Dollar Posts Its Biggest Rally In Two Months, Will It Last To NFPs?

By John Kicklighter, Currency Strategist
  • Dollar Posts its Biggest Rally in Two Months, Will it Last to NFPs?
  • Euro Ends a Week of Fundamental Recovery Sharply Lower
  • Australian Dollar Traders Face RBA Decision, GDP, Employment
  • British Pound Keeps a Balance Between Austerity and Growth
  • Canadian and New Zealand Dollars Hold Reserved Expectations for Rate Decisions
  • Japanese Yen: Policy Officials Will Work to Extend Currency’s Biggest Tumble in 8 Months
  • Gold’s Lackluster Rebound a Source of Concern for Medium-Term Trend

Dollar Posts its Biggest Rally in Two Months, Will it Last to NFPs?

While Friday may haveseemed a reserved day for the capital markets, the US dollar put infor a commendable performance. The Dow Jones FXCM Dollar Index posted its biggest,single-day rally in two months and subsequently marked a remarkablereversal of fortune in the span of a single week. Follow through isa greater burden than just a single-day’s volatility though.There is a big ticket event risk on our calendar, but it would beunreasonable to simply expect the market to remain on hold forFriday’s NFPs. The dollar’s course will fall to generalrisk trends.

Euro Ends a Week of Fundamental Recovery Sharply Lower

Though the euro openedthis past week relatively stable, it ended the period with a sharpdecline. In fact, the single currency posted significantly lossesthrough the week against all its major counterparts – withthe exception of the Swiss franc. For EURUSD specifically, thethree-day decline that closed us out marks the worst performancefor the pair since the final stumble in the larger bear trendthrough the opening week of the year. The question oneveryone’s mind is whether this is the beginning of a larger decline or simply anothertemporary correction. To answer this, we need to gauge themarket’s reaction to positive developments (further points ofrelief from the oppressive crisis) as well as those negativeevents. Greece will be an ongoing (if indistinct) concern. Monday,we will see if Moody’s downgrade of the country to‘C’ with a warning of full-blown default will generategreater concern. Friday, the EU ministers are scheduled to vote onthe release of the remainder of Greece’s second bailoutpackage. And throughout the week, we will have to keep tabs onwhether Spain, Ireland and Portugal are being sucked intoGreece’s wake. For definable event risk the ECB will decidewhether they will indeed ease off the stimulus pedal.

Australian Dollar Traders Face RBA Decision, GDP, Employment

In a stacked week forscheduled event risk for the majors, the Australian dollar stands out . In a remarkableseries of releases, the country’s docket holds an RBA ratedecision (Tuesday 03:30 GMT), the fourth quarter GDP figures(Wednesday 00:30 GMT) and February employment numbers (Thursday00:30 GMT). For market moving potential, the rate meeting is ofprimary concern. As the primary carry currency amongst the liquidmajors, cutting rates would undermine the Aussie dollar’sprimary appeal. Expectations for a rate cut are low (a hold isunanimous amongst economists and the market is pricing in a modest15 percent probability of a cut), but that only leverage the impactof a surprise. The GDP and labor figures have a greater potentialfor variance, yet are better suited for volatility rather thantrend generation.

British Pound Keeps a Balance Between Austerity and Growth

The sterling’sperformance deviated significantly from its euro counterpart thispast week thanks to the benefit the UK draws from the EuroZone’s bailout of its financial system (without the negativefiscal liabilities that come with the injection). This is similarto the benefit many of the United States’ counterpartsenjoyed by the Federal Reserve’s massive quantitative easingprograms. Tempering the prospect of a Euro-area crisis turning intoa UK crisis is a clear improvement. That said, a swell in sovereignor bank level troubles for the region (despite the rescue efforts)will quickly put the pound back into line. In the meantime,sterling traders should take note of the docket. While the Bank of England is unlikely to changeits bond program at its meeting, the market will certainlyinterpret all commentary to gauge the chance of a change inMay.

Canadian and New Zealand Dollars Hold Reserved Expectations for Rate Decisions

What is moreinfluential for the comm bloc currencies: appetite for yield or theperformance of commodities? Most of the time, both tend to trend inthe same direction. Yet, this past week, we noted oil prices weredriven sharply higher by supply fears while general risk trendsretreated. This led to a notable divergence between the performanceof the Canadian dollar (the UnitedStates’ primary energy provider) and the New Zealand currency . For a group so highlycorrelated, these unique variables can offer unique tradingopportunities. However, there are further catalysts to follow forthe ‘loonie’ and ‘kiwi’ dollarsspecifically. Rate decisions from the RBNZ (Wednesday at 20:00 GMT)and BoC (Thursday at 14:00 GMT) can generate short-term volatilityfor their respective currencies. Of course, the probability forchange for each is set low.

Japanese Yen: Policy Officials Will Work to Extend Currency’s Biggest Tumble in 8 Months

Since bottoming out at the beginning of February, the USDJPY has rallied an incredible 7.6 percent. That is the best run for the pair since the March 2011 rally that followed a devastating natural disaster and subsequent global stabilization effort for Japan. Another way to look at it, this is the best, unadulterated rally for the pair since the December 2009 rally. Yet, whether we are referring to the moves from March 2011, December 2009, first quarter 2009 or first half 2008 (all larger in magnitude); each one of this moves have represented corrections in a much larger bear phase. Of course, we should follow the short-term bearings for this pair (the possibility of a correction after the first four-week rally in 15 months is a distinct risk); but we shouldn’t ignore the much larger potential should this be a long-term trend change. The fundamental foundation for such a shift is there, but sustaining it through the medium-term may fall to the BoJ and MoF’s efforts to manipulate the currency lower.

Gold’s Lackluster Rebound a Source of Concern for Medium-Term Trend

Following thebiggest drop from gold since December 2008 this past Thursday, wewould expect an equally impressive recovery…that is if theinitial tumble wasn’t a permanent fixture. This past week, wewere presented with a few notable developments that could havetheoretically evoked a different reaction from the previous metal.Most remarkable was the reaction drawn from the ECB’s secondbank-level liquidity program (the LTRO). As an alternative tomanipulated and devalued fiat currencies, gold would normally lookmore attractive for European officials’ efforts. Instead (theFed’s QE efforts are good examples of that fact). Yet, theinjection would have the exact opposite effect. Now, the bearingfor gold traders rests between the possibility of a flare up inGreek financial issues and more steadfast risk aversion efforts. Ifthe dollar extends its gains next week, the metal will suffer asits primary, non-currency alternative. One of the few things thatcan occur concurrently with risk aversion to lift both dollar andgold: a revival of global financial crisis fears.

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ECONOMIC DATA

N ext 24 Hours

GMT

Currency

Release

Survey

Previous

Comments

1:00

(Sat)

CNY

China Non-manufacturing PMI (FEB)

52.9

Official services data could follow manufacturing higher

21:45

(Sun)

NZD

Net Migration SA (JAN)

-520

Emigrant rate continues to rise

22:30

(Sun)

AUD

AiG Performance of Service Index (FEB)

51.9

Services relatively flat

23:30

(Sun)

AUD

TD Securities Inflation MoM% (FEB)

0.2%

Inflation estimates still below current, though scope for additional cuts may be subdued

23:30

(Sun)

AUD

TD Securities Inflation YoY% (FEB)

2.2%

0:01

GBP

Lloyds Business Barometer (FEB)

-11

Lloyd’s survey improving

0:30

AUD

Company Operating Profit QoQ% (4Q)

4.8%

Company data showing moderate recovery on easing

0:30

AUD

Inventories (4Q)

-1.1%

0:30

AUD

ANZ Job Advertisements (MoM) (FEB)

6.0%

Labor markets moving higher

2:30

CNY

China HSBC Services PMI (FEB)

52.5

HSBC survey following official

8:15

CHF

Retail Sales (Real) (YoY) (JAN)

0.6%

Swiss retail moderate

8:45

EUR

Italian PMI Services (FEB)

44.8

European services expected to be relatively unchanged as peripheral risk continues to linger

8:50

EUR

French PMI Services (FEB F)

50.3

8:55

EUR

German PMI Services (FEB F)

52.6

9:00

EUR

Eurozone PMI Composite (FEB F)

49.7

9:00

EUR

Eurozone PMI Services (FEB F)

49.4

9:00

EUR

Italy PPI (MoM) (JAN)

0.1%

Italian producer prices not large case for alarm

9:00

EUR

Italy PPI (YoY) (JAN)

4.0%

9:30

GBP

PMI Services (FEB)

56

British services sector stronger

9:30

EUR

Sentix Investor Confidence (MAR)

-11.1

EU confidence strengthening

9:30

GBP

Official Reserves (Changes) (FEB)

$2477M

Asset purchases continuing

10:00

EUR

Euro-Zone Retail Sales (MoM) (JAN)

-0.4%

Zone-wide sales showing improvement, points to confidence

10:00

EUR

Euro-Zone Retail Sales (YoY) (JAN)

-1.6%

15:00

USD

ISM Non-Manf. Composite (FEB)

56.9

56.8

Services slightly higher

15:00

USD

Factory Orders (JAN)

0.3%

1.1%

Domestic orders may see some pressure

SUPPORT AND RESISTANCE LEVELS

To seeupdated SUPPORT AND RESISTANCE LEVELS for the Majors, visit Technical Analysis Portal

To seeupdated PIVOT POINT LEVELS for the Majors and Crosses, visitour Pivot Point Table

CLASSIC SUPPORT ANDRESISTANCE EMERGING MARKETS 18 :00GMT SCANDIES CURRENCIES 18:00GMT

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

12.7599

1.7680

7.5208

7.7588

1.2522

Spot

6.6782

5.6330

5.6075

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

1.3351

1.5968

82.65

0.9250

0.9976

1.0864

0.8395

109.36

131.01

Resist. 2

1.3313

1.5935

82.44

0.9223

0.9955

1.0832

0.8369

109.02

130.64

Resist. 1

1.3275

1.5902

82.23

0.9196

0.9935

1.0799

0.8343

108.67

130.27

Spot

1.3198

1.5835

81.81

0.9142

0.9893

1.0733

0.8291

107.97

129.53

Support 1

1.3121

1.5768

81.39

0.9088

0.9851

1.0667

0.8239

107.27

128.79

Support 2

1.3083

1.5735

81.18

0.9061

0.9831

1.0634

0.8213

106.92

128.42

Support 3

1.3045

1.5702

80.97

0.9034

0.9810

1.0602

0.8187

106.58

128.05

v

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

To contact John , email jkicklighter@dailyfx.com . Follow me on twitter athttp://www.twitter.com/JohnKicklighter

To be added toJohn’s email distribution list, send an email with thesubject line “Distribution List” to jkicklighter@dailyfx.com .

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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/2012/03/03/Dollar_Posts_its_Biggest_Rally_in_Two_Months_Will_it_Last_to_NFPs.html

DailyFX is the forex news and research arm of FXCM (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.

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