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Dollar Mounts a Sharp Recovery as ECB Hope Falls Flat

Dollar Mounts a Sharp Recovery as ECB Hope Falls Flat

2011-12-22 06:31:00
John Kicklighter, Chief Currency Strategist
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  • Dollar Mounts a Sharp Recovery as ECB Hope Falls Flat
  • Euro Traders See Little Relief in Banking System, Bond Yields after LTRO
  • Japanese Yen Losing Stability after BoJ Hold, Shirakawa’s Warning, Downgrade
  • British Pound Surprisingly Buoyant after BoE Signals Future Stimulus
  • New Zealand Dollar Fails to Mount Rally on Strong 3Q GDP Showing
  • Swiss Franc Ready to Extend its Decline as Country Mulls Capital Curbs
  • Gold Retreats Despite Flood of Europe’s Flood of Liquidity

Dollar Mounts a Sharp Recovery as ECB Hope Falls Flat

The exceptional volatility for the dollar and capital markets over the previous 24 hours should have surprised no one. Anticipation of the European Central Bank’s pseudo-stimulus program fed into the market’s insatiable appetite for speculative rallies derived from government intervention. Yet, the flash of volatility that resulted from this known catalyst was not at extraordinary as the resultant lack of follow through. Despite the exceptional market reaction to the news of a massive infusion of liquidity for the European banking system, we note that the S&P 500 Index (our benchmark for risk appetite) notched volume on par with the previous trading days – in other words, surprisingly light. Volatility does not guarantee trend generation and follow through, and the volume figures on the equity benchmarks (as well as Forex futures contracts, gold, Treasury futures, etc.) remind us of that fact. Without the necessary market depth to mount a full run, we may have seen the market’s last and best potential opportunity to make a year-end drive pass us by.

For those embargoing fundamentals or financial headlines of any kind this week, we have just passed the allotment of the ECB’s Long-Term Refinancing Operation (LTRO) facility. This program was a liquidity injection aimed at preventing a credit crunch within the European banking system. Was this an effective initiative? It is easy to right off the event as a failure because the speculative markets would completely retrace the day’s risk-positive response. However, that doesn’t appreciate the dampening effects of thin liquidity (which work both ways – curbing optimism as well as pessimism). The 36-month lending tempers the immediate threat of European banks (an enormous segment of the global system) collapsing under a wave of debt maturing in the open of the New Year. In other words, they have put out an immediate fire; but they have not solved the underlying troubles. Buying time is an art – and becoming increasingly expensive.

What does this mean for the dollar? Shallow markets have prevented what could have been a more concerted effort to build up speculative positioning (a more probable scenario in reaction to this event just a few months ago). That, naturally, is a boon for the greenback – a safe haven for those seeking absolute liquidity. Furthermore, if risk trends are to temper into the close of the year; we would expect the same from the speculative antithesis. However, these are not the conditions in which to ignore the risk in the unexpected. If we were to weigh the scenarios for an unexpected surge in risk versus risk aversion, it is far easier to envision panic finding an easier footing than greed in these conditions. That being the case, we will keep an eye out for a critical European downgrade and keep track of the remarkably strong demand for Treasuries.

Euro Traders See Little Relief in Banking System, Bond Yields after LTRO

We cannot garner a fair gauge of whether the ECB’s liquidity program was ‘successful’ in these kind of market conditions. An optimistic slant would find that short-term need for refinancing for banks that have been drawing excessive yields has been answered and perhaps the financial institutions will be encouraged to lend to each other and the governments (buy government bonds). However, the pessimist would say that this yet another rescue effort (an overly concentrated one) that does not answer the underlying troubles. It isn’t hard to interpret 523 banks asking for 489 billion euros in three-year funds as a very real sign of stress. If everything is stable and calm until the markets fill out against early next year; perhaps a sense of stability can return. On the other hand, if a AAA-rated EU country or the EFSF program is downgraded; the market’s calm will certainly be disrupted. That isn’t a far-fetched concern either with the ECB still buying Italian bonds on the day of a liquidity program…

Japanese Yen Losing Stability after BoJ Hold, Shirakawa’s Warning, Downgrade

Some policy officials and exporters in Japan may feel any decline in the yen is a good one; but those with long-term scope and a feel for the money markets know that you want a controlled depreciation. Yesterday, the Bank of Japan maintained its policy bearings (including its asset purchasing and credit purchasing programs). However, with that announcement Governor Shirakawa gave voice to a true concern: the impact of a spreading European financial crisis to Japan (recall the 1980’s and 1997). And, then there was the Tokyo-based R&I’s downgrade of Japan.

British Pound Surprisingly Buoyant after BoE Signals Future Stimulus

I didn’t have high expectations for the Bank of England minutes as we know their generate lean towards wait-and-see (hoping the EU will stop the bleeding). Yet, there was something there to note: that some of the members were already starting the argument for more bond purchases early next year. The sterling has little, meaningful scheduled event risk through the rest of this wing. Watch the euro connection.

New Zealand Dollar Fails to Mount Rally on Strong 3Q GDP Showing

The New Zealand dollar has been fundamentally primed to the point that it has shown buoyancy on even the most mundane development – a benefit of a positive bearing on yield expectations when the rest of the world is cutting. However, a genuine, better-than-expected 3Q GDP reading couldn’t drive the kiwi to a meaningful run. That is the power of speculative interests. Sentiment can anchor data releases and LTROs…

Swiss Franc Ready to Extend its Decline as Country Mulls Capital Curbs

The market didn’t add much volatility to the news that some policy officials are trying to push forward an agenda of capital controls and negative interest rates – which is reasonable enough as the Parliament shot them down. Enacting rules aimed at stymieing banking interest in a banking economy is difficult to sell. However, if the Swiss want to push their currency down when the threat of mass panic is high, the bar is set high.

Gold Retreats Despite Flood of Europe’s Flood of Liquidity

Devaluing one of the most liquid currencies in the world is bullish for the gold (alternative store of wealth). Putting a plug in liquidity is bullish for gold (investors are comfortable with the large outlay). Lowering rates is bullish for gold (the metal doesn’t provide yield). And, yet, gold marked a bearish reversal Wednesday. Perhaps it is safer to stay in cash just in case a crisis (downgrade?) hits in think markets…

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ECONOMIC DATA

Next 24 Hours

GMT

Currency

Release

Survey

Previous

Comments

5:00

JPY

Supermarket Sales (YoY) (NOV)

-0.9%

Seen weakening despite rise in convenience store sales

9:00

EUR

Italian Retail Sales s.a. (MoM) (OCT)

-0.2%

-0.4%

Still-dropping sales points to lower consumer confidence

9:00

EUR

Italian Retail Sales (YoY) (OCT)

-1.5%

-1.6%

9:30

GBP

Gross Domestic Product (QoQ) (3Q F)

0.5%

0.5%

Final revisions of GDP and critical investment component seen moderate, may not move markets

9:30

GBP

Gross Domestic Product (YoY) (3Q F)

0.5%

0.5%

9:30

GBP

Total Business Investment (QoQ) (3Q F)

-1.4%

-1.4%

9:30

GBP

Total Business Investment (YoY) (3Q F)

0.3%

0.3%

9:30

GBP

Current Account (Pounds) (3Q)

-6.1B

-2.0B

Expected weaker, likely led by weaker trade

13:30

USD

Chicago Fed Nat Activity Index (NOV)

-0.1

-0.13

Index may continue recovery

13:30

USD

Gross Domestic Product (Annualized) (3Q T)

2.0%

2.0%

Third revision not expected to move markets, though may confirm US growth decoupling

13:30

USD

Gross Domestic Product Price Index (3Q T)

2.5%

2.5%

13:30

USD

Personal Consumption (3Q T)

2.3%

2.3%

Revision for spending expected to remain same, though 4Q report may be better

13:30

USD

Core PCE (QoQ) (3Q T)

2.0%

2.0%

13:30

USD

Initial Jobless Claims (DEC 16)

378K

366K

Weekly data showing stagnant labor markets

13:30

USD

Continuing Claims (DEC 9)

3600K

3603K

14:55

USD

U. of Michigan Confidence (DEC F)

68

67.7

Final revision could further confirm US decoupling

15:00

USD

Leading Indicators (NOV)

0.3%

0.9%

Overall indicators expected weaker

15:00

USD

House Price Index (MoM) (OCT)

0.2%

0.9%

May help housing demand

15:30

USD

EIA Natural Gas Storage Change (DEC 16)

-102

Drop continues on season

GMT

Currency

Upcoming Events & Speeches

5:00

JPY

Bank of Japan Monthly Economic Report

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 & SCANDIES 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

13.8363

1.8862

8.2634

7.7807

1.2957

Spot

6.8933

5.6977

5.9279

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

1.3242

1.5852

78.81

0.9497

1.0384

1.0258

0.7817

103.31

123.82

Resist. 2

1.3193

1.5808

78.63

0.9462

1.0353

1.0217

0.7785

102.96

123.47

Resist. 1

1.3144

1.5764

78.45

0.9427

1.0322

1.0176

0.7753

102.60

123.12

Spot

1.3047

1.5676

78.09

0.9356

1.0260

1.0093

0.7690

101.89

122.42

Support 1

1.2950

1.5588

77.73

0.9285

1.0198

1.0010

0.7627

101.18

121.72

Support 2

1.2901

1.5544

77.55

0.9250

1.0167

0.9969

0.7595

100.82

121.37

Support 3

1.2852

1.5500

77.37

0.9215

1.0136

0.9928

0.7563

100.47

121.02

v

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--- 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

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