Wednesday, January 5, 2011

Forex: Dollar Climbs a Second Day as a Natural Reversal Effort Offsets Disappointing FOMC Minutes

http://www.dailyfx.com/forex/fundamental/daily_briefing/session_briefing/daily_fundamentals/2011/01/05/Forex_Dollar_Climbs_a_Second_Day_as_a_Natural_Reversal.html





  • Dollar Climbs a Second Day as a Natural Reversal Effort Offsets Disappointing FOMC Minutes
  • Euro Puts in for an Uneven Performance as Traders Doubt Data, ECB Financing Progress
  • British Pound Surges on the First Action London Session with Help from Manufacturing
  • Japanese Yen Starting to Feel the Fundamental Pressure as Kan Hints at Higher Taxes
  • Australian Dollar Progresses a Stumble into a Possible Reversal While Risk Seems Steady
  • Canadian Dollar Moves Right Back to Parity against the Greenback without Conviction
Dollar Climbs a Second Day as a Natural Reversal Effort Offsets Disappointing FOMC Minutes
Tuesday was a highly unusual trading day for not only the US dollar but for the capital markets in general. Falling back on the normal fundamental drivers, it would seem that the backdrop activity should have been relatively steady. Instead, various assets and currency pairs were exceptionally volatile; and more interestingly, there was a remarkable divergence in the performance of markets that usually trade hand-in-hand. Looking first at our benchmark for investor sentiment, the S&P 500 spent the New York session retracing the sharp rally that opened the New Year. Under normal circumstances, this would denote a general move towards risk aversion. However, the conviction in this reversal was tepid at best considering the benchmark index would not trade below Monday’s low. Yet, if we expand our horizons, we note that oil and AUDUSD tumble through the day. Such a performance from two favored speculative assets would suggest a concerted effort at unwinding risky positioning. Yet, looking closer, we also note that the Japanese yen collapsed through the early morning – typifying a build in carry interest.
Such a mixed day could lead one to believe that fundamentals had descended into chaos. However, this confusion can be alleviated by untangling the performance of the various assets. The first thing to establish is that trading conditions are still abnormal. Liquidity has certainly improved since the end of December; but many long-term investors as well as short-term speculators are keeping to the sidelines until there is a clear and consistent vote on market direction through the coming month, quarter and year. With that in mind, we note that divergences can develop and volatility is still very high. More importantly, the larger fundamental trends (like underlying risk appetite) have not reengaged. That said, we look back to our benchmark for speculative interest – the S&P 500. The index was lower on the day; but it did not make the necessary effort to break the long-term bull trend. That would contribute to the tentative boost to the greenback against fundamentally troubled currencies like the euro and Japanese yen. That said, there was also a notable push from key counter-currencies like the yen and Australian dollar. The former was shaken by the mention of a tax hikes that could dampen the economic recovery while the latter is still suffering from the destructive effects of the nation’s worst flood in recent memory along with a marked drop in key data. So, after untangling this complicated scenario; what should we take away from the day’s developments? Market conditions are still distorted, the influences of government stimulus versus austerity will continue to press and trends are still flimsy. Therefore, cautious and skepticism are warranted on the dollar’s nascent advance.
While, as traders, our primary concern is fundamental trends impacting the market now; we should also keep an eye on developments that alter the long-term course of the currency market. That said, the market’s general projection for the dollar over the next six months via the $600 billion stimulus program seems to be accurately priced in. The minutes from the FOMC’s last monetary policy decision noted directly that though there were improvements in the economy, they were “not sufficient” to warrant a change in the asset-purchasing program. A change in the program before its maturity is highly unlikely barring an extreme change in the outlook; so don’t expect this to have a marked impact on the dollar besides the constant weight of regular Treasury purchases. Looking ahead to tomorrow, we will get in the NFPs spirit with the ADP report release.
Euro Puts in for an Uneven Performance as Traders Doubt Data, ECB Financing Progress
It was difficult to get an accurate read on the euro Tuesday. The currency slipped against the US dollar and British pound but rallied against the Swiss franc. That in itself is a contradiction to accepted risk appetite correlations. Once again, this can be partially attributed to the unusual market conditions we are still facing as well as the data and news for the day. On the docket, we note that German unemployment rose for the first time since June of 2009 (though it doesn’t really alter the larger trend) while the initial Euro Zone CPI reading hit an October 2008 high (though the ECB is likely to take more interest in the later-released core data). On the headlines, the ECB announced it had successfully sterilized its cumulative government bond purchases through last week; but skepticism certainly remains surrounding European financials.
British Pound Surges on the First Action London Session with Help from Manufacturing
With London back online, sterling traders had a round of notable event risk to take stock of. The near eight-month high in mortgage approvals was worth a footnote; but it was the manufacturing activity PMI reading that really struck a chord with pound bulls. The strongest reading in 16 years suggests that – like the US – the United Kingdom may fall back on a factory-led recovery to sustain it.
Japanese Yen Starting to Feel the Fundamental Pressure as Kan Hints at Higher Taxes
It is a rare occasion when Japanese fundamentals actually alter the course of the yen; but the currency certainly felt the aftershocks of an announcement by Finance Minister Kan. The policy maker said it was inevitable that the government must debate the current course of consumption tax and social security to rein in its deficits. Will an economic slump finally remind the market that the future looks dim for Japan?
Australian Dollar Progresses a Stumble into a Possible Reversal While Risk Seems Steady
The Australian dollar was one of the more active currencies for the day – fundamentally rather than technically. The disastrous effects of the nation’s flood have forced many companies to break contracts and create a very real concern for growth. Yet, where this may be temporary, the fourth consecutive drop in factory activity presents a more engrained trouble with high interest rates and a high currency.
Canadian Dollar Moves Right Back to Parity against the Greenback without Conviction
When there isn’t a clear foundation of fundamental support for a currency (be it growth, interest rates, speculative conviction or any other overwhelming driver), trends are quickly snuffed out. That seems to be the case for USDCAD; which has quickly retraced from its bearish break below the closely-watched parity level. This is already a difficult pair on which to establish trends and a lack of risk trend is further complicating.
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ECONOMIC DATA
Next 24 Hours
Currency
GMT
Release
Survey
Previous
Comments
JPY
23:50
Monetary Base (YoY) (DEC)
7.6%
Not translating into inflation
AUD
1:00
HIA New Home Sales (MoM) (NOV)
6.1%
Fell 0.2% in Nov after surging in Oct
CNY
2:30
HSBC Services PMI (DEC)
53.1
Manufacturing is more important
JPY
5:00
Vehicle Sales (YoY) (DEC)
-30.7%
Down as subsidies have expired
EUR
8:45
Italian Purchasing Manager Index Services (DEC)
53.5
54.5
Service sector is expanding in Europe, but the recovery continues to be led by manufacturing
EUR
8:50
French Purchasing Manager Index Services (DEC F)
54.1
54.1
EUR
8:55
German Purchasing Manager Index Services (DEC F)
58.3
58.3
EUR
9:00
Euro-Zone Purchasing Manager Index Composite (DEC F)
55
55
EUR
9:00
Euro-Zone Purchasing Manager Index Services (DEC F)
53.7
53.7
GBP
9:30
UK PMI Construction (DEC)
51
51.8
Weak housing keeps activity muted
GBP
9:30
Official Reserves (Changes) (DEC)
-$728M
EUR
10:00
Euro-Zone Industrial New Orders (YoY) (OCT)
18.4%
13.5%
Recovering from last year's 15% year-over-year decline in October
EUR
10:00
Euro-Zone Industrial New Orders s.a. (MoM) (OCT)
1.5%
-3.8%
EUR
10:00
Euro-Zone Producer Price Index (MoM) (NOV)
0.3%
0.4%
CPI is considered more important from a monetary policy standpoint
EUR
10:00
Euro-Zone Producer Price Index (YoY) (NOV)
4.4%
4.4%
USD
12:00
MBA Mortgage Applications (DEC 31)
-18.6%
Plunging as long-term rates rise
USD
12:30
Challenger Job Cuts (YoY) (DEC)
ADP not a consistent indicator of government nonfarm payrolls report
USD
13:30
ADP Employment Change (DEC)
100K
93K
CAD
13:30
Industrial Product Price (MoM) (NOV)
0.3%
0.5%
Prices are creeping higher on commodity inflation
CAD
13:30
Raw Materials Price Index (MoM) (NOV)
2.0%
1.7%
USD
15:00
ISM Non-Manufacturing Composite (DEC)
55.6
55
Would be highest since April 2006
USD
15:30
DOE U.S. Crude Oil Inventories (DEC 31)
-1258K
Inventories have been plunging on elevated demand and year-end tax considerations
USD
15:30
DOE U.S. Gasoline Inventory (DEC 31)
-2316K
USD
15:30
DOE U.S. Distillate Inventory (DEC 31)
+243K
Currency
GMT
Upcoming Events & Speeches
USD
18:00
Hoenig Speaks at The Central Exchange in Kansas City
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
1.0000
1.0922
1.0600
0.8230
127.60
146.05
Resist 1
1.3700
1.5910
86.00
0.9735
1.0750
1.0200
0.8000
120.00
140.00
Spot
1.3301
1.5584
82.04
0.9494
0.9991
1.0052
0.7672
109.12
127.84
Support 1
1.3000
1.5312
80.00
0.9300
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
7.1750
7.8165
1.4945
Resist 2
7.7500
5.7800
6.2750
Resist 1
13.8500
1.5931
6.7650
7.8075
1.4655
Resist 1
7.5800
5.6625
6.1150
Spot
12.2430
1.5419
6.6780
7.7694
1.2880
Spot
6.7233
5.6029
5.8644
Support 1
12.0500
1.4724
6.4000
7.7490
1.2750
Support 1
6.4500
5.2625
5.7030
Support 2
11.7200
1.3475
5.9200
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
1.3483
1.5753
82.65
0.9636
1.0098
1.0227
0.7786
110.94
129.85
Resist 1
1.3392
1.5668
82.34
0.9565
1.0044
1.0139
0.7729
110.03
128.85
Pivot
1.3342
1.5562
81.98
0.9446
0.9981
1.0084
0.7685
109.33
127.60
Support 1
1.3251
1.5477
81.67
0.9375
0.9927
0.9996
0.7628
108.42
126.60
Support 2
1.3201
1.5371
81.31
0.9256
0.9864
0.9941
0.7584
107.72
125.35
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
1.3492
1.5762
83.01
0.9615
1.0100
1.0200
0.7788
110.77
129.65
Resist. 2
1.3444
1.5718
82.77
0.9584
1.0073
1.0163
0.7759
110.36
129.20
Resist. 1
1.3397
1.5673
82.52
0.9554
1.0046
1.0126
0.7730
109.95
128.75
Spot
1.3301
1.5584
82.04
0.9494
0.9991
1.0052
0.7672
109.12
127.84
Support 1
1.3205
1.5495
81.56
0.9434
0.9936
0.9978
0.7614
108.29
126.93
Support 2
1.3158
1.5450
81.31
0.9404
0.9909
0.9941
0.7585
107.88
126.48
Support 3
1.3110
1.5406
81.07
0.9373
0.9882
0.9904
0.7556
107.47
126.03
v
Written by: John Kicklighter, Currency Strategist for DailyFX.com
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