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Euro Hits Two Month High against Safe Haven Dollar, Greece Irrelevant?

Euro Hits Two Month High against Safe Haven Dollar, Greece Irrelevant?

2012-02-08 03:57:00
John Kicklighter, Chief Strategist
Share:
  • Dollar Fades as Speculative Capital Chases Euro, Yield, Shares
  • Euro Hits Two Month High against Safe Haven Dollar, Greece Irrelevant?
  • Australian Dollar Rally Cooled Immediately after RBA Hold
  • British Pound Rallies on Euro Goodwill, Gilt Yields at Two-Month High
  • Swiss Franc: SNB’s Jordan Blames EURCHF Pressure on EU Crisis
  • New Zealand Dollar Traders Look to 4Q Employment Data
  • Gold Wins its Third Biggest Rally This Year Despite Steadfast Risk

Dollar Fades as Speculative Capital Chases Euro, Yield, Shares

Though the Dow Jones Industrial Average was leading risk trends high, the equity benchmark’s pace wasn’t all that threatening for a safe haven like the US dollar. Yet, the trend has been unbelievably consistent – and so too has been the pressure on the currency. Trend was not a surprise for the greenback, rather revived momentum and the near three-month low for the Dow Jones FXCM Dollar Index (coinciding with a two-month high for EURUSD) was. This particular stage of the tumble comes thanks to the euro’s strong performance. Is there anything that stops risk?

Euro Hits Two Month High against Safe Haven Dollar, Greece Irrelevant?

In yet another remarkable turn, the euro was the best performer through Tuesday’s session. That is particularly unusual considering that underlying risk appetite trends themselves – though positive – were relatively tame. If we look for an additional fundamental drive in Euro-specific developments, there is little to suggest genuine improvement. Instead, what we find is a more distant timetable for a financial reckoning for a genuinely troubled region. Keeping track of the region’s primary anchor, a supposed draft of measures crafted by Greek officials to secure its second round of financial aid was postponed for further conversation in the upcoming session. If this discussion is moved once again, it will quickly come into conflict with the EU ministers planned gathering for Thursday (suggested by Germany’s Schaeuble). Though we have heard it before, sometime to keep an eye is the push for European Union members to cede more control to EU authorities – voiced by German Chancellor Angela Merkel. If power sharing must be forced through in the short-term for this situation to stabilize, the euro will be in trouble.

Australian Dollar Rally Cooled Immediately after RBA Hold

When is a bullish outcome to a rate decision not really all that bullish? When the consensus is for a particularly dovish (bearish) outcome, and we are met with only a modest one. That was the position we were in with the Aussie dollar over the past 24 hours. Immediately following Tuesday’s RBA decision to hold the benchmark lending rate at 4.25 percent, the Australian dollar climbed against all of its most liquid counterparts. Yet, the swell didn’t last for very long. The lack of follow through was most prominent with AUDUSD as we witnessed the S&P 500 and EURUSD carry forward meaningful advances through the European and New York session as the carry-favored pair held anchored around 1.0800. In the rate decision itself, we need to realize that the central bank left the door wide open to future cuts. Upon reflection, it makes sense that they take a more restrained gait towards policy easing. The RBA bullishness has been fully spent. Now, we are fully back on risk trends.

British Pound Rallies on Euro Goodwill, Gilt Yields at Two-Month High

The Sterling surged higher Tuesday, riding on the back of both risk appetite and the euro’s own performance. For the benchmark GBPUSD (cable), a strong advance would revive the side-tracked bull trend that began January 13th and bring us up to the mid-point of the August-to-January range. Like the euro, the pound further managed an advance against the high yield currencies (Aussie and kiwi dollars) as well as the safe havens (dollar and yen). However, with EURGBP, we can tell the strength for the regional currencies originated with the shared currency. For the pound, a relief rally from the fear of Euro Zone crisis spillover as well as local recession fears (though neither threat has really dissipated for the medium-term) feeds covering of shorts. A notable highlight in the fundamental background for sterling traders to take note of: the 10 year government bond (Gilt) yield surged Tuesday to nudge two-month highs. This denotes a move away from safety, just like Treasuries and Bunds.

Swiss Franc: SNB’s Jordan Blames EURCHF Pressure on EU Crisis

The Swiss franc is stubbornly strong and it’s the Euro Zone’s fault. At least, that is what we derive from SNB acting President Thomas Jordan said in his speech this past session. According to the central banker, EURCHF has slowly clawed back towards the forcibly-imposed 1.2000-floor because a flight to safety is encouraging capital to find harbor in Switzerland – regardless of the exchange rate abnormalities. There were no remarkable changes in the tone or quality of Jordan’s comments through the event. The vow to defend the franc’s ceiling was reiterated. In fact, he would remark that living up to that guarantee is more important now than ever. Attempting another tack to dissuade capital, the SNB head would also note that 2012 growth would “cool considerably”. Normally, this would weigh the franc; but he’s right. Euro fears are in control.

New Zealand Dollar Traders Look to 4Q Employment Data

The kiwi dollar is following in the wake of its Australian counterpart. And, both are at the mercy of carry interest. In fact, the Deutsche Bank Carry Harvest Index (a good representation of carry trade interest) is just off a nine-month high – and that May swing high wasn’t matched since August of 2008. We often talk of the New Zealand dollar as a significant laggard to its Australian counterpart in terms of yield. Indeed, 4.25 percent benchmark for Australia runs at a considerable to the kiwi’s equivalent 2.50 percent rate. However, there are other investments to consider when looking for relative return (especially when low risk is a factor). A prime example is the yield on 10-year government bonds, which see Australian paper yielding 3.95 percent against New Zealand rates of 3.88 percent. Nevertheless, carry may be pointing higher; but it will lack for momentum as long as risk trends themselves are lacking for drive. A possible intervening catalyst to consider is the upcoming New Zealand event risk: the 4Q employment data. Previous iterations of this report have generated modest activity, but this is an impressionable market.

Gold Wins its Third Biggest Rally This Year Despite Steadfast Risk

Despite the buoyancy of underlying investor sentiment and the apparently disregard for Greece’s ever-moving time line for a solution to its financial troubles, gold managed a significant rally through Tuesday’s session. In fact, the 1.5 percent move in spot gold was the third largest daily advance this year. Has this put us back on the bull trend that has so far defined 2012 or is the Friday high still out of grasp? Looking at the backdrop of trading activity, we find that volume on the futures and ETF markets was still exceptionally light compared to swells over previous weeks. That could lead us to believe that the rally lacks conviction, but the pullback itself was founded on particularly weak participation as well. Fundamentally, a risk positive lean may not undermine gold’s rise. It is momentum (or the lack thereof) of risk buildup that matters here.

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ECONOMIC DATA

Next 24 Hours

GMT

Currency

Release

Survey

Previous

Comments

0:01

GBP

BRC Shop Price Index (YoY) (JAN)

1.7%

Retail price index could weaken

4:30

JPY

Bankruptcies (YoY) (JAN)

-6.3%

Declining after new fiscal rules

5:00

JPY

Eco Watchers Survey: Current (JAN)

47.4

47

Overall Japanese economic surveys still dragged by exports

5:00

JPY

Eco Watchers Survey: Outlook (JAN)

45.5

44.4

6:45

CHF

Unemployment Rate (JAN)

3.5%

3.3%

Data not that important compared to CPI later this week

6:45

CHF

Unemployment Rate s.a. (JAN)

3.1%

3.1%

7:00

EUR

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

-1.0%

2.5%

Exports expected to drop, though overall current account expected to increase on continued foreign investment

7:00

EUR

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

1.0%

-0.4%

7:00

EUR

German Current Account (euros) (DEC)

15.2B

14.3B

7:00

EUR

German Trade Balance (euros) (DEC)

13.7B

16.2B

7:30

EUR

Bank of France Business Sentiment (DEC)

96

96

Sentiment has been stagnant

7:45

EUR

French Central Government Balance (euros) (JAN)

-90.8B

-97.2B

Deficit moderately recovering

12:00

USD

MBA Mortgage Applications (FEB 3)

-2.9%

Lending market still weak

13:15

CAD

Housing Starts (JAN)

191.5K

199.9K

New housing moderate

21:45

NZD

Unemployment Rate (4Q)

6.5%

6.6%

New Zealand labor markets steady, may not have large effect on central bank rates

21:45

NZD

Employment Change (QoQ)(4Q)

0.4%

0.2%

21:45

NZD

Employment Change (YoY) (4Q)

1.9%

1.1%

21:45

NZD

Participation Rate (QoQ) (4Q)

68.5%

68.4%

23:50

JPY

Housing Loans (YoY) (4Q)

2.1%

Helped by housing demand

23:50

JPY

Machine Orders (MoM) (DEC)

-5.0%

14.8%

December final data showing slowdown in orders

23:50

JPY

Machine Orders (YoY) (DEC)

8.5%

12.5%

GMT

Currency

Upcoming Events & Speeches

15:30

USD

Fed's Williams Speaks on Economy in San Ramon

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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