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Dollar Bull Trend Depends on EURUSD, USDJPY Reaction to Risk

Dollar Bull Trend Depends on EURUSD, USDJPY Reaction to Risk

John Kicklighter, Chief Strategist
  • Dollar Bull Trend Depends on EURUSD, USDJPY Reaction to Risk
  • British Pound Hammered into the Close on Moody’s Downgrade
  • Euro Finds Little Strength in LTRO2, Italian and Cyprus Elections Ahead
  • Japanese Yen: Prime Minister Abe Plans to Hire Next BoJ Governor
  • Australian Dollar Has Accounted for Rate Outlook, Now it Needs Risk
  • Canadian Dollar Hits 8 Month Low Versus USD, GDP Figures Ahead
  • Gold’s Late Bounce Doesn’t Erase Plunge, Four-Year Low In Positioning

How does a Currency War affect your FX trading? For live market updates, visitDailyFX’s Real Time News Feed

Dollar Bull Trend Depends on EURUSD, USDJPY Reaction to Risk

How strong we expect the dollar to be depends on what we are measuring it against. If our benchmark is EURUSD, the pair has just this past week threatened to change directions on a seven-month bull trend. Alternatively, the Dow Jones FXCM Dollar Index (ticker = USDollar) is at its highest level in nearly two-and-a-half years with serious contributions from both USDJPY and GBPUSD. In a market where performance is relative, we need to pick the correct measure to establish just how strong or weak the benchmark currency is. We can do that by looking at various pairs, but we can also establish its strength by following its most influential fundamental drivers.

The most promising catalyst moving forward for serious dollar strength is a convincing change in risk appetite trends. Notably, the Dow Jones Industrial Average and S&P 500 both regained ground through Friday and ensured critical turning points (13,875 and 1,495) were left intact for the next bearish assault to second guess conviction. The FOMC minutes have started the conversation about a withdrawal of the unnatural stimulus backing, but it isn’t enough to fully withdrawal support and spark a deleveraging effort. In the week ahead, Fed Chairman Bernanke’s testimony in Congress will be digested and the sequester countdown will be fretted for the stimulus angle. Fear though, will be a market issue

British Pound Hammered into the Close on Moody’s Downgrade

It was a fitting way for the British pound to end the week. Having taken the incredible dive below 1.5250 through the middle of the week – as the market recognized in the BoE minutes that there was a growing call to follow through with the stimulus speculators were projecting – it seemed like the bears had accomplished what they needed for the period. Yet, there was an incredible follow up to come in the closing hours of Friday when rating agency Moody’s announced that it had downgraded the United Kingdom from the top AAA rating down to Aa1. This was another serious aspect of fundamental depreciation for the currency: fear that the austerity-versus-recession balance would introduce an external factor that can disrupt the balance (in other words, a rate cut). Now we look ahead to determine whether there is momentum to be fed after the shock has set in. This development certainly changes the pound’s long-term health, but it has also depreciated sharply these past months.

Euro Finds Little Strength in LTRO2, Italian and Cyprus Elections AheadThere wasn’t much encouraging news for the Euro through the final 24 hours of this past week. Top headline was the announcement for the planned first repayment of the LTRO2 (second Long-Term Refinancing Operation) program loans. Though the €61.1 billion reduction continues to pull the ECB balance sheet down – while others like the Fed continue to add stimulus – it was much smaller than the consensus forecast. In other news, the EU downgraded its regional 2013 growth forecast for 0.1 percent expansion to a 0.3 percent contraction; and the Olli Rehn said further support for Spain would only come with evidence that the budget will stabilize. We will kick off next week with crowded newswires as investors interpret what the Italian and Cypriot elections mean for the euro. Through it all, remember, the ECB is shrinking its balance sheet.

Japanese Yen: Prime Minister Abe Plans to Hire Next BoJ Governor

Speculation surrounding the Fed’s eventual withdrawal of stimulus sometime before the end of 2013 was a modest boon for the yen crosses, as Japan’s more distant stimulus efforts seem more credible means for deflating the nation’s currency. Yet, relative gains through expectations that the Fed is moving to a tightening regime will lose momentum quickly. If the yen is too revive its five-month tumble, it will have to find an active catalyst. That may be difficult. Leveraging the carry trade through risk trends is highly unlikely given the turn in capital markets and fundamentals. Once again, it’s up to Japanese officials. If that is the case, the crosses will be looking very heavy. Prime Minister Abe may decide the next BoJ Governor next week, but actual policy change is highly unlikely to occur until the transition policy meeting.

Australian Dollar Has Accounted for Rate Outlook, Now it Needs Risk

There are two ways to move a currency when it comes to the influence of interest rates: you can either alter risk appetite levels (the demand for return) or you can alter a currency’s position on the yield spectrum. For the past month, the Aussie dollar has suffered on both fronts. However, interest rate expectations have arguably carried much of the performance. That said, RBA Governor Steven’s unflattering suggestion that the Aussie dollar was too high and that a cut would be the most likely move didn’t seem to unsettle AUDUSD. The balance of power is shifting over to actual carry deleveraging on risk aversion as the rate outlook for the Aussie dollar seems largely priced in barring a surprise rate cut.

Canadian Dollar Hits 8 Month Low Versus USD, GDP Figures Ahead

We’ve been distracted by the sterling, euro and greenback recently because of big ticket event risk. Yet, one of the most surprising performances has come from the Canadian dollar. The currency has fallen against most of its counterparts this past week and has notably encouraged a six consecutive day advance USDCAD. In turn, the pair has climbed to its highest level since June and is threatening to break congestion that dates all the way back to 2009. The loonie’s troubles were highlighted by a surprise trade deficit, easing house prices, a sharp drop in retail sales and inflation that is well below target. We will see how bad the situation may become with BoC’s Carney and GDP next week.

Gold’s Late Bounce Doesn’t Erase Plunge, Four-Year Low In Positioning

Gold may have advanced for a second consecutive day through Friday, but that didn’t do much to assuage the pain the metal has suffered through the entire week. Despite the reprieve, the metal still dropped 1.8 percent on the week – following the 3.4 percent plunge the period before. With this most recent effort on the six-month bear leg gold has found itself dangerously close to the $1,525 floor that has been in place since July 2011. Progress beyond that floor and this will quickly start to look more like a lasting change of trend. Fundamentally, the continued stimulus reduction for the ECB (LTRO repayments) and the recent FOMC discussion about timing a reduction of QE injections is troubling gold bugs. The sequester may stabilize things before the market catches fire. Though, considering net speculative futures positioning – measured in the COT report – hit a four year low for gold, it may already be burning.

**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

1:45

CNY

HSBC Flash Manufacturing PMI

52.2

52.3

Published 1W before final PMI, Based on 85-90% of total surveys

9:30

GBP

BBA Loans for House Purchase

34000

33636

Has not been 34000 or above since 1/12

13:30

USD

Chicago Fed Nat Activity Index

0.02

Volatile Data Set, 5Y avg.: -0.76; high: 0.67; low: -4.56

15:30

USD

Dallas Fed Manufacturing Activity

5.5

Large swings in data, 3Y avg.: 0.9; low: -19; high; 23.2

GMT

Currency

Upcoming Events & Speeches

24

EUR

Cyprus Second Round Election

24-25

EUR

Italian Election

8:00

EUR

Portugal Quarterly Aid Review (7th) Begins

17:15

CAD

Bank of Canada Gov Carney Speaks

22:00

USD

US Acting Treasury Sec Wolin Speaks

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

Click Here to Learn 3 Basic Forex Trading Strategies: http://www.youtube.com/watch?v=880UGOQyK40

CLASSIC SUPPORT AND RESISTANCE

Ilyauat25

EMERGING MARKETS 18:00 GMT

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

15.5900

2.0000

9.2080

7.8165

1.3650

Resist 2

7.5800

5.8300

6.1150

Resist 1

15.0000

1.9000

9.1900

7.8075

1.3250

Resist 1

6.8155

5.7350

5.8200

Spot

12.7458

1.7931

8.8911

7.7561

1.2383

Spot

6.4148

5.6472

5.6684

Support 1

12.5000

1.6500

8.5650

7.7490

1.2000

Support 1

6.0800

5.4440

5.5000

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

1.3329

1.5430

94.40

0.9375

1.0243

1.0396

0.8464

125.08

144.46

Resist. 2

1.3300

1.5394

94.11

0.9354

1.0224

1.0375

0.8442

124.60

143.98

Resist. 1

1.3270

1.5359

93.82

0.9334

1.0206

1.0353

0.8420

124.13

143.51

Spot

1.3210

1.5288

93.24

0.9292

1.0169

1.0310

0.8377

123.17

142.56

Support 1

1.3150

1.5217

92.66

0.9250

1.0132

1.0267

0.8334

122.21

141.61

Support 2

1.3120

1.5182

92.37

0.9230

1.0114

1.0245

0.8312

121.74

141.13

Support 3

1.3091

1.5146

92.08

0.9209

1.0095

1.0224

0.8290

121.26

140.65

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

Sign up for John’s email distribution list, here.

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