Dollar Slides a Fourth Day as Risk Appetite Persists, Euro Rallies

Dollar Slides a Fourth Day as Risk Appetite Persists, Euro Rallies

On the week, the dollar finds itself significantly lower against all of its major counterparts with the exception of the Japanese yen. This is a move that fits the picture that the broader capital market is painting for us. Among the signs, we find the S&P 500 advancing to fresh five-month highs, volatility indexes are testing lows not seen since July and the euro is charging higher across the board. When the masses are pining for liquidity and safety of funds at the cost of a negative real rate of return, the greenback will shine. And, conversely, when this sentiment extreme isn’t pressuring the masses; funds will seek greater diversity. That said, a move away from an extremophile currency does not necessarily mean that risk appetite will naturally climb to new heights.

Everything we have seen from the capital and FX markets suggests that what we have seen to this point is a pull back or retracement. As the jitters of panic in the spread of a global crisis pass, there is room to unwind positions that look to speculation on or insure against impending catastrophe. Traders must ask: how much premium is there to unwind, and will fear return before this correction is naturally completed?

Euro Marks a Critical Technical Break Higher as Relief Pours In

After a round of Spanish and French bond auctions through Thursday’s session, we have officially closed out the last of this week’s important bond auctions. What started as a period that was destined for disaster after last Friday’s round of sovereign ratings downgrades (including France, Italy, Spain and Portugal), we are ending with a sigh of relief. Objectively, the rates that the various governments pulled from the market are not sustainable for financing deficits and spending over the medium to long-term, but they do ease the threat of imminent doom (a complete collapse of credit and funding). And, risk of uncontrollable financial crisis was what drove the shared currency so low, so quickly. Therefore, it is only reasonable that the immediate pressure relief should lead to near-term recovery. That said, over-estimating the pace (and possibly depth) of the crisis doesn’t imply a recovery with higher yields and non-existent risk.

With the bullish tide that accompanies this corrective rally, we can see optimism stain bond auctions outcomes and expectations for various open-ended problems. A notable example is the negotiations between banks and Greece for a viable agreement to help Greece to a surplus. FT reported a deal was close while the New York Time says Hedge Funds may sue. I refer to Fitch that says: regardless, it would be a default.

British Pound Slow to Follow Euro Higher, Looking Ahead to GDP

The FTSE 100 closed at a five-month high through Thursday’s close in London, but this is yet another example of asset pricing running astray of genuine fundamental potential. Typically, the stock market will follow growth potential through an ‘investment, wage, spending, production, revenue increase’ cycle. Yet, we know that expansion is exactly the opposite of what’s in store for the United Kingdom through the immediate future. In fact, the Bank of England Governor, Chancellor of the Exchequer, World Bank and industry groups have all warned that the country may dip into period of negative growth – if not technical recession. Suggestion an economic slump and all it would entail has already been priced in is preposterous as it entails an indefinite period of little-to-no dividend income alongside rising capital loss risk. This raises a very real red flag for next week’s 4Q GDP reading. Following the euro higher could set the sterling up for a big fall given the correct fundamental winds.

Gold Running at the Same Steady Pace as the S&P 500, With Better Fundamentals

Gold’s advance since the beginning of this year has run at about the same pace as the S&P 500’s gait: consistent but lacking for momentum. IN fact, looking at an intraday chart of the metal overlaid with the index; you would see a remarkable consistency in the two assets’ performance. In fact, the two-week rolling correlation between the two is currently 0.90 (exceptionally strong). That is very unusual given one is a safe haven and the other a risk barometer. We could attribute the general performance to anti-dollar capital flows, but that ignores the underling drive. Moving away from the greenback is essentially moving away from cash. In other words, capital is being reinvested into safe and risky assets.

ECONOMIC DATA

GMT	Currency	Release	Survey	Previous	Comments
0:30	AUD	Import price index (QoQ) (4Q)	0.6%	0.0%	Terms of trade important for Australia’s export-dependent economy
0:30	AUD	Export price index (QoQ) (4Q)	-2.0%	4.0%
1:35	CNY	MNI January Flash Business Sentiment Survey			Comes after GDP figures showing slowest growth in more than 2 years
2:30	CNY	HSBC Flash China Manufacturing PMI (JAN)		49
4:30	JPY	All Industry Activity Index (MoM) (NOV)	-0.9%	0.8%	Could point to period of slow growth in Japanese economy
7:00	EUR	Producer Prices (MoM) (DEC)	0.1%	0.1%	Price pressures to ease further amid threat of recession
7:00	EUR	Producer Prices (YoY) (DEC)	4.6%	5.2%
9:30	GBP	Retail Sales Ex Auto Fuel (MoM) (DEC)	0.7%	-0.7%	Some improvement expected amid holiday season
9:30	GBP	Retail Sales Ex Auto Fuel (YoY) (DEC)	1.7%	0.5%
9:30	GBP	Retail Sales (MoM) (DEC)	0.6%	-0.4%
9:30	GBP	Retail Sales (YoY) (DEC)	2.4%	0.7%
12:00	CAD	Consumer Price Index (MoM) (DEC)	-0.2%	0.1%	Price pressures remain weak in Canada; to further dampen expectations of BoC rate hikes
12:00	CAD	Consumer Price Index (YoY) (DEC)	2.7%	2.9%
12:00	CAD	Bank Canada CPI Core (MoM) (DEC)	-0.2%	0.1%
12:00	CAD	Bank Canada CPI Core (YoY) (DEC)	2.2%	2.1%
12:00	CAD	Consumer Price Index (DEC)	120.8	120.9
13:30	CAD	Wholesale Sales (MoM) (NOV)	0.5%	0.9%
15:00	USD	Existing Home Sales (DEC)	4.65M	4.42M	Recovery in US real estate market has lagged behind rest of the economy
15:00	USD	Existing Home Sales (MoM) (DEC)	5.2%	4.0%

GMT	Currency	Upcoming Events & Speeches
1/21	EUR	EU’s Barroso Speaks in Guimaraes, Portugal

SUPPORT AND RESISTANCE LEVELS

\Currency	EUR/USD	GBP/USD	USD/JPY	USD/CHF	USD/CAD	AUD/USD	NZD/USD	EUR/JPY	GBP/JPY
Resist. 3	1.3132	1.5640	77.81	0.9442	1.0214	1.0556	0.8136	101.34	120.84
Resist. 2	1.3090	1.5602	77.64	0.9413	1.0191	1.0521	0.8110	101.02	120.51
Resist. 1	1.3048	1.5565	77.48	0.9383	1.0167	1.0487	0.8083	100.69	120.18
Spot	1.2965	1.5489	77.16	0.9323	1.0120	1.0419	0.8031	100.04	119.52
Support 1	1.2882	1.5413	76.84	0.9263	1.0073	1.0351	0.7979	99.39	118.85
Support 2	1.2840	1.5376	76.68	0.9233	1.0049	1.0317	0.7952	99.06	118.52
Support 3	1.2798	1.5338	76.51	0.9204	1.0026	1.0282	0.7926	98.74	118.19

USD Index At Critical Juncture, Euro Correction Eyes 1.3100

Index	Last	High	Low	Daily Change (%)	Daily Range (% of ATR)
DJ-FXCM Dollar Index	9921.26	9945.57	9909.47	-0.04	54.96%

Although the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDollar) remains 0.04 percent lower from the open, the reserve currency should continue to retrace the decline from earlier this week as market sentiment wavers. In turn, the shift away from risk-taking behavior should prop up the greenback over the next 24-hours of trading, and the rebound looks poised to gather pace over the near-term as the more robust recovery in the world’s largest economy dampens the prospects for additional monetary support. However, as price action comes up against the downward trendline, former support around 9,947 may come in as new resistance, and the reserve currency may ultimately give back the advance from earlier this year should market participants continue to ramp up their appetite for risk.

As the index threatens the upward trend carried over from the previous year, we may see the bearish divergence in the relative strength index spur a sharp decline in the USD, and the dollar may fall back towards the 50.0 percent Fibonacci retracement around 9,828 as it searches for support. In turn, we may see the greenback track within a narrow range over the near-term, but the slew of event risks of tap for the following week could increase the appeal of the reserve currency as the recovery in the world’s largest economy gradually gather space. As we’re expecting to see GDP expand at an annual rate of 3.0% in the fourth-quarter, the Federal Reserve may continue to soften its dovish outlook for monetary policy at the rate decision on tap for January 25, and the central bank may endorse a wait-and-see approach for 2012 as the U.S. skirts a double-dip recession. As a result, the USD looks poised to regain its footing over the following week, and we may see the greenback make a run at the 78.6 percent Fib (10,117) as market participants scale back speculation for another large-scale asset purchase program.

Two of the four components gained ground against the USD, led by a 0.58 percent rally in the single currency, and the technical developments points to additional Euro strength as the exchange rate breaks out of the downward trending channel carried over from the previous year. As the EUR/USD clears the 20-Day SMA at 1.2868, the rebound from the January low (1.2623) may gather pace over the next 24-hours of trading, and the pair may come up against 38.2 percent Fib from the 2009 high to the 2010 low around 1.3100-20 to test for resistance. However, as the fundamental outlook for the euro-area remains bleak, the recent bounce in the EUR/USD could turn out to be a short-term correction, and the single currency remains poised to face additional headwinds this year as the region braces for a ‘mild recession.’ As the euro-area faces an increased risk of a major economic downturn in 2012, we expect the European Central Bank to ease policy further over the coming months, and speculation for additional monetary support continues to cast a bearish outlook for the EUR/USD as the governments operating under the monetary union struggle to address the sovereign debt crisis.