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Forex: Dollar Rallies for 8 Weeks Straight after Strong NFP-Friday Close

Forex: Dollar Rallies for 8 Weeks Straight after Strong NFP-Friday Close

John Kicklighter, Chief Strategist
  • Dollar Rallies for 8 Weeks Straight after Strong NFP-Friday Close
  • Euro: How will the Market React to the Italian Downgrade?
  • British Pound Dives to Two-and-a-Half Year Low Versus Dollar
  • Japanese Yen Reversal Window Closing as Stimulus Closes In
  • Canadian Dollar Struggles to Hold Gains After Strong Jobs Report
  • New Zealand Dollar Traders Look Ahead to RBNZ Rate Decision
  • Gold’s Activity Lull this Past Week an Indication of Near-Term Breakout

Take this quiz to assess your trading IQ!For live market updates, visitDailyFX’s Real Time News Feed

Dollar Rallies for 8 Weeks Straight after Strong NFP-Friday Close

Perhaps the only thing more remarkable from the market’s this past week than the Dow Jones Industrial Average hitting a record high was the US dollar’s incredible run. Though the Dow Jones FXCM Dollar Index (ticker = USDollar) can only boast a two-and-a-half year high, the currency has climbed for eight consecutive weeks. That is the longest rally the benchmark has sustained since historical price action became available back on 1999 (with the introduction of EURUSD – a quarter of the index). The critical, fundamental question here how one of the world’s move recognizable safe havens can advance with such abandon at the same time the most basic risk measure is on a record breaking run. This isn’t a fundamental shift in the dollar’s orientation to risk, but a side effect of the manipulation in risk itself: stimulus.

The final trading session of this past week gives us a prime example of how the market is focusing in on stimulus and investor sentiment. The February nonfarm payrolls (NFP) report hit the wires in the morning hours of the New York session with a much-better-than-expected 236,000 net addition- the second largest increase in a year. Stronger employment trends speak to general growth and thereby confidence in investing. That was the initial thought process as we could see from the climb in S&P 500 futures (the report was released before the shares market opened). Yet, despite the implications this data has for the needs of a last resort safe haven; EURUSD responded to the same news with a 135-pip drop. Why did the dollar gain so much ground? Because the unemployment rate unexpectedly dropped to a four-year low 7.7 percent. The subtext here is very different. The Fed has stated that its inevitable cap on stimulus and turn to tightening will come when the medium-term outlook for the unemployment rate was 6.5 percent.

Given the pace of employment improvement over the past year, the central bank’s unemployment target could be reached as soon as April of next year. They would project that eventuality well before it would be met. In this fundamental calculation, we can start to see a rough time frame for the slowdown in stimulus (before the end of the year) and a shift to tightening in either rates or balance sheet (1Q or 2Q 2014). That is a serious boon for the dollar. Though that time frame is set well into the future, the market has priced in a lot for the dollar. Seeing the end of the road while a steep hill is just appearing for currencies like the yen and the pound represents a serious shift.

Euro: How will the Market React to the Italian Downgrade?

Two weeks ago, FX trades were delivered an unpleasant surprise when Moody’s announced it had downgraded for the UK from its AAA status. That gave plenty of time for pound traders to brew for the new trading week, but the torrent never came for the sterling the following Monday. Things might be a little different for the Euro this coming week after Fitch announced its downgrade of Italy. Admittedly, the UK lost a more prized rating, but it was already under significant selling strain, and it was expected. The Eurozone, however, is attempting to stave off the disaster of a returned financial crisis for the region and Italy is at the center of the latest flare up after its election left the country incapable of making the decisive moves to answer recession and deficits. Watch the euro specifically during the European session Monday.

British Pound Dives to Two-and-a-Half Year Low Versus DollarThe bleeding doesn’t seem to stop for the sterling. The currency tumbled against most of its counterparts this past week, but the GBPUSD’s epic drop stood out of the crowd. The four-week plunge has torn the sterling down nearly 1500 pips from its peak on the opening day of the year. Why is the cable at a two-and-a-half year low? The dollar certainly has something to do with it, but the pound is bigger player here. Where the market is starting to see the finish line on the US stimulus horizon, the Bank of England seems to be walking up to the starting line. The fact that the sterling didn’t rally after the BoE held rates this past week suggests expectations for easing are growing extreme.

Japanese Yen Reversal Window Closing as Stimulus Closes In

What does the future hold for the Japanese yen – aggressive easing by the country’s monetary policy body. There is no doubt about the Bank of Japan’s (BoJ) efforts and how committed the group will be; and that means that the yen will suffer for it. The question is whether the central bank will act as quickly and forcefully as speculators are pricing in. Traders await confirmation one way or another. This past week, the Governor and two Deputy Governor nominees clearly vowed their commitment to accelerate their easing to compete with the Fed. We will hear more of the same when they speak in the Upper House next week. We have until April 4 until the next meet, will we have a risk pullback by then?

Canadian Dollar Struggles to Hold Gains After Strong Jobs Report

As expected, USDCAD was exposed to serious volatility between the Canadian and US employment statistics. Yet, the positive stimulus reaction from the greenback obscured a remarkable move from the loonie in response to particularly strong data. In February, the world’s eleventh largest economy added 50,700 jobs (33,600 of them permanent). Far better than the forecast, implications for the BoC keeping to its rate hike threat are reinforced; and the currency winds a significant fundamental upgrade.

New Zealand Dollar Traders Look Ahead to RBNZ Rate Decision

The kiwi was on the lam through the end of this past week, though momentum is not yet on the sellers’ side. In the upcoming week, we have a key release to contemplate – the RBNZ rate decision. In the past weeks we have seen the Governor Wheeler lament the level of the currency, inflation expectations ease and a change to more democratic meetings for policy. Could this precede a warning of possible easing?

Gold’s Activity Lull this Past Week an Indication of Near-Term Breakout

Inordinately quiet or active markets naturally return to a norm. That’s what we should remember with gold heading into the new trading week. This past week, the metal managed a range of only $25 through the entire week. A particularly quiet market at the end of a multi-month decline often piques speculators’ interest as they dream of how quick a reversal could be on an extended trend. Yet, we should be open to the alternative as well: a burst of momentum behind the prevailing trend could break $1,500. The deciding factor: the net stimulus outlook.

**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

21:45

NZD

NZ Card Spending - Retail MoM (Feb)

0.5%

0.3%

Consumer spending update before the RBNZ decision

21:45

NZD

NZ Card Spending - Total MoM (Feb)

0.4%

23:50

JPN

Japan Money Stock M2 YoY (Feb)

2.7%

2.7%

Money supply is the ancillary target of the BoJ’s forthcoming stimulus

23:50

JPN

Japan Money Stock M3 YoY (Feb)

2.3%

2.3%

23:50

JPN

Machine Orders (MoM) (Jan)

-1.7%

2.8%

A manufacturing predecessor, overall growth measure

23:50

JPN

Machine Orders (YoY) (Jan)

-0.3%

-3.4%

0:01

GBP

Lloyds Employment Confidence (Feb)

-45

Labor figures to be closely monitored given recession watch

6:00

JPN

Machine Tool Orders (YoY) (Feb P)

-26.4%

First read of leading factory activity report

7:00

EUR

German Trade Balance (Jan)

13.9B

12.0B

Trade figures measured for growth contributions, sensitivity to euro fluctuations and contrast to other Eurozone economies

7:00

EUR

German Current Account (EURO) (Jan)

10.5B

17.3B

7:00

EUR

German Imports SA (MoM) (Jan)

0.7%

-1.3%

7:00

EUR

German Exports SA (MoM) (Jan)

0.5%

0.3%

7:00

EUR

German Labor Costs Workday Adj (YoY) (4Q)

3.3%

A contributor to regional inflation

7:00

EUR

German Labor Costs Seas. Adj. (QoQ) (4Q)

0.7%

7:45

EUR

French Industrial Production (MoM) (Jan)

-0.2%

-0.1%

Given President Hollande’s approval rating and the economy’s economic struggles, industrial activity an important lead-in

7:45

EUR

French Industrial Production (YoY) (Jan)

-2.7%

-2.1%

7:45

EUR

French Manufacturing Production (MoM) (Jan)

-0.2%

0.1%

7:45

EUR

French Manufacturing Production (YoY) (Jan)

-3.3%

-2.9%

8:15

CHF

Retail Sales (Real) (YoY) (Jan)

5.1%

Domestic consumption draws less attention than Swiss trade

9:00

EUR

Italian GDP sa and wda (QoQ) (4Q F)

-0.9%

-0.9%

A final reading on Italian GDP made more important due to ongoing political gridlock

9:00

EUR

Italian GDP sa and wda (YoY) (4Q F)

-2.7%

-2.7%

23:50

JPN

Domestic CGPI (MoM) (Feb)

0.3%

0.4%

Upstream inflation figures offer little of the 2% CPI target expectation the BoJ is looking for

23:50

JPN

Domestic CGPI (YoY) (Feb)

-0.1%

-0.2%

23:50

JPN

Tertiary Industry Index (MoM) (Jan)

-0.2%

1.4%

Service sector activity expected to drop in opening month of quarter

23:50

JPN

BSI Large All Industry (QoQ) (1Q)

-5.5

Business confidence critical to sustaining the return to positive GDP shown in 4Q revisions

23:50

JPN

BSI Large Manufacturing (QoQ) (1Q)

-10.3

GMT

Currency

Upcoming Events & Speeches

-:-

JPN

BOJ Governor Nominee Kuroda Hearing in Parliament

1:30

JPN

Bank of Japan Board Member Ishida Speaks

8:30

EUR

EU Foreign Ministers Hold Meeting

23:50

JPN

BOJ Minutes for February Meeting

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 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

12.6279

1.8065

9.0896

7.7569

1.2477

Spot

6.4032

5.7345

5.7258

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

1.3115

1.5056

97.22

0.9593

1.0359

1.0316

0.8302

126.68

145.00

Resist. 2

1.3087

1.5023

96.92

0.9573

1.0341

1.0296

0.8282

126.22

144.58

Resist. 1

1.3060

1.4990

96.61

0.9553

1.0323

1.0276

0.8262

125.77

144.16

Spot

1.3005

1.4925

96.00

0.9514

1.0287

1.0236

0.8222

124.86

143.32

Support 1

1.2950

1.4860

95.39

0.9475

1.0251

1.0196

0.8182

123.95

142.47

Support 2

1.2923

1.4827

95.08

0.9455

1.0233

1.0176

0.8162

123.50

142.05

Support 3

1.2895

1.4794

94.78

0.9435

1.0215

1.0156

0.8142

123.04

141.63

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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