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Dollar Enjoys its Biggest Rally in Five Weeks, What Lies Ahead?

Dollar Enjoys its Biggest Rally in Five Weeks, What Lies Ahead?

2012-02-11 05:08:00
John Kicklighter, Chief Strategist
Share:
  • Dollar Enjoys its Biggest Rally in Five Weeks, What Lies Ahead?
  • Euro’s Indifference to Financial and Economic Problems Coming to an End
  • Australian Dollar Sensitive to Risk Threatens Critical Volatility Next Week
  • British Pound Has its Risk Bearings as Well as Meaningful Event Risk
  • Japanese Yen Facing Another Painful Swell if Sentiment Collapses
  • Swiss Franc Playing More the Role of Euro-Counterpart, Less Safe Haven
  • Gold Traders Watching Greece, But Dollar a More Immediate Problem

Dollar Enjoys its Biggest Rally in Five Weeks, What Lies Ahead?

When we have the S&P 500 puts in for its largest decline this year and the dollar subsequently wins its biggest daily rally since January 5th, we have to consider something bigger is afoot. A seismic shift in risk appetite trends is the greenback’s best catalyst for a meaningful rally, and there is plenty of thematic event risk that we can point out to suggest that just such a move is upon us. However, ‘news’ has betrayed us too many times recently. We have to monitor momentum, the level of correlation and the premium on risk protection (the VIX volatility index produced its biggest daily jump in three months Friday) all in concert next week. Confirmation is important when it comes to a true trend change.

Euro’s Indifference to Financial and Economic Problems Coming to an End

Over the past months we have seen what the true definition of bear trend and bull trend is through the performance of the euro. When a market responds to positive developments but minimizes the influence of the disappointing, we have a bull trend on our hands. Alternatively, when a positive view simply can’t gain traction while each disappointing report is met by greater selling pressure, the bears are in control. At this point, the euro has grown so oversaturated by ‘news’ that both sides are skeptical. That is especially true as we continue to carry forward the unpredictable Greek issue forward. Once again, we have series of critical votes that need to go through: Parliament must agree to further austerity measures (supposedly over the weekend), the private investor bond swap must go through and the EU must accept all the proposals to approve the second bailout package. And, this time, we are coming to critical deadlines and facing every-more dramatic ultimatums. Through it, perhaps the market will remember, this does not solve all the regions issues. Another important line to follow: 4Q GDP releases.

Australian Dollar Sensitive to Risk Threatens Critical Volatility Next Week

Through the final trading day of this past week, the Aussie dollar was the worst performing of the most liquid currencies. That’s only fitting, considering the high-yielder was one of the strongest performers (second only to the New Zealand currency) over the previous two weeks when optimism was on the rise. The two things that we need to establish for the Aussie dollar over the coming week is which direction underlying risk trends take and whether the RBA’s hold this past week has permanently altered the unit’s rate bearing. There is plenty of evidence to suggest a larger correction can develop, but history tells us that optimism amid stimulus can be resilient. As for the currency’s yield bearing, the 12-month rate forecast jumped from nearly 100 bps of cuts to 63 bps, but swaps tell us there is still a 66 percent chance of a cut next month.

British Pound Has its Risk Bearings as Well as Meaningful Event Risk

In the yield spectrum, the sterling ranks near the bottom of return, but it is also a fundamentally-sensitive currency. The connections the UK holds to the troubled Euro Zone via trade lines, European Union ties and financial market integration means the pound is at constant risk of catching the same cold that the euro itself is suffering – especially true given Prime Minister Cameron’s vow to stay the austerity course. Hence, should the Greek situation deteriorate in the upcoming week; the sterling will trace the euro lower against most pairs (though risk aversion could balance the performance against high yield currencies). Aside from the whiles of risk and reward, pound traders should keep an eye on the docket. The CPI and jobless claims data is good for short-term volatility, but the BoE minutes will give us a lasting view of policy.

Japanese Yen Facing Another Painful Swell if Sentiment Collapses

Japanese Finance Minister Azumi tried his best to extend the yen’s tumble this past week. Daily speeches regurgitated the same threat to take ‘decisive’, ‘bold’, ‘firm’ or ‘extraordinary’ action in the foreign exchange market should the yen be driven by ‘speculators’ to excess volatility or heights. Adding a little more bite to his bark, the policymaker further said that the decision of further manipulation from the Ministry of Finance (as opposed to the BoJ) rested with him. A situation where the mood of a single person can decide such a meaningful market dynamic adds a level of caution to those looking to bid the yen. However, the influence this may have had was undermined when Azumi stated in Parliament that he started the October intervention at 75.63 and stopped after USDJPY reached 78.20. While the level didn’t necessarily trigger the effort, FX traders may nevertheless use it as a target. Moving forward, the market may put the pressure on and drive the benchmark pair back towards lows should risk aversion light a bid under the yen. Unique solutions like Noda’s fund for foreign purchases may need to be fast tracked.

Swiss Franc Playing More the Role of Euro-Counterpart, Less Safe Haven

Over the past weeks, a steady bearing on growth-sensitive capital markets has offered an even keel for the balance of risk appetite. However, the critical absence of momentum (our technical gauge for conviction) has rendered the Swiss franc a questionable funding currency in the carry trade. Looking at the correlation between the S&P 500 (our benchmark for risk trends) and the various franc-based crosses, we have noted a substantial deviation in performance. Pairs like AUDCHF, NZDCHF and CADCHF have diverged from the equity index (whereas AUDUSD, NZDUSD and USDCAD are all running exceptional relationships). We see the issue more clearly when we set the franc against the dollar and yen. The correlations for CHFJPY and USDCHF are incredible matches for EURJPY and USDEUR (inverted). A constant threat of intervention, a diminished export market and the spread of the Euro Zone is melding the franc to the euro. We will really test this link if risk trends grow heavy.

Gold Traders Watching Greece, But Dollar a More Immediate Problem

It wasn’t a strong way to end the week. Gold closed Friday down 0.4 percent to notch a third consecutive decline. That was the worst string of losses for the metal for the year – and it occurs at the same time that capital markets were knocked back. How is a safe haven on the retreat at the same time that investor sentiment itself is shaky? While the risk aversion move through Friday didn’t offer us a momentous correction, it was a market-wide drive that occurred during otherwise quiet market conditions. This offers a taste of the liquidity rush that typically drives capital to the deep end of the financial pool where the dollar reigns. That said, the commodity did play a decent role of safe haven. Though gold slid against the greenback and yen Friday; it advanced when denominated in the Australian, New Zealand and Euro-area currencies.

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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

(Sat)

CNY

New Yuan Loans (JAN)

1000.0B

640.5B

Money supply may moderately increase as economic data showing domestic economy cooling

(Sat)

CNY

Money Supply - M0 (YoY) (JAN)

13.8%

(Sat)

CNY

Money Supply - M1 (YoY) (JAN)

8.6%

7.9%

(Sat)

CNY

Money Supply - M2 (YoY) (JAN)

13.70%

13.6%

23:50

(Sun)

JPY

GDP Deflator YoY (4Q P)

-1.7%

-2.2%

Japanese output still expected to fall on low exports, lack of post-rebuilding spending

23:50

(Sun)

JPY

Nominal GDP (QoQ) (4Q P)

-0.6%

1.2%

23:50

(Sun)

JPY

GDP Annualized (4Q P)

-1.4%

5.6%

23:50

(Sun)

JPY

Gross Domestic Product (QoQ) (4Q P)

-0.4%

1.4%

23:50

(Sun)

JPY

Tertiary Industry Index (MoM) (4Q P)

-0.8%

Services industries still pressured

(Sun)

NZD

REINZ Housing Price Index (JAN)

3301.4

House prices may be stable, no sudden increase that will call for a rate hike in near term

(Sun)

NZD

REINZ Housing Price Index MoM% (JAN)

-0.1%

(Sun)

NZD

REINZ House Sales YoY% (JAN)

20.9%

0:30

AUD

Home Loans MoM (DEC)

1.4%

Australian lending may increase as central bank cuts rates

0:30

AUD

Investment Lending (DEC)

1.8%

0:30

AUD

Owner-Occupied Home Loan Value MoM (DEC)

2.2%

8:15

CHF

Producer & Import Prices (MoM) (JAN)

0.3%

Import prices expected to stabilize on continued peg

8:15

CHF

Producer & Import Prices (YoY) (JAN)

-2.3%

21:45

NZD

Food Prices (MoM) (JAN)

0.2%

Expected to see little change

23:00

NZD

QV House Prices YoY% (JAN)

2.4%

Houses still in demand

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

12.8021

1.7620

7.7493

7.7553

1.2615

Spot

6.6618

5.6319

5.7428

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

1.3358

1.5889

78.30

0.9282

1.0107

1.0815

0.8378

103.75

123.58

Resist. 2

1.3318

1.5855

78.13

0.9252

1.0084

1.0779

0.8350

103.42

123.26

Resist. 1

1.3278

1.5822

77.96

0.9223

1.0060

1.0744

0.8322

103.09

122.93

Spot

1.3197

1.5755

77.61

0.9165

1.0014

1.0673

0.8266

102.43

122.27

Support 1

1.3116

1.5688

77.26

0.9107

0.9968

1.0602

0.8210

101.77

121.61

Support 2

1.3076

1.5655

77.09

0.9078

0.9944

1.0567

0.8182

101.44

121.29

Support 3

1.3036

1.5621

76.92

0.9048

0.9921

1.0531

0.8154

101.11

120.96

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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