Forex: Dollar Closes Week at Six Month High, FOMC and GDP Ahead

 

Dollar Closes Week at Six Month High, FOMC and GDP Ahead

Euro: LTRO Repayments a Bullish Factor Until Banks Need Funding

British Pound Holds Fast in Face of UK 4Q GDP Path to Recession

Japanese Yen Closes Incredible 11 Week Rally – Record Bullish Move

New Zealand Dollar Reaction to CPI Data Sets Up Interesting RBNZ Decision

Australian Dollar Deviates from Risk Trends

Gold Sells Off for a Third Day, LTRO Spells Stimulus Reduction

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Dollar Closes Week at Six Month High, FOMC and GDP Ahead

Despite EURUSD’s final move through the end of this past week to clear 1.3400 and close at the highest level in 11 months, the dollar was rather strong. Over the same period, the greenback posted notable gains against the Japanese yen, British pound, Australian and Canadian dollars (it’s only meaningful losses were at the hands of the Euro and its counterpart Swiss franc). In turn, the Dow Jones FXCM Dollar Index (ticker = USDollar) ensured its own six-month high through the Friday’s close. This high alongside the US equity markets’ own outperformance to multi-year highs draws a stark contrast between speculative interests and the safe haven currency. This is a disparity unlikely to last.

Over the coming week, there is a distinct possibility that underlying sentiment generates its own friction and subsequently drives risk trends and the reserve dollar back into opposition of each other. Yet, we will also have a round of meaningful data that can help accommodate such a change as well. From the US docket, the top listing for systemic impact is the Federal Open Market Committee’s (FOMC) rate decision. It is unlikely that we are in for a dramatic policy change considering the central bank had just affirmed monthly purchases of $85 billion in Treasuries and mortgage backed securities (MBS) at its previous meeting. However, the market is sensitive to nuance. In the previous minutes, we learned that there was debate as to when the stimulus effort could be reduced and closed. This timing will be even more important given the recent reduction in theEurozone’s stimulus programs (more on that below). More stimulus means higher money supply and risk – both USD negative.

From the more traditional stock of market-movers, the US docket also holds the 4Q GDP release and January nonfarm payrolls (NFPs). The growth reading comes out the same day as the Fed decision for a competing effort for top fundamental theme. This past week, downgrades in IMF growth forecasts reminded the markets that output has been notable absent in the market’s scramble for more risk (a side effect of stimulus). Should the world’s largest economy offer an unexpectedly, dire reading; it may rouse the market to this meaningful disconnect. Alternatively, it could also lengthen the Fed’s support. The NFPs, will offer less influence on sentiment and instead carry more of a monetary policy sway. The Fed has said it will keep its ultra-loose policy in place until 6.5 percent unemployment and/or 2.5 percent CPI is achieved.

Euro: LTRO Repayments a Bullish Factor Until Banks Need Funding

The Euro-area had embarked upon fiscal austerity long ago. Now it seems that there is also an element of financial austerity in the region as well. This past Friday, European banks that had received funds through the first of the ECB’s Long-Term Refinancing Operation (LTRO) stimulus program announced their intention to pay back the three-year loans early – they can repay starting a year after they were issued. According to the central bank, 278 firms would repay €137.2 billion of the capital. This was modestly larger than the consensus, which was the primary catalyst to EURUSD’s rally through 1.3400.

A withdrawal of stimulus contradicts the approach taken by the ECB’s largest counterparts. In the FX market, that is a boon for the currency. On the other hand, there are downsides to this development as well. The downside of banks giving up their liquidity is that they have less buffer to adverse shocks going forward. EU Commissioner Rehn stated this past week that financing is the region’s greatest problem moving forward and Moody’s said Eurozone banks need more cash. A more subtle change to consider, this shift is now largely priced in. Less relief rally ahead.

British Pound Holds Fast in Face of UK 4Q GDP Path to RecessionDespite the disappointing showing from the UK economic docket through the final trading day of this past week, the British pound showed considerable strength. Through the fourth quarter, the troubled economy shrank 0.3 percent – three times the consensus forecast – which led the annual pace of activity to stagnate. This stands as a cautionary tale for other countries that austerity does have a detrimental impact on the economy. If the BoE doesn’t act to offset the fiscal pain going forward, the sterling can find itself at the bottom of the pile.

Japanese Yen Closes Incredible 11 Week Rally – Record Bullish Move

USDJPY broke a record with this past week’s close. While the rebound for the pair through the second half of the week to a two-and-a-half-year high was impressive enough, the fact that such a move secured an 11th consecutive week rally was far more so. There is no precedence for such a consistent run going back to when the gold standard was dropped back in 1971. This move is quite clearly a yen depreciation drive as it is showing across the board. Japanese policy officials would be more than happy to keep the currency sliding, but their tools are spent for now. With the 13 trillion-per-month stimulus effort not starting until 2014, the crosses are exposed to any adverse risk trend developments.

New Zealand Dollar Reaction to CPI Data Sets Up Interesting RBNZ Decision

The week before last, the New Zealand dollar took a sizable tumble when the country’s statistical group reported a 0.2 percent drop in 4Q consumer inflation (CPI) that kept the annual figure to 0.9 percent. Well below the Reserve Bank of New Zealand’s (RBNZ) target, this threatened the latent hawkish lean for the high-yield currency. How much so? We will find out Wednesday at the rate decision.

Australian Dollar Deviates from Risk Trends

The Australian dollar took a tumble through the final trading day of this past week despite a consistent advance from the S&P 500 and even a stabilization of the Risk-Reward Index. In other words, this prominent carry trade currency is balking positive risk trends. The softening of interest rate forecasts likely carries some responsibility, but growth concern and possibly a reversal of ‘reserve’ capital flows likely guided this move.

Gold Sells Off for a Third Day, LTRO Spells Stimulus Reduction

With the 0.6 percent drop through Friday, gold closed out a three-day decline. The precious metal’s bane this past week was a shift away from stimulus – an effort that devalues currencies and leverages the value of a hard asset like gold. Most notably, the passage of more time on the US debt ceiling and European banks’ repayment of some of its LTRO loans bolsters ‘fiat’ assets. The Fed may make up for it next week though.

**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

1:30

CNY

Industrial Profits YTD YoY

3.0%

Steadily increased from 6 month low of -3.1% on 8/2012

9:30

NZD

Performance Services Index

54.1

6 year average of 52.4

11:50

JPY

Corp Service Price Index (YoY)

-0.4%

Has remained in negative territory since 5/2012

12:01

GBP

Hometrack Housing Survey (MoM)

-0.1%

Has steadily remained at -0.10% since 7/2012

12:01

GBP

Hometrack Housing Survey (YoY)

-0.3%

Continually increased from -3.9% on 6/2011

9:00

EUR

Euro-Zone M3 s.a. 3 mth ave.

3.4%

Grown by 3.6% since a 3 year low of -0.02% on 1/2010

9:00

EUR

Euro-Zone M3 s.a. (YoY)

3.9%

3.8%

Has not broken 4% since 4/09

9:00

EUR

Italian Consumer Confidence Ind. s.a

86.1

85.7

Suffered a sharp decrease from 102.1 on 6/11

10:00

EUR

Italian Hourly Wages (MoM)

0.1%

Exhibits extreme volatility

10:00

EUR

Italian Hourly Wages (YoY)

1.6%

5 year average of 2.4%

13:30

USD

Durable Goods Orders

1.9%

0.7%

Volatile 5 year range between 13.9% and -14.3%

13:30

USD

Durable Goods Ex Transportation

0.8%

1.6%

Excludes transportation durable goods in order to decrease volatility

13:30

USD

Durable Goods Cap Goods Orders Nondef Ex Air

-1.5%

2.7%

Shows extreme volatility without seasonal adjustment

13:30

USD

Durable Goods Cap Goods Ship Nondef Ex Air

1.8%

Correlated with orders, though less volatile in movements

15:00

USD

Pending Home Sales MoM

0.4%

1.7%

Remained positive over the last 3 months

15:00

USD

Pending Home Sales YoY

8.9%

Average of 11.37% since 5/11

15:30

USD

Dallas Fed Manf. Activity

6.8

1 year high of 17.8 and low of -13.2

21:45

NZD

New Zealand Trade Balance

-700M

Generally falls into negative territory during 2nd half of year

21:45

NZD

New Zealand Exports

3.81B

Remained above $3.0B since 8/09

21:45

NZD

New Zealand Imports

4.51B

Remained above $3B since 2/10

21:45

NZD

New Zealand Trade Balance 12 Mth YTD

-1457M

Stuck in negative territory since 3/12, follwing two years positive

23:00

AUD

Conference Board Leading Index

0.2%

Large swings in data set

EUR

German Retail Sales (MoM)

-0.2%

1.2%

5 year average around 0, high of 4.7% and low of -2.8%

EUR

German Retail Sales (YoY)

-0.9%

More volatile than MoM indicator, 5 year high of 6.3%, low of -7.2%

EUR

German Import Price Index (MoM)

-0.1%

0.0%

Fallen below -1.0% only once since 12/08

EUR

German Import Price Index (YoY)

0.7%

1.1%

Positive since 12/09, peak of 12% on 12/10, followed by rapid decline

CNY

Leading Index

100.21

Peak of 105.98 on12/09, highest since 6/93

GMT

Currency

Upcoming Events & Speeches

5:00

JPY

Japanese PM Abe Gives Policy Speech at Parliament

13:30

EUR

EU’s Rehn Speaks in Madrid

16:00

CAD

BoC/BoE Governor Carney Press Conference after Fin Reg 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 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

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

12.7063

1.7670

8.9446

7.7542

1.2347

Spot

6.4584

5.5424

5.5222

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

1.3576

1.5910

92.00

0.9341

1.0128

1.0506

0.8452

124.13

145.52

Resist. 2

1.3548

1.5883

91.72

0.9322

1.0111

1.0486

0.8432

123.68

145.05

Resist. 1

1.3520

1.5855

91.45

0.9303

1.0093

1.0465

0.8412

123.23

144.57

Spot

1.3464

1.5799

90.91

0.9265

1.0058

1.0424

0.8373

122.32

143.63

Support 1

1.3408

1.5743

90.37

0.9227

1.0023

1.0383

0.8334

121.41

142.69

Support 2

1.3380

1.5715

90.10

0.9208

1.0005

1.0362

0.8314

120.96

142.22

Support 3

1.3352

1.5688

89.82

0.9189

0.9988

1.0342

0.8294

120.51

141.75

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

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