DailyFX | March 3 2012 1:29 EST
While Friday may have seemed a reserved day for the capital markets, the US dollar put in for a commendable performance. The Dow Jones FXCM Dollar Index posted its biggest, single-day rally in two months and subsequently marked a remarkable reversal of fortune in the span of a single week.
Dollar Posts its Biggest Rally in Two Months, Will it Last to NFPs?
While Friday may have seemed a reserved day for the capital markets, the US dollar put in for a commendable performance. The Dow Jones FXCM Dollar Index posted its biggest, single-day rally in two months and subsequently marked a remarkable reversal of fortune in the span of a single week. Follow through is a greater burden than just a single-day’s volatility though. There is a big ticket event risk on our calendar, but it would be unreasonable to simply expect the market to remain on hold for Friday’s NFPs. The dollar’s course will fall to general risk trends.
Euro Ends a Week of Fundamental Recovery Sharply Lower
Though the euro opened this past week relatively stable, it ended the period with a sharp decline. In fact, the single currency posted significantly losses through the week against all its major counterparts – with the exception of the Swiss franc. For EURUSD specifically, the three-day decline that closed us out marks the worst performance for the pair since the final stumble in the larger bear trend through the opening week of the year. The question on everyone’s mind is whether this is the beginning of a larger decline or simply another temporary correction. To answer this, we need to gauge the market’s reaction to positive developments (further points of relief from the oppressive crisis) as well as those negative events. 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 generate greater concern. Friday, the EU ministers are scheduled to vote on the release of the remainder of Greece’s second bailout package. And throughout the week, we will have to keep tabs on whether Spain, Ireland and Portugal are being sucked into Greece’s wake. For definable event risk the ECB will decide whether they will indeed ease off the stimulus pedal.
Australian Dollar Traders Face RBA Decision, GDP, Employment
In a stacked week for scheduled event risk for the majors, the Australian dollar stands out. In a remarkable series of releases, the country’s docket holds an RBA rate decision (Tuesday 03:30 GMT), the fourth quarter GDP figures (Wednesday 00:30 GMT) and February employment numbers (Thursday 00:30 GMT). For market moving potential, the rate meeting is of primary concern. As the primary carry currency amongst the liquid majors, cutting rates would undermine the Aussie dollar’s primary appeal. Expectations for a rate cut are low (a hold is unanimous amongst economists and the market is pricing in a modest 15 percent probability of a cut), but that only leverage the impact of a surprise. The GDP and labor figures have a greater potential for variance, yet are better suited for volatility rather than trend generation.
British Pound Keeps a Balance Between Austerity and Growth
The sterling’s performance deviated significantly from its euro counterpart this past week thanks to the benefit the UK draws from the Euro Zone’s bailout of its financial system (without the negative fiscal liabilities that come with the injection). This is similar to the benefit many of the United States’ counterparts enjoyed by the Federal Reserve’s massive quantitative easing programs. Tempering the prospect of a Euro-area crisis turning into a UK crisis is a clear improvement. That said, a swell in sovereign or 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 change its bond program at its meeting, the market will certainly interpret all commentary to gauge the chance of a change in May.
Canadian and New Zealand Dollars Hold Reserved Expectations for Rate Decisions
What is more influential for the comm bloc currencies: appetite for yield or the performance of commodities? Most of the time, both tend to trend in the same direction. Yet, this past week, we noted oil prices were driven sharply higher by supply fears while general risk trends retreated. This led to a notable divergence between the performance of the Canadian dollar (the United States’ primary energy provider) and the New Zealand currency. For a group so highly correlated, these unique variables can offer unique trading opportunities. However, there are further catalysts to follow for the ‘loonie’ and ‘kiwi’ dollars specifically. Rate decisions from the RBNZ (Wednesday at 20:00 GMT) and BoC (Thursday at 14:00 GMT) can generate short-term volatility for their respective currencies. Of course, the probability for change 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 the biggest drop from gold since December 2008 this past Thursday, we would expect an equally impressive recovery…that is if the initial tumble wasn’t a permanent fixture. This past week, we were presented with a few notable developments that could have theoretically evoked a different reaction from the previous metal. Most remarkable was the reaction drawn from the ECB’s second bank-level liquidity program (the LTRO). As an alternative to manipulated and devalued fiat currencies, gold would normally look more attractive for European officials’ efforts. Instead (the Fed’s QE efforts are good examples of that fact). Yet, the injection would have the exact opposite effect. Now, the bearing for gold traders rests between the possibility of a flare up in Greek financial issues and more steadfast risk aversion efforts. If the dollar extends its gains next week, the metal will suffer as its primary, non-currency alternative. One of the few things that can occur concurrently with risk aversion to lift both dollar and gold: a revival of global financial crisis fears.
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SUPPORT AND RESISTANCE LEVELS
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--- Written by: John Kicklighter, Senior Currency Strategist for DailyFX.com
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