• Dollar Fully Retraces its Opening Gains for the Year with its Biggest Weekly Drop in 4 Months
  • Euro: Can Official’s Promises Stabilize the Euro Zone Markets and Rally the Currency?
  • British Pound’s Borrowed Strength Needs to be Supplemented by Next Week’s Data
  • Canadian Dollar Looking at Volatility with Top Event Risk in the BoC Decision and Retail Sales
  • New Zealand Dollar Faces Inflation and Retail Data to Benchmark Rate Potential
  • Swiss Franc: The SNB Reports a 21 Billion Franc Loss on the Year, Does It Matter?

Dollar Fully Retraces its Opening Gains for the Year with its Biggest Weekly Drop in 4 Months

Through the opening week of the new trading year, the trade-weighted Dollar Index staged its biggest rally in five months. Therefore, is it particularly shocking to see the greenback suffer its largest weekly loss in four months this past week? If the opening move were the genesis of a new and lasting trend, we would expect a moderate correction at best. Yet, there is reason to believe that this bullish burst of life for the FX market’s most liquid currency was merely a reaction to the unusual trading conditions related to the time of year. Indeed, if the rally was founded on temporary grounds; it makes sense that the market would quickly correct to its ‘fair value.’ And so, we find the Dollar Index is back at the same level it started the year on a trade-weighted basis.

That said, we need to once again consider the composition of this weighted-index. Representing 60 percent of the dollar gauge, EURUSD’s chart unsurprisingly looks like the exact inflection of the Index. Most other pairs, though, are significantly off the starting mark. For AUDUSD, USDJPY and USDCHF, gains have proven to be sticky. Alternatively, GBPUSD and USDCAD have traded steadily against the greenback. This suggests that there is a little more going on in background than a mere fluctuation in liquidity. Though it may not seem so given the S&P 500’s unwavering climb; but the dollar’s safe haven status has been tested these past weeks – specifically as it pertains to the benchmark counterpart to the euro. Revived concerns surrounding the Euro Zone’s financial health and the subsequent recovery in confidence seem to line up nicely to the performance of EURUSD. That being the case, we should expect this fundamental driver to play a significant role going forward. Yet, restraining our focus on the dollar specifically, we should reflect on the outcome and meaning of Friday’s round of US event risk. The 0.6 percent increase in the advanced retail sales report for December (referred to as ‘advanced’ because it is actually a preliminary reading) was a smaller improvement than expected and the University of Michigan’s consumer sentiment survey for the same period unexpectedly fell for the first time in three months. Disappointments though they may be, both indicators reflect a general trend of improvement for the American consumer – the backbone of the world’s largest economy. As for the December consumer inflation report, the 1.5 percent annualized growth puts the eventual return of rate hikes closer into reach. On the other hand, considering the yearly reading of the core report is just off its lowest level on records going back over half a century; that hike is hawkish turn is likely further down the line than many think.

Looking ahead to next week, the dollar’s performance will likely remain a derivative of larger and more ‘exciting’ developments. Monday’s session will be distorted as US banks are offline in recognition of the Martin Luther King Jr. day holiday. Beyond this void in activity, the economic docket will be heavily concentrated on housing data. The potential trouble still facing this sector is underappreciated; but that also means it isn’t market moving. Interestingly enough, the biggest event of the week could be the Chinese 4Q GDP report.

Related:Discuss the Dollar in the DailyFX Forum, John’s Analyst Picks: EURUSD, GBPJPY and GBPAUD Offer Pressing Trade Opportunities

Euro: Can Official’s Promises Stabilize the Euro Zone Markets and Rally the Currency?

It’s as if policy officials have breathed life back into the euro. At least, that is how it seems after the euro’s incredible run this past week. More likely, they have merely bought themselves time. Talk of the proposals the EU is discussing as a “comprehensive” solution to the region’s ever-devolving financial situation sets the bar very high. Promise of a larger EFSF program, lower rates on emergency loans, direct support to Portugal and Greece, and guarantees among other things would represent a very complete effort to snuff out doubts over the troubles Europe faces. However, an agreement on these very aggressive policies will be difficult to realize; and that doesn’t even account for the fact that even these efforts are merely a salve and not an answer to the underlying problems. Yet, for now, it is all about how long officials can maintain a sense of relief across the market. They are not expected to make real progress until March – if at all. In the meantime, we should also keep an eye on rate expectations. Friday’s CPI reading confirmed inflation is above target; and officials have warned that rates can be firmed up.

British Pound’s Borrowed Strength Needs to be Supplemented by Next Week’s Data

This past week, the sterling has seen little fundamentally to justify the remarkable strength it has enjoyed against the dollar, yen and franc. That is because much of its performance can be linked to the apparent improvement of the Euro Zone’s health (particularly via Irish exposure). Next week though, the burden is back on the pound’s own docket. Consumer confidence, inflation and jobs are all big-ticket releases to watch.

Canadian Dollar Looking at Volatility with Top Event Risk in the BoC Decision and Retail Sales

In general, the FX economic docket is relatively light next week. Yet, if we were to pick a top currency for fundamental potential; it would have to be the Canadian dollar. Overnight index swaps from Credit Suisse suggest there will be three quarter-point rate hikes over the next 12 months, and the BoC will have the chance to tell us whether that is reasonable or not Tuesday. Retail sales though will likely be more influential.

New Zealand Dollar Faces Inflation and Retail Data to Benchmark Rate Potential

Riding on the coattails of the Aussie dollar has worked well for the kiwi; but this passive relationship is starting to breakdown. Fundamental concern is starting to warp the outlook for the Australian currency; and that is putting the focus back on the weaker New Zealand unit. This week, we have a round of housing data, retail sales and confidence figures. Our real interest rests in the 4Q CPI numbers with a 4.0 percent forecast.

Swiss Franc: The SNB Reports a 21 Billion Franc Loss on the Year, Does It Matter?

The Swiss National Bank reported Friday that it had suffered a 21 billion franc loss through 2010 (25 billion francs on FX intervention). If this were a bank or trader, this mark-to-market would be disastrous. However, this is a central bank and such conventions don’t apply. The take away is their failed effort to halt the franc’s appreciation. This stands as a good reflection of the power that the market encompasses.

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ECONOMIC DATA

Next 24 Hours

Currency

GMT

Release

Survey

Previous

Comments

NZD

21:00

REINZ House Sales (YoY) (DEC)

-15.2%

REINZ home sales declined annually for an eleventh consecutive month in November.

NZD

21:00

REINZ Housing Price Index (MoM) (DEC)

1.9%

NZD

21:00

REINZ Housing Price Index (DEC)

3221.5

NZD

21:45

Food Prices (MoM) (DEC)

-0.6%

Food prices fell in November by the most in nine months.

AUD

23:30

TD Securities Inflation (MoM) (DEC)

0.4%

Australia’s inflation accelerated in November and surpassed the top of the central bank’s target range.

AUD

23:30

TD Securities Inflation (YoY) (DEC)

3.9%

GBP

0:01

Rightmove House Prices (MoM) (JAN)

-3.0%

U.K. home prices dipped in the last two months of 2010.

GBP

0:01

Rightmove House Prices (YoY) (JAN)

0.4%

AUD

0:30

New Motor Vehicle Sales (MoM) (DEC)

0.2%

New vehicle sales rose in November for a third time in four months.

AUD

0:30

New Motor Vehicle Sales (YoY) (DEC)

-0.9%

JPY

5:00

Consumer Confidence (DEC)

40.6

Consumer confidence fell last month to its lowest level since February.

JPY

5:00

Consumer Confidence Households (DEC)

41.6

40.4

CAD

13:30

International Securities Transactions (Canadian dollar) (NOV)

9.500B

9.507B

Likely fell to lowest level since July.

Currency

GMT

Upcoming Events & Speeches

JPY

0:30

Bank of Japan Quarterly Branch Managers’ Meeting

EUR

11:00

Bundesbank Publishes Monthly Report

USD

12:15

Fed’s Charles Plosser Speaks on Monetary Policy

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

1.3615

1.6420

89.00

1.0000

1.0922

1.0600

0.8230

127.60

146.05

Resist 1

1.3400

1.5910

86.00

0.9775

1.0750

1.0200

0.8000

120.00

140.00

Spot

1.3377

1.5874

82.97

0.9643

0.9896

0.9895

0.7670

110.98

131.69

Support 1

1.2900

1.5312

80.00

0.9300

0.9800

0.9600

0.6850

103.80

125.00

Support 2

1.2585

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

13.8500

1.6755

7.2790

7.8165

1.4945

Resist 2

7.7500

5.7800

6.2750

Resist 1

12.5000

1.5931

7.1750

7.8075

1.4655

Resist 1

7.5800

5.6625

6.1150

Spot

12.0475

1.5531

6.9243

7.7743

1.2873

Spot

6.6582

5.5690

5.8419

Support 1

11.7200

1.4724

6.4000

7.7490

1.2750

Support 1

6.4500

5.2625

5.7030

Support 2

11.4400

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

1.3525

1.5937

83.48

0.9726

1.0011

1.0053

0.7769

111.59

132.78

Resist 1

1.3451

1.5905

83.22

0.9685

0.9953

0.9974

0.7720

111.29

132.23

Pivot

1.3383

1.5858

82.82

0.9645

0.9920

0.9915

0.7677

110.68

131.35

Support 1

1.3309

1.5826

82.56

0.9604

0.9862

0.9836

0.7628

110.38

130.80

Support 2

1.3241

1.5779

82.16

0.9564

0.9829

0.9777

0.7585

109.77

129.92

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

1.3560

1.6046

83.90

0.9764

1.0000

1.0029

0.7777

112.46

133.34

Resist. 2

1.3515

1.6003

83.67

0.9733

0.9974

0.9996

0.7750

112.09

132.92

Resist. 1

1.3469

1.5960

83.44

0.9703

0.9948

0.9962

0.7723

111.72

132.51

Spot

1.3377

1.5874

82.97

0.9643

0.9896

0.9895

0.7670

110.98

131.69

Support 1

1.3285

1.5788

82.50

0.9583

0.9844

0.9828

0.7617

110.24

130.87

Support 2

1.3239

1.5745

82.27

0.9553

0.9818

0.9794

0.7590

109.87

130.46

Support 3

1.3194

1.5702

82.04

0.9522

0.9792

0.9761

0.7563

109.50

130.04

v

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

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