Saturday, January 1, 2011

Forex: Dollar Anchored by Liquidity, What Should We Expect for Trading Next Week?

http://www.dailyfx.com/forex/fundamental/daily_briefing/session_briefing/daily_fundamentals/2010/12/24/Forex_Dollar_Anchored_by_Liquidity_What_Should_We_Expect_for_Trading_Next_Week.html

  • Dollar Anchored by Liquidity, What Should We Expect for Trading Next Week?
  • Euro Weakness - Temporarily Masked by Trading Conditions - Will Start to Show through Soon
  • British Pound Extends its Tentative Recovery Though Fundamental Reality Hard to Ignore
  • Japanese Yen Will Respond to Predicament of Capped Government Spending and BoJ Intervention
  • Swiss Franc Stumbles a Second Day as the SNB Capitalizes on Investor Squaring
  • New Zealand Dollar Likely to Give Back Post GDP Gains Next Week as Liquidity Stabilizes
  • Australian Dollar: Thin Speculative Interest Could Amplify any Risk Waves Next Week
Dollar Anchored by Liquidity, What Should We Expect for Trading Next Week?
No one was surprised when the dollar ended this past week little moved. The normal liquidity drain into the close Friday was magnified by the sidelined capital in accordance with the holiday weekend. However, if we look at the market conditions beyond the exaggerated impact of year-end position squaring; we can start to see the evidence of an impending collapse in risk appetite and capital markets in the not-too-distant future. Yet, timing is criticalhere. This past week was a write off as market participants ignored major economic releases, next-level financial troubles from Europe and adjustments in stimulus programs around the world to prevent major trends from hurting their positions. However, the global fundamentals have tangibly deteriorated in the past week and month; and resolution is required. If we were looking at the equities market, a dramatic move that sparked in the Asian market is most likely to bleed over to the European and US indexes when those markets come online. The same principle can be applied to the FX markets now as the backdrop for risk appetite trends and financial stability deteriorate; but the absence of the full speculative crowd delays the reaction.
In the week ahead, speculative liquidity is likely to pick up and therefore trading conditions will be a little more constructive (volatility will be better matched with trend potential). That said, there is unlikely to be a meaningful trend developing behind the US dollar or risk appetite trends in general. The year-end period is a far more widely-spread holiday for the global markets and the year-end tax implications for many regions will discourage large positions from being established. But, as always, the expectation that others will comply to the expected seasonal effects will almost certainly have the greatest influence (the ‘self-fulfilling prophecy’ phenomena has wide-spread implications for capital markets). That does not mean, however, that there is a no risk of dramatic price action. Liquidity conditions can actually amplify volatility; and there are still mean looming threats to global financial stability. Just a few threats to keep an eye out for are: a notable deterioration in the EU’s handling of its financial troubles; an escalation of the North and South Korea conflict; and an effort by China to further curb its market.
As for scheduled event risk; there isn’t much in the way of data that can encourage the dollar to fall back on its lingering safe haven traits (liquidity and highly regulated markets). For short-term influence, indicators like pending home sales, initial jobless claims and the S&P/Case Shiller home price data has little hold. The Conference Board consumer confidence report is top pick; but even that carries little weight.
Euro Weakness - Temporarily Masked by Trading Conditions - Will Start to Show through Soon
If we were to measure the euro’s performance against its benchmark counterpart (the dollar), we could be led to believe that the fundamental backdrop changed very little. However, the inherent stability derived from the liquidity of this pair means this is a poor indicator for the actual health of the shared currency. A better measure is EURCHF or EURJPY. From these pairs, we can see the unabashed efforts to avoid the risk associated to the euro. And, this past week, the risk for this unit certainly increased. In addition to Portugal’s downgrade, Ireland’s necessitating taking Allied Irish under government control and the passage of the more stringent Greek budget; we were met Friday with speculation from the Greek media that officials are moving towards a debt restructuring when the immediate support of the EU/IMF bailout is set to expire.
British Pound Extends its Tentative Recovery Though Fundamental Reality Hard to Ignore
In the past two weeks, the British pound has plunged over 550 points against the dollar on what many attribute to the BoE’s efforts to talk down high CPI readings and the disappointing employment figures The fact that the currency dropped so quickly in otherwise quiet market conditions is remarkable and therefore likely warrant a correction. However, this may also be just a peak at a long-term adjustment to fundamentals…
Japanese Yen Will Respond to Predicament of Capped Government Spending and BoJ Intervention
Deflation and credit market troubles have persisted in Japan for over two decades now; so what is the probability that officials will be able to correct the problem now that global conditions are so taxing? Friday, the Cabinet Office reaffirmed the proposal to cap 2011 debt issuance at 44.3 trillion yen while it was suggested that the reserves for intervention would likely be boosted. It is difficult to see this currency’s strength.
Swiss Franc Stumbles a Second Day as the SNB Capitalizes on Investor Squaring
Perhaps the biggest mover in an otherwise quiet day, the Swiss franc put in for a remarkable drop Friday. However, the activity exhibited across the board was likely attributable to EURCHF specifically. While it may be easy to label the SNB’s comments that they are ready to act the catalyst for this move; it is more likely that a natural position squaring through this heavily oversold pair carried more weight.
New Zealand Dollar Likely to Give Back Post GDP Gains Next Week as Liquidity Stabilizes
The New Zealand dollar’s gains Thursday morning following the unexpected contraction in growth through the third quarter was exceptionally unusual. And, that hiccup is likely to weigh on the currency next week. Just as the market often closes technical gaps, a fundamental disconnect of this magnitude will almost certainly be reconciled. Consider, the first steps towards a recession will certainly curb future rate hikes.
Australian Dollar: Thin Speculative Interest Could Amplify any Risk Waves Next Week
One of the side effects of reduced participation in the markets (thin liquidity) is amplified volatility. This is good for scalpers; but probably not good for the Australian dollar. Becoming more deeply intertwined in carry interest, a lack of inherent stability via leveraged swings will unnerve this expensive currency. And, when risk appetite does finally correct, the Aussie dollar stands to lose the most – and the market knows this.
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**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar
ECONOMIC DATA
Next 24 Hours
Currency
GMT
Release
Survey
Previous
Comments
CNY
Leading Index (NOV)
101.57
Declined in the last 8 months.
JPY
23:50
Corporate Service Price (YoY) (NOV)
-1.2%
-1.2%
Fell YoY in last 25 months.
JPY
Small Business Confidence (DEC)
45.8
Sits at lowest level since March.
GBP
0:01
Hometrack Housing Survey (MoM) (DEC)
-0.8%
Home prices fell for a fifth month in November on lagging demand.
GBP
0:01
Hometrack Housing Survey (YoY) (DEC)
-1.1%
CNY
2:00
Industrial Profits (YTD) (YoY) (NOV)
55.0%
Electricity profits rose 120%.
JPY
4:00
Vehicle Production (YoY) (NOV)
-8.4%
Fell YoY for first time since 2009.
JPY
5:00
Housing Starts (YoY) (NOV)
4.9%
6.4%
Housing starts likely rose for a sixth month in November.
JPY
5:00
Annualized Housing Starts (NOV)
0.831M
0.813M
JPY
5:00
Construction Orders (YoY) (NOV)
-5.6%
Last annual gain was in May.
USD
15:30
Dallas Fed Manufacturing Activity (DEC)
17.0
16.2
Likely rose to an 8-month high.
Currency
GMT
Upcoming Events & Speeches
JPY
23:50
Bank of Japan Meeting Minutes
SUPPORT AND RESISTANCE LEVELS
CLASSIC SUPPORT AND RESISTANCE - 18:00 GMT
Currency
EUR/USD
GBP/USD
USD/JPY
USD/CHF
USD/CAD
AUD/USD
NZD/USD
EUR/JPY
GBP/JPY
Resist 2
1.3840
1.6420
89.00
1.0460
1.0922
1.0600
0.8230
127.60
146.05
Resist 1
1.3700
1.5910
86.00
1.0000
1.0750
1.0200
0.8000
120.00
140.00
Spot
1.3112
1.5441
82.88
0.9630
1.0076
1.0047
0.7493
108.68
127.98
Support 1
1.3000
1.5312
80.00
0.9500
0.9950
0.9600
0.6850
103.80
125.00
Support 2
1.2925
1.5186
75.00
0.9000
0.9700
0.9375
0.6585
100.00
119.00
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
14.4500
1.6755
8.7915
7.8165
1.4945
Resist 2
7.7500
5.7800
6.2750
Resist 1
13.8500
1.5931
8.3675
7.8075
1.4655
Resist 1
7.5800
5.6625
6.1150
Spot
12.3680
1.5470
6.7320
7.7817
1.2995
Spot
6.8607
5.6840
5.9692
Support 1
12.0500
1.4724
6.6950
7.7490
1.2750
Support 1
6.4500
5.2625
5.7030
Support 2
11.7200
1.3475
6.4300
7.7450
1.2500
Support 2
6.1250
5.1000
5.5200
INTRA-DAY PIVOT POINTS 18:00 GMT
Currency
EUR/USD
GBP/USD
USD/JPY
USD/CHF
USD/CAD
AUD/USD
NZD/USD
EUR/JPY
GBP/JPY
Resist 2
1.3177
1.5503
83.28
0.9689
1.0147
1.0072
0.7519
109.25
128.69
Resist 1
1.3144
1.5472
83.08
0.9660
1.0111
1.0060
0.7506
108.96
128.34
Pivot
1.3117
1.5445
82.97
0.9606
1.0081
1.0040
0.7485
108.77
128.08
Support 1
1.3084
1.5414
82.77
0.9577
1.0045
1.0028
0.7472
108.48
127.73
Support 2
1.3057
1.5387
82.66
0.9523
1.0015
1.0008
0.7451
108.29
127.47
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
1.3309
1.5598
83.86
0.9716
1.0210
1.0187
0.7585
110.32
129.67
Resist. 2
1.3260
1.5556
83.62
0.9685
1.0183
1.0152
0.7558
109.91
129.23
Resist. 1
1.3212
1.5513
83.38
0.9655
1.0156
1.0117
0.7531
109.51
128.78
Spot
1.3115
1.5428
82.90
0.9594
1.0101
1.0046
0.7477
108.71
127.89
Support 1
1.3018
1.5343
82.42
0.9533
1.0046
0.9975
0.7423
107.91
127.00
Support 2
1.2970
1.5300
82.18
0.9503
1.0019
0.9940
0.7396
107.51
126.55
Support 3
1.2921
1.5258
81.94
0.9472
0.9992
0.9905
0.7369
107.10
126.11
v
Written by: John Kicklighter, Currency Strategist for DailyFX.com
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DailyFX provides forex news on the economic reports and political events that influence the currency market.
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