Euro: Is The Rally In Expectation Of A Smooth Greece Rescue Or LTRO – It Matters

By John Kicklighter, Currency Strategist

  • Dollar at Multi-Month Lows Against Euro and Franc, Highs Versus Yen
  • Euro: Is the Rally In Expectation of a Smooth Greece Rescue or LTRO – It Matters
  • Swiss Franc Benefiting More from Europe’s Recovery than the Euro
  • Japanese Yen Suffering its Worst Month for Performance Since December 2009
  • Australian Dollar Traders Will Watch, Not Likely Trade, Leadership Vote
  • Canadian Dollar Completely Decouples from Oil
  • Gold Breaks a Perfect Week but Greece, LTRO and Risk Will Weigh In

Dollar at Multi-Month Lows Against Euro and Franc, Highs Versus Yen

EURUSD was soaring; and for many, that spells out a clearly bearish day for the greenback. However, when we look at the Dow Jones FXCM Dollar Index (an equal weighting of EURUSD, GBPUSD, AUDUSD and USDJPY), the currency was little changed. Furthermore, when we look at the S&P 500 and other benchmarks for general sentiment; investor appetites were far more restrained. Friday’s performance seems more a unique drive from the European currencies and the Japanese yen rather than an essential move for the broader markets. The difference: fundamental moves that don’t find the support of (or worse, contradict) risk appetite typically fall apart quickly. The upcoming week will be an interesting for the dollar. We should monitor both EURUSD and the S&P 500 for cumulative bearing; but volatility seems virtually assured.

Euro: Is the Rally In Expectation of a Smooth Greece Rescue or LTRO – It Matters

The Euro may have reengaged the bull wave that it began back in the middle of January. In fact EURUSD put in for its best weekly run (2.4 percent) since the October 14 th surge and subsequently moved to two-and-a-half month highs. The trend and recent moment are clear, but the endurance of the run isn’t as straightforward. Noting the vast difference in performance between the Euro’s performance and general risk appetite trends (equities, carry-specific currencies, speculative commodities, etc), there was a significant influence of innate fundamental strength. So, was this drive encouraged by further discounting of the Greek crisis outlook that has built up over the months or reinforced stability expectations via next week’s LTRO injection ? Greece is still at high risk of losing its €130 billion second bailout package if the private sector bond swap falls through, the IMF’s contribution leaves the rescue underfunded or the country simply pulls out. As for the regional stimulus injection for banks, we would expect a more evenly distributed impact on risk trends. And, stimulus is quickly priced-in and forgotten nowadays.

Swiss Franc Benefiting More from Europe’s Recovery than the Euro

Fear of a blooming Greek and Euro Zone crisis has faded. Risk appetite trends have subsequently firmed up – especially in the region. Under these conditions, it is natural to expect that the capital that was moved out of the regional economy and into the safe keeping of the Swiss banking system would reverse (if for nothing else than to avoid a loss on an exchange rate correction). And yet, we find the Swiss franc is still inching higher against the euro. In fact, the currency squeezed out greater gains than its Euro counterpart against all of its other liquid counterparts through Friday. This may be the market’s effort to breakdown the SNB’s artificial influence or a sign of Euro recovery skepticism.

Japanese Yen Suffering its Worst Month for Performance Since December 2009

What an epic way to end the week . Having already built considerable momentum through the month, USDJPY closed Friday with its largest single-day rally (1.5 percent) since October 31 st . That is saying something considering that previous surge was the result of a record intervention effort. Though February is not yet complete, this is so far the best month for this exceptionally liquid pair since December 2009. And, while we cannot confirm it; this move seems to be developing under its own fundamental health rather than the temporary and vain influence of mass dollar purchases by the BoJ or MoF (suggested by the consistency of the move). There is plenty of fundamental fuel to keep the bullish trend behind USDJPY intact for many months and hundreds of pips, but the real question is whether the market is willing to focus on those issues. Carry unwind (especially in a wide risk aversion move) is still a possibly yen booster; but at this point, it would likely be limited hit for USDJPY.

Australian Dollar Traders Will Watch, Not Likely Trade, Leadership Vote

Australian Prime Minister Julia Gillard and former Foreign Minister Kevin Rudd are vying for control of the Labor party. A leadership vote is scheduled to begin Monday morning at 10:00 AM local time. This certainly makes for bombastic headlines, but is it a trade-worthy event? If the outcome threatened significantly divergent paths on policy (fiscal, economic, foreign affairs, etc), then an impact on the exchange rate would be a concern. However, both candidates have pursued fairly similar courses in their time at the helm (Rudd was ousted as Prime Minister by Gillard back in June, 2010). This could very well make for a riveting read or television, but anyone that focuses on this drama will miss far more crucial shifts in risk appetite trends. As the top yielder amongst the majors (and one slowly losing its premium), the order of importance is clear.

Canadian Dollar Completely Decouples from Oil

Historically, the Canadian dollar (via USDCAD) maintains a strong correlation to US crude oil prices. Whether a direct reflection of the producer / consumer relationship between Canada and the US or an implicit link to risk to underlying risk appetite trends (through carry and speculative commodity), this has been one of the more reliable associations. That said, the link has completely broken down recently . In fact, the 20-day rolling correlation between USDCAD and West Texas Intermediate (WTI – the benchmark for US pricing) was just a hair off of 0.00. For reference, a 1.00 reading suggests two assets move in perfect lock step; while a -1.00 denotes absolute mirroring. This is likely a temporary development; but nevertheless, it speaks to the fundamental influence over the Canadian dollar. General investor sentiment (determining carry, safe haven flows, etc) is extremely influential even when it is relatively congestive…

Gold Breaks a Perfect Week but Greece, LTRO and Risk Will Weigh In

We were on track to see the first, five-day bull run from gold since the opening week of the year; but a mild pullback Friday would ensure that record would remain out of reach. Fundamentally, the anti-dollar, anti-stimulus, and anti-inflation features were all running in favor of the previous metal. Yet, the exceptional drive of the euro (and its regional cohorts) would overwhelm the constructive support of those other factors. As the current focal point for uncertainty in global financial markets and investor sentiment, Euro-area stability can drive the metal higher and pull it lower. Given the clear boost in confidence for the region this past week (just look at the euro’s rally), it was easy to draw funds out of a commodity that provides no yield and into an entire ‘undervalued’ region. However, gold may find another boost next week. Should Greece or general risk trends falter next week, the safe haven properties of gold will shine. More tangible though is the LTRO. Stimulus equals inflation.

For Real Time Forex News, visit: http://www.dailyfx.com/real_time_news/

**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar

ECONOMIC DATA

N ext 24 Hours

GMT

Currency

Release

Survey

Previous

Comments

21:45

NZD

Trade Balance (JAN)

338M

Trade data may fall during this , but could be helped by China easing

21:45

NZD

Exports (JAN)

4.32B

21:45

NZD

Imports (JAN)

3.98B

21:45

NZD

Trade Balance 12 Mth YTD (JAN)

1113M

0:00

AUD

CBAHIA House Affordability (Q4)

57.2

House index moderating at levels

0:01

GBP

Hometrack Housing Survey (MoM) (FEB)

0.0%

Prices not showing improvements

0:01

GBP

Hometrack Housing Survey (YoY) (FEB)

-1.6%

7:45

EUR

French Producer Prices (MoM) (JAN)

-0.1%

Producer prices may start to fall as demand still weaker

7:45

EUR

French Producer Prices (YoY) (JAN)

4.7%

9:00

EUR

Euro-Zone M3 s.a. 3 mth ave. (JAN)

2.1%

Money supply not growing as quickly, could induce easing

9:00

EUR

Euro-Zone M3 s.a. (YoY) (JAN)

1.6%

9:00

EUR

Italian Business Confidence (FEB)

92.1

Index could trend into 90

15:00

USD

Pending Home Sales MoM (JAN)

1.0%

-3.5%

Pending sales could be helped by last week’s new sales data

15:00

USD

Pending Home Sales YoY (JAN)

4.4%

15:30

USD

Dallas Fed Manf. Activity (FEB)

15.3

Southwest manufacturing easing

23:50

JPY

Retail Trade MoM SA (JAN)

0.3%

Retail trade expected to drop after dismal trade data last week

23:50

JPY

Retail Trade YoY (JAN)

2.5%

23:50

JPY

Large Retailers' Sales (JAN)

-0.3%

GMT

Currency

Upcoming Events & Speeches

23:00

AUD

Leadership Vote in Australia Begins

EUR

German Parliament Votes on Greek Bailout

13:45

EUR

ECB’s Peter Praet Speaks on the Euro-area Economy

17:30

EUR

ECB’s Joerg Asmussen Speaks on the Euro-area Economy

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 & SCANDIES CURRENCIES 18:00 GMT

Currency

USD/MXN

USD/TRY

USD/ZAR

USD/HKD

USD/SGD

Currency

USD/SEK

USD/DKK

USD/NOK

Resist 2

16.5000

2.0000

9.2080

7.8165

1.3650

Resist 2

7.5800

5.6625

6.1150

Resist 1

14.3200

1.9000

8.5800

7.8075

1.3250

Resist 1

6.5175

5.3100

5.7075

Spot

13.1813

1.8298

7.9516

7.7618

1.2719

Spot

6.7826

5.7501

5.9324

Support 1

12.6000

1.6500

6.5575

7.7490

1.2000

Support 1

6.0800

5.1050

5.3040

Support 2

11.5200

1.5725

6.4295

7.7450

1.1800

Support 2

5.8085

4.9115

4.9410

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

1.3096

1.5727

77.65

0.9464

1.0227

1.0620

0.8168

100.92

121.26

Resist. 2

1.3055

1.5689

77.49

0.9434

1.0203

1.0586

0.8142

100.59

120.94

Resist. 1

1.3014

1.5652

77.33

0.9405

1.0179

1.0552

0.8116

100.27

120.61

Spot

1.2931

1.5576

77.01

0.9345

1.0132

1.0484

0.8063

99.62

119.97

Support 1

1.2848

1.5500

76.69

0.9285

1.0085

1.0416

0.8010

98.97

119.32

Support 2

1.2807

1.5463

76.53

0.9256

1.0061

1.0382

0.7984

98.65

119.00

Support 3

1.2766

1.5425

76.37

0.9226

1.0037

1.0348

0.7958

98.32

118.67

v

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

To contact John , email jkicklighter@dailyfx.com . Follow me on twitter at http://www.twitter.com/JohnKicklighter

To be added to John’s email distribution list, send an email with the subject line “Distribution List” to jkicklighter@dailyfx.com .

Additional Content:

Money Management Video

Trading the News Video

DailyFX is the forex news and research arm of FXCM, Inc (NYSE: FXCM), which provides currency trading and brokerage services and is an advertiser on TheStreet websites. Any opinions, news, research, analyses, prices, or other information is provided as general market commentary, and does not constitute investment advice. Dailyfx will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Currency trading involves significant risk of loss. Individual authors may hold positions in the currencies discussed in the article.

Original Article: http://www.dailyfx.com/forex/fundamental/daily_briefing/session_briefing/daily_fundamentals/2012/02/25/Euro_Is_the_Rally_In_Expectation_of_a_Smooth_Greece_Rescue_or_LTRO.html