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Dollar at the Mercy of Risk Trends Early, Fed and 4Q GDP on Deck

Dollar at the Mercy of Risk Trends Early, Fed and 4Q GDP on Deck

2012-01-21 03:44:00
John Kicklighter, Chief Strategist
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  • Dollar at the Mercy of Risk Trends Early, Fed and 4Q GDP on Deck
  • Euro Advance Takes a Step Back as Market Awaits Word on Greece
  • British Pound: Will We See Confirmation of Policy Official’s Recession Warnings
  • Australian Dollar Takes its Turn at Bat for Inflation, Rate Outlook Leverages Impact
  • New Zealand Dollar Traders Will Quickly Discover Whether CPI Reading Important
  • Japanese Yen Finding Heavy Risk Appetite Selling, Government Eases Pressure
  • Gold Working on its Best January Performance Since 2008

Dollar at the Mercy of Risk Trends Early, Fed and 4Q GDP on Deck

Though the dollar managed to regain a little lost ground against the euro Friday, the currency was still under pressure into the close. For the Dow Jones FXCM Dollar Index, this would lead to a fifth consecutive daily (open-to-close) bearish close – the longest series of losses for the benchmark currency since the run through October 10th. The opportunity to press new 12-month highs has considerably diminished, but it is still early to claim the greenback has made a critical bearish change in trend. Moving forward, there are two key fundamental considerations to monitor for guidance on the dollar: the sentiment surrounding the euro and the progress in underlying risk appetite trends. For the greenback’s most liquid counterpart, the relief of an impending crisis has dissipated, and the euro can continue to draw capital away from the world’s most extreme safe haven. Investor sentiment itself is what we should be most concerned with. The S&P 500 has capped a three-week advance to five month highs, yet conviction is still flimsy. It could find a serious booster however if the Fed hints at QE3 or US 4Q GDP impresses this week.

Euro Advance Takes a Step Back as Market Awaits Word on Greece

Having posted its best rally against the benchmark dollar in three months against a foul-weather fundamental backdrop, it makes sense to have seen the euro ease into the close of this past week. Considering the region’s troubles are so well known at this point, the currency is running fully on speculation of the timing for expected troubles. A side effect of knowing that you are fighting the current, however, is a greater sensitive to holding risk through lockups. With the weekend approaching and negotiations over the discount on private holding of Greek debt ongoing, it is natural to ease the risk of a long euro exposure a little.

Heading into the new trading week, there is a list of potential fundamental threats; but the weight of their influence has lessened considerably from just a few weeks ago. Given expected time frames, the terms of the private sector investors’ accommodation for Greece’s debt burden will be the first concern. The current consensus is still for a 50 percent haircut (essentially debt forgiveness), in a roll to new 30-year bonds with a significantly reduced 3.0 to 4.75 percent coupon. Anything along these lines could buy us a little more time of disregard for real fundamental threats. We have come to expect the same quick-fix and we’ll-fix-it-later policy decisions to follow the EU Finance Minister summit on Monday. A little more open to surprise are the growth-based economic indicators and the ECB’s three-month liquidity tender due in the first 48 hours.

British Pound: Will We See Confirmation of Policy Official’s Recession Warnings

If there is a recession or region-wide financial crisis for the Euro Zone, it is highly likely that the United Kingdom is not far behind (if it is not already suffering the same fate). The relationship between euro and sterling price action against third party currencies is exceptional due to its fundamental connections, but there are still external factors that can offer a degree of separation. Those alternative factors led to the significant swing in EURGBP over the past week. The three-day rally through Thursday was the influence of the euro’s relief rally and the sterling lagging response. Friday’s plunge was encouraged by rising gilt yields but follow through requires something more. A bullish surprise in the face of growing recession fears for the UK could offer a relief rally akin to what the euro has enjoyed. With 4Q GDP seen contracting, the line is drawn.

Australian Dollar Takes its Turn at Bat for Inflation, Rate Outlook Leverages Impact

Interesting rate expectations for the Reserve Bank of Australia (RBA) are already a point of pain for the Aussie dollar. Currently, the market is fully pricing in 100 basis points of rate cuts over the coming 12 months – and the outlook for rates generates greater short-term volatility than the currently level does. That said, we will see if Aussie dollar traders’ preoccupation with the ebb and flow of risk appetite trends can be temporarily disrupted by the release of fourth quarter CPI figures. Unlike the New Zealand numbers released last week, this report isn’t expected to deliver a sharp easing in inflation pressure; but the dovish bearings of the policy group could leverage a smaller changes impact.

New Zealand Dollar Traders Will Quickly Discover Whether CPI Reading Important

Though it didn’t supply the drive necessary to separate from prevailing risk trends, the 4Q CPI reading released this past week generated remarkable volatility for the kiwi – and a lasting concern about hawkish buoyancy. Despite the implications of an inflation gauge running below the central bank’s target zone (2 to 3 percent), the market is showing no belief that a rate cut by the RBNZ is forthcoming. We will put that stubborn bullishness to the test this week however. Governor Alan Bollard and company are expected to announce policy intentions Wednesday evening / Thursday morning. It isn’t a change to the benchmark rate at this meeting that we should be concerned about. Rather, the commentary that accompanies the decision and Bollard’s speech on the economy three hours later should earn our attention.

Japanese Yen Finding Heavy Risk Appetite Selling, Government Eases Pressure

The S&P 500, commodity bloc and euro all put in for notable gains this past week, suggestive of a clear advance in risk appetite. In turn, this has translated into a persistent unwinding effort across the board for the market’s favored funding currency – the Japanese yen. Picking up from record low against the European currencies, near-record lows versus the dollar and breaking congestion amongst the commodity contingent; there is certainly enough stress here to produce a short-cover rally. However, have we entered into a lasting recovery of carry interest? That is one of the few factors that can offer long-term relief from extreme highs. Despite a ‘coping’ tack by the government, this doesn’t seem the case.

Gold Working on its Best January Performance Since 2008

So far this year, gold is up 6.6 percent. This represents the first time in three years that we could see a positive opening month and it is generally the best performance for the period since 2008. Under normal circumstances, we could say this strength was guided by anti-dollar capital flows; but the rolling, 20-day (trading month) correlation between the fiat and metal has deteriorated significantly recently. Furthermore, we see that the relationship between the traditionally safe commodity and risk-inclined S&P 500 is tightening (currently 0.83 – 1.00 being perfect). From this, we can are seeing the distribution of speculative capital from absolute liquidity havens to relative (but expensive) safe havens.

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

GMT

Currency

Release

Survey

Previous

Comments

0:30

AUD

Producer Price Index (QoQ) (4Q)

0.6%

Another item that will influence the RBA in its decision-making at the Feb 7 meeting

0:30

AUD

Producer Price Index (YoY) (4Q)

2.7%

7:45

EUR

French Own-Company Production Outlook (JAN)

-2

French business confidence has been sliding since mid-2011 on worsening Eurozone outlook

7:45

EUR

French Production Outlook Indicator (JAN)

-37

7:45

EUR

French Business Confidence Indicator (JAN)

94

8:00

CHF

Money Supply M3 YoY (DEC)

7.2%

The 12-month average hit a May 2004 high with the last reading.

8:00

CHF

Real Estate Index Family Homes (4Q)

398.6

Looking for exchange rate influence for growth bearing

13:30

CAD

Leading Indicators MoM (DEC)

0.8%

Will act as a placeholder for year-end GDP speculation

15:00

EUR

Euro-Zone Consumer Confidence (JAN A)

-21.1

Has weakened since mid-2011

23:00

AUD

Conference Board Leading Index (NOV)

0.6%

Signs of a slowing economy coupled with weakening inflation would boost rate cut concerns

GMT

Currency

Upcoming Events & Speeches

10:15

EUR

German Bill Auction

11:45

EUR

Germany’s Merkel Meets with Belgian Prime Minister Di Rupo in Berlin

14:00

EUR

French Bill Auction

16:00

EUR

Euro-Area Finance Ministers Meet in Brussels

17:00

EUR

Germany’s Merkel Speaks in Berlin

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

13.1813

1.8298

7.9516

7.7618

1.2719

Spot

6.7826

5.7501

5.9324

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

1.3096

1.5727

77.65

0.9464

1.0227

1.0620

0.8168

100.92

121.26

Resist. 2

1.3055

1.5689

77.49

0.9434

1.0203

1.0586

0.8142

100.59

120.94

Resist. 1

1.3014

1.5652

77.33

0.9405

1.0179

1.0552

0.8116

100.27

120.61

Spot

1.2931

1.5576

77.01

0.9345

1.0132

1.0484

0.8063

99.62

119.97

Support 1

1.2848

1.5500

76.69

0.9285

1.0085

1.0416

0.8010

98.97

119.32

Support 2

1.2807

1.5463

76.53

0.9256

1.0061

1.0382

0.7984

98.65

119.00

Support 3

1.2766

1.5425

76.37

0.9226

1.0037

1.0348

0.7958

98.32

118.67

v

--- 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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