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Dollar Climbs as Risk Eases, Slump in Correlations More Interesting

Dollar Climbs as Risk Eases, Slump in Correlations More Interesting

2012-02-23 06:05:00
John Kicklighter, Chief Strategist
Share:
  • Dollar Climbs as Risk Eases, Slump in Correlations More Interesting
  • Euro Stability Causing Unease as Fitch and IMF Remind Risks Still Present
  • British Pound: Will the Cable Hold On to its Post-BoE Minutes Losses?
  • Japanese Yen Takes Another Tumble against Dollar Regardless of Risk Trends
  • Australian Dollar: Political Uncertainty Can Add to an Unfavorable Yield Situation
  • Swiss Franc Helps Shape Euro Skepticism, EURCHF Refuses to Climb
  • Gold Trading at a Four Month High, What is the Fundamental Drive?

Dollar Climbs as Risk Eases, Slump in Correlations More Interesting

Though anti-Euro and anti-risk sentiment have not yet developed into heavy trends yet, the two fundamental themes have effectively traded off these past weeks to afford the US dollar a meaningful advance. To see the influence of this trade off, we can refer to the performance of EURUSD and AUDUSD over the past two weeks. This past week, AUDUSD has taken the lead with a slide that reflects the same risk-aversion theme that has pulled the benchmark S&P 500 Index back from multi-year highs. During this same time, EURUSD was little moved. That is very different from where we were two weeks ago. Turning back the clock further, we found that AUDUSD was dithering while the FX market’s most liquid pair was sliding on concerns surrounding the Euro-area crisis. Ultimately, this has been an effective trade off for progress from the greenback, but this haphazard mix is less likely to provide a strong trend. Yet, perhaps there is something more in these correlations…

For weeks, months and even years past, the FX market has followed dominant fundamental themes (risk trends, Euro crisis fears, expectations for stimulus) to great effect. In fact, most of the real trending that we have seen in currency and capital markets can trace its origin back to these dominant subjects. So, what will revive the larger tide? We have seen benchmarks overlook disappointing earnings (S&P 500), the approval of the second Greek bailout (EURUSD) and signs of a global slowdown in growth (everything). The fuel may be there, but the spark continues to elude us. However, perhaps speculative interests themselves are close to reengaging the markets. Not only have we seen EURUSD and AUDUSD tread different courses, but there has been a loosening of correlation across many different risk-synced assets. Is this the sign?

Euro Stability Causing Unease as Fitch and IMF Remind Risks Still Present

EURUSD has been relatively quiet this past week. That wouldn’t be a remarkable observation if it weren’t for the fact that general risk trends (S&P 500 and AUDUSD acting as standards) weren’t sliding and had we not just learned that Greece was approved for its second bailout. There are times when stable market conditions are worrying. So, what does this departure from fundamental reality mean? If we consider the time tables of the euro’s performance over the past weeks, we can unravel this mystery. Last week, the euro was far more active as speculation leading into another make-or-break weekend for Greece took the initiative. With the EU ministers’ approval of the 130 billion euro program, it would seem that there would be a relief rally to follow. However, such an outcome seems to have been priced in. And, more importantly, skepticism that approval and implementation were separate concerns remained. This past session, we were reminded that averting an immediate crisis doesn’t solve long-term problems. Of note, Fitch downgraded Greece’s credit rating from CCC to C (just above default) with the note that a near-term default was highly likely. Perhaps more remarkable, an IMF official remarked on “huge” implementation risks with Greece.

British Pound: Will the Cable Hold On to its Post-BoE Minutes Losses?

I wasn’t expecting the Bank of England’s minutes to be as market moving as they ultimately were. The group’s decision to boost the bond purchasing program by £50 billion roused little surprise from sterling traders while the Quarterly Inflation report released last week defined the outlook for growth and interest rates. Nevertheless, the knowledge that two of the MPC’s ranks (Posen and Miles) had voted for a larger slug of £75 billion would send the pound tumbling. This question now is whether the sterling will maintain this big shift. While the stimulus outlook certainly has an influence over the pound’s perceived strength, themes of risk appetite and the spread of the Euro-area financial crisis are far more critical. In the absence of drive behind these themes, we would see the change in stimulus forecasts absorb quickly and the currency retreat to the underlying trends. Should risk or Euro concerns explode, it would simply hasten the regression.

Japanese Yen Takes Another Tumble against Dollar Regardless of Risk Trends

USDJPY seems unstoppable. Despite a downshift in risk trends (not a true decline), the benchmark pair would continue its surge. At this point, the yen has dropped against the greenback in both ‘risk on’ and ‘risk off’ scenarios. Of course, if we line the Japanese currency against more yield-intensive counterparts, the tendency is to return to risk appetite trends. In the absence of that overriding catalyst, their gains continue. This is a long-overdue move and the fundamentals support its continuation over the long-term, but be wary of natural corrections.

Australian Dollar: Political Uncertainty Can Add to an Unfavorable Yield Situation

The political situation in Australia is in flux. Following the surprise resignation of Foreign Minister Kevin Rudd, we find Prime Minister Jullia Gillard struggling to maintain control of the Labour party at a time when their popularity is on the ropes. Is this a critical concern for Australian dollar traders? Not really. While uncertainty is rarely a positive for investment, there is little immediate risk that the currency’s position will change as the high-yield player amongst its colleagues. Of course, if the general trend is towards risk aversion, this just adds another issue.

Swiss Franc Helps Shape Euro Skepticism, EURCHF Refuses to Climb

Though there is still a clear sense of skepticism surrounding a tidy recovery from the Euro Zone’s financial troubles, there is still room for relief. And yet, the euro can’t gain traction against its most direct safe haven: the Swiss franc. If you’re looking to gauge the market’s assessment of the euro situation, EURCHF will arguably offer the truest reflection. That said, the persistent appreciation of the Swiss currency is a true burden for monetary policy makers. If this is what is happening when conditions are ‘improving’ what happens if the Greek effort falls through…

Gold Trading at a Four Month High, What is the Fundamental Drive?

Once again, gold is a remarkable stand out for the global financial markets. The precious metal charged a second, aggressive rally that has driven the commodity to four month highs. Yet, with this move, we find that risk trends were notably weaker and the dollar has pushed higher (a direct reversal of the standard correlations of recent months). Where is this strength coming from? Skepticism. Against the tame backdrop of risk aversion, we see that skepticism for a clean Greek recovery is encouraging investors to avoid currency and sovereign debt more and more.

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ECONOMIC DATA

Next 24 Hours

GMT

Currency

Release

Survey

Previous

Comments

0:30

AUD

Average Weekly Wages (MoM) (NOV)

1.0%

1.2%

Falling weekly wages may prompt additional dovishness

0:30

AUD

Average Weekly Wages (YoY) (NOV)

4.7%

5.3%

9:00

EUR

German IFO - Business Climate (FEB)

108.8

108.3

IFO surveys expected to show moderately improving German economy

9:00

EUR

German IFO - Current Assessment (FEB)

116.5

116.3

9:00

EUR

German IFO – Expectations (FEB)

102

100.9

9:30

GBP

BBA Loans for House Purchase (JAN)

36250

36171

Loans increasing on easing

11:00

GBP

CBI Trends Total Orders (FEB)

-13

-16

Prices expected to decline again as British economy slows even with stimulus

11:00

GBP

CBI Trends Selling Prices (FEB)

12

13

13:30

USD

Initial Jobless Claims (FEB 18)

355K

348K

Weekly data expected to show improvement

13:30

USD

Continuing Claims (FEB 11)

3480K

3426K

15:00

USD

House Price Purchase Index (QoQ) (Q4)

0.2%

Home index expected to grow, though slower last year

15:00

USD

House Price Index (MoM) (DEC)

0.4%

1.0%

15:30

USD

EIA Natural Gas Storage Change (FEB 17)

-127

Fuel inventories expected to decline again on demand

16:00

USD

DOE U.S. Crude Oil Inventories (FEB 17)

-171K

16:00

USD

DOE Cushing OK Crude Inventory (FEB 17)

1990K

16:00

USD

DOE U.S. Distillate Inventory (FEB 17)

-2867K

16:00

USD

DOE U.S. Gasoline Inventories (FEB 17)

400K

16:00

USD

Kansas City Fed Manf. Activity (FEB)

9

7

Midwest seen to recover

23:50

JPY

Corporate Service Price (YoY) (JAN)

0.1%

0.1%

Tertiary industry stagnant

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

12.8467

1.7607

7.7289

7.7544

1.2577

Spot

6.6617

5.6156

5.6525

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

1.3394

1.5798

81.02

0.9212

1.0083

1.0780

0.8406

107.65

127.13

Resist. 2

1.3356

1.5766

80.82

0.9186

1.0060

1.0745

0.8379

107.30

126.78

Resist. 1

1.3318

1.5735

80.63

0.9160

1.0038

1.0711

0.8351

106.95

126.43

Spot

1.3243

1.5671

80.24

0.9107

0.9994

1.0641

0.8295

106.26

125.74

Support 1

1.3168

1.5607

79.85

0.9054

0.9950

1.0571

0.8239

105.57

125.05

Support 2

1.3130

1.5576

79.66

0.9028

0.9928

1.0537

0.8211

105.22

124.70

Support 3

1.3092

1.5544

79.46

0.9002

0.9905

1.0502

0.8184

104.87

124.35

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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