• Dollar Extends its Biggest Rally in a Month with the Help of Strong Data and Confused Risk Trends
  • Euro: Can China Fill in the Europe’s Financial Gaps Where the Market and EU Fall Short?
  • Swiss Franc: What are the Implications of an SNB that Snubs Irish Debt?
  • British Pound Not as Strong as EURGBP and GBPJPY Seem to Suggest
  • Japanese Yen Plunge Continues with Select Pairs as Risk Trends Take up the Cause
  • Australian Dollar May Suffer Materially for the Nation’s Flood

Dollar Extends its Biggest Rally in a Month with the Help of Strong Data and Confused Risk Trends

We can’t deny the dollar’s recent strength. Taking score, the greenback posted its biggest rally in three weeks against the euro, three-and-a-half months against the Japanese yen and 21 months against the Swiss franc. For the other majors, the dollar’s performance was a little more down to earth; but its consistency is enough to confirm the currency’s general strength. However, while we can’t refute the dollar’s recent strength; we do have reason to doubt the stability of this young trend. To form a true opinion of the fundamental outlook, it is important to once again look at the correlations (or lack thereof) between the different asset classes. Though currencies, equities, commodities and other securities are very different from one another in many aspects; they all fall under the scope of investor sentiment. As underlying risk appetite oscillates from one extreme to the other, capital flows naturally follow the same paths between safe haven and high yield assets. That said, a broader view of risk appetite would offer a confused picture. Both the Japanese yen and Swiss franc tumbled Wednesday alongside declines for the Australian and New Zealand dollars. At the same time, the benchmark S&P 500 has maintained its remarkably consistent climb. This mixed picture tells us that investor sentiment is not strong enough an influence at the moment to unify participants in the various markets. And, if this key driver is absent, what will keep the dollar buoyant?

There are fundamental catalysts other than risk appetite trends that can influence the greater flow of capital; but most of them exist only in unique market conditions. The appetite for return versus the fear of loss is elemental to all investment decisions; and that makes it a common denominator for all markets. As such, it is only a matter of time before clear moves in risk appetite once again take back the reins. In the meantime, speculators are leveraging their influence on the market. Feeding the recovery momentum that began Monday/Tuesday, the dollar found an accelerant in strong economic data. As little as a month, anything to encourage the outlook for a strong economic recovery would have leveraged investor confidence and subsequently hurt the safe haven US dollar. However, with the strong showings on the headline ISM non-manufacturing (services) sector and ADP employment reports, the S&P 500 would restrain its performance to the steadying trend of the past four months and the greenback would actually rally. The proprietary jobs report proved the more remarkable release when it reported payrolls rose by 297,000 through December. This was the biggest increase on record and three times the market consensus. If this were NFPs, the impact meaning and impact would be remarkable. Yet, despite their efforts, this indicator has not proven itself an accurate benchmark to the government figure. So, while excitement around NFPs has certainly increased; we should remain skeptical of the indicators outcome.

In contrast to the ADP figure, the service sector activity report likely carries more weight when it comes to forecasting economic activity. Accounting for roughly 80 percent of GDP, a true recovery will be founded in this sector. As such, the highest reading from the indicator since May 2006 (57.1) is an encouraging sign. On the other hand, US consumer spending is the foundation of everything; so a 2.2 percentage point drop in the measure’s employment gauge (50.5) contradicts the ADP report and obscures a bullish forecast.

Related: Discuss the Dollar in the DailyFX Forum, John’s Analyst Picks: Booking EURUSD, Though the Pair Still has Potential

Euro: Can China Fill in the Europe’s Financial Gaps Where the Market and EU Fall Short?

European Union financial problems cannot be wished away. However, they can be ignored for a while. That has been more or less the circumstances surrounding the currency through the past month as downgrades, nationalizations and discussion of debt restructuring crowded the headlines. Now, with liquidity filling back out and investors ready to allocate capital for 2011, we are waiting for a catalyst to reengage a euro trend. A modest upward revision in the region’s service sector index offers a weak argument for confidence. Far more concerning was Portugal’s six-month bond auction which drew a yield (their cost) of 3.686 percent. For perspective, they were paying 2.045 percent in September and 0.594 percent a year ago. Perhaps China’s recent interest in Greece, Spain and other EU countries’ debt can help stem the bleeding…

Swiss Franc: What are the Implications of an SNB that Snubs Irish Debt?

It was initial reported Tuesday and confirmed Wednesday that the SNB had announced it was no longer accepting Irish government debt as collateral for its repurchasing operations. The impact this has on the euro is relatively straightforward; but what does it mean for the franc? Well, destabilizing confidence in the shared currency only encourages the flow of capital to the safe haven franc.

British Pound Not as Strong as EURGBP and GBPJPY Seem to Suggest

The British pound was exceptionally strong Wednesday – that is against the euro, Swiss franc and Japanese yen. Yet, these currencies themselves were exceptionally weak. It seemed the currency’s performance was mixed on balance; and that is not unexpected given the lack of fundamental activity for the day. Only the construction activity report for December was on our radar and that is hardly a top tier indicator.

Japanese Yen Plunge Continues with Select Pairs as Risk Trends Take up the Cause

Like the euro and pound, the yen’s performance is mixed – though where it is falling, it does so with gusto. The economic docket is still relatively light; but Finance Minister Kan’s suggestion of growth killing tax hikes still stings. What’s more, the bullish performance of the Nikkei 225 this week is offering a domestic source of risk appetite flows – a burden to a funding currency.

Australian Dollar May Suffer Materially for the Nation’s Flood

Just how influential is the flood in Australia to its economy and currency? RBA member McGauchie suggested it could be “significant” as exports are hurt in the short-term and infrastructure is destroyed in the medium-term. What does this mean for currency traders? A tempered pace of growth and a reason for the central bank to further ease up on rate hikes.

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ECONOMIC DATA

Next 24 Hours

Currency

GMT

Release

Survey

Previous

Comments

AUD

22:30

AiG Performance of Service Index (DEC)

46.2

Index hasn’t gained consecutive months since Feb-March.

AUD

0:30

Building Approvals (MoM) (NOV)

-4.0%

9.3%

Signs of eroding Aussie housing market beginning to show.

AUD

0:30

Building Approvals (YoY) (NOV)

-9.8%

1.2%

CHF

8:00

Foreign Currency Reserves (DEC)

212.4B

Should drop as Franc strengthened.

CHF

8:15

Consumer Price Index (MoM) (DEC)

-0.1%

0.2%

Deflation could spur intervention rumors.

CHF

8:15

Consumer Price Index (YoY) (DEC)

0.4%

0.2%

GBP

9:30

Purchasing Manager Index Services (DEC)

52.8

53.0

Steady growth expected.

EUR

10:00

Euro-Zone Economic Confidence (DEC)

105.8

105.3

Most Euro-confidence indicators expected to rise, though could be short-lived optimism as sovereign debt problems have begun to resurface.

EUR

10:00

Euro-Zone Business Climate Indicator (DEC)

1.00

0.96

EUR

10:00

Euro-Zone Consumer Confidence (DEC)

-10.5

-9.4

EUR

10:00

Euro-Zone Industrial Confidence (DEC)

2.0

0.9

EUR

10:00

Euro-Zone Services Confidence (DEC)

10.1

10.2

EUR

10:00

Euro-Zone Retail Sales (MoM) (NOV)

0.2%

0.3%

Sales likely to be boosted again by German consumption.

EUR

10:00

Euro-Zone Retail Sales (YoY) (NOV)

2.1%

1.3%

EUR

11:00

German Factory Orders s.a. (MoM) (NOV)

1.0%

1.6%

Decline in orders likely as domestic demand tapers off.

EUR

11:00

German Factory Orders n.s.a. (YoY) (NOV)

15.8%

17.9%

USD

13:30

Initial Jobless Claims (JAN 1)

400K

388K

Labor market expected to continue recent recovery momentum.

USD

13:30

Continuing Claims (DEC 25)

4080K

4128K

CAD

15:00

Ivey Purchasing Managers Index (DEC)

53.3

57.5

Could outpace survey as Canadian economy heats up.

USD

21:00

RPX Composite 28 Day (YoY) (OCT)

-1.86%

Index could break above 190.00 for first time since August.

USD

21:00

RPX Composite 28 Day Index (OCT 31)

189.21

Currency

GMT

Upcoming Events & Speeches

EUR

-:-

Italian Market Closed For Epiphany

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

1.3155

1.5511

83.26

0.9658

0.9963

0.9999

0.7579

109.52

129.14

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

12.1906

1.5448

6.7032

7.7705

1.2919

Spot

6.7659

5.6651

5.9014

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

1.3401

1.5707

84.33

0.9820

1.0062

1.0127

0.7718

110.49

130.30

Resist 1

1.3278

1.5609

83.80

0.9739

1.0013

1.0063

0.7648

110.01

129.72

Pivot

1.3202

1.5530

82.84

0.9604

0.9973

1.0012

0.7612

109.26

128.59

Support 1

1.3079

1.5432

82.31

0.9523

0.9924

0.9948

0.7542

108.78

128.01

Support 2

1.3003

1.5353

81.35

0.9388

0.9884

0.9897

0.7506

108.03

126.88

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

1.3345

1.5689

84.24

0.9783

1.0072

1.0147

0.7695

111.18

130.96

Resist. 2

1.3297

1.5644

83.99

0.9752

1.0045

1.0110

0.7666

110.76

130.50

Resist. 1

1.3250

1.5600

83.75

0.9720

1.0017

1.0073

0.7637

110.35

130.05

Spot

1.3155

1.5511

83.26

0.9658

0.9963

0.9999

0.7579

109.52

129.14

Support 1

1.3060

1.5422

82.77

0.9596

0.9909

0.9925

0.7521

108.69

128.23

Support 2

1.3013

1.5378

82.53

0.9564

0.9881

0.9888

0.7492

108.28

127.78

Support 3

1.2965

1.5333

82.28

0.9533

0.9854

0.9851

0.7463

107.86

127.32

v

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

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