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Forex News: Dollar Posts Biggest Weekly Rally in 6 Months

Forex News: Dollar Posts Biggest Weekly Rally in 6 Months

2013-01-05 08:48:00
John Kicklighter, Chief Strategist
Share:
  • Dollar Posts Biggest Weekly Rally in 6 Months
  • Euro Struggles Before ECB Adds Weight
  • Japanese Yen Crosses Extend Rally to New Highs
  • Canadian Dollar: FX Traders Pay Little Heed to Strong Jobs Numbers
  • British Pound Excessive Tumble May Spur Rebound
  • Swiss Franc: Safety Flows and SNB Reserves Still Issues
  • Gold Drops For Sixth Week, Longest Slide in 8 Years

New to FX?Watch thisVideo; For live market updates, visitDailyFX’s Real Time News Feed

Dollar Posts Biggest Weekly Rally in 6 Months

Market conditions can supersede both fundamentals and technicals – a truism we witnessed this past week. Typically, the dollar’s position as the preferred reserve currency would have leveraged a selloff with the S&P 500 posting its biggest rally in 13 months. In fact, the Dow Jones FXCM Dollar Index (ticker = USDollar) enjoyed its strongest advance in six months over the same period and closed at its highest level since July 25. This unusual correlation between underlying risk trends and the safe haven dollar was facilitated by both the extremely low levels of speculative participation through the passage of the holiday period as well as an intense focus on the on the outcome of the US Fiscal Cliff.

Though pushing the decision beyond the technical deadline, the US government managed to hammer out a solution to the impending doom of automatic tax hikes and spending cuts. Naturally, removing the risk of a sure push into recession for the world’s largest economy lifts a serious cloud of uncertainty and bolsters risk appetite – thereby driving equities and other ‘riskier’ assets higher. However, the dollar also benefits from this turn as the threat of a critical sovereign credit rating downgrade (a move that hits at the dollar’s core value as the benchmark currency) evaporates as well. That being said, the positive correlation between risk trends and greenback is unlikely to last for long. A relief rally for the dollar via reduced rate cut fears has an exceptionally short shelf life. That doesn’t mean we should expect the dollar to simply tumble into a new bear trend though. The ‘solution’ offered up for the Fiscal Cliff, was merely a band aid that carries us over to the bigger threat of a standoff on raising the debt ceiling. The Treasury runs out of extraordinary means for preventing the US to breaching its debt cap sometime in mid-February and the so-called ‘sequestration’ – or $110 billion in automatic spending cuts – is set for March 1. This can easily set risk trends on fire once again and thereby benefit the safe haven status of the dollar. The deciding factor is whether investors look ahead or enjoys the brief calm.

As we establish the next phase of the US fiscal crisis, there are other considerations for risk and dollar traders to consider. Though not fully engaged, there is a shift in comfortable expectations for Fed stimulus to remain a driving force for years into the future. After the Fed minutes this past week showed growing support for the $85 billion-per-month QE purchases of MBS and Treasuries by or before the end of 2013, the tepid growth outlook and extreme lows in investment returns look far more daunting to the long-term investor. For a more concise time frame, we will watch the reaction to the beginning of the 4Q earnings season with Alcoa reporting on Tuesday and Wells Fargo on Friday.

Euro Struggles Before ECB Adds Weight

A rebound in risk appetite often has a forgiving influence for currencies or assets that maintain a questionable fundamental outlook. We have seen the general rise in sentiment tides lift the troubled euro numerous times in the past, but the currency showed little of that strength over the past week. Aside from EURJPY, the euro lost ground against all of its freely-floating, major counterparts. This may be a sign that the relief of Greece avoiding catastrophe has been spent. Another consideration that is often overlooked – the euro’s benchmark Libor and Treasury rates are lower than its US counterparts’, which may actually drive carry interests away from the euro. Looking to the week ahead, there is plenty of event risk in sentiment measures (investor, consumer, economy), an ESM bond sale, a number of meetings for officials and Greece unemployment. Most euro traders’ top concern though is the ECB rate decision Thursday. The risk is for further cuts to rates or growth forecasts.

Japanese Yen Crosses Extend Rally to New HighsThe yen’s tumble continued with little check this past week. Though the foundation of risk trends were somewhat dubious, the safe haven and carry funding currency didn’t shy away from a hearty drop against all of its counterparts. Between a 1.3 percent drop against the Euro (a weakened currency) and 4.0 percent plunge versus the New Zealand currency, this tumble is extremely stretched. The implications of a natural correction would find serious leverage should a bout of risk aversion kick in. If fear rises, there isn’t much carry to in these crosses to buffer it.

Canadian Dollar: FX Traders Pay Little Heed to Strong Jobs Numbers

Once again, the Canadian docket would impress on employment. The payrolls figure roundly beat consensus with a 39,800- position increase and the jobless s rate unexpectedly dropped its lowest level since December 2008 (7.1 percent). However, this times, the Canadian dollar (‘loonie’) paid little mind to the positive report. The NFPs report at the same time offered some distraction, but there is further an issue that the market is growing acclimated to ‘beats’ by this data series. Once again, loonie traders must focus on risk trends and symbiotic USD trends.

British Pound Excessive Tumble May Spur Rebound

Over the past three days, the sterling has enjoyed the worst performance amongst the majors. Whether against high yielding counterparts or safe havens like the dollar, the pound was the most afflicted of its counterparts. This intense decline has some grounding in data (like the Services PMI) and the lagging pace of government bond yield growth; yet it is still arguably overdone. Be careful of a speculative reversal.

Swiss Franc: Safety Flows and SNB Reserves Still Issues

Though the panicked drive behind the flight to safety for European capital has let up, the franc is still a shining beacon for investors and citizens that realize the larger issues are far from resolved. The SNB’s report of its foreign currency reserves this coming week will be interpreted for its influence on keeping the franc suppressed. Traders should keep a vigilant eye on EURCHF for any serious changes in interpretations.

Gold Drops For Sixth Week, Longest Slide in 8 Years

Thanks to a late-day rebound this past Friday, gold closed out the week with a mere 0.01 percent decline. Nevertheless, that puts the metal in the red and notches up its consecutive bearish tally to six - its longest tumble in eight years. Futures volume behind the decline is still light, which means the move isn’t panicked (and thereby prone to reversal). The US dollar and debt ceiling will be necessary drivers moving forward.

**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

23:50

JPY

Monetary Base (YoY) (DEC)

-

-

BoJ easing should swell monetary base in coming months.

23:50

JPY

Loans & Discounts Corp (YoY) (NOV)

-

0.30%

Corporate deleveraging should keep figure near zero.

0:01

GBP

Lloyds Employment Confidence (DEC)

-

-42

Gradually improved over 2012, but still pessimistic job prospectus.

5:00

JPY

Vehicle Sales (YoY) (DEC)

-

-3.30%

Global growth could help exports; hit 2012 low during Sept. at -9%.

8:00

CHF

Foreign Currency Reserves (DEC)

-

424.8B

FX reserves on upward terror since 1.2 EUR peg. Expect more of same

9:30

EUR

Euro-zone Sentix Investor Confidence (JAN)

-

-16.8

Been improving since -30 low on August 2012.

10:00

EUR

Euro-zone Producer Price Index (MoM) (NOV)

0.10%

0.10%

Wholesale price inflation slowing confirms regional flag.

10:00

EUR

Euro-zone Producer Price Index (YoY) (NOV)

2.40%

2.60%

15:00

CAD

Ivey Purchasing Managers Index s.a. (DEC)

47.5

Just entered below 50 level in Nov. may find support at 47.

22:30

AUD

AiG Performance of Construction Index (DEC)

37

Been contracting since May 2010, but improving since Sept 2012.

GMT

Currency

Upcoming Events & Speeches

14:30

EUR

ECB Announces Bond Purchases

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

15.5900

2.0000

9.2080

7.8165

1.3650

Resist 2

7.5800

6.1875

6.1150

Resist 1

15.0000

1.9000

9.1900

7.8075

1.3250

Resist 1

6.8155

5.9190

5.8200

Spot

12.7417

1.7825

8.5619

7.7513

1.2272

Spot

6.5374

5.7077

5.6038

Support 1

12.5000

1.6500

8.5650

7.7490

1.2000

Support 1

6.0800

5.5840

5.6000

Support 2

11.5200

1.5725

6.5575

7.7450

1.1800

Support 2

5.8085

5.3350

5.3040

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

1.3172

1.6172

89.04

0.9317

0.9929

1.0559

0.8395

116.59

143.21

Resist. 2

1.3146

1.6147

88.82

0.9299

0.9915

1.0539

0.8376

116.25

142.82

Resist. 1

1.3121

1.6121

88.60

0.9282

0.9901

1.0519

0.8356

115.90

142.44

Spot

1.3069

1.6069

88.15

0.9246

0.9872

1.0480

0.8317

115.21

141.66

Support 1

1.3017

1.6017

87.70

0.9210

0.9843

1.0441

0.8278

114.52

140.88

Support 2

1.2992

1.5991

87.48

0.9193

0.9829

1.0421

0.8258

114.17

140.50

Support 3

1.2966

1.5966

87.26

0.9175

0.9815

1.0401

0.8239

113.83

140.11

v

--- Written by: John Kicklighter, Chief Strategist for DailyFX.com

To contact John, email jkicklighter@dailyfx.com. Follow me on twitter at http://www.twitter.com/JohnKicklighter

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