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Dollar Gains Against Euro but Little Else, Awaiting Equities

Dollar Gains Against Euro but Little Else, Awaiting Equities

2012-02-01 04:42:00
John Kicklighter, Chief Strategist
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  • Dollar Gains Against Euro but Little Else, Awaiting Equities
  • Euro Traders Run through the Rumors, Disbelief Seeping Back In
  • British Pound Shows a Remarkable Divergence from its Euro Counterpart
  • Swiss Franc Nudges 7 Pips Closer to the SNB’s Breaking Point
  • Japanese Yen: Ministry of Finance Reports No Yen Sales in January
  • Australian Dollar: A Rumbling in Risk Trends in the Asian Session Doesn’t Catch Traction
  • Gold Posts a New High as Dollar Weakness, Global Financial Health Spell a Remarkable January

Dollar Gains Against Euro but Little Else, Awaiting Equities

The dollar didn’t show any intrinsic strength through the past session – though neither did it suffer weakness. On the docket, the January consumer sentiment from the Conference Board presented a significant disappointment in a 61.1-reading that fell significantly short of expectations of an improvement. That said, the trend behind US and global economic activity are well known and therefore generally priced in. The greenback’s true role is as the extreme safe haven and liquidity provider. That being the case, neither the S&P 500’s sluggish and so-far unconvincing retracement nor the weary interest in the financial troubles of the euro offers us anything to act upon. That said, we are seeing risky assets and safe havens level off, correlations temper and volatility/volume hit new lows. Though this is far from a guarantee of changing tides, these developments often precede a reversal in underlying sentiment trends. The more evidence we see, the greater the risk.

Euro Traders Run through the Rumors, Disbelief Seeping Back In

The euro was lower across the board Tuesday. Selling pressure on a weak day for risk appetite positioning isn’t remarkable, but it is worth noting that the bearish pressure also occurred on a particularly heavy day for ‘promises’. Topping headlines, Greece’s Finance Minister suggested a Euro-group meeting would take place on the sixth, while Reuters reported that negotiations on private investor accommodation may end with a (country) favorable outcome of 70 percent haircuts. Perhaps the market is ready to interpret headlines from a negative perspective again. If so, the FT report in which it reports some EU banks plan to double or triple their takedown on the February 36-month LTRO program can be seen a an underlying sign of market stress. We’ll put this theory to further test in the upcoming session with the Portuguese bond auction (10:30 GMT).

British Pound Shows a Remarkable Divergence from its Euro Counterpart

Under normal circumstances, the sterling and euro follow the same path. Whether sentiment trends are strong or not, the fundamental bearings for the Euro-region translate into fear of or relief from spreading crisis for the UK. In fact, the 20-day rolling correlation between GBPUSD and EURUSD is 0.93 – exceptionally high (the relationship between EURJPY and GBPJPY is currently 0.94 and more consistent). And yet, over the past 24 hours, both sets have shown a notable divergence in relative performance (the sterling generally outperforming the euro). Fundamentally, this could be attributed to a more active concern for the euro and fortifying boost to the sterling. However, this is more likely another consequence of an underlying sentiment shift. Not only do prices level off in a prelude to a risk reversal, but correlations wane.

Swiss Franc Nudges 7 Pips Closer to the SNB’s Breaking Point

Between Monday’s and Tuesday’s low, EURCHF has progressed another 7 pips. That is a modest move, but consistency has driven us from a range high of 1.2450 down to 1.2250 to within 33 pips of the Swiss National Bank’s supposed tolerance threshold of 1.2200. The policy group has issued considerable threats of unlimited euro purchases should the pair attempt to slip below this floor, but that isn’t curbing the steady march lower. Some believe this bearish bias is the work of speculators, either looking to ‘break’ the central bank or force them to act and leverage a volatility response. However, the real momentum is far more passive and subsequently more difficult to deal with. There is little speculative benefit to building up a short position given the high probability risk of a dramatic surge when the central bank acts. Alternatively, when the driving force is basic risk aversion (Europeans looking for safety for their funds), the exchange rate manipulation doesn’t even enter the equation – and therefore isn’t a deterrent. That brings up another issue, is mere euro purchases effective? No. Capital controls would be.

Japanese Yen: Ministry of Finance Reports No Yen Sales in January

It’s a day ending in -day, so Japanese Finance Minister Azumi has once again warned that he is watching the currency market and is prepared to act should it be required. We’ve heard this tune before and the market is understandably skeptical. Adding to the market’s doubts, the Ministry of Finance this past session reported that it sold no yen between December 29th and January 27th – an interesting tack for a policy authority that threatens action on a regular basis. That said, traders shouldn’t tempt fate with aggressive shorts on the yen crosses. Though Azumi and Bank of Japan Governor Shirakawa talk more than they act; the consequences of those infrequent sorties in the FX market are severe. The BoJ or MoF can act at any time, but the probability of action rises exponentially when there is a push towards record lows for USDJPY alongside a swell in volatility for either USDJPY or EURJPY. The next step in the intervention discussion is: just how much impact should we expect?

Australian Dollar: A Rumbling in Risk Trends in the Asian Session Doesn’t Catch Traction

Risk appetite trends trembled in the early hours of the Asian session, and the Australian dollar made sure to follow its carry trade connections to volatility in response. Fundamental minimalists could try to associate the activity level to the release of the Australian manufacturing survey for January (which rose to 51.6 from 50.2), but the currency didn’t really throttle up on volatility after the release. Having a more definitive affect on risk trends – and thereby the high-yield currency – was the Chinese equivalent. Expected to contract, Chinese manufacturing actually expanded at a faster pace in January than the previous month. That’s encouraging as a signal for global activity, but this isn’t a global trend changer. The positive winds from the release didn’t last long, yet volatility seems to be sticking around.

Gold Posts a New High as Dollar Weakness, Global Financial Health Spell a Remarkable January

With risk appetite edging lower (established using my favored benchmark – the S&P 500 Index), gold’s tempered advance and intraday test of 8-week highs shouldn’t raise any eyebrows. However, we should take greater appreciation for the precious metal’s performance. Though Tuesday’s performance was modest, its run through January measured $173.9 and 11.1 percent. That is the best January performance we have seen from the metal on record and the second biggest dollar-based move overall. What happened through the opening month of the year to encourage such a run? Risk appetite carved a remarkably consistent advance, but the US dollar compensated with an aggressive two-week decline. Where we go from here is likely the responsibility of the greenback.

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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

0:00

AUD

HIA New Home Sales (MoM) (DEC)

6.8%

RBA to watch housing market conditions ahead of rate decision on Feb 7

0:30

AUD

House Price Index (QoQ) (4Q)

-0.6%

-1.2%

0:30

AUD

House Price Index (YoY) (4Q)

-3.3%

-2.2%

1:00

CNY

Purchasing Manager Index Manufacturing (JAN)

49.6

50.3

Chinese economic outlook continues to hang in the balance despite better PMI reading in Dec

1:30

JPY

Labor Cash Earnings (YoY) (DEC)

-0.4%

-0.2%

2:30

CNY

HSBC Purchasing Manager Index Manufacturing (JAN)

48.7

HSBC PMI index more heavily weighted to smaller- and medium-sized firms

5:00

JPY

Vehicle Sales (YoY) (JAN)

23.5%

5:30

AUD

RBA Commodity Price Index (JAN)

104.5

Reflects global demand for Australian mineral exports

5:30

AUD

RBA Commodity Index SDR (YoY) (JAN)

10.9%

7:00

GBP

Nationwide House Prices s.a. (MoM) (JAN)

-0.2%

-0.2%

UK housing market remains anemic

7:00

GBP

Nationwide House Prices n.s.a. (YoY) (JAN)

1.2%

1.0%

8:15

CHF

Retail Sales (Real) (YoY) (DEC)

1.8%

Data to shed light on Swiss economy as CHF gains strength, nears 1.20 floor versus EUR

8:30

CHF

SVME-Purchasing Managers Index (JAN)

51.2

50.7

8:45

EUR

Italian Purchasing Manager Index Manufacturing (JAN)

45.3

44.3

Aside from Germany, manufacturing in major Eurozone economies to remain in contraction territory amid recession threats.

8:50

EUR

French Purchasing Manager Index Manufacturing (JAN F)

48.5

48.5

8:55

EUR

German Purchasing Manager Index Manufacturing (JAN F)

50.9

50.9

9:00

EUR

Euro-Zone Purchasing Manager Index Manufacturing (JAN F)

48.7

48.7

9:30

GBP

Purchasing Manager Index Manufacturing (JAN)

50.0

49.6

UK manufacturing reflecting broader economic weakness; technical recession looms following negative 4th quarter growth

10:00

EUR

Euro-Zone Consumer Price Index Estimate (YoY) (JAN)

2.7%

2.8%

Price pressures expected to continue to ease; ECB to maintain dovish bias

12:00

USD

MBA Mortgage Applications (JAN 27)

-5.0%

13:15

USD

ADP Employment Change (JAN)

185K

325K

To foreshadow Friday’s NFP figures; job growth expected to have slowed following strong Dec numbers

13:30

USD

Construction Spending (MoM) (DEC)

0.5%

1.2%

Construction and housing has generally been a weak spot in the US recovery so far

15:00

USD

ISM Manufacturing (JAN)

54.5

53.9

To complement data pointing to steady recovery and subdued price pressures in the US

15:00

USD

ISM Prices Paid (JAN)

49.5

47.5

15:00

USD

DOE U.S. Crude Oil Inventories (JAN 27)

3558K

Data comes amid prospect of commodity price volatility given ongoing Persian Gulf tensions

15:30

USD

DOE U.S. Gasoline Inventories (JAN 27)

-390K

15:30

USD

DOE U.S. Distillate Inventory (JAN 27)

-2456K

15:30

EUR

Italian New Car Registrations (YoY) (JAN)

-15.3%

16:20

EUR

Italian Budget Balance (euros) (YTD) (JAN)

-61.5B

Comes after successful Italian 10-year bond auction on Monday

17:00

EUR

Italian Budget Balance (euros) (JAN)

8.0B

18:00

USD

Domestic Vehicle Sales (JAN)

10.50M

10.45M

Little change expected

18:00

USD

Total Vehicle Sales (JAN)

13.60M

13.52M

22:00

JPY

Monetary Base (YoY) (JAN)

13.5%

GMT

Currency

Upcoming Events & Speeches

8:30

USD

Fed's Charles Plosser Speaks on U.S. Economy

11:20

EUR

ECB's Jens Weidmann Speaks on Euro Economy

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

13.1813

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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