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Dollar Recovers Lost Ground, Sentiment May Falter without Catalyst

Dollar Recovers Lost Ground, Sentiment May Falter without Catalyst

2012-02-16 06:38:00
John Kicklighter, Chief Strategist
Share:
  • Dollar Recovers Lost Ground, Sentiment May Falter without Catalyst
  • Euro: Stringing out the Euro Zone’s Crisis is Intensifying It
  • British Pound Reserve Reaction to Inflation Outlook, Jobs to Follow Risk
  • Australian Dollar Rally Post-Employment Quickly Falls Apart
  • New Zealand Dollar Fails to Gain Traction on Manufacturing Data
  • Japanese Yen: Risk Aversion Undermines the Azumi’s Yen Tumble
  • Gold’s First Meaningful Run in Six Days Falls Apart as Dollar Recovers

Dollar Recovers Lost Ground, Sentiment May Falter without Catalyst

Though the Dow Jones FXCM Dollar Index didn’t make much progress through Wednesday’s session, its intraday recovery was remarkable. The greenback has shaken the selling pressure that has been in place since the year began, but a meaningful bid has yet to fill the void. Like most other benchmarks for risk appetite (whether safe haven or yield provider), the greenback is leveling off. Yet, risk watchers can sense the pressure building each day. Despite exceptionally light volume and low implied (expected) volatility readings, the fallout from catalyzing the ever-present Euro Zone financial crisis leverages a clear safe haven premium to the greenback. The question – as it has always been – is timing.

Euro: Stringing out the Euro Zone’s Crisis is Intensifying It

Just a few months ago, a bid to buy another week before having to make an important decision in the Euro Zone’s ongoing financial crisis would have cleared the way for the euro to rally. How things have changed. The postponed EU ministers meeting (previously planned for last week and then for this past session) on the second Greek bailout package is hanging over the market like a fog – obstructing the future for an already very troubled region. Recapping the conference call that replaced the meeting, the EU’s Juncker commented that he was confident that everything will be resolved by Monday – the new deadline. What was absent this time around? According to the Eurogroup Chairman, stronger surveillance and comment by Greece. On the other side of the fence, Greek Finance Minister Venizelos said the Troika (EU, ECB, IMF) was playing with fire and that new terms are continuously tacked on when a solution seems near. In the meantime, the March 20th, €14.5 billion payment is approaching, and the strain is more apparent (Moody’s has warned that 116 EU banks have been put on watch). Patience is wearing thin…

British Pound Reserve Reaction to Inflation Outlook, Jobs to Follow Risk

There was plenty of potential market-movement in the collective event risk for the sterling over the past session, but expectations worked to ensure the reaction was muted. From the labor report, the 6,900-claim increase strayed far from the consensus forecast and the 8.4 percent unemployment rate was ultimately unchanged. So, from a broader fundamental perspective, there is little here to change the slow trend towards a modest recession under the burden of recession. In contrast to the short-term volatility potential of the employment data, the BoE Inflation report could tap into the lasting shift of the pound towards a wholesale stimulus currency (much like the dollar). Yet, leaving the door open more bond purchases and fears of the Euro Zone spread were not new. And so, the focus shifts back to the euro correlation and dominant risk trends.

Australian Dollar Rally Post-Employment Quickly Falls Apart

Though the broader FX market is showing evidence of substantial volatility, the Australian dollar nevertheless stood out this past trading session thanks to a leveraged reaction to meaningful scheduled event risk on the Aussie docket. This morning’s stop headline was the much-sharper-than-expected jump in the January employment level. A 46,300 net increase in payrolls last month was more than four times the consensus and reason enough to fortify sentiment in normal conditions. Yet, we are not dealing with ‘normal’ conditions. Uncertainty over the stability of the global economy and market presents a proverbial anchor on anything that is considered to be tied to investor sentiment. Therefore, when the Australian dollar took higher after the improved economic data, we were seeing a move on many risk-sensitive pairs that was at high risk of returning to a mean defined by underlying sentiment trends. Not surprisingly, AUDUSD’s post-data rally was quickly and completely retraced.

New Zealand Dollar Fails to Gain Traction on Manufacturing Data

The New Zealand dollar is lower across the board – with the exception of EURNZD – as risk aversion drives the carry currency lower. It is important, in times like these, to remember the kiwi dollar’s roll in the global FX market. A currency that backs such a small economy seems to have no place in the upper echelons of the most liquid; but the unit enjoys a special status because of its consistently high yield and otherwise stable sovereign credit rating. What does this combination present to global investors? A perfect carry currency. However, that role means that a slide in risk trends leaves the kiwi little chance of holding its own. That is the situation we find NZDUSD in currently. As US equity futures track lower in the Asian session, so too does the carry-prone major slide. Where does that leave the factory PMI reading? On newspaper headlines.

Japanese Yen: Risk Aversion Undermines the Azumi’s Yen Tumble

Japanese Minister of Finance Azumi and Bank of Japan Governor Azumi were no doubt feeling a little more optimistic this week as they watched USDJPY climb to highs they hadn’t seen since the end of October (the previous move notably one that was artificially strong-armed by unprecedented manipulation). Yet, if the policy makers feel they can rest on their haunches now, they will most likely find their nerves once again strained. Though USDJPY (the focus of intervention for Japanese officials) has yet to retreat, we have seen the more risk sensitive, carry pairs (EURJPY, GBPJPY, NZDJPY, etc) pitch into notable reversals. The move shouldn’t surprise the fundamentally-minded trader. It is the natural path of a market that is tipping into a broader trend of risk aversion. What we should assess is whether Japanese officials truly appreciate this connection. If they do, they may see the risk that the yen could quickly rally back to record highs. Would they preempt such a shift?

Gold’s First Meaningful Run in Six Days Falls Apart as Dollar Recovers

Over the past few weeks, gold has worked its way deeper and deeper into congestion – a pattern that technical traders would consider a high breakout risk. So, when the precious metal made a tentative run to the upside through the past trading session, it seemed that there was the potential for a meaningful trend to once again take root. However, as unique as gold is to the fiat asset class, it will remain beholden to risk trends and the relative health of the US dollar. And, looking to the dollar’s intraday recovery (and general turn to a bullish path), it was too high a hurdle for the commodity to keep up the run without a clear fundamental source of strength. It says something that on a day that the FOMC minutes show a willingness to adopt more QE, the BoE saying it could increase stimulus and the EU working to provide a direct bailout to one of its troubled members that the anti-currency (gold) can’t regain traction. This is a special kind of fear…

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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

Consumer Inflation Expectation (FEB)

2.8%

Inflation expected to ease

0:00

NZD

ANZ Consumer Confidence Index (FEB)

116.1

New Zealand consumer confidence showing in spending

0:00

NZD

ANZ Consumer Confidence (MoM) (FEB)

7.1%

0:30

AUD

RBA FX Transactions (AUD) (JAN)

737M

Demand for AUD picking up

0:30

AUD

Employment Change (JAN)

10.0K

-29.3K

Australian labor market expected to be stable, improve moderately on lower rates

0:30

AUD

Unemployment Rate (JAN)

5.3%

5.2%

0:30

AUD

Full Time Employment Change (JAN)

0.0K

24.5K

0:30

AUD

Part Time Employment Change (JAN)

7.5K

-53.7K

0:30

AUD

Participation Rate (JAN)

65.3%

65.2%

4:00

JPY

Tokyo Condominium Sales (YoY) (JAN)

8.5%

Sales still picking up

7:00

EUR

EU 25 New Car Registrations (JAN)

-6.4%

Large purchases tapering

8:00

EUR

Spanish GDP (Constant s.a.) (QoQ) (4Q F)

-0.3%

-0.3%

Production relatively weaker

9:00

EUR

Italian Trade Balance (Total) (euros) (DEC)

-1581M

Italian trade still expected to fall as outside demand weaker

9:00

EUR

Italian Trade Balance Eu (euros) (DEC)

-386M

10:00

EUR

Italian Current Account (euros) (DEC)

-3448M

13:30

CAD

International Securities Transactions (CAD)

10.00B

14.99B

Transactions still expected strong

13:30

CAD

Manufacturing Shipments (MoM) (DEC)

0.5%

2.0%

Represents a drop in 4 months

13:30

USD

PPI (MoM) (JAN)

0.3%

-0.1%

Moderately weaker long term producer prices supports, questions Fed’s ZIRP promise

13:30

USD

PPI Ex Food & Energy (MoM) (JAN)

0.1%

0.3%

13:30

USD

PPI (YoY) (JAN)

4.1%

4.8%

13:30

USD

PPI Ex Food & Energy (YoY) (JAN)

2.6%

3.0%

13:30

USD

Initial Jobless Claims (FEB 11)

365K

358K

Weekly data showing some pullback in improvement

13:30

USD

Continuing Claims (FEB 4)

3490K

3515K

13:30

USD

Housing Starts (JAN)

670K

657K

Construction data expected to moderately improve again, though lending still lagging

13:30

USD

Housing Starts (MoM) (JAN)

2.0%

-4.1%

13:30

USD

Building Permits (JAN)

680K

679K

13:30

USD

Building Permits (MoM) (JAN)

1.3%

-0.1%

15:00

USD

Mortgage Delinquencies (4Q)

8.0%

Credit still weaker despite stronger housing market, lending

15:00

USD

MBA Mortgage Foreclosures (4Q)

4.4%

15:00

USD

Philadelphia Fed. (FEB)

9

7.3

Eastern economy stronger

15:30

USD

EIA Natural Gas Storage Change (FEB 10)

-78

Declines due to heavy demand

GMT

Currency

Upcoming Events & Speeches

9:00

EUR

ECB Publishes Feb. Monthly Report

14:00

USD

Fed's Bernanke Speaks on Community Banking in Arlington

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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