Forex: Dollar Returns to 1.3400 Versus Euro, USDJPY Hits 31-Month High

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  • Dollar Returns to 1.3400 Versus Euro, USDJPY Hits 31-Month High
  • Japanese Yen Suffers Biggest Non-Intervention Drop in Years
  • Australian Dollar Retreats from 1.0600 Despite ‘Risk On’, Chinese GDP
  • New Zealand Dollar Tumbles after 4Q CPI
  • British Pound: Prime Minister Delays Speech About UK’s EU Membership
  • Euro Rallies Across the Board on With Little More than Risk
  • Gold Advances as BoJ ‘Unlimited Stimulus’ Call Stokes Anti-Currency Demand

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Dollar Returns to 1.3400 Versus Euro, USDJPY Hits 31-Month High

Once again, the dollar was advancing at the same time the benchmark S&P 500 equity index was placing a fresh five-year high. This is a direct contrast in fundamental norms where both the market’s favored reserve currency (the greenback) and most stimulus-leveraged risk measure (the stock index) were forging progress. If underlying sentiment trends were the primary catalyst underling the global financial markets, this unusual correlation would not present itself. That tells us that there isn’t an overwhelming drive towards higher-yielding or safe haven assets. That knowledge in itself is value to an FX trader as risk trends are one of the few systemic influences that trigger and sustain meaningful trends.

If risk aversion trends wasn’t a key catalyst the Dow Jones FXCM Dollar Index’s (ticker = USDollar) biggest climb in two weeks, where was the drive coming from? One the most prominent fundamental struts of support for the benchmark currency is the forcible depreciation of the Japanese yen. For the Dollar Index, the 1.7 percent rally for USDJPY offers serious encouragement. However, from a fundamental perspective, the benefit comes through the undermining of the world’s third most liquid currency – significantly offsetting the weight saddled on the currency through rounds of record-breaking stimulus following the Great Recession and sub-prime housing crisis. This acts to balance significantly the currency market’s standard safe havens: the US dollar, Japanese yen and Swiss franc (which still sports an unnatural ceiling).

As we watch this slow, FX ‘schadenfreude’ play out in the dollar’s favor; we should continue to monitor updates on two localized interests for the US markets: speculation surrounding the end of Fed’s open-ended QE3 stimulus program and approach of the deficit ceiling. The economic docket has been thick with Fed official speeches this past week, and we can start to see the debate in timing the wind-down of the $85 billion-per-month effort. The baseline assumption is for continued purchases through the end of the year, but some members are discussing the options for an tapering well before that distant target. Alternative, the Treasury’s mid-to-late-February warning for debt ceiling breach has many thinking this is a greater risk the Fiscal Cliff was. That being said, talk of a possible temporary extension offers momentary relief.

Japanese Yen Suffers Biggest Non-Intervention Drop in Years

Expectations for the building Japanese stimulus wave have already been set exceptionally high. So, without tangible money- supply inflation, it is especially difficult to push the yen to further losses before next week’s Bank of Japan (BoJ) policy meeting. Yet, that one further point of escalation was found by the market and certainly exploited. Over the past few weeks, the driving point behind the yen crosses’ rally has been the suggestion that the government’s efforts to devalue the national currency would be match and outpaced by the central bank. The 2 percent inflation target that Japanese Prime Minister Abe has tried to push on the BoJ has stood as the crux (alongside the announce 10.6 trillion yen program announced last week) behind the most recent advance through the first part of this week.

Perhaps recognizing that the self-supported momentum was disrupted by Economy Minister Amari’s ‘misinterpreted’ comments about how a rapid drop in the yen could cause problems for the average Japanese citizen; the next level of speculation was reached. This past session, different sources (Reuters, Nikkei) that the inflation target would be merely the justification for ‘unlimited’ stimulus. Though this argument wasn’t hitting headlines with particular regularity before, this was already assumed. Without risk trends, it will be hard to push further pre-BoJ.

Australian Dollar Retreats from 1.0600 Despite ‘Risk On’, Chinese GDPThe Australian dollar hasn’t found much support from the fundamental docket over the past 24 hours. Yesterday, the December employment figures were caught traders off guard with an unexpected drop in the net change in jobs and a 0.2 percentage point increase in the unemployment rate (to 5.4 percent). However, some bulls were holding out that the AUDUSD may revive its efforts to overtake 1.0600 this morning with strong encouragement from the Chinese 4Q GDP release. Despite a 7.9 percent, annual pace of growth (better than the 7.8 percent expected), Aussie dollar traders saw neither the direct export demand nor the risk appetite boost in the slight (and dubious) beat.

New Zealand Dollar Tumbles after 4Q CPI

Remarkably, the New Zealand 4Q CPI figures proved far more market-moving than the Chinese GDP figures. Why? Because the former generated sufficient ‘surprise’. Given the market’s persistent belief that the Reserve Bank of New Zealand’s next move will be a rate cut, the news that inflation actually contracted last quarter and left the annual figure at 0.9 percent (well below target), rate watchers have to once again reevaluate their assumptions. Rate cut expectations have yet to filter in, but you can certainly see it in AUDNZD and NZDCAD pairs.

British Pound: Prime Minister Delays Speech About UK’s EU Membership

Pound traders have been biting their nails as we’ve approached Friday. After a few time shifts, Prime Minister David Cameron had scheduled a speech that was expected to address a possible renegotiation of the UK’s position with the EU. The hard-line austerity move has many suggesting that such demands would hurt the UK more than the Eurogroup. Yet, we will have to wait a little long for word as it has been delayed.

Euro Rallies Across the Board on With Little More than Risk

There wasn’t much in the way of scheduled event risk in the euro-area. And, against a pickup in Spanish yields and IMF Director Lagarde’s suggestion that more stimulus may be needed from the ECB, we would expect a mild retracement. That wasn’t what we were presented with though. The euro advanced against all its counterparts yesterday – with some level of gusto. And, we still see that strength this morning.

Gold Advances as BoJ ‘Unlimited Stimulus’ Call Stokes Anti-Currency Demand

There are very few ‘reserve’ currencies in the FX market. Generally, the market considers the US dollar, Euro and Japanese yen as the three standard bearers for fiat currency. That said, with the Bank of Japan expected to embark on an unlimited stimulus effort next week, the call for an alternative to manipulated currencies seems to grow even larger. Hence gold’s strength. Now for confirmation.

ECONOMIC DATA

Next 24 Hours

GMT

Currency

Release

Survey

Previous

Comments

1:30

CNY

China Property Prices (DEC)

-

-

Previously experienced falling prices in aggregate.

1:35

CNY

MNI Flash Business Sentiment Indicator (JAN)

-

-

May see an uptick after strong PMI’s.

2:00

CNY

Real GDP (QoQ) (4Q)

2.2%

2.2%

Growing at slower rate since 3/2010 peak at 12.1% on a yearly change basis.

2:00

CNY

Real GDP (YoY) (4Q)

7.8%

7.4%

2:00

CNY

Real GDP YTD (YoY) (4Q)

7.7%

7.7%

2:00

CNY

Industrial Production (YoY) (DEC)

10.2%

10.1%

Growing at slower rate since 2/2010 peak at 20.7%, YTD.

2:00

CNY

Industrial Production YTD (YoY) (DEC)

10.0%

10.0%

2:00

CNY

Fixed Assets Inv Excl. Rural YTD (YoY) (DEC)

20.7%

20.7%

In clear downtrend since 2009 (34% peak). May have found bottom on 5/2012 (20.1%).

2:00

CNY

Retail Sales (YoY) (DEC)

15.1%

14.9%

2:00

CNY

Retail Sales YTD (YoY) (DEC)

14.3%

14.2%

Been slowly trending lower since 1/2011 when at 19.9%.

4:30

JPY

Industrial Production (MoM) (NOV F)

-

-1.7%

4:30

JPY

Industrial Production (YoY) (NOV F)

-

-5.8%

4:30

JPY

Capacity Utilization (MoM) (NOV F)

-

1.6%

9:30

GBP

Retail Sales (MoM) (DEC)

0.1%

0.1%

Has been wavering around zero since 2009 on a yearly change basis.

9:30

GBP

Retail Sales (YoY) (DEC)

2.0%

2.0%

9:30

GBP

Retail Sales w/Auto Fuel (MoM) (DEC)

0.2%

0.0%

9:30

GBP

Retail Sales w/Auto Fuel (YoY) (DEC)

1.0%

0.9%

13:30

CAD

Manufacturing Sales (MoM) (NOV)

1.0%

-1.4%

Has been wavering around zero since 2009 on a yearly change basis.

14:55

USD

U. of Michigan Confidence (JAN)

75

72.9

6 year average at 72.9. Recently declined from 82.7 in November.

15:00

USD

American Petroleum Institute Monthly Report

-

-

GMT

Currency

Upcoming Events & Speeches

-:-

JPY

Deadline for Standard & Poor's Japan Unit to Submit Report

11:00

EUR

ECB's Coeure speaks in Paris

8:00

JPY

Japan Auction for Enhanced-Liquidity

-:-

USD

Earnings – Morgan Stanley and General Electric

SUPPORT AND RESISTANCE LEVELS

To see updated SUPPORT AND RESISTANCE LEVELS for the Majors, visitTechnical Analysis Portal

To see updated PIVOT POINT LEVELS for the Majors and Crosses, visit ourPivot Point Table

CLASSIC SUPPORT AND RESISTANCE

EMERGING MARKETS 18:00 GMT

SCANDIES CURRENCIES 18:00 GMT

Currency

USDMXN

USDTRY

USDZAR

USDHKD

USDSGD

Currency

USDSEK

USDDKK

USDNOK

Resist 2

15.5900

2.0000

9.2080

7.8165

1.3650

Resist 2

7.5800

6.1875

6.1150

Resist 1

15.0000

1.9000

9.1900

7.8075

1.3250

Resist 1

6.8155

5.9190

5.8200

Spot

12.5827

1.7561

8.8134

7.7527

1.2256

Spot

6.5001

5.5766

5.5774

Support 1

12.5000

1.6500

8.5650

7.7490

1.2000

Support 1

6.0800

5.5840

5.6000

Support 2

11.5200

1.5725

6.5575

7.7450

1.1800

Support 2

5.8085

5.3350

5.3040

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

1.3503

1.6094

91.00

0.9473

0.9927

1.0599

0.8433

122.14

145.64

Resist. 2

1.3473

1.6065

90.74

0.9451

0.9913

1.0579

0.8412

121.69

145.15

Resist. 1

1.3442

1.6036

90.47

0.9429

0.9898

1.0558

0.8392

121.25

144.67

Spot

1.3382

1.5978

89.94

0.9386

0.9869

1.0517

0.8352

120.36

143.70

Support 1

1.3322

1.5920

89.41

0.9343

0.9840

1.0476

0.8312

119.47

142.73

Support 2

1.3291

1.5891

89.14

0.9321

0.9825

1.0455

0.8292

119.03

142.25

Support 3

1.3261

1.5862

88.88

0.9299

0.9811

1.0435

0.8271

118.58

141.77

v

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

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

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