Dollar Climbs As Risk Eases, Slump In Correlations More Interesting

By John Kicklighter, Currency Strategist

• Dollar Climbs as Risk Eases, Slump in Correlations More Interesting
• Euro Stability Causing Unease as Fitch and IMF Remind Risks Still Present
• British Pound: Will the Cable Hold On to its Post-BoE Minutes Losses?
• Japanese Yen Takes Another Tumble against Dollar Regardless of Risk Trends
• Australian Dollar: Political Uncertainty Can Add to an Unfavorable Yield Situation
• Swiss Franc Helps Shape Euro Skepticism, EURCHF Refuses to Climb
• Gold Trading at a Four Month High, What is the Fundamental Drive?

Dollar Climbs as Risk Eases, Slump in Correlations More Interesting

Though anti-Euro and anti-risk sentiment have not yet developed into heavy trends yet, the two fundamental themes have effectively traded off these past weeks to afford the US dollar a meaningful advance . To see the influence of this trade off, we can refer to the performance of EURUSD and AUDUSD over the past two weeks. This past week, AUDUSD has taken the lead with a slide that reflects the same risk-aversion theme that has pulled the benchmark S&P 500 Index back from multi-year highs. During this same time, EURUSD was little moved. That is very different from where we were two weeks ago. Turning back the clock further, we found that AUDUSD was dithering while the FX market’s most liquid pair was sliding on concerns surrounding the Euro-area crisis. Ultimately, this has been an effective trade off for progress from the greenback, but this haphazard mix is less likely to provide a strong trend. Yet, perhaps there is something more in these correlations…

For weeks, months and even years past, the FX market has followed dominant fundamental themes (risk trends, Euro crisis fears, expectations for stimulus) to great effect. In fact, most of the real trending that we have seen in currency and capital markets can trace its origin back to these dominant subjects. So, what will revive the larger tide? We have seen benchmarks overlook disappointing earnings ( S&P 500 ), the approval of the second Greek bailout (EURUSD) and signs of a global slowdown in growth (everything). The fuel may be there, but the spark continues to elude us. However, perhaps speculative interests themselves are close to reengaging the markets. Not only have we seen EURUSD and AUDUSD tread different courses, but there has been a loosening of correlation across many different risk-synced assets. Is this the sign?

Euro Stability Causing Unease as Fitch and IMF Remind Risks Still Present

EURUSD has been relatively quiet this past week. That wouldn’t be a remarkable observation if it weren’t for the fact that general risk trends (S&P 500 and AUDUSD acting as standards) weren’t sliding and had we not just learned that Greece was approved for its second bailout. There are times when stable market conditions are worrying. So, what does this departure from fundamental reality mean? If we consider the time tables of the euro’s performance over the past weeks, we can unravel this mystery. Last week, the euro was far more active as speculation leading into another make-or-break weekend for Greece took the initiative. With the EU ministers’ approval of the 130 billion euro program, it would seem that there would be a relief rally to follow. However, such an outcome seems to have been priced in. And, more importantly, skepticism that approval and implementation were separate concerns remained. This past session, we were reminded that averting an immediate crisis doesn’t solve long-term problems. Of note, Fitch downgraded Greece’s credit rating from CCC to C (just above default) with the note that a near-term default was highly likely. Perhaps more remarkable, an IMF official remarked on “huge” implementation risks with Greece.

British Pound: Will the Cable Hold On to its Post-BoE Minutes Losses?

I wasn’t expecting the Bank of England’s minutes to be as market moving as they ultimately were. The group’s decision to boost the bond purchasing program by £50 billion roused little surprise from sterling traders while the Quarterly Inflation report released last week defined the outlook for growth and interest rates. Nevertheless, the knowledge that two of the MPC’s ranks (Posen and Miles) had voted for a larger slug of £75 billion would send the pound tumbling. This question now is whether the sterling will maintain this big shift . While the stimulus outlook certainly has an influence over the pound’s perceived strength, themes of risk appetite and the spread of the Euro-area financial crisis are far more critical. In the absence of drive behind these themes, we would see the change in stimulus forecasts absorb quickly and the currency retreat to the underlying trends. Should risk or Euro concerns explode, it would simply hasten the regression.

Japanese Yen Takes Another Tumble against Dollar Regardless of Risk Trends

USDJPY seems unstoppable. Despite a downshift in risk trends (not a true decline), the benchmark pair would continue its surge. At this point, the yen has dropped against the greenback in both ‘risk on’ and ‘risk off’ scenarios. Of course, if we line the Japanese currency against more yield-intensive counterparts, the tendency is to return to risk appetite trends. In the absence of that overriding catalyst, their gains continue. This is a long-overdue move and the fundamentals support its continuation over the long-term, but be wary of natural corrections.

Australian Dollar: Political Uncertainty Can Add to an Unfavorable Yield Situation

The political situation in Australia is in flux . Following the surprise resignation of Foreign Minister Kevin Rudd, we find Prime Minister Jullia Gillard struggling to maintain control of the Labour party at a time when their popularity is on the ropes. Is this a critical concern for Australian dollar traders? Not really. While uncertainty is rarely a positive for investment, there is little immediate risk that the currency’s position will change as the high-yield player amongst its colleagues. Of course, if the general trend is towards risk aversion, this just adds another issue.

Swiss Franc Helps Shape Euro Skepticism, EURCHF Refuses to Climb

Though there is still a clear sense of skepticism surrounding a tidy recovery from the Euro Zone’s financial troubles, there is still room for relief. And yet, the euro can’t gain traction against its most direct safe haven: the Swiss franc. If you’re looking to gauge the market’s assessment of the euro situation, EURCHF will arguably offer the truest reflection. That said, the persistent appreciation of the Swiss currency is a true burden for monetary policy makers. If this is what is happening when conditions are ‘improving’ what happens if the Greek effort falls through…

Gold Trading at a Four Month High, What is the Fundamental Drive?

Once again, gold is a remarkable stand out for the global financial markets. The precious metal charged a second, aggressive rally that has driven the commodity to four month highs. Yet, with this move, we find that risk trends were notably weaker and the dollar has pushed higher (a direct reversal of the standard correlations of recent months). Where is this strength coming from? Skepticism. Against the tame backdrop of risk aversion, we see that skepticism for a clean Greek recovery is encouraging investors to avoid currency and sovereign debt more and more.

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
0:30	AUD	Average Weekly Wages (MoM) (NOV)	1.0%	1.2%	Falling weekly wages may prompt additional dovishness
0:30	AUD	Average Weekly Wages (YoY) (NOV)	4.7%	5.3%
9:00	EUR	German IFO - Business Climate (FEB)	108.8	108.3	IFO surveys expected to show moderately improving German economy
9:00	EUR	German IFO - Current Assessment (FEB)	116.5	116.3
9:00	EUR	German IFO – Expectations (FEB)	102	100.9
9:30	GBP	BBA Loans for House Purchase (JAN)	36250	36171	Loans increasing on easing
11:00	GBP	CBI Trends Total Orders (FEB)	-13	-16	Prices expected to decline again as British economy slows even with stimulus
11:00	GBP	CBI Trends Selling Prices (FEB)	12	13
13:30	USD	Initial Jobless Claims (FEB 18)	355K	348K	Weekly data expected to show improvement
13:30	USD	Continuing Claims (FEB 11)	3480K	3426K
15:00	USD	House Price Purchase Index (QoQ) (Q4)		0.2%	Home index expected to grow, though slower last year
15:00	USD	House Price Index (MoM) (DEC)	0.4%	1.0%
15:30	USD	EIA Natural Gas Storage Change (FEB 17)		-127	Fuel inventories expected to decline again on demand
16:00	USD	DOE U.S. Crude Oil Inventories (FEB 17)		-171K
16:00	USD	DOE Cushing OK Crude Inventory (FEB 17)		1990K
16:00	USD	DOE U.S. Distillate Inventory (FEB 17)		-2867K
16:00	USD	DOE U.S. Gasoline Inventories (FEB 17)		400K
16:00	USD	Kansas City Fed Manf. Activity (FEB)	9	7	Midwest seen to recover
23:50	JPY	Corporate Service Price (YoY) (JAN)	0.1%	0.1%	Tertiary industry stagnant

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	12.8467	1.7607	7.7289	7.7544	1.2577		Spot	6.6617	5.6156	5.6525
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	1.3394	1.5798	81.02	0.9212	1.0083	1.0780	0.8406	107.65	127.13
Resist. 2	1.3356	1.5766	80.82	0.9186	1.0060	1.0745	0.8379	107.30	126.78
Resist. 1	1.3318	1.5735	80.63	0.9160	1.0038	1.0711	0.8351	106.95	126.43
Spot	1.3243	1.5671	80.24	0.9107	0.9994	1.0641	0.8295	106.26	125.74
Support 1	1.3168	1.5607	79.85	0.9054	0.9950	1.0571	0.8239	105.57	125.05
Support 2	1.3130	1.5576	79.66	0.9028	0.9928	1.0537	0.8211	105.22	124.70
Support 3	1.3092	1.5544	79.46	0.9002	0.9905	1.0502	0.8184	104.87	124.35

v

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

To contact John, email [e-mail]. 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 [e-mail].

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/2012/02/23/Dollar_Climbs_as_Risk_Eases_Slump_in_Correlations_More_Interesting.html

>To order reprints of this article, click here: Reprints