FOREX: Dollar’s Biggest Rally in Two Weeks Does Little to Confirm a Bullish Reversal

• Dollar’s Biggest Rally in Two Weeks Does Little to Confirm a Bullish Reversal
• Euro: Efforts to Fill in Financial Gaps Offers the Euro Another Temporary Boost
• British Pound Reacts to a Drop in Business Orders with an Inflation Angle
• Canadian Dollar Slips before Retail Sales Data Gives a Bearing on Growth
• Japanese Yen faces Long Term Problems as CDS Spreads Swell in the Face of Debt
• New Zealand Dollar Finds Little Strength in Retail Sales, Business Confidence Figures

Dollar’s Biggest Rally in Two Weeks Does Little to Confirm a Bullish Reversal

It’s difficult to get a read on the market’s Thursday. On one extreme, we see commodities plunge and drag commodity currencies with it. On the opposite side of this spectrum, the fundamentally-troubled euro surged and Japanese yen tumbled. And, in the middle of it all, the US dollar put in for its biggest daily advance in two weeks. This seems a very contradiction in its nature given what we have come to expect from correlations. But that is where the disconnect should be traced to – relationships between different assets can and do change. The past 24 hours, we have been dealt the same general story that has prevailed over the past few months: the absence of a prominent underlying driver. With fear surrounding Europe temporarily sidelined and China’s long-term issues still simmering (they will almost certainly hit an explosive point); each currency and asset class is finding itself jostled by personalized drivers.

Looking for the specific catalysts for the greenback Thursday, there was a sufficient mixture of risk aversion and improved fundamental outlook to guide the Dollar Index higher. From the investor optimism side of the coin, many of the benchmark equities indexes were aiming lower through the end of their respective sessions. Tracking this performance, the Hang Seng dropped 1.7 percent and the FTSE 100 dropped 1.8 percent; though the S&P 500 would only nudge 0.13 percent lower. In the early Asian session, momentum was stoked by the release of the 4Q Chinese data. While the year-to-date GDP reading printed a remarkable 10.3 percent performance; the confidence this would otherwise stoke in international trade was dampened by the threat that a 4.6 percent clip of inflation poses (steps to further curb output and returns). The other role the Chinese growth figures play is as a leading indicator for activity in the US and other advanced economies. The advance US 4Q GDP figures are due next Friday; and you can bet, they will be closely watched.

In the meantime, the US economic docket would perform a necessary role of bolstering the perception of the dollar. Aside from the Philly Fed manufacturing index, everything listed offered a tangible improvement. Initial jobless claims marked their biggest drop since February of last year and the Leading Indicators index was well above its consensus. But, it was the existing home sales figures that really caught the market off guard. The 12.3 percent swell in sales was the biggest on records going back to 1999; but it bears mention that 36 percent of these sales were on distressed properties and 2010 was the worst year for sales since 1997. There is still a long way to go before this economy is outperforming.

Related: Discuss the Dollar in the DailyFX Forum, John’s Analyst Picks: GBPJPY and AUDUSD Lead Notable Cross Opportunities

Euro: Efforts to Fill in Financial Gaps Offers the Euro Another Temporary Boost

Though the euro was slightly down on the day against the benchmark dollar; a look at the currency’s performance elsewhere offers a very different perspective of health. The shared currency surged against the Swiss franc, British pound and high-yield commodity currencies alike even though the fundamental backdrop was only modestly improved. When analyzing the fundamental health of the euro, the first thing we still go to is the level of risk associated to a spreading financial crisis in the region. Perhaps the biggest headline was the news that Spain was looking to recapitalize its ‘cajas’ (savings banks) ahead of a second round of EU stress tests. This was likely a necessary step and a good catalyst for the crisis to fell Spanish boarders; but the gesture may ultimately be too little too late. In the meantime, Goldman Sachs’ head of Fixed Income warned Greece would not likely repay all its bondholders, Moody’s said it was reviewing Portugal’s exports as it related to its sovereign credit rating and Irish Prime Minister called an election for March 2011. These are not immediate threats and can be conveniently ignored – that is until fear swells once again. Looking ahead to tomorrow, the German IFO business sentiment data is worthy of your attention.

British Pound Reacts to a Drop in Business Orders with an Inflation Angle

A disappointing indicator for economic growth should lead a currency lower, right? Not necessarily. For sterling traders, the CBI business optimism survey is a second tier economic indicator; but it does give insight into an important topic: will the UK be able to grow its way through austerity? Optimism amongst business leaders seemed to pump up from the previous reading’s lull; but the measure on export orders showed an even report of those seeing growth and those seeing contraction; while total orders marked a sharp turn for the negative. The saving grace for this particular report was the prices received component, which is just off a two-decade low. This is yet another growth reading that produces an indirect boost to inflation. And, so we have interest rate speculation to offset growth potential yet again.

Canadian Dollar Slips before Retail Sales Data Gives a Bearing on Growth

The Canadian dollar took a significant tumble Thursday, helped along by the general underperformance of commodities. The sharp drop in crude certainly didn’t help the picture. As for event risk, the Leading Indicators figure gave little boost to the economic outlook. Looking ahead to tomorrow; retail sales figures will be a higher-level event risk. Will it bolster growth expectations and revive interest rate speculation?

Japanese Yen faces Long Term Problems as CDS Spreads Swell in the Face of Debt

Evaluating the Japanese yen is generally an effort to establish the ebb and flow of carry; because the currency seems to be permanently branded as a funding currency. However, we have seen the yen surge despite a rise in risk appetite that would be seen as bolstering carry. Perhaps what is needed is an additional booster. With CDS spreads hitting a six-month high; we can see a clear evaluation of the country.

New Zealand Dollar Finds Little Strength in Retail Sales, Business Confidence Figures

The kiwi dollar’s connection to commodities and risk appetite trends is so strong that it seems to overwhelm regular fundamental trends. On the docket early Friday, we had both retail sales for November and a December business sentiment survey. Both were better than expected; but NZDUSD would do little to recover lost ground through Thursday’s session. Perhaps we are waiting for next week’s RBNZ rate decision.

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ECONOMIC DATA

Next 24 Hours

Currency	GMT	Release	Survey	Previous	Comments
NZD	21:30	Business NZ PMI (DEC)	-	52.7	Ticks up to 53.1
NZD	21:45	Retail Sales (MoM) (NOV)	1.1%	-2.4%	Better than expected at 1.5%
NZD	21:45	Retail Sales Ex-Auto (MoM) (NOV)	0.5%	-1.6%	Worse than expected at -0.2%
JPY		Cabinet Office Monthly Economic Report	-	-	No surprises expected
AUD	0:30	Import Price Index (QoQ) (4Q)	-	0.7%	Export prices surge with commodities
AUD	0:30	Export Price Index (QoQ) (4Q)	-	7.8%
AUD	0:30	RBA Foreign Exchange Transaction (Australian dollar) (DEC)	-	342M	Typically little variation in this data
JPY	4:30	All Industry Activity Index (MoM) (NOV)	0.2%	-0.2%	Would be first increase in 4 months
EUR	7:45	French Business Confidence Indicator (JAN)	-	103	All these French indicators have been steadily trending higher
EUR	7:45	French Own-Company Production Outlook (JAN)	-	8
EUR	7:45	French Production Outlook Indicator (JAN)	-	10
CHF	8:00	Money Supply M3 (YoY) (DEC)	-	6.4%	Has not translated into inflation
CHF	8:00	Real Estate Index Family Homes (4Q)	-	384.3	All-time high house prices
EUR	9:00	German IFO Business Climate (JAN)	109.9	109.9	These German economic indicators are sitting at record highs
EUR	9:00	German IFO Current Assessment (JAN)	113.2	112.9
EUR	9:00	German IFO Expectations (JAN)	106.5	106.9
GBP	9:30	Retail Sales (MoM) (DEC)	-0.2%	0.3%	A modest month-over-moth decline is forecast, but overall trend is for steady growth over last year
GBP	9:30	Retail Sales (YoY) (DEC)	1.3%	1.8%
GBP	9:30	Retail Sales w/Auto Fuel (MoM) (DEC)	-0.2%	0.3%
GBP	9:30	Retail Sales w/Auto Fuel (YoY) (DEC)	1.1%	1.1%
CAD	13:30	Retail Sales (MoM) (NOV)	0.4%	0.8%	Would be the sixth increase in as many months
CAD	13:30	Retail Sales Less Autos (MoM) (NOV)	0.4%	0.9%
Currency	GMT	Upcoming Events & Speeches
-	-:-	-

SUPPORT AND RESISTANCE LEVELS

CLASSIC SUPPORT AND RESISTANCE - 18:00 GMT

Currency	EUR/USD	GBP/USD	USD/JPY	USD/CHF	USD/CAD	AUD/USD	NZD/USD	EUR/JPY	GBP/JPY
Resist 2	1.3615	1.6420	89.00	1.0000	1.0922	1.0600	0.8230	127.60	146.05
Resist 1	1.3534	1.6034	86.00	0.9775	1.0750	1.0200	0.8000	120.00	140.00
Spot	1.3466	1.5983	82.10	0.9553	0.9956	0.9974	0.7652	110.56	131.22
Support 1	1.2900	1.5312	80.00	0.9300	0.9800	0.9600	0.6850	103.80	125.00
Support 2	1.2585	1.5186	75.00	0.9000	0.9700	0.9375	0.6585	100.00	119.00

CLASSIC SUPPORT AND RESISTANCE –EMERGING MARKETS 18:00 GMTSCANDIES CURRENCIES 18:00 GMT

Currency	USD/MXN	USD/TRY	USD/ZAR	USD/HKD	USD/SGD		Currency	USD/SEK	USD/DKK	USD/NOK
Resist 2	13.8500	1.6755	7.2790	7.8165	1.4945		Resist 2	7.7500	5.7800	6.2750
Resist 1	12.5000	1.5931	7.1750	7.8075	1.4655		Resist 1	7.5800	5.6625	6.1150
Spot	12.0875	1.5491	6.9937	7.7789	1.2825		Spot	6.6260	5.5339	5.8232
Support 1	11.7200	1.4724	6.4000	7.7490	1.2750		Support 1	6.4500	5.2625	5.7030
Support 2	11.4400	1.3475	5.9200	7.7450	1.2500		Support 2	6.1250	5.1000	5.5200

INTRA-DAY PIVOT POINTS 18:00 GMT

Currency	EUR/USD	GBP/USD	USD/JPY	USD/CHF	USD/CAD	AUD/USD	NZD/USD	EUR/JPY	GBP/JPY
Resist 2	1.3487	1.6004	82.17	0.9566	0.9965	1.0026	0.7707	110.65	131.33
Resist 1	1.3476	1.5994	82.14	0.9559	0.9961	1.0000	0.7680	110.60	131.28
Pivot	1.3467	1.5986	82.07	0.9554	0.9955	0.9983	0.7661	110.52	131.18
Support 1	1.3456	1.5976	82.04	0.9547	0.9951	0.9957	0.7634	110.47	131.13
Support 2	1.3447	1.5968	81.97	0.9542	0.9945	0.9940	0.7615	110.39	131.03

INTRA-DAY PROBABILITY BANDS 18:00 GMT

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Currency	EUR/USD	GBP/USD	USD/JPY	USD/CHF	USD/CAD	AUD/USD	NZD/USD	EUR/JPY	GBP/JPY
Resist. 3	1.3647	1.6153	83.03	0.9670	1.0060	1.0109	0.7758	112.04	132.88
Resist. 2	1.3602	1.6110	82.80	0.9641	1.0034	1.0075	0.7731	111.67	132.47
Resist. 1	1.3557	1.6068	82.57	0.9611	1.0008	1.0042	0.7705	111.30	132.05
Spot	1.3466	1.5983	82.10	0.9553	0.9956	0.9974	0.7652	110.56	131.22
Support 1	1.3375	1.5898	81.63	0.9495	0.9904	0.9906	0.7599	109.82	130.39
Support 2	1.3330	1.5856	81.40	0.9465	0.9878	0.9873	0.7573	109.45	129.97
Support 3	1.3285	1.5813	81.17	0.9436	0.9852	0.9839	0.7546	109.08	129.56

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Written by: John Kicklighter, Currency Strategist for DailyFX.co