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.

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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

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

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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

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