Dollar Rallies To End The Week, Risk Trends Will Remain Top Concern

By John Kicklighter, Currency Strategist

  • Dollar Rallies to End the Week, Risk Trends Will Remain Top Concern
  • Euro Traders Watching Spain, ECB and Bond Auctions as Crisis Fears Balloon
  • Japanese Yen Retreats for a Second Week, Officials Growing Antsy
  • Australian Dollar: RBA Minutes Impact will Leverage Rate Expectations
  • British Pound Ups the Rate Speculation with CPI, Jobless Claims and BoE Minutes
  • New Zealand Dollar May Follow Aussie Lower if 1Q CPI Cools Further
  • Gold Holds Three Year Bull Trend for Another Week, Stimulus Debate Becoming Serious

Dollar Rallies to End the Week, Risk Trends Will Remain Top Concern

Referring to a weekly chart of the Dow Jones FXCM Dollar Index , the greenback was worked its way into a loaded period of congestion. We now find the currency holding a 200-pip range just below a 14-month range high that has prevented a larger bull trend reversal. The risk is clear. What is not clear, however, is what will catalyze the inevitable break – whether that will be bullish or bearish. This past week was a good representation of both the bullish and bearish factors for the greenback that continuously circulate yet consistently fall short of that critical sentiment shift. What we need is a fundamental change that categorically changes the dollar’s value in the global market.

Over the past week, the world’s reserve currency seemed to temper its correlation to risk trends. While the S&P 500 equity index (my favored measure of investor sentiment) phased from a tentative reversal to aggressive bounce, the dollar seemed responsive only when carry interest swelled. Should we expect this one-sided risk role to persist over the next week and beyond? The hang up for the usually equanimous safe haven was the drop in Treasury yields alongside sentiment-based assets. Normally, this wouldn’t have been a concern for a currency with such an exceptionally low rate. But the strong 10-year yield jump in previous weeks roused enough speculation of an accelerated stimulus withdrawal that the correlation warped. Yet, now back within the range low of the past six months, that premium should be mostly worked off.

So, now we head into a new trading week with a currency that should have greater freedom of movement if capital markets continue to fall apart. That is an opportune situation as the S&P 500 is on the verge of a genuine bear trend. That said, we are still in need of fuel to feed the fledgling drive. Earnings will be a highlight for capital market participants that have based much of their optimism on investment that has circumvented still-weak consumer spending. The reemergence of the Euro-area crisis is another loaded catalyst for the global market. And, of course, there remains the stimulus debate. The Fed seems to have quashed speculation of QE3, but there are other central banks increasing balance sheets.

Euro Traders Watching Spain, ECB and Bond Auctions as Crisis Fears Balloon

The fundamental outlook for the Euro-region hasn’t changed significantly over the past months. Rather, the market’s appreciation of the risks and what it would mean for exposure in the region have. And, when investors want to exit before the crowd, it naturally touches off a flood. How extensive and violent any deleveraging becomes depends on two factors: the underlying balance of risk trends and the intensity of regional trouble. With benchmarks for sentiment starting to take a turn for the worse, the euro is already in a sensitive position. Fundamental traders should keep a close eye on Spain’s financial health. The country’s 10-year yield is just below 6 percent, credit default swaps trade at record highs and the ECB’s lending to the Bank of Spain surged to a record high €316 billion in March. Spain is looking more and more like Ireland or Portugal. Other highlights to watch include the ECB’s SMP bond purchase report and the Spanish and Greek bond auctions on tap.

Japanese Yen Retreats for a Second Week, Officials Growing Antsy

Bank of Japan officials and politicians were no doubt relieved back in February when the central bank’s announcement of an additional 10 trillion yen boost to the asset purchase program finally felled a multi-year USDJPY bear trend. From the beginning, however, it was clear that wouldn’t be a straight line decline for the funding currency. The policy group’s efforts to devalue the currency are no doubt significant, but they do not carry enough weight to alter the yen’s position as a long-term funding source for yield spread-derived trades. And, that means strong anti-risk / anti-carry winds will naturally force deleveraging that boosts the yen. The question is whether the BoJ will try to fight the natural course again.

Australian Dollar: RBA Minutes Impact will Leverage Rate Expectations

Normally, the RBA minutes would have little to no influence over the Australian dollar. The statements that Governor Stevens usually leaves us off with are sufficiently transparent in their intentions. The last policy decision from the central bank was pretty clear as well, however, the threat of an imminent rate cut generally leverages more intense focus. More specifically, the Governor suggested that another trimming of the benchmark rate depended on the pace of the 1Q CPI figures do out the following week. While we wait for the results of that data, traders who have already driven the currency lower through rate forecasts will pick the statement apart to assess the intensity of their dovish stance.

British Pound Ups the Rate Speculation with CPI, Jobless Claims and BoE Minutes

Interest rates and monetary policy have been and will be primary drivers for the sterling, but it just so happens that monetary policy has been on ice for the Bank of England. The only changes to come through are bond purchase program (QE) increases that are signaled well ahead of time. Further intentions beyond these efforts are simply not offered up. Yet, traders will still set the bar through their own speculation. That sets us up for a unique view further ahead the policy curve with both inflation and employment readings to compliment the BoE’s minutes.

New Zealand Dollar May Follow Aussie Lower if 1Q CPI Cools Further

When talking about fading interest rates amongst the high-end of the yield curve, the conversation has remained almost exclusively on the Australian dollar’s ills these past weeks and months. The exemption for the kiwi may soon come to an end however. A key reason the currency has limited its sensitivity to negative sentiment trends is that we haven’t seen a momentous bear trend arise for risk. Another factor is New Zealand’s own economic balance. We have 1Q CPI due for release next week, and the annual clip is expected to cool even further.

Gold Holds Three Year Bull Trend for Another Week, Stimulus Debate Becoming Serious

A bullish close on the week for gold is a boon for long-term bulls. At current levels the precious metal is dangerously close to the long-term trendline that has stood as the backbone to the bull trend that began at the height of the financial crisis back in 2008. Traders will have noticed that volume has materially dropped and all swells have been tied to selling efforts. Furthermore, futures open interest is at its lowest point since September 2009 and Fed stimulus expectations have eased. Is there enough anti-inflation, alternative-store-of-wealth demand out there?

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ECONOMIC DATA

N ext 24 Hours

GMT

Currency

Release

Survey

Previous

Comments

22:30

NZD

Performance Services Index (MAR)

55.5

Services industry still growing

22:45

NZD

Food Prices (MoM) (MAR)

0.6%

Not high enough to cause inflation

23:01

GBP

Rightmove House Prices (MoM) (APR)

1.6%

UK housing prices may be seeing a turn, but overall demand still weak

23:01

GBP

Rightmove House Prices (YoY) (APR)

2.2%

7:15

CHF

Producer & Import Prices (MoM) (MAR)

0.8%

Longer term import prices dropping on cheaper raw materials

7:15

CHF

Producer & Import Prices (YoY) (MAR)

-1.9%

8:00

EUR

Italian Trade Balance (Total) (Euros) (FEB)

-4350M

Italian trade expected to slow

8:00

EUR

Italian Trade Balance Eu (Euros) (FEB)

756M

8:30

EUR

Italian General Government Debt (FEB)

1935.8B

Debt levels improving on Monti

9:00

EUR

Euro-Zone Trade Balance sa (FEB)

5.9B

Overall trade balance still expected weaker on lack on intrazone and overall demand

9:00

EUR

Euro-Zone Trade Balance (FEB)

-7.6B

12:30

CAD

Int'l Securities Transactions (FEB)

-4.19B

Yields continuing to drive markets

12:30

USD

Empire Manufacturing (APR)

21.5

20.21

New York Industries stronger

12:30

USD

Advance Retail Sales (FEB)

0.6%

1.1%

Retail sales expected to slow as spending slows

12:30

USD

Retail Sales Less Autos (FEB)

0.6%

0.9%

12:30

USD

Retail Sales Ex Auto & Gas (FEB)

0.6%

12:30

USD

Retail Sales "Control Group" (FEB)

0.5%

13:00

USD

Total Net TIC Flows (FEB)

$18.8B

Interest in treasuries continuing to increase on yield

13:00

USD

Net Long-term TIC Flows (FEB)

$101.0B

14:00

USD

Business Inventories (FEB)

0.5%

0.7%

Investment spending weaker

14:00

USD

NAHB Housing Market Index (APR)

28

Housing market may flatten

CNY

Actual FDI (YoY) (MAR)

-13.6%

-0.9%

Investment dropping as domestic economy slows

GMT

Currency

Upcoming Events & Speeches

8:00

EUR

ECB Financial Market Survey

13:30

EUR

ECB Announces Bond Purchases

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 GMT 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

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Original Article: http://www.dailyfx.com/forex/fundamental/daily_briefing/session_briefing/daily_fundamentals/2012/04/14/llar_Rallies_to_End_the_Week_Risk_Trends_Will_Remain_Top_Concern.html