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Dollar on the Verge of a Bullish Reversal, Needs Risk’s Approval

Dollar on the Verge of a Bullish Reversal, Needs Risk’s Approval

2012-02-10 04:30:00
John Kicklighter, Chief Strategist
Share:
  • Dollar on the Verge of a Bullish Reversal, Needs Risk’s Approval
  • Euro Traders Unmoved by Greece Agreement, Has Sentiment Shifted?
  • British Pound Has Little to Reprice in BoE Stimulus Increase, What Now?
  • Japanese Yen: Finance Minister Azumi Says an MoF Intervention is His Decision
  • Australian Dollar Slides after RBA Statement Released
  • Canadian Dollar Not to be Overlook for a View on Risk Trends
  • Gold: What Would Matter More In Broad Risk Reversal – Safe Haven, Dollar Connection?

Dollar on the Verge of a Bullish Reversal, Needs Risk’s Approval

Looking across the capital markets, we find the S&P 500, the Euro and carry interest losing momentum under fading participation and on the verge of a trend change. When these different markets line up to the same shift, we are witnessing an attempt to reverse investor sentiment itself. And, we know where the safe haven dollar fits into the risk appetite conversation. Technical traders will note that the Dow Jones FXCM Dollar Index is threatening to catalyze a drive higher should it overtake 9,750 and find traction. Where would the drive to cover ‘risky’ holdings likely originate? There is an overwhelming amount of fundamental fuel ready to catch with the right spark. What matters more for the liquidity-haven dollar is breadth and momentum in sentiment. In a true bear trend, all bad news is significant and all the good is inconsequential.

Euro Traders Unmoved by Greece Agreement, Has Sentiment Shifted?

There were a lot of fundamental updates crossing the wires over the past 24 hours – perhaps too many. When there are too many headlines (especially when they conflict), confusion can sabotage a clear run. The event risk that we have recently slogged through certainly puzzled many. The ECB policy decision was the easiest to interpret. The policy authority held its benchmark rate and President Draghi remarked that the economic and financial outlook had improved. The real interest was in the ongoing drama with Greece. A statement from the Greek Premier’s office noted that the county’s policymakers and the Troika had finally agreed to the terms supposedly required to push forward the second rescue package. And yet, bullish interest would not materialize. Far more interesting was the statement made by Greece Financial Minister Venizelos who said February 15th was a do-or-die deadline for keeping the euro, while the EU’s Juncker said it may not be wrapped up by then.

British Pound Has Little to Reprice in BoE Stimulus Increase, What Now?

Few people were caught off guard by the Bank of England’s monetary policy moves this past trading session. In fact, the 50 billion sterling increase to the bond purchase program (bringing the target to 325 billion or more than a quarter of the market’s outstanding gilts) was modestly smaller than what many others were expecting – a repeat 75 billion clip. The MPC has proven itself quite adept at improving its transparency. That’s a blessing for the economy but a frustration for the speculators that are looking for volatility and a sterling-derived fundamental drive. Moving forward, the sterling is still sensitive to the spread of Euro-area crisis; but a meaningful shift in risk appetite is the real threat here.

Japanese Yen: Finance Minister Azumi Says an MoF Intervention is His Decision

We have grown accustomed to hearing both Finance Minister Azumi and Bank of Japan Governor Shirakawa threaten extraordinary action in the foreign exchange market if the yen is pushed higher by unnatural, speculative means. Of course, after many confirmed attempts to drive currency lower through manipulation, we find the yen crosses hovering defiantly close to record or multi-year highs. In general, intervention is most effective in its ability to sideline speculators. The actual impact of sales or purchases is comparatively minor given the depth of the FX market. That said, Japan has laid all its cards on the table and still tries to intimidate. We have seen their interventions generate remarkable volatility immediately after they are factored in, but its influence consistently unravels. This morning Azumi suggested MoF-sanctioned intervention is his call alone (making it more unpredictable and impulsive), but the lack of outcome is too well-known. Yet, there is a more imposing threat not too far off the radar. If Noda’s “study” on a fund to buy foreign assets is realized, it could be a more permanent driver.

Australian Dollar Slides after RBA Statement Released

The RBA’s decision to hold the benchmark lending rate caught a significant portion of the investing market off guard earlier this week, but the decision was hardly one to incite wholesale buying. To further diminish the positive influence a deferred cut can offer a carry currency, the Aussie dollar slid this morning following the release of the RBA’s Monetary Policy Statement. Mirroring the general sentiment surrounding the rate decision itself, the report seemed to deflate the pressure for a front-ended rate cut regime. That said, the group would lower its both its 2012 growth (3.5 percent from 4.0 percent) and inflation (1.75 percent from 2.0 percent) forecasts. Ultimately, this carries the same level of influence in feeding expectations of future rate cuts as this week’s hold did to ease fears of cyclical easing. It’s worth noting that the 12-month rate forecast is calling for only 58 bps in cuts versus nearly 100 bps last Friday; but all that vanishes should risk trends give way – a very real risk.

Canadian Dollar Not to be Overlook for a View on Risk Trends

When looking to establish a risk trade amongst the majors, the speculative FX contingent almost always turns to AUDUSD or NZDUSD. The Aussie and Kiwi dollars make for easier explanations in their fundamental correlation to sentiment: the greater the yield differential (or the carry), the more sensitive to the universal risk / reward balance that determines the flow of speculative capital. For the Canadian dollar, a benchmark yield of 1.00 percent (and modest three-month money market rate of 1.20 percent compared to Australia’s 4.03 percent) seems to knock it out of the running. Yet, when we run all three of the dollar-based ‘comm bloc’ pairs against my favored, basic sentiment gauge (the S&P 500); we find USDCAD is just as significant a player in risk. The 20-day (one month) correlation between the equity index and the three pairs falls like this: AUDUSD (0.91); USDCAD (-0.88); NZDUSD (0.86). In other words, temper expectations for data like Friday’s trade stats. Watch risk trends.

Gold: What Would Matter More In Broad Risk Reversal – Safe Haven, Dollar Connection?

Offering further confirmation that its steady bull phase has passed, spot gold carved out another trading day to solidify the boundaries of recent congestion between 1,750 and 1,725. Yet, with the winds of underlying risk appetite blowing, there is a dangerously high chance that this tentative stability is merely a temporary transition before another strong drive. What would be the catalyst of another push, and what pace should we expect. A quiet advance against the backdrop of catalysts is hard to envision. Should the dollar continue to flat-line or slide lower going forward, a deleveraging in risky and fiat-based assets could boost the alternative asset. Yet, looking at the fundamental threat display, a focus on Greece’s troubles or basic move away from traditional assets like equities would likely help the greenback more than the metal.

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ECONOMIC DATA

Next 24 Hours

GMT

Currency

Release

Survey

Previous

Comments

7:00

EUR

German CPI (YoY) (JAN F)

2.0%

2.0%

German inflation expected to be stable, though European focus remains on Greek, debt deals

7:00

EUR

German CPI - EU Harmonised (YoY) (JAN F)

2.3%

2.3%

7:00

EUR

German CPI (MoM) (JAN F)

-0.4%

-0.4%

7:00

EUR

German CPI - EU Harmonised (MoM) (JAN F)

-0.5%

-0.5%

7:45

EUR

French Current Account (euros) (DEC)

-

-2.3B

French deficit may widen

7:45

EUR

French Manufacturing Production (MoM)(DEC)

-1.0%

1.3%

French industries seeing slower growth on lower overall continental demand

7:45

EUR

French Manufacturing Production (YoY) (DEC)

0.9%

2.2%

7:45

EUR

French Industrial Production (MoM) (DEC)

-0.8%

1.1%

7:45

EUR

French Industrial Production (YoY) (DEC)

-0.6%

0.9%

8:15

CHF

CPI (MoM) (JAN)

-0.3%

-0.2%

Swiss prices expected to experience large deflation again, eyes on SNB for policy guidance

8:15

CHF

CPI (YoY) (JAN)

-0.8%

-0.7%

8:15

CHF

CPI - EU Harmonised (MoM) (JAN)

-0.5%

0.3%

8:15

CHF

CPI - EU Harmonised (YoY) (JAN)

-0.7%

-0.4%

9:00

EUR

Italian Industrial Production s.a. (MoM) (DEC)

-0.5%

0.3%

Italian industries expected to weaken again as debt reduces investment spending

9:00

EUR

Italian Industrial Production w.d.a. (YoY) (DEC)

-

-4.1%

9:00

EUR

Italian Industrial Production n.s.a. (YoY) (DEC)

-7.2%

-4.1%

9:30

GBP

PPI Input n.s.a. (MoM) (JAN)

0.2%

-0.6%

Producer prices expected to be weaker across the board, though BoE may be reaching limit of monetary easing for the time being

9:30

GBP

PPI Input n.s.a. (YoY) (JAN)

6.8%

8.7%

9:30

GBP

PPI Output n.s.a. (MoM) (JAN)

0.1%

-0.2%

9:30

GBP

PPI Output n.s.a. (YoY) (JAN)

3.7%

4.8%

9:30

GBP

PPI Output Core n.s.a. (MoM) (JAN)

0.0%

-0.1%

9:30

GBP

PPI Output Core n.s.a. (YoY) (JAN)

2.3%

3.0%

13:30

CAD

International Merchandise Trade (CAD) (DEC)

0.70B

1.07B

Weaker despite US recovery

13:30

USD

Trade Balance (DEC)

-$48.5B

-$47.8B

Deficit widens again

14:55

USD

U. of Michigan Confidence (FEB P)

74

75

Interesting expected preliminary report as confidence may pivot

19:00

USD

Monthly Budget Statement (JAN)

-$45.0B

-$49.8B

Debt moderately improving

CNY

Trade Balance (USD) (JAN)

$10.70B

$16.52B

Chinese exports expected to slow drastically on lower European demand

CNY

Exports (YoY) (JAN)

-1.5%

13.4%

CNY

Imports (YoY) (JAN)

-5.0%

11.8%

GMT

Currency

Upcoming Events & Speeches

0:30

AUD

Reserve Bank Board Statement on Monetary Policy

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

12.7054

1.7520

7.6065

7.7560

1.2516

Spot

6.6376

5.5978

5.7517

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

1.3431

1.5932

78.27

0.9231

1.0053

1.0877

0.8433

104.29

123.92

Resist. 2

1.3392

1.5899

78.09

0.9203

1.0030

1.0842

0.8405

103.96

123.59

Resist. 1

1.3353

1.5867

77.92

0.9175

1.0008

1.0807

0.8377

103.64

123.26

Spot

1.3276

1.5803

77.57

0.9120

0.9964

1.0737

0.8322

102.99

122.59

Support 1

1.3199

1.5739

77.22

0.9065

0.9920

1.0667

0.8267

102.34

121.93

Support 2

1.3160

1.5707

77.05

0.9037

0.9898

1.0632

0.8239

102.02

121.59

Support 3

1.3121

1.5674

76.87

0.9009

0.9875

1.0597

0.8211

101.69

121.26

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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