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Dollar: Risk Rally May be Fatigued but GDP Expectations Restrained

Dollar: Risk Rally May be Fatigued but GDP Expectations Restrained

2012-01-27 03:09:00
John Kicklighter, Chief Strategist
Share:
  • Dollar: Risk Rally May be Fatigued but GDP Expectations Restrained
  • Euro Traders Reduce Bets on Greek Default Modestly, Price in Portugal Troubles
  • British Pound: Despite Weak 4Q GDP Read and BoE Forecasts, Sterling Holds
  • New Zealand Dollar Slow to React to RBNZ Bollard’s Suggestion of Hold Through 2012
  • Japanese Yen Regaining Traction Just as BoJ Minutes Voice Concern
  • Swiss Franc: Why Does the SNB Allow EURCHF to Hold So Close to 1.20
  • Gold Holds its Gains as Both Weak Dollar and Stimulus Boost Appeal

Dollar: Risk Rally May be Fatigued but GDP Expectations Restrained

Did the Fed meet – much less exceed – the market’s expectations for greater monetary accommodation to support an ever-buoyant capital market Wednesday evening? It would seem that way in the bullish follow through from the S&P 500 and the simultaneous slide from the safe haven US dollar. Yet, a forecast of virtually-zero interest rates through the end of 2014 does not have the same level of short-term liquidity and leverage amperage that a wholesale asset purchasing program (long ago given the moniker ‘QE3’) would. The masses seem to be slowly coming to terms with the reality that perhaps the Fed short of expectations in its ‘hand-sitting’ approach. Once again, benchmarks for risk like the S&P 500 look heavy and the liberal stimulus approach of the US doesn’t seem to be outpacing European counterparts. Nevertheless, to truly turn sentiment around; it seems the market needs a definitively catalyst. It is natural to expect the first reading of US 4Q GDP to be an able-body provider, but there are issues with this release. A big miss would be the best curb on the risk-drive; yet that could also jumpstart stimulus talk.

Euro Traders Reduce Bets on Greek Default Modestly, Price in Portugal Troubles

Over the past few weeks, euro traders have generally ignored the risk inherent in a downgrade of 9 Euro Zone members, a blown Greek bailout time line, a bungled Euro Zone rescue meeting and a round of important bond auctions. Each one of these factors could have capsized unstable risk bearings; and yet the euro has held onto its rebound. The allure of a natural correction to the shared currency’s aggressive decline these past few months is too powerful against the backdrop of a steadily rising S&P 500. However, a correction by definition is limited to a percentage of the prevailing move; and so, it is only a matter of time before blind speculative momentum gives way to true fundamentals. As such, we keep the focus on the Greek bond swap discussions, but the scenarios are clear. Portugal, on the other hand, just saw its 10-year yield hit 15 percent.

British Pound: Despite Weak 4Q GDP Read and BoE Forecasts, Sterling Holds

We have seen what kind of impact the cumulative fundamental threat of recession and a ballooning stimulus regime can do to a currency – just look at the dollar’s performance over the past three years. Yet, it seems that the sterling is clinging on to unclear and undeserved fundamental strength against a few key counterparts despite suffering the same general issues. On Wednesday, the government confirmed the first step towards the recession that so many officials and pundits have warned with the 0.2 percent contraction in GDP, while the BoE minutes cleared the way for another increase in the bond purchasing program. That said, there is a question of relative activism: the Euro-area crisis is more immediate and the dollar’s expansive policy far greater. Yet, given its current level and bearing, there is a value gap that will be filled.

New Zealand Dollar Slow to React to RBNZ Bollard’s Suggestion of Hold Through 2012

If we didn’t know any better, it would seem that we never had an RBNZ monetary policy decision at all this week. The kiwi has eventually succumbed to the change in winds for underlying risk appetite trends, but Thursday’s performance for NZDUSD was remarkably consistent on the bid side. Despite Governor Bollard’s suggestion that inflation pressures were ‘well contained’ and that future growth was troubled by the Euro Zone’s infectious financial issues, the 2.50 percent benchmark is enough of a premium to keep the currency buoyant. Therefore, Bollard’s follow up commentary this morning suggesting that he agreed with the market’s expectation for no hike this year meets relatively little selling pressure.

Japanese Yen Regaining Traction Just as BoJ Minutes Voice Concern

With the market’s appetite for higher yields whetted this week, it shouldn’t surprise that the funding currency and safe haven Japanese yen has slid on the week. That said, we have seen the ‘risky’ assets stumble a little over the past 24 hours as confidence in stimulus has proven itself to be a little more hollow than expectations were projection (buy the rumor…). Of course, when the winds of sentiment are strong, the yen will be swept away. However, if we were to discount the heavy risk influence, are starting to see real problems show through. The national CPI figures this morning reminded us that a persistent state of deflation creates an unusual fold in financial health, but there is more pressure coming through exchange rate issues. In the Bank of Japan’s minutes from Dec 20-21, the group noted greater concern in Japan’s debts and its own fear that EU banks could further unload US assets (thereby pushing the dollar down against the yen even further).

Swiss Franc: Why Does the SNB Allow EURCHF to Hold So Close to 1.20

A common question that I have been receiving recently inquires why the Swiss National Bank tolerates the EURCHF to hold so close to the 1.2000-floor that they had defined back in September. It is true that the policy authority’s ultimate aim is to reduce the pressure a high exchange rate has on its exports to the Euro Zone, but there are limitations to their capabilities. Holding back the tide at a certainly level is one thing, but actively and consistently manipulating an entire market in one direct is something completely different. The mere threat that there is a deep-pocketed franc seller at a specific level is probably more effective as a speculative curb than an actual dip into the market by the SNB. Alternatively, to fight the natural, risk aversion capital flow related to Euro-area fears would put any central bank to the test immediately. And, plugging capital flow that is merely seeking safety (regardless of exchange risk) is a losing battle given the depths of Europe’s issues.

Gold Holds its Gains as Both Weak Dollar and Stimulus Boost Appeal

We have seen meaningful volatility coupled with a marked correction in risk-based assets over the past 48 hours, but gold has generally avoided the flippancy with direction. The precious metal enjoyed its biggest single-day rally since October 25th in the wake of the Fed’s exceptionally loose monetary policy review. Whether we consider the extension of the near-zero interest rate out to late 2014 as a negative to the dollar or the market’s assessment that this is a lead into QE3 and thereby a store-of value-deflator; the affect on the precious metal is the same. The appeal of gold as a less-manipulated and acceptable means of payment boosts its relative value. Conviction in this move is further supported by futures volume. While Wednesday’s surge (323,000 was the second largest swell in turnover in four months), the subsequent session generated more than 315,000 contracts. This isn’t a questionable risk appetite bid, rather it’s a well-thought out move to safety.

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ECONOMIC DATA

Next 24 Hours

GMT

Currency

Release

Survey

Previous

Comments

1:35

CNY

MNI January Business Condition Survey

52.78

Conditions may recover on scope for additional loosening

7:00

EUR

German Import Price Index (MoM) (DEC)

0.3%

0.4%

German import prices continue to slow as global demand for raw materials drop

7:00

EUR

German Import Price Index (YoY) (DEC)

3.8%

6.0%

8:00

CHF

KOF Swiss Leading Indicator (JAN)

-0.1

0.01

Domestic indicator may drop into negative territory as EURCHF floor at stake

9:00

EUR

Euro-Zone M3 s.a. (3M) (DEC)

2.3%

2.5%

Eurozone money supply expected to be stable even as ECB starts to loosen

9:00

EUR

Euro-Zone M3 s.a. (YoY) (DEC)

2.1%

2.0%

13:30

USD

Gross Domestic Product (Annualized) (4Q A)

3.0%

1.8%

Advance data expected to show large improvement in output, may further confirm decoupling

13:30

USD

Gross Domestic Product Price Index (4Q A)

1.9%

2.6%

13:30

CAD

Revisions: Canada Employment

13:30

USD

Core Personal Consumption Exp (QoQ) (4Q A)

0.9%

2.1%

Spending expected to show mixed data

13:30

USD

Personal Consumption (4Q A)

2.4%

1.7%

14:55

USD

U. of Michigan Confidence (JAN F)

74

74

Final confidence expected unchanged

GMT

Currency

Upcoming Events & Speeches

10:00

EUR

Italy to Sell Bills

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

13.0295

1.7935

7.8299

7.7588

1.2600

Spot

6.7924

5.6809

5.8422

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

1.3249

1.5815

78.01

0.9338

1.0127

1.0739

0.8303

102.54

122.53

Resist. 2

1.3208

1.5779

77.85

0.9310

1.0104

1.0704

0.8275

102.21

122.21

Resist. 1

1.3168

1.5743

77.69

0.9281

1.0080

1.0668

0.8247

101.89

121.88

Spot

1.3086

1.5670

77.37

0.9224

1.0033

1.0598

0.8192

101.24

121.24

Support 1

1.3004

1.5597

77.05

0.9167

0.9986

1.0528

0.8137

100.59

120.59

Support 2

1.2964

1.5561

76.89

0.9138

0.9962

1.0492

0.8109

100.27

120.26

Support 3

1.2923

1.5525

76.73

0.9110

0.9939

1.0457

0.8081

99.94

119.94

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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