Dollar at the Mercy of Risk Trends Early, Fed and 4Q GDP on Deck

Dollar at the Mercy of Risk Trends Early, Fed and 4Q GDP on Deck

Though the dollar managed to regain a little lost ground against the euro Friday, the currency was still under pressure into the close. For the Dow Jones FXCM Dollar Index, this would lead to a fifth consecutive daily (open-to-close) bearish close – the longest series of losses for the benchmark currency since the run through October 10th. The opportunity to press new 12-month highs has considerably diminished, but it is still early to claim the greenback has made a critical bearish change in trend. Moving forward, there are two key fundamental considerations to monitor for guidance on the dollar: the sentiment surrounding the euro and the progress in underlying risk appetite trends. For the greenback’s most liquid counterpart, the relief of an impending crisis has dissipated, and the euro can continue to draw capital away from the world’s most extreme safe haven. Investor sentiment itself is what we should be most concerned with. The S&P 500 has capped a three-week advance to five month highs, yet conviction is still flimsy. It could find a serious booster however if the Fed hints at QE3 or US 4Q GDP impresses this week.

Euro Advance Takes a Step Back as Market Awaits Word on Greece

Having posted its best rally against the benchmark dollar in three months against a foul-weather fundamental backdrop, it makes sense to have seen the euro ease into the close of this past week. Considering the region’s troubles are so well known at this point, the currency is running fully on speculation of the timing for expected troubles. A side effect of knowing that you are fighting the current, however, is a greater sensitive to holding risk through lockups. With the weekend approaching and negotiations over the discount on private holding of Greek debt ongoing, it is natural to ease the risk of a long euro exposure a little.

Heading into the new trading week, there is a list of potential fundamental threats; but the weight of their influence has lessened considerably from just a few weeks ago. Given expected time frames, the terms of the private sector investors’ accommodation for Greece’s debt burden will be the first concern. The current consensus is still for a 50 percent haircut (essentially debt forgiveness), in a roll to new 30-year bonds with a significantly reduced 3.0 to 4.75 percent coupon. Anything along these lines could buy us a little more time of disregard for real fundamental threats. We have come to expect the same quick-fix and we’ll-fix-it-later policy decisions to follow the EU Finance Minister summit on Monday. A little more open to surprise are the growth-based economic indicators and the ECB’s three-month liquidity tender due in the first 48 hours.

British Pound: Will We See Confirmation of Policy Official’s Recession Warnings

If there is a recession or region-wide financial crisis for the Euro Zone, it is highly likely that the United Kingdom is not far behind (if it is not already suffering the same fate). The relationship between euro and sterling price action against third party currencies is exceptional due to its fundamental connections, but there are still external factors that can offer a degree of separation. Those alternative factors led to the significant swing in EURGBP over the past week. The three-day rally through Thursday was the influence of the euro’s relief rally and the sterling lagging response. Friday’s plunge was encouraged by rising gilt yields but follow through requires something more. A bullish surprise in the face of growing recession fears for the UK could offer a relief rally akin to what the euro has enjoyed. With 4Q GDP seen contracting, the line is drawn.

Gold Working on its Best January Performance Since 2008

So far this year, gold is up 6.6 percent. This represents the first time in three years that we could see a positive opening month and it is generally the best performance for the period since 2008. Under normal circumstances, we could say this strength was guided by anti-dollar capital flows; but the rolling, 20-day (trading month) correlation between the fiat and metal has deteriorated significantly recently. Furthermore, we see that the relationship between the traditionally safe commodity and risk-inclined S&P 500 is tightening (currently 0.83 – 1.00 being perfect). From this, we can are seeing the distribution of speculative capital from absolute liquidity havens to relative (but expensive) safe havens.

ECONOMIC DATA

Next 24 Hours

GMT	Currency	Release	Survey	Previous	Comments
0:30	AUD	Producer Price Index (QoQ) (4Q)		0.6%	Another item that will influence the RBA in its decision-making at the Feb 7 meeting
0:30	AUD	Producer Price Index (YoY) (4Q)		2.7%
7:45	EUR	French Own-Company Production Outlook (JAN)		-2	French business confidence has been sliding since mid-2011 on worsening Eurozone outlook
7:45	EUR	French Production Outlook Indicator (JAN)		-37
7:45	EUR	French Business Confidence Indicator (JAN)		94
8:00	CHF	Money Supply M3 YoY (DEC)		7.2%	The 12-month average hit a May 2004 high with the last reading.
8:00	CHF	Real Estate Index Family Homes (4Q)		398.6	Looking for exchange rate influence for growth bearing
13:30	CAD	Leading Indicators MoM (DEC)		0.8%	Will act as a placeholder for year-end GDP speculation
15:00	EUR	Euro-Zone Consumer Confidence (JAN A)		-21.1	Has weakened since mid-2011
23:00	AUD	Conference Board Leading Index (NOV)		0.6%	Signs of a slowing economy coupled with weakening inflation would boost rate cut concerns

GMT	Currency	Upcoming Events & Speeches
10:15	EUR	German Bill Auction
11:45	EUR	Germany’s Merkel Meets with Belgian Prime Minister Di Rupo in Berlin
14:00	EUR	French Bill Auction
16:00	EUR	Euro-Area Finance Ministers Meet in Brussels
17:00	EUR	Germany’s Merkel Speaks in Berlin

SUPPORT AND RESISTANCE LEVELS

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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