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Dollar Activity Level Drops to Lowest Level Since Holiday Period

Dollar Activity Level Drops to Lowest Level Since Holiday Period

2012-02-21 05:57:00
John Kicklighter, Chief Strategist
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  • Dollar Activity Level Drops to Lowest Level Since Holiday Period
  • Euro Rally Stalled as Market Awaits Clear Decision on Greece
  • Australian Dollar Holds Monday Rally as RBA Minutes Read Neutral, Market Awaits Greek Vote
  • Japanese Yen: S&P Warning of Downgrade and Vows for EU Investment Add to Short
  • New Zealand Dollar Ignores Inflation Expectations for Carry Position
  • British Pound Traders Look to January Deficit Figures as Austerity/Growth Row Continues
  • Gold Can’t Rouse Follow Through Despite Benefit in Risk-On and Greek Crisis Scenarios

Dollar Activity Level Drops to Lowest Level Since Holiday Period

With a gap higher on the open of the week for risk appetite, the safe haven dollar would suffer its own drop to start trading Monday. That said, follow through was notably limited on both fronts. With the US offline for the President’s Day holiday and word on the second Greek bailout effort notably absent, there was a curb on speculative drive. It is interesting to note though, that between holiday trading conditions and uncertainty in sentiment trends; the Dow Jones FXCM Dollar Index carved out its smallest range since January 2nd – interesting comparison for activity level…

Euro Rally Stalled as Market Awaits Clear Decision on Greece

We were supposed to have a decision on Greece’s second bailout package from the Euro-area Finance Ministers this past trading session. Yet, it’s already Tuesday and there is no resolution. Should we be surprised? No. If you recall, there have been many broken deadlines for this glaring threat to financial stability over the past weeks and months. This time around, policymakers took a new tack to pushing it back and have simply not given the market any official guidance (a new time for announcement, pushing back to another day, indications of what issues are sticking points). Feeding such uncertainty could stoke fear that the deal will not be done, but traders have grown acclimated to officials’ habit of rolling the issue forward. The pressure, however, builds with each day as Greece’s €14.5 billion bond payment (due March 20) closes in. Euro traders should keep a close eye on headlines that speak to an official pause or approval of the second bailout program. The focus is on key sticking points: authorities demanding private investors to take haircuts greater than 50 percent on their bond holdings and the EU/IMF’s demand for a permanent Troika presence in Greece to monitor adherence to austerity measures.

Australian Dollar Holds Monday Rally as RBA Minutes Read Neutral, Market Awaits Greek Vote

The rolling, 20-day correlation between AUDJPY and the S&P 500 (my favored gauge of investor sentiment) is still 0.90. There is no better sign that the balance between risk and reward is firmly in control of the Australian dollar. Therefore, risk appetite’s swell on Monday’s open against the backdrop of hope that we would finally come up for air on the Greek crisis, stood as a clear leverage for carry interest. That said, as quickly as risk appetite surged, the impetus faded when liquidity was present. The market is still awaiting clarity on what could be the first global financial crisis of the current decade. In the meantime, the RBA’s minutes reported officials saw further scope for easing at its last meeting, but growth and inflation expectations were said to be close to trend – suggesting a wait-and-see approach.

Japanese Yen: S&P Warning of Downgrade and Vows for EU Investment Add to Short

It was difficult to distinguish Monday, but the yen was under fundamental pressure of its own making. On the surface, fundamental traders were no doubt linking the funding currency’s slide to the jump in risk appetite through the open of the week – and they wouldn’t be wrong. However, there is more there. Over the past two weeks, we have seen the currency take a significant dive. Many attribute this to intervention as Finance Minister Azumi’s testimony to Parliament (in which he admitted to actively selling yen in late October) is fresh in everyone’s mind. Yet, we have also seen disappointing growth, further stimulus, warnings of long-term financial issues and latent carry build up. Add to that list a warning from Standard & Poor’s that Japan could lose its ‘AA-‘ rating if the economic outlook deteriorates and the open-ended promise to further increase investment in the EU (a way of sending capital out) if further rescue requirements are met.

New Zealand Dollar Ignores Inflation Expectations for Carry Position

There are few currencies that are still sensitive to interest rates or interest rate expectations. The New Zealand dollar may be one of those standouts to follow those carry trade implications. That said, the latest data to weigh in on for yield expectations generated few waves from the kiwi early in Tuesday’s trading session. The two-year inflation outlook from the RBNZ dropped to 2.5 percent in the first quarter. This is the lowest level since the third quarter of 2009 and represents the third consecutive decline in the series from its highest reading since 1991. To put that into perspective though, the target zone is 2 to 3 percent. Furthermore, there is a tame 17bps worth of hikes priced in over 12 months.

British Pound Traders Look to January Deficit Figures as Austerity/Growth Row Continues

Though there was significant interest in the volatility of GBPUSD and GBPUSD Monday, we should look to the sterling’s overall performance. Measured up against the balance of its liquid counterparts, the currency was uniformly underwater. This relative performance tells us where in the fundamental spectrum the pound falls. Underperforming the Euro and Swiss franc, means that the sterling is a few steps down the ladder in reacting to positive developments in the Euro-area crisis (we shouldn’t extend that assessment to negative outcomes without evidence). Furthermore, the subordination to the high-yield carry currencies tells us the pound can’t compete for carry. In general, this makes the pound less exciting, but less volatility can be a good thing too. In the meantime, short-term traders should watch upcoming UK event risk. The January public sector borrowing figures will tell heat up the debate between holding austerity and helping growth ahead of the March budget.

Gold Can’t Rouse Follow Through Despite Benefit in Risk-On and Greek Crisis Scenarios

Despite the volatility in risk-linked assets (generated in contradictory forces of hope that Greece would receive the go-ahead for its bailout and fear that it would simply receive a hard ‘no’), gold was unable to generate a meaningful drive of its own. In fact, the daily range on the precious metal Monday was a sparse $29.25 – the smallest daily breadth for the commodity since January 2nd. Clearly, the market holiday in the US was a curb for speculative activity on both accounts, but that doesn’t necessarily account for the one-week average range sliding to its lowest level since the Christmas holiday (approximately $45). This is an unnaturally staid period for gold, suggesting the market could quickly come back to life given the proper motivation. For this safe haven asset, it is worth noting that the two most probable scenarios for capital market positioning favor demand for the metal: an orderly risk aversion or risk appetite bid that leverages an anti-dollar position. There is a downside however. As usual, a market-wide need for liquidity will divert capital away from the pricey metal and directly to gold.

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ECONOMIC DATA

Next 24 Hours

GMT

Currency

Release

Survey

Previous

Comments

2:00

NZD

RBNZ 2-Year Inflation Expectation (1Q)

2.8%

Continued rise may add scope for rate increases

4:30

JPY

All Industry Activity Index (MoM) (DEC)

1.5%

-1.1%

December monthly higher

7:00

CHF

Trade Balance (Swiss franc) (JAN)

2.5B

2.01B

Trade data once again brings into question of SNB floor, though inflation data more important

7:00

CHF

Exports (MoM) (JAN)

6.1%

7:00

CHF

Imports (MoM) (JAN)

7.6%

8:00

CHF

Money Supply M3 (YoY) (JAN)

7.7%

Continues to rapidly grow

9:30

GBP

Public Finances (PSNCR) (Pounds) (JAN)

-24.7B

22.9B

British government spending expected to fall on weaker economy, continued austerity efforts

9:30

GBP

Public Sector Net Borrowing (JAN)

-6.3B

13.7B

9:30

GBP

Public Sector Net Borrowing (Pounds) (JAN)

-9.1B

10.8B

13:30

CAD

Retail Sales (MoM) (DEC)

-0.2%

0.3%

Weaker sales numbers could reduce hawkishness, though eventual rate hike in question

13:30

CAD

Retail Sales Less Autos (MoM) (DEC)

0.2%

0.3%

13:30

CAD

Wholesale Sales (MoM) (DEC)

0.5%

-0.4%

13:30

USD

Chicago Fed Nat Activity Index (JAN)

0.22

0.17

Midwest economy improving

15:00

EUR

Euro-Zone Consumer Confidence (FEB A)

-20.1

-20.7

Overall confidence may improve

23:00

AUD

Conference Board Leading Index (DEC)

-0.3%

Private bank surveys could show some kind of improvement

23:30

AUD

Westpac Leading Index (MoM) (DEC)

-0.2%

GMT

Currency

Upcoming Events & Speeches

0:30

AUD

Reserve Bank Board February Minutes

8:15

EUR

EU Fin Mins to Decide on Short-Selling, CDS

11:00

EUR

EFSF Bond Auction (€2 Bln of 182-day)

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

12.7344

1.7424

7.6878

7.7543

1.2544

Spot

6.6654

5.6225

5.6832

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

1.3381

1.5962

80.56

0.9240

1.0036

1.0872

0.8499

106.87

127.73

Resist. 2

1.3342

1.5930

80.36

0.9212

1.0014

1.0837

0.8470

106.53

127.37

Resist. 1

1.3302

1.5897

80.16

0.9184

0.9992

1.0801

0.8442

106.18

127.01

Spot

1.3223

1.5832

79.77

0.9129

0.9947

1.0730

0.8385

105.48

126.30

Support 1

1.3144

1.5767

79.38

0.9074

0.9902

1.0659

0.8328

104.78

125.58

Support 2

1.3104

1.5734

79.18

0.9046

0.9880

1.0623

0.8300

104.43

125.22

Support 3

1.3065

1.5702

78.98

0.9018

0.9858

1.0588

0.8271

104.09

124.86

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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