceding trading days this week. Still standing in the way of a market-wide shift in risk trends - and thereby the US dollar - we need better clarity on the health of economic activity and financial market functioning moving forward. Luckily for us (or not, depending on how one is positioned); we will find some level of clarification on the global market’s biggest threat to stability going forward heading into the end of the week. The ECB rate decision from this past session represented one half of policy officials’ response to the world’s most ominous financial risk. The biggest drop from the EURUSD (0.5 percent) and benchmark S&P 500 Index (-2.1 percent) in two weeks tells us the consensus was one of disappointment. That shifts our attention to the next (and possibly final) effort to stem the spread of financial contagion with the EU Summit. The world’s most liquid, reserve currency awaits the verdict.

It is easy to simply look at the performance of EURUSD and chalk up the greenback’s health to this pair alone. However, as we head into greater uncertainty between stimulus programs, economic sputtering and the ill-effects of fading market confidence on capital flow; it is important to reflect on the dollar for its own strengths and weaknesses. For flaws, there is a questionable growth outlook, a ballooning fiscal deficit and excessive stimulus is watering down the currency’s inherent value. Yet, despite all of these issues; the market is willing to overlook them and bid the dollar higher if its virtues are amplified. Given the financial rollercoaster over the past three years; it isn’t difficult to see that absolute risk aversion (where return is sacrificed for safety of funds) is the currency’s ideal scenario. Will we see this tomorrow? That depends on the EU.

Related:Discuss the Dollar in the DailyFX Forum, Special Report: What is the Number One Mistake Forex Traders Make?

Euro Traders Disappointed by ECB Efforts, Will the EU Compensate?

The bulk of the headlines this week related to the future of the Euro Zone and the euro have revolved around speculation as to which initiatives the European Union could push forward at the end of the week. However, with four comprehensive plans to rescue the region having already fallen apart; it is arguable that the European Central Bank has the greater fire power to offer a viable and lasting solution. The group certainly delivered meaningful support in this time around; but the changes nevertheless seem to have come up short of fully reviving confidence in the Euro-area’s markets and economy. President Draghi and his colleagues announced a 25 basis point rate cut to the benchmark lending rate, a new three-year unlimited liquidity program, a cut in the reserve ratio to 1 percent and easing in the collateral criteria for banks to draw loans. These are significant efforts; but optimists were expecting a larger rate cut and more importantly an expanded bond purchasing program. In fact, the group lacked a major for realized quarter percent cut and Draghi said he did not support an increase to the 207 billion euro bond holdings.

The ECB’s reticence to help the Euro Zone pushes the ball back into the EU officials’ court with the central bank head calling for greater fiscal consolidation and potentially treaty changes that would bestow more power to the European authority to enact sweeping policy akin to what the Fed is capable of. As for the Summit, the possibilities for a true solution to the long-term issues are slim. Increased funding for stimulus programs or guarantees would put the region in greater jeopardy of the critical downgrades that Standard & Poor’s has threatened. Common fiscal rules certainly helps prevent future issues; but it does not put an end to the current problems. The true help rests with the ECB; but that is at the very least later down the line. In the meantime, don’t write off a short-term, confused relief rally. Just don’t expect follow through.

British Pound Ignores BoE Hold, Falls in Sympathy to Euro Tumble

As expected, the Bank of England rate decision passed without event. With the European Union in disorder, Governor King (who has vociferously warned about the possible spread of financial crisis) would find good reason to sit back and await guidance from the ECB. It is important to remember that the UK is a member of the EU. The country will shoot down any EU-wide fixes that involve a financial tax.

Canadian Dollar Tumbles Alongside Risk, BoC’s Financial Warnings

The Canadian dollar was under pressure Thursday and the selling effort carried forward to into the early Friday session. Risk trends are the primary catalyst here as the investment currency (mainly through its commodity ties and yield premium to the US). Friday carries a lot of risk; but a clear sentiment bearing may elude us until after the market’s close. In the meantime, trade figures will take a back seat.

Swiss Franc Playing Safe Haven but EU Connections Too Concerning

The Swiss franc has played safe haven against nearly every one of its major counterparts – except for the dollar. The ECB efforts promise to fill out liquidity through the immediate future; but the underlying issues with investor confidence remain unresolved. If the EU fails to deliver a meaningful solution to building fears, it will be important to gauge the franc’s position as a safe haven against its EU influence.

Japanese Yen Volatility Against USD a Sign of BoJ Intervention?

The Japanese yen posted a remarkable rally against the US dollar this past session that was quickly reversed. It isn’t a stretch nowadays to entertain the thought that this could be an intervention move; but if we look across the more risk-sensitive dollar based majors, we see the same thing. This is an interesting move that suggests that organized risk aversion still seems to favor the yen over the dollar (carry unwind vs liquidity).

Gold Pulls Back after ECB Decision as Liquidity Wavers

While USDJPY dropping would suggest an orderly risk aversion move; gold’s own drop this past session would imply liquidity need. The metal held on to its losses against the benchmark dollar; and an immediate disappointment with the EU could lead to a critical technical breakdown. However, the ECB’s effort to amplify stimulus and the inability to stabilize regional finances inevitably leverages its alternative currency appeal.

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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

GMT

Currency

Release

Survey

Previous

Comments

2:00

CNY

CPI (YoY) (NOV)

4.5%

5.5%

Major data of Asian session: a sharp drop in Chinese inflation

2:00

CNY

PPI (YoY)(NOV)

3.3%

5.0%

7:00

EUR

German Exports s.a. (MoM) (NOV)

-1.3%

1.0%

German trade data expected to weaken as global demand slower

7:00

EUR

German Imports s.a. (MoM) (NOV)

0.3%

-0.5%

7:00

EUR

German Current Account (euros) (OCT)

14.0B

15.7B

7:00

EUR

German Trade Balance (euros) (OCT)

15.0B

17.4B

7:00

EUR

German CPI (MoM) (NOV F)

0.0%

0.0%

Expected stagnant inflation in the key EU economy will give the ECB greater scope to ease monetary policy

7:00

EUR

German CPI (YoY) (NOV F)

2.4%

2.4%

9:30

GBP

PPI Input n.s.a. (MoM) (NOV)

-0.1%

0.8%

British producer prices expected to rise again, putting pressure on the BoE to tighten

9:30

GBP

PPI Input n.s.a. (YoY) (NOV)

12.9%

0.8%

9:30

GBP

PPI Output n.s.a. (MoM) (NOV)

0.0%

0.0%

9:30

GBP

PPI Output n.s.a. (YoY) (NOV)

5.3%

5.7%

9:30

GBP

PPI Output Core n.s.a. (MoM) (NOV)

0.0%

0.3%

9:30

GBP

PPI Output Core n.s.a. (YoY) (NOV)

3.4%

0.3%

9:30

GBP

Visible Trade Balance (Pounds) (OCT)

-9400

-9814

British trade deficit expected to close a small amount as demand for imports wane

9:30

GBP

Trade Balance Non EU (Pounds) (OCT)

-5400

-5715

9:30

GBP

Total Trade Balance (Pounds) (OCT)

-3450

-3940

13:30

CAD

International Merchandise Trade (CAD) (OCT)

0.60B

1.25B

October fall in Canadian goods demand could be last as US economy picks up

13:30

USD

Trade Balance (OCT)

-$44.0B

-$43.1B

US trade deficit at moderate levels

14:55

USD

U. of Michigan Confidence (DEC P)

65.8

64.1

Michigan confidence increasing into the end of the year

CNY

Industrial Production YTD (YoY) (NOV)

14.0%

14.1%

Moderately slowing industries and manufacturing suggest “fine tuning” may be expected

CNY

Industrial Production (YoY) (NOV)

12.6%

13.2%

CNY

Fixed Assets Inv Excl. Rural YTD (YoY) (NOV)

24.8%

24.9%

Rate of fixed asset growth may sustain higher deposit requirements, interest rates

CNY

Retail Sales YTD (YoY) (NOV)

17.0%

17.0%

Consumer spending in China still strong, points to economy avoiding hard landing

CNY

Retail Sales (YoY) (NOV)

16.8%

17.2%

GMT

Currency

Upcoming Events & Speeches

EUR

ECB Publishes Dec. Monthly Report

9:30

EUR

EU Leaders to Meet in Brussels

SUPPORT AND RESISTANCE LEVELS

To see updated SUPPORT AND RESISTANCE LEVELS for the Majors, visit Technical Analysis Portal

To see updated PIVOT POINT LEVELS for the Majors and Crosses, visit our Pivot Point Table

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

16.5000

2.0000

9.2080

7.8165

1.3650

Resist 2

7.5800

5.6625

6.1150

Resist 1

14.3200

1.9000

8.5800

7.8075

1.3250

Resist 1

6.5175

5.3100

5.7075

Spot

13.7169

1.8486

8.2729

7.7759

1.2957

Spot

6.7910

5.5709

5.7899

Support 1

12.6000

1.6500

6.5575

7.7490

1.2000

Support 1

6.0800

5.1050

5.3040

Support 2

11.5200

1.5725

6.4295

7.7450

1.1800

Support 2

5.8085

4.9115

4.9410

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

1.3561

1.5822

78.48

0.9416

1.0346

1.0341

0.7862

105.42

123.11

Resist. 2

1.3507

1.5776

78.29

0.9377

1.0314

1.0297

0.7829

104.99

122.71

Resist. 1

1.3454

1.5730

78.09

0.9338

1.0282

1.0254

0.7796

104.56

122.32

Spot

1.3347

1.5639

77.70

0.9260

1.0218

1.0167

0.7729

103.71

121.52

Support 1

1.3240

1.5548

77.31

0.9182

1.0154

1.0080

0.7662

102.86

120.73

Support 2

1.3187

1.5502

77.11

0.9143

1.0122

1.0037

0.7629

102.43

120.33

Support 3

1.3133

1.5456

76.92

0.9104

1.0090

0.9993

0.7596

102.00

119.93

v

Additional Content:Money Management Video

Trading the News Video

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

To contact John, email jkicklighter@dailyfx.com. Follow me on twitter at http://www.twitter.com/JohnKicklighter

To be added to John’s email distribution list, send an email with the subject line “Distribution List” to jkicklighter@dailyfx.com.

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