http://www.dailyfx.com/forex/fundamental/daily_briefing/session_briefing/daily_fundamentals/2011/01/04/Forex_Dollar_Recovery_Hits_a_Road_Block_as_Data_Prints_Strong_and_Risk_Appetite_Rallies.html
- Dollar Recovery Hits a Road Block as Data Prints Strong and Risk Appetite Rallies
- Euro Suspiciously Strong as Updated Manufacturing Data Distracts from Financial Conditions
- British Pound Set for a Return to Volatility as Markets Open, Calendar Fills Out
- Japanese Yen Trend Remarkably Divergent from Standard Funding Currency Trends
- Australian Dollar takes its First Steps Toward Correction – On a Day Risk Soars…
- Swiss Franc Relinquishes some Strength as Euro Steadies Itself
Dollar Recovery Hits a Road Block as Data Prints Strong and Risk Appetite Rallies
Though it was not a dramatic change from the circumstances we were experiencing through the end of last week, the US dollar showed an exceptional level of volatility through the opening 24 hours of the trading week. Now, the trading community must determine whether this is a sign that the New Year has encourage a resolution of increased activity amongst its participants or whether trading conditions are simply still distorted. Looking at the backdrop for trading Monday, there is an argument to be made that the level of volatility in the opening trading day of the year has been leveraged by a reduction in liquidity. The absence of Tokyo, London, Australian and Canadian markets Monday would certainly give credence to this assessment. On the other hand, the US-based markets showed a marked increase in activity and a clear direction on one of the favored fundamental themes: risk appetite trends. Looking at activity levels first, we note that the S&P 500 reported its highest reading for volume (approximately 850 million shares) since December 17th. More interesting to those looking to establish conviction and thereby a trend via the US dollar and many other currencies and assets was the 1.1 percent surge from the benchmark equities index – the biggest in a month and a push that would subsequently send it to its highest level in over two years.
Yet, despite the usually implications of a climb in risk appetite trends translating into a drop in the standard safe havens, the greenback seemed to perform despite the blowing fundamental headwinds. It is important to look at the intraday swings in the dollar and match them up to performance of its fellow risk-based assets. Doing so, we find that the dollar’s initial rally likely had little to do with the swell in investor optimism. As liquidity returned for the first time this trading week in the early Asian session, the world’s reserve currency took off to establish the day’s range before European traders could really get their bearings. Though, despite this drive, the Hang Seng Index (a good proxy for risk appetite – especially as a benchmark for China) was also very strong through the day. As the day wore on, the greenback would settle back from its rally through the European session. Assigning even partial responsibility for the currency’s pace and performance to risk appetite and the influence it may have had on speculative interests (and thereby weigh on a dollar that is considered a safe haven and funding currency) is a stretch. Through the opening rally of the US equities market and the strong showing from the ISM manufacturing report, the dollar was steadily marching higher. Does this mean the markets have completely abandoned their expectations for fundamental guidance? No. What this does mean is that a recovery in liquidity and speculative interest has just as distorting an influence as its exodus.
Going back to the top scheduled event risk for the day, there is something to be said about the strong December reading of the ISM manufacturing report. Though factory output accounts for an estimated 11 percent of US GDP (according to Bloomberg), its trend invariably offers a sense of strength for the broader economy. The indicator printed more or less in line with expectations at 57.0; but it was the details that were truly encouraging. The production figure rose 5.7 percentage points while new orders rose 4.3 points. And, while the employment component slipped 1.8 points, it was still well in expansionary territory. All told, this indicator paints the picture of a robust sector for an economy that desperately needs inspiration. As this week wears on, keep an eye on risk trends; but watch out for stimulus flows as well.
Related:Discuss the Dollar in the DailyFX Forum, John’s Analyst Picks: Trading Conditions are Still Distorted but a EURUSD Still Provides
Euro Suspiciously Strong as Updated Manufacturing Data Distracts from Financial Conditions
The euro marked a remarkable intraday recovery through Monday’s active trading session. Through the opening hours of the day, the shared currency plummeted; but recouped those losses by the early European trading session. This was a shared performance (to one degree or another) for most of the euro-based crosses – suggesting that, though it may have been encouraged by the dollar, it was generally the responsibility of the currency itself. Looking for a catalyst, a lose sense of confidence can be found in the positive revisions in the PMI manufacturing figures. Final readings for factory activity showed a marked improvement for the entire Euro Zone. That said, the ECB’s announcement of only 164 million euros in government bonds likely carried more sway as a means for cautious optimism in financial conditions.
British Pound Set for a Return to Volatility as Markets Open, Calendar Fills Out
Monday was a surprisingly active day for the British pound thanks to volatile counterparts. With London still closed for the holiday, there was limited participation in a sterling-based rally. That said, the upcoming session will bring with it the return of a large segment of traders as well as a round of notable event risk. Mortgage approvals, manufacturing activity and consumer credit are all important economic updates.
Japanese Yen Trend Remarkably Divergent from Standard Funding Currency Trends
If we take a look at the performance of the Japanese yen over the past few months and match it up to the path that the S&P 500 has taken (a benchmark for risk trends), it is remarkable to note that the negative correlation has been severely curbed. A comparison of S&P 500 and GBPJPY drives it home. Is this a sign of a fundamental change in market flows or an unnatural distortion somewhere? Most likely the latter.
Australian Dollar takes its First Steps Toward Correction – On a Day Risk Soars…
With an economic and interest rate outlook that is the envy of the trading world; it should strike as very unusual that AUDUSD has tipped into an early bearish correction on a day the S&P 500 has surged. This is likely another sign that a return of liquidity is distorting capital flows. Alternatively, it could also reflect a general worry in China’s efforts to cool its economy and even the impact of severe national floods.
Swiss Franc Relinquishes some Strength as Euro Steadies Itself
Though it may not be founded on the most stable of fundamental developments; where the euro finds a measure of stability, it will curb the demand for the Swiss franc as a necessary hedge. So, while the euro was able to recover some of its dollar-based losses and climb against other pairs; EURCHF was hesitant to truly retrace. This is yet another macro sign that risk trends are not yet fully developed.
**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 |
| AUD | 22:30 | AiG Performance of Manufacturing Index (DEC) | - | 47.6 | Fell to 46.3, remains in contraction |
| JPY | 23:50 | Loans & Discounts Corp (YoY) (NOV) | - | -4.50% | Stayed steady in Nov. at -4.5% |
| AUD | 5:30 | RBA Commodity Price Index Austrailan Dollar (DEC) | - | 92.7 | Trend is clearly higher as commodities surge |
| AUD | 5:30 | RBA Commodity Index SDR (YoY) (DEC) | - | 44.4 | |
| EUR | 7:45 | French Consumer Confidence Indicator (DEC) | -31 | -32 | Would be highest reading since 07 |
| EUR | 8:55 | German Unemployment Change (DEC) | -15K | -9K | Unemployment rate is sitting at a 19-year low |
| EUR | 8:55 | German Unemployment Rate s.a. (DEC) | 7.50% | 7.50% | |
| GBP | 9:30 | Purchasing Manager Index Manufacturing (DEC) | 57.2 | 58 | Over 50 represents expansion |
| GBP | 9:30 | Net Consumer Credit (NOV) | 0.2B | 0.3B | Credit growth slowed dramatically in 2009 and hasn't recovered |
| GBP | 9:30 | Net Lending Sec. on Dwellings (NOV) | 0.7B | 1.0B | |
| GBP | 9:30 | Mortgage Approvals (NOV) | 46.5K | 47.2K | Essentially unchanged through 2010 |
| GBP | 9:30 | M4 Money Supply (MoM) (NOV) | - | 0.70% | Falling from elevated levels; was up 9.8% year-over-year in November 2009 |
| GBP | 9:30 | M4 Money Supply (YoY) (NOV) | - | -0.70% | |
| GBP | 9:30 | M4 Ex OFCs 3M Annualised (NOV) | - | 2.90% | |
| EUR | 10:00 | Euro-Zone Consumer Price Index Estimate (YoY) (DEC) | 2.00% | 1.90% | Would be highest since Nov. 2008 |
| EUR | 10:00 | Italian Consumer Price Index (NIC incl. tobacco) (MoM) (DEC P) | 0.20% | 0.00% | Inflation trend follows extremely closely with Euro-Zone figure, making this data unimportant |
| EUR | 10:00 | Italian Consumer Price Index (NIC incl. tobacco) (YoY) (DEC P) | 1.70% | 1.70% | |
| EUR | 10:00 | Italian Consumer Price Index - EU Harmonized (MoM) (DEC P) | 0.20% | 0.00% | |
| EUR | 13:30 | Italian Consumer Price Index - EU Harmonized (YoY) (DEC P) | 1.90% | 1.90% | |
| USD | 15:00 | Factory Orders (NOV) | -0.20% | -0.90% | 2nd decline after rising 3% in Sept |
| USD | 19:00 | Fed Releases Minutes from Dec. 14 FOMC Meeting | - | - | Dovish stance to be maintained |
| USD | 22:00 | ABC Consumer Confidence (JAN 2) | - | -44 | Other confidence gauges have fallen |
| USD | 22:00 | Domestic Vehicle Sales (DEC) | 9.20M | 9.27M | Domestic sales were over 13M pre-recession |
| USD | 22:00 | Total Vehicle Sales (DEC) | 12.30M | 12.26M | |
| Currency | GMT | Upcoming Events & Speeches | |||
| - | - | - |
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 | 1.3364 | 1.5487 | 81.67 | 0.9335 | 0.9919 | 1.0186 | 0.7751 | 109.14 | 126.48 |
| 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 | 12.2494 | 1.5570 | 6.6194 | 7.7691 | 1.2840 | Spot | 6.6995 | 5.5774 | 5.8276 | |
| 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 | 1.3481 | 1.5653 | 82.24 | 0.9410 | 0.9984 | 1.0251 | 0.7805 | 110.21 | 127.53 |
| Resist 1 | 1.3422 | 1.5570 | 81.96 | 0.9372 | 0.9952 | 1.0218 | 0.7778 | 109.67 | 127.01 |
| Pivot | 1.3337 | 1.5502 | 81.44 | 0.9347 | 0.9920 | 1.0196 | 0.7758 | 108.74 | 126.39 |
| Support 1 | 1.3278 | 1.5419 | 81.16 | 0.9309 | 0.9888 | 1.0163 | 0.7731 | 108.20 | 125.87 |
| Support 2 | 1.3193 | 1.5351 | 80.64 | 0.9284 | 0.9856 | 1.0141 | 0.7711 | 107.27 | 125.25 |
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 | 1.3564 | 1.5666 | 82.66 | 0.9458 | 1.0027 | 1.0335 | 0.7867 | 110.82 | 128.32 |
| Resist. 2 | 1.3514 | 1.5621 | 82.42 | 0.9427 | 1.0000 | 1.0297 | 0.7838 | 110.40 | 127.86 |
| Resist. 1 | 1.3464 | 1.5576 | 82.17 | 0.9396 | 0.9973 | 1.0260 | 0.7809 | 109.98 | 127.40 |
| Spot | 1.3364 | 1.5487 | 81.67 | 0.9335 | 0.9919 | 1.0186 | 0.7751 | 109.14 | 126.48 |
| Support 1 | 1.3264 | 1.5398 | 81.17 | 0.9274 | 0.9865 | 1.0112 | 0.7693 | 108.30 | 125.56 |
| Support 2 | 1.3214 | 1.5353 | 80.92 | 0.9243 | 0.9838 | 1.0075 | 0.7664 | 107.88 | 125.10 |
| Support 3 | 1.3164 | 1.5308 | 80.68 | 0.9212 | 0.9811 | 1.0037 | 0.7635 | 107.46 | 124.64 |
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Written by: John Kicklighter, Currency Strategist for DailyFX.com
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