DailyFX | February 25 2012 12:09 EST
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 14th surge and subsequently moved to two-and-a-half month highs.
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 14th 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 31st. 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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Next 24 Hours
Trade Balance (JAN)
Trade data may fall during this , but could be helped by China easing
Trade Balance 12 Mth YTD (JAN)
CBAHIA House Affordability (Q4)
House index moderating at levels
Hometrack Housing Survey (MoM) (FEB)
Prices not showing improvements
Hometrack Housing Survey (YoY) (FEB)
French Producer Prices (MoM) (JAN)
Producer prices may start to fall as demand still weaker
French Producer Prices (YoY) (JAN)
Euro-Zone M3 s.a. 3 mth ave. (JAN)
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Euro-Zone M3 s.a. (YoY) (JAN)
Italian Business Confidence (FEB)
Index could trend into 90
Pending Home Sales MoM (JAN)
Pending sales could be helped by last week’s new sales data
Pending Home Sales YoY (JAN)
Dallas Fed Manf. Activity (FEB)
Southwest manufacturing easing
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Retail trade expected to drop after dismal trade data last week
Retail Trade YoY (JAN)
Large Retailers' Sales (JAN)
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Leadership Vote in Australia Begins
German Parliament Votes on Greek Bailout
ECB’s Peter Praet Speaks on the Euro-area Economy
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--- Written by: John Kicklighter, Senior Currency Strategist for DailyFX.com
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