FOREX: Dollar Posts an Aggressive Recovery as Thin Trading Conditions Work Both Ways

http://www.dailyfx.com/forex/fundamental/daily_briefing/session_briefing/daily_fundamentals/2010/12/29/FOREX_Dollar_Posts_an_Aggressive_Recovery_as_Thin_Trading_Conditions_Work_Both_Ways.html

• Dollar Posts an Aggressive Recovery as Thin Trading Conditions Work Both Ways
• Euro Financial Stability Hits another Snag as the ECB Fails to Sterilize Bond Purchases
• Japanese Yen: Finance Minister Noda Threatens ‘Bold Action’ on Exchange Rates
• British Pound Suffers a Sharp Loss before UK Liquidity Returns
• Australian and New Zealand Dollars Advance as Risk Appetite Funnels into Commodities, Carry
• Swiss Franc Just off a Record High against the Euro as Investors Crave a Specific Brand of Safety

Dollar Posts an Aggressive Recovery as Thin Trading Conditions Work Both Ways

In the opening hours of Tuesday’s trading session, the greenback was already pitched into a meaningful decline. Though it may seem a tidy explanation to simply associate the initial decline on the poor performance of the US economic data scheduled for release on the day; in reality the slide occurred well before the event risk hits the wires. Neither does the traditional argument of risk appetite trends hold water in explaining this early slide. The Shanghai Composite, Hang Seng and Nikkei 225 stock indexes were all lower through their active trading sessions, representing a drop in speculative interest. Furthermore, heading into the European and US trading sessions, risk appetite never really found its footing.

If the fundamental standard bearers for price action can’t take responsibility for the largest dollar swing since the 17th, from where did this aggressive move originate? Instead of looking for an exogenous source of activity, we should look at the market itself. The market for the dollar (like any other asset) is a reflection of the crowd. Sure, specific catalysts can unify traders’ expectations and positioning (thereby establishing a trend); but an imbalance in positioning itself can be the genesis of a meaningful move – especially in thin market conditions. Once again, we return to the lull in trading conditions. As a benchmark for the broader markets, volume on the S&P 500 was only slightly higher Tuesday than the 14-year low (when shortened trading sessions are ignored) set the previous day. Without speculative market depth beyond a nascent trend, it will be exceptionally difficult to support trends. And therefore, sharp moves like the one we witnessed yesterday will be exposed to quick profit taking. It will be interesting to see whether the return of UK, Canadian, Australian and New Zealand liquidity (coming off of their Christmas / Boxing Day holidays) will leverage price action; but in reality, their influence will not likely override the anchored sentiment in the US.

Looking for specific fundamental activity in the US session Tuesday, the S&P/Case-Shiller home prices index and Conference Board’s consumer sentiment survey were notable economic releases. Given the recent state of market participation, the immediate impact on price action was limited. Nevertheless, the data is important to defining the fundamental outlook over the coming months. The December confidence report is the more influential indicator as consumers represent near three quarters of economic activity in the world’s largest economy. That said, the unexpected drop in the headline reading (to 52.5) strikes a disconcerting contrast to the positive trends in personal spending, initial jobless claims and even the six-month high for the University of Michigan confidence report. In the useful breakdown, we can see that employment conditions were the distressing for Americans. In fact, the percentage of respondents reporting jobs were hard to find rose to its highest level since February. If the US is to produce a steady recovery (and not a flash-burn improvement fueled by temporary stimulus); consumer spending must find traction. That said, the Mastercard Advisors Spending Pulse report reported holiday retail sales of $584 in the period between November 5th and December 24th today. The best holiday shopping season in five years, we have conflicting data to balance forecasts. The same may not be true of the problem the housing market poses the US economy. Though the S&P/Case-Shiller report is a lagging the largest decline in a year nonetheless supports the general assessment that the housing sector is expected to weigh further on the economy going forward. The question here is whether this major component of the economy will just be an impediment or spawn another crisis.

Related: Discuss the Dollar in the DailyFX Forum, John’s Analyst Picks: It’s Market Conditions vs Tempting Patterns for GBPUSD, GBPJPY

Euro Financial Stability Hits another Snag as the ECB Fails to Sterilize Bond Purchases

On Monday, the ECB announced a larger purchase of government bonds (1.121 billion euros worth) through the previous week suggesting Portugal’s downgrade, Ireland’s absorption of another bank and budget struggles in Greece were closing these nations out of the market. Yet these troubles are well known. The next step toward financial distress is the central bank’s inability to sterilize all of its bond purchases - which happened Tuesday when the policy group could only cover 60.8 billion euros of the 73.5 billion euros on their books. As with the other developments of the past few weeks, this is a development to keep in the back of our mind. Wednesday, the focus is inflation.

Japanese Yen: Finance Minister Noda Threatens ‘Bold Action’ on Exchange Rates

It used to be that threats from some policy official or group to intervene in the FX market led traders to panic. This isn’t the case nowadays after the markets have acclimated to large interventions from Japan, Switzerland, New Zealand and other countries. Therefore, Japanese Finance Minister Noda’s warnings of “bold action” on “one-sided” moves fall on disinterested ears.

British Pound Suffers a Sharp Loss before UK Liquidity Returns

Aside from the dollar, the British pound was perhaps the biggest mover on the day. The sterling plunged across the board Tuesday – that is after morning rallies against the euro and dollar. And, just like the dollar, there wasn’t an easily highlighted source for this drive. We will see whether this level of activity is augmented tomorrow or a trend takes root with UK banks back online after the extended holiday.

Australian and New Zealand Dollars Advance as Risk Appetite Funnels into Commodities, Carry

If we were to rely on the equities market as our gauge for risk appetite, it would seem that sentiment was anemic Tuesday. However, a very clear bid was established for the Aussie and Kiwi dollars. Taking risk in every asset class across the board denotes a high level of risk appetite; but a bid in carry trades is also a sign of investor optimism. It just so happens, the benefit of stability raises the appeal of regular yield income.

Swiss Franc Just off a Record High against the Euro as Investors Crave a Specific Brand of Safety

Though most currencies can be split between funding and carry roles; that does not mean they will simply respond to sentiment trends. While the dollar (a safe haven prized for liquidity) was struggling to maintain its equilibrium; the Swiss franc surged Tuesday. This is likely a direct reflection of the currency’s role as a safe haven specifically for European capital – a meaningful function given the ECB’s failed sterilization.

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ECONOMIC DATA

Next 24 Hours

Currency	GMT	Release	Survey	Previous	Comments
EUR		German Consumer Price Index (MoM) (DEC P)	0.9%	0.1%	German inflation accelerated more than forecast in November, after food and energy prices rose. Rising prices have been caused by a strong German economy coupled with low ECB interest rates.
EUR		German Consumer Price Index (YoY) (DEC P)	1.5%	1.5%
EUR		German Consumer Price Index - EU Harmonised (MoM) (DEC P)	0.9%	0.1%
EUR		German Consumer Price Index - EU Harmonised (YoY) (DEC P)	1.6%	1.6%
EUR	9:00	Euro-Zone M3 s.a. (3M) (NOV)	1.2%	1.1%	The rate of growth in M3, which the ECB uses to gauge future inflation, rose 1% year-over-year in October.
EUR	9:00	Euro-Zone M3 s.a. (YoY) (NOV)	1.6%	1.0%
GBP	9:30	Bank of England Housing Equity Withdrawal (Pounds) (3Q)	-6.0B	-6.2B	Negative reading in the past 9 quarters.
CHF	10:30	KOF Swiss Leading Indicator (DEC)	2.1	2.12	November reading was lowest in 7 months.

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	1.3113	1.5372	82.40	0.9521	0.9997	1.0097	0.7550	108.05	126.66
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	12.3849	1.5617	6.6680	7.7802	1.2993		Spot	6.8720	5.6850	5.9579
Support 1	12.0500	1.4724	6.6350	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	1.3342	1.5577	83.40	0.9693	1.0112	1.0208	0.7635	110.30	128.87
Resist 1	1.3227	1.5474	82.90	0.9607	1.0055	1.0152	0.7593	109.17	127.76
Pivot	1.3161	1.5410	82.36	0.9521	1.0015	1.0097	0.7542	108.40	126.95
Support 1	1.3046	1.5307	81.86	0.9435	0.9958	1.0041	0.7500	107.27	125.84
Support 2	1.2980	1.5243	81.32	0.9349	0.9918	0.9986	0.7449	106.50	125.03

INTRA-DAY PROBABILITY BANDS 18:00 GMT

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Currency	EUR/USD	GBP/USD	USD/JPY	USD/CHF	USD/CAD	AUD/USD	NZD/USD	EUR/JPY	GBP/JPY
Resist. 3	1.3305	1.5541	83.37	0.9642	1.0106	1.0240	0.7660	109.70	128.49
Resist. 2	1.3257	1.5498	83.13	0.9612	1.0079	1.0204	0.7632	109.29	128.03
Resist. 1	1.3209	1.5456	82.88	0.9581	1.0051	1.0168	0.7605	108.88	127.57
Spot	1.3113	1.5372	82.40	0.9521	0.9997	1.0097	0.7550	108.05	126.66
Support 1	1.3017	1.5288	81.92	0.9461	0.9943	1.0026	0.7495	107.22	125.75
Support 2	1.2969	1.5246	81.67	0.9430	0.9915	0.9990	0.7468	106.81	125.29
Support 3	1.2921	1.5203	81.43	0.9400	0.9888	0.9954	0.7440	106.40	124.83

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Written by: John Kicklighter, Currency Strategist for DailyFX.com

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