Contributed By: DailyFx
US Dollar Recovery on Track as Traders Cover Short Positions
Fundamental Outlook for US Dollar: Bullish
US Dollar drops on speculation that Ireland to accept Euro Zone fiscal aid
Greenback loses on soft US CPI inflation print, broader financial market consolidation
Yet the DailyFX team remains broadly positioned for continued US Dollar strength
A week of broader market consolidation left the US Dollar roughly unchanged from last week’s close, but the Greenback’s impressive turn from significant lows warns that the currency could recover further into the weeks ahead. Speculation that Ireland would accept a fiscal aid package from the Euro Zone and the UK calmed market tensions over the stability of the Euro, and the subsequent recovery in financial market risk sentiment sunk the safe-haven US currency. Yet exceedingly volatile day-to-day swings in the US S&P 500 and other financial market risk barometers warn that sentiment remains especially fragile, and flare-ups in tensions could easily force further US Dollar strength.
Lower-tier US economic data may make event-driven volatility unlikely in the days ahead, but traders should keep an eye out for especially surprising results from a densely packed string of economic releases through Tuesday and Wednesday. Such events include Existing Home Sales data, monthly changes in Durable Goods Orders, Personal Income and Spending releases, New and Existing Home Sales purchases, and the Minutes from the most recent US Federal Open Market Committee meeting.
FOMC Minutes arguably have the greatest potential to move markets, as they will clarify the Fed’s thinking in their decision to boost controversial Quantitative Easing measures by a further $600 billion through their most recent meeting. Though their decision was almost unanimous, markets may pay especially close attention to dissenting views from within the central bank as several officials have already spoken against such efforts.
The other events certainly have the potential to shift financial market sentiment, but it may take especially above or below-forecast results for these second-tier news releases to elicit reactions from the US Dollar. Given the recent fragility in financial market risk sentiment, we would argue that risks remain to the downside on any key disappointments in consumer and housing-centric economic data.
Recent weeks of US Dollar rallies leave momentum firmly in the currency’s favor, and the past week of sideways price action seems reasonable in light of previous gains. We maintain that the US Dollar established a fairly significant low against the Euro and other key currencies in the days following the Fed’s announcement of further QE. Recent CFTC Commitment of Traders data shows that many speculators have rushed to cover USD shorts amidst a general correction across financial markets. Yet Non-Commercial traders remain fairly net-short, and a further contraction in leveraged financial bets could fuel further US Dollar strength.
Contributed By: DailyFx
Near term in crude, 5 waves down are visible from the top which confirms that the larger trend has reversed. Crude reversed close to the former 4th wave extreme of 8300 therefore the next leg lower (either wave c or 3) is probably underway towards 71.50 (May low). Above 8332 would shift focus to resistance from Fibonacci at 8400 and 8500.
Contributed By: DailyFx
As mentioned in recent days, “price needs to stay below 13775 for the immediate extremely bearish count to remain valid. A move above there could also complete an expanded flat so it is best to NOT put a stop at that level. Bottom line, the larger EURUSD trend is down and I favor selling rallies.” Forget trying to count every single market squiggle and instead focus on the fact that the EURUSD has reversed in the face of extreme sentiment. The rally from the low may be wave a of an a-b-c correction. If it is, then wave b may test 13560 before a c wave ends upwards of 13860 early next week. A rally to there would present the ultimate shorting opportunity.
Contributed By: DailyFx
The CADJPY has worked its way into an ascending channel which has remained intact since the end of October. We entered into a long position at 80.86as the pair broke above its falling channel that lasted nearly seven months. I believe this pair has a great risk to reward level. A break and a close above 82.50 will validate my bullish bias. Looking ahead, we will shift our focus to the Canadian interest rate decision. As of late, economists are forecasting the annualized inflation rate to rise to 2.2 percent in October from 1.9 percent the month prior. In turn, this report may be the catalyst needed for the CAD to push higher. At the same time, holding onto out long British pound positions despite Irish woes proved well as the currency rallied yesterday amid speculation of an Irish bailout. Though I favor additional upside in the GBPJPY, I will take profits at this level and look to re-enter if the pair manages to break and close above the 200-day moving average. On the other hand, I will remain long GBPUSD as price action managed to break above the descending channel on the 4 hour chart. However, I will take off half of my positions as the slow stochastic indicator looks poised to cross back over to the downside, hinting at a slight pull back.
Nonetheless, entering into an AUDCAD short may be in the horizon as the pair has broken below the rising channel on the 4 hour chart. Taking a look at the daily chart, a close below 0.995 may validate additional downside risks towards the 0.97 area. Interest rate expectations in Canada are 16.0 percent versus 3.0 percent in Australia. Good luck trading!!!
Contributed By: DailyFx
I remain short EURUSD from last week at reduced size, having taken partial profits on the position at 1.36. I would ideally wait for the pair to test 1.3750-1.3800 before adding to my short position. Yet the pair has since reversed at just above the 1.3700 mark and I'm not sure it will get that far. The next step seems as if a test of 1.3600 is likely, and a break below targets a fresh run towards lows.
Contributed By: DailyFx
Europe Session Key Developments
* Stocks Edge lower as China Increases Reserve Requirements
* 14 of the 18 Western European Benchmark Indexes Close Lower
European Stocks Close Lower Amid Debt Concerns and Chinese Economic Policy
European markets closed lower as investors waited on whether Ireland would accept a bailout and China increased reserve requirements in order to cool inflation. When a central bank decides to increase the reserves a bank must hold, they are essentially tightening credit and slowing the money multiplier process, thereby pursuing contractionary monetary policy. The effect of this is a decreased rate of inflation at the cost of slower economic growth. Overall, many investors feel that the economic picture remains uncertain as European debt concerns are still weighing down markets. National benchmark gauges declined in 14 of the 18 western European markets, as the FTSE 100 experienced the largest decline among the major indexes.
FTSE 100 / 5,732.83 / -35.88 / -0.62%
The FTSE 100 experienced the largest decline among the major western European gauges. Lloyds Banking Group Plc and HSBC Holdings Plc fell over one and a half percent. European banking shares dropped 2.3 percent today, the worst performance among 19 industry groups in the Stoxx Europe 600 index. Rio Tinto, the world’s third-largest mining company, fell 2.3 percent, while BHP Billiton ltd dropped 2.6 percent. Basic resource shares were the second largest decliners in the Stoxx Europe 600. Hammerson fell 2 percent as Morgan Stanley downgraded the stock to “equal weight” from “overweight.”
CAC 40 / 3,860.16 / -7.81 / -0.20%
The CAC 40 closed lower at the end of the trading session on Friday. Essilor International SA fell 0.9 percent, ending a two-day advance. The company was cut to “underperform” from “neutral” at Exane BNP Paribas. Lagardere SCA advanced 0.6 percent as the company may surpass its upgraded guidance for the year thanks to a stronger advertising market. Technicolor gained 2.6 percent, the largest advance in more than a month. The production and distribution services company announced a court rejected an appeal to its restructuring plan.
DAX / 6,843.55 / +11.44 / +0.17%
The benchmark DAX managed to be one of the few major European indexes to close in the green on Friday. Bayer jumped 2.2 percent after Germany’s largest drug and chemical maker announced it aims to cut about 800 million Euro a year in expenses. Volkswagen preferred shares surged 3 percent. The 20-member supervisory board approved the outlays for plants, vehicles, and developing the carmaker’s nine brands at a meeting today in German. Henkel AG rose 2.4 percent as the company was upgraded to “overweight” from “equal weight” at Barclays Plc.
IBEX 35 / 10,271.70 / -53.60 / -0.52%
The IBEX 35 closed lower as 7 out of 10 sectors retreated at the end of the week. The benchmark index closed lower for the first time in three days. Banco Bilbao Vizcaya Argentaria SA fell 1 percent to 8.26 Euros, the second drop this week. Spain’s second-largest bank today ends a 5.06 billion-Euro rights offering. Ferrovial SA advanced 1.6 percent, the stock’s third gain this week. The UK competition regulator announced it may reconsider its ruling that the company must sell three airports after the UK government cancel plans to build a third runway at Heathrow.
S&P/MIB / 21,385.45 / -95.92 / -0.45%
Italian equities lost 0.8 percent for the day and 0.6 percent for the week. Banca Popolare di Milano Scrl declined 2.4 percent, retreating from a 3.2 percent gain yesterday. The Milan-based cooperative bank was cute to sell from hold at UnicreditSpA. Lottomatica SpA, Italy’s largest lottery company, advanced 2.5 percent to 10.5 Euros, leading gains in the FTSE MIB.
Contributed By: DailyFx
Given all that stress that the Federal Reserve's currency debasement program is laying on the global economy, last week's G-20 summit in South Korea should have been the monetary equivalent of a military degradation for the U.S. dollar. The greenback should have been slapped across the face, stripped of its medals, and cashiered from the ranks of respected currencies. Instead the dollar escaped unscathed, retaining its privileged status as the world's reserve.
However, the meeting did have its dark moments for America. The troubles starting even before the summit began with the failure of president Obama to conclude a long-planned trade deal with South Korea. Once the G-20 meetings began in earnest, the United States made scant headway with its main initiative to pressure the Chinese on Yuan revaluation. Just when it looked like the dollar would benefit from strife in Europe, a joint statement by key European leaders signaled that potential problems within the euro-zone may have been averted. In other words, nothing from this meeting should give any confidence that the dollar has a bright future.
Over the past three years, while the Chinese Yuan has appreciated ever so slightly against the U.S. dollar, it has depreciated against almost all other major currencies. As a result, one may have expected wider support for America's calls for appreciation of the Chinese Yuan. But in Seoul this issue was buried amidst rancor and fractious all-night meetings between splintered partners. Most participants were so focused on America's second campaign of quantitative easing, that the question of Yuan appreciation was moved to the back burner.
In an effort to avert competitive devaluations, the U.S. proposed that nations should restrict their current account surpluses and deficits within agreed percentages of economic output. Ironically, this idea had been proposed by the British at Breton Woods in July 1944. But this was at a time when war-ravaged Europe was in huge current account deficit. America was in massive surplus and vetoed the idea. Now that America is in chronic deficit, it is surplus countries such as China, India, Brazil, and Germany that oppose the idea.
While such restrictions would certainly be beneficial for all, given the lack of international enforcement mechanisms, it's hard to envision how, when push comes to shove, sovereign countries would respect the guidelines. Certainly America's power to persuade is greatly diminished.
America has lost much of the enormous political, economic, and financial prestige it enjoyed following World War II. In past G-7 and G-20 meetings, what America suggested usually was adopted. Now that other nations see the United States in trouble with no clear plan, rancor has replaced respect and argument has supplanted compliance.
In economic terms, the world appears leaderless, and China is anxious to fill the vacuum. Although its economy is still but one-third the size of that of the United States, China's power is growing daily. It is clear that it will not bow to American pressure. However, as an ancient and experienced nation, China knows a thing or two about diplomacy. Publicly, at least, China withheld its closely held push to challenge the U.S. dollar's privileged role as the international reserve currency. There can be little doubt that China is carefully choosing its best moment to strike.
In the meantime, the dollar is benefited from continuing trouble in Europe. Based on the growing crisis in Ireland, it now seems clear that sovereign debt problems of many 'euro zone' countries were only papered over temporarily by the ECB and IMF rescue plan of early 2010. Hard working German voters are now voicing revulsion at the prospect of more bailouts. To stem a voter revolt, German Chancellor Merkel has called for private holders of sovereign bonds to share the losses. But there are problems with this approach.
The EU treaty precludes individual states from bailing out others for reasons deemed "unexceptional" (defined as issues within a country's control). In order to bypass this rule, Euro zone governments had persuaded their banks to buy sovereign bonds to camouflage a direct bailout. The deception worked. Investors moved funds out of the U.S. dollar and into the euro, driving it higher. However, Chancellor Merkel's pronouncement reversed this trend, the euro faced a second great crisis and the U.S. dollar experienced temporary strengthening. However, a joint G-20 announcement from the finance ministers of Germany, France, Italy, Spain, and Great Britain effectively diluted Chancellor Merkel's position. This German retreat was enough to stem euro declines.
As far as investors are concerned, the G-20 provided little new information, but confirmed the continuing drift. The international monetary system is still based upon the gravely flawed U.S. dollar. The Yuan will not be allowed to rise in the near term, the euro faces great political challenges, and the U.S. dollar seems continually to be devalued. Meantime, precious metals, key commodities, and hard currencies should continue to benefit.
Contributed By: DailyFx
I need to reflect on a few of my rules. First, I don't like to take on new positions that are short to medium-term before the weekend. Second, I like to keep my exposure to a specific currency or theme measured. I am tempting both of this requirements with my holdings heading into the weekend. In addition to the long-term and reduced size USDJPY long that is being carried over, new setups taken yesterday (so not technically in breach of my weekend rule - though I fully expected Friday to be a write off session for trend development) include short EURUSD, GBPUSD and NZDUSD. These are all based on the same concept - we are seeing a correction on a burgeoning risk aversion move that is naturally occuring given a lull in the fundamental wave that instigated the initial break. Looking ahead to next week, we have a range of fundamental themes that can easily inspire fear and deleveraging. However, it is up to the market to decide whether they will let fear overtake them. That said, we need to also account for the drained speculative interest with the extended Thanksgiving holiday period in the US - a period that usually curbs volatility as well.
As for my setups, the USDJPY carries the same explanation as before. Rather than this being a vote of confidence for the US dollar, it is based on a lack of confidence in the yen and a general belief that the Japanese currency should be so high through any concept of yield potential, financial stability or capital stability. I have a loose first target at 85; so we will see what happens. More demanding of my attention are my three new setups. EURUSD was entered short at 1.3635 with an initial stop and first target of 150 points. GBPUSD was taken short at 1.6035 with a 150 point buffer as well. And, the NZDUSD short was put on at 0.7775 with a 125 extension in both direction. I recognize that these are riskier than I usually allow for. To partially mitigate this risk, the position size is a third of my full size. Nonetheless, all of these are exposed to risk appetite trends as we await guidance on Ireland's bailout, China's inflation fight and the United States' housing problems.
Looking for those pairs that are one or two steps away from a great trade, the list is filled with some really attractive setups. At the top of my list is still that AUDCAD reversal pattern following the aggressive bull trend channel. Like gold and the S&P 500, consistent trends don't survive long without a meaningful pullback; so I continue to watch 0.99. Next is GBPJPY. This is a short-term look at the rising trend channel seen on the 60 minute chart of the past four weeks. Both a range and breakout trade is possible here. USDCHF is nearing parity in a possible reversal. GBPCAD is pushing deeper into a terminal congestion pattern. EURNZD is at the bottom of a mult-month and wide range. CHFJPY is maintaining its chop but the 83.50 pivot is looking dangerous. Finally, even though EURJPY has jumped from its range low; I'm still concerned about the euro's future.
Contributed By: DailyFx
U.S. Session Key Developments
* Investors Optimistic About Ireland Bailout
* China Raises Reserve Requirement for Second Straight Week
Markets Close Higher Amid Optimism over Potential Bailout Package
U.S. Markets closed higher at the end of the week as investors became more optimistic about a bailout for Ireland. However, the markets were kept from surging after China’s move to curb inflation. Friday, China raised its banks’ reserve requirements for the second time in 2 weeks. When a country requires banks to hold more cash in their reserves, banks will have to lend less money in order to meet the new standards. The move is expected to help curb inflation at the cost of some economic growth. Overall, markets plunged this week amid concern that the policy in China could cut demand for US goods and commodities. The markets managed to close higher after statements from Irish Prime Minister Cowen, who announced the second day of talks on a possible aid package is going well.
DJIA 30 / 11,203.55 / +22.32 / +0.20%
The DJIA closed slightly higher at the end of the trading session on Friday. Walt Disney and Boeing were among the Dow’s worst performers and experienced 1.8 and 1.6 percent declines, respectively. Hewlett-Packard advanced 1.6 percent ahead of its fourth quarter earnings report Monday.
S&P 500 / 1,199.73 / +3.04 / +0.25%
The S&P 500 also closed flat as investors were uncertain how to balance improved European outlook with the contractionary Chinese monetary policy. Among stocks in focus, AnnTaylor Stores surged 8.5 percent. The women’s apparel retailer reported fiscal third quarter profits that substantially outpaced expectations. The company also boosted its sales target for the year. Foot Locker climbed 12 percent after announcing better-than-expected profit in the fiscal third quarter as its comparable sales climbed and gross margin imporved. General Motors gave back some of yesterday’s gain, as the stock fell 0.3 percent. GM surged yesterday after the auto company returned to the public market.
NASDAQ / 2,518.12 / +3.72 / +0.15%
7 out of 10 sectors closed in the black Friday for the NASDAQ. The US benchmark gauge experienced the smallest advance among the three major indexes. Oil & Gas and Basic Materials led the index with 1.10 and 0.63 percent gains, respectively.
Contributed By: DailyFx
* Dollar Ready to Respond to a Clear Sentiment Trend but Liquidity may be an Issue Next Week
* Euro Traders Prepare for a Resolution for Ireland and to Shift the Focus on Portugal, Spain
* British Pound Stumbles on Drop in Construction Expectations, Tucker Downplaying Inflation
* Canadian Dollar Sensitive to Investor Optimism but CPI and Retail Sales May Steal the Show
* Japanese Yen Slowly Deflating as Market Comes to Grips with Lasting Stimulus
* Australian and New Zealand Dollars Remain Highly Sensitive to Ripples in Global Risk Appetite
Dollar Ready to Respond to a Clear Sentiment Trend but Liquidity may be an Issue Next Week
The dollar retraced nearly all of the gains it had made in the first two days of this past week when all was said and done. Friday offered up the third consecutive decline for the benchmark currency; and the technical implications of this final performance could not be ignored. For the trade-weighted dollar index, the week-ending push made a notable test of the same level that held the currency down for nearly six weeks before Tuesday’s critical breakout. It is no coincidence that this former ceiling is now marking a tentative floor to impede trend development. From the majors, we can see the same measured correction. The most familiar setup comes from EURUSD which has moved back up to the frequented 1.37 level; though retracements for GBPUSD, USDCAD and AUDUSD are very similar in nature even if the technical figures are not as prominent. What truly grounds this shared path for the greenback in fundamentals though is the correlation it maintains with other asset classes. With the S&P 500 equities index gravitating back towards 1,200 and gold testing $1,365 (the breaking point of a bull trend that directed price action for over three months), it is clear that there is an underlying current to investor sentiment itself.
Through the final 24 hours of this past trading week, there were notable updates on two of the market’s most headline-worthy themes. Ireland has focused general concerns surrounding the convoluted situation the European Union faces in securing financial stability in the region. That said, a definitive move from capital flows and the dollar in response to this matter is now being reserved for the next consequential development – namely, the announcement of a bailout. Therefore, speculation that Ireland will have to abandon its favorable tax policies and news that Allied Irish is marching towards a liquidity crisis is merely building interest into what traders see as a meaningful climax (though Europe’s troubles hardly end with this single member). The same, tepid interest from investor confidence was paid to the announcement that China had raised the reserve ratio for its banks for a fifth time this year. Though a step clearly intended to cool growth and capital turnover in the economy, the market has grown accustomed to the PBoC’s measured efforts. Going forward, either or both of these particular catalysts can shape the appeal of the dollar as a safe haven currency; but a market weary of the pitfalls in speculative trends overshooting fundamentals may require a more explicit resolution to these bigger fundamental themes before committing to a lasting run.
When the financial headlines are dedicated to global developments, it is easy to miss the fundamental developments that direct the dollar’s bearing. The US docket may have been empty of scheduled indicators through the final session of this past week; but comments directed to the Fed’s stimulus program bear reflection. Board member Plosser remarked Friday that it was “premature” to assume the central bank would buy the entire $600 billion available over the coming 8 months. If indeed the Fed decided it was appropriate to discontinue its monthly purchases, a significant burden would be lifted for the greenback. Looking out over the next week, we have a concentrated docket for economic releases. A range of indicators including the second reading of 3Q GDP, existing and new home sales, personal income and spending, durable goods and a national activity index are squeezed into a period foreshortened by the Thanksgiving holiday. Falling on Thursday, this American holiday will sap speculative liquidity over the final two days of the week. As such, it could be exceptionally difficult to jump start a meaningful trend next week.
Euro Traders Prepare for a Resolution for Ireland and to Shift the Focus on Portugal, Spain
We seem to detect new symptoms of the Euro-region’s financial troubles every day. However, the market seems to be acclimatizing itself to these developments, waiting for evidence of the true fallout. However, as fundamental traders, we should take note of these developments to assess the likelihood of and full consequences to a true crisis. With EU, IMF and ECB officials currently scrutinizing Ireland’s financial books; news that Allied Irish lost 17 percent of its deposits this year and tripled its dependency on ECB loans suggests there is no natural solution to be found. In the meantime, Germany and the Netherlands are forging ahead with permanent bailout regulations to share losses with bond holders.
British Pound Stumbles on Drop in Construction Expectations, Tucker Downplaying Inflation
Bank of England Deputy Governor Paul Tucker could have balanced dovish rate expectations when he said the group shouldn’t dilute its price stability commitments; but a forecast for prices to drop below the 2 percent target did little to further interest rate calls. For macro data, a quarterly RICS construction activity survey dropped to its lowest level in a year-and-a-half as a supply glut and weak economy curb activity.
Canadian Dollar Sensitive to Investor Optimism but CPI and Retail Sales May Steal the Show
When it comes to USDCAD, the influential swings in risk appetite trends are significantly subdued. For a true trend to develop for this pair, the outlook for growth and interest rates between the two has to shift. We may see just such a meaningful change develop next week. On the loonie’s docket, we have both retail sales and CPI data. This could raise doubts about growth and feed criticism in the BoC’s early hikes.
Japanese Yen Slowly Deflating as Market Comes to Grips with Lasting Stimulus
It is worth noting that over the past three weeks we have seen both a strong rallies and slumps in risk appetite trends. And, through it all, USDJPY has maintained its steady appreciation. From this, we can start to see the yen’s position as a safe haven fade – a reality that has been ignored for too long. Next week, CPI data will help to remind investors that there is long-standing deflation and little hope for yield in Japan.
Australian and New Zealand Dollars Remain Highly Sensitive to Ripples in Global Risk Appetite
In monitoring underlying sentiment trends, the natural inclination is to keep track of those currencies that are directly responsible for the fundamental bustle. However, given the nature of capital flow, it is those currencies that are at the extremes of the risk spectrum that see the biggest moves. Both the Aussie and Kiwi dollars are tuned into Irish, Chinese and the US news wires, waiting for their net meaningful trend.