Forex: Euro Regains Footing, British Pound To Consolidate Ahead of 4Q GDP

http://www.dailyfx.com/forex/fundamental/daily_briefing/session_briefing/us_open/2011/01/21/01-21-11.html

Talking Points

• British Pound: Retail Spending Contracts
• Euro: German Business Confidence Hits Record-High
• Canadian Dollar: Retail Sales To Climb For Six Straight Months
• U.S. Dollar: Weighed By Risk Appetite, U.S. Stocks To Open Higher

The near-term rally in the Euro gathered pace on Friday and the exchange rate may continue to push higher throughout the North American trade as investors raise their appetite for risk. The EUR/USD advanced to a fresh monthly high of 1.3565 as business confidence in Germany rose to a record-high in January, and the pair may continue to retrace the decline from back in November as the outlook for growth and inflation improves. As the euro-dollar crosses back above 1.3500, the 50.0% Fibonacci retracement from the 2009 high to the 2010 low, the pair may work its way towards former support around 1.3700, but the exchange rate may consolidate throughout the remainder of the day as market liquidity going into the weekend.

The IFO business confidence survey unexpectedly increased to 110.3 from a revised 109.8 in December to mark the highest reading since the series began in 1991, while the gauge for future expectations rose to 107.8 during the same period from 106.8 in the previous month. As growth prospects improve, the European Central Bank may turn increasingly hawkish over the coming months, and the central bank may see scope to implement its exit strategy later this year as it maintains its one and only mandate to ensure price stability. However, the near-term rally in the euro could be short-lived as European policy makers maintain a relaxed approach in addressing the sovereign debt crisis, and the single-currency is likely to face additional headwinds over the coming months as the risk for contagion continues to bear down on investor confidence.

The British Pound rallied to a high of 1.5961, but the exchange rate may hold steady going into the North American session as it trades within the previous day’s range. Nevertheless, retail spending in the U.K. slipped 0.3% in December, which was largely in line with expectations, while sales including auto fuel tumbled 0.8% amid forecasts for a 0.2% decline. In turn, private consumption may weaken further over the coming months as households cope with higher inflation paired with the ongoing weakness in the real economy, and the Bank of England may retain its wait-and-see approach throughout the first-half of the year as it aims to balance the risks for the region. As market participants expect economic activity in the fourth quarter to expand at a slower pace, the British Pound may come under pressure over the following week, and the BoE may continue to talk down the risk for inflation as the central bank expects the substantial margin of slack within the real economy to damped price growth.

The greenback weakened across the board on Friday, with the USD/CAD slipping to a low of 0.9951, and the reserve currency may continue to selloff throughout the North American trade as equity futures foreshadow a higher open for the U.S. market. Nevertheless, the Canadian dollar may show a bullish reaction to the retail sales report as market participants expect household spending to expand for the sixth consecutive month, and the dollar-loonie may continue to retrace the advance from earlier this week as the data reinforces an improved outlook for Canada.

Will the EUR/USD retrace the advance from September? Join us in the Forum

Related Articles: Weekly Trading Forecast - 01.17.11

To discuss this report contact David Song, Currency Analyst:dsong@fxcm.com

FX Upcoming

Currency	GMT	EST	Release		Expected	Prior
CAD	13:30	08:30	Retail Sales (MoM) (NOV)		0.4%	0.8%
CAD	13:30	08:30	Retail Sales Less Autos (MoM) (NOV)		0.4%	0.9%

Currency	GMT	Release	Expected	Actual	Comments
NZD	21:30	Business PMI (DEC)	--	53.1	Highest since June
NZD	21:45	Retail Sales (MoM) (NOV)	1.1%	1.5%	Bounces back from sharp contraction
NZD	21:45	Retail Sales Ex-Auto (MoM) (NOV)	0.5%	-0.2%	2nd straight contraction
AUD	00:30	Export Price Index (QoQ) (4Q)	--	-8.1%	1st contraction in 2010
AUD	00:30	Import Price Index (QoQ) (4Q)	--	-3.8%
AUD	00:30	RBA Forex Transaction (AUD) (DEC)	--	855M	Highest since June
JPY	04:30	All Industry Activity Index (MoM) (NOV)	0.2%	-0.1%	4th straight contraction
EUR	07:45	French Business Confidence Indicator (JAN)	--	108	Continues 2010 strength
EUR	07:45	French Own-Company Production Outlook (JAN)	--	16	Best since Oct ‘10
EUR	07:45	French Production Outlook Indicator (JAN)	--	10	Remains at strongest level
CHF	08:00	Money Supply M3 (YoY) (DEC)	--	6.6%	Best since Sept.
CHF	08:00	Real Estate Index Family Homes (4Q)	--	390.0	Hits a record high
EUR	09:00	German IFO Busines Climate (JAN)	109.9	110.3	Remains on record-breaking course.
EUR	09:00	German IFO Current Assessment (JAN)	113.2	112.8
EUR	09:00	German IFO Expectations (JAN)	106.5	107.8
GBP	09:30	Retail Sales (MOM) (DEC)	-0.3%	-0.3%	Softer than expected figures due to harsh winter conditions.
GBP	09:30	Retail Sales (YoY) (DEC)	1.3%	1.0%
GBP	09:30	Retail Sales w/ Auto Fuel (MOM) (DEC)	-0.2%	-0.8%
GBP	09:30	Retail Sales w/ Auto Fuel (YoY) (DEC)	1.1%	0.0%

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An Intra-day NZD/USD Channel is Creating Scalping Environment

http://www.dailyfx.com/forex/fundamental/daily_briefing/daily_pieces/scalping_report/2011/01/21/An_Intra-day_NZDUSD_Channel_is_Creating_Scalping_Environment.html

The NZD/USD has seen choppy trade since its sharp decline following a weak core retail sales reading. Demand for goods outside of automobiles fell 0.2% versus expectations for a 0.5% rise which overshadowed the 1.5% gain in the headline reading and added to the dimming outlook for further tightening. Broader risk aversion had also weighed on the high yielder as markets grew concerned that China would begin to raise rates to cool their economy. A surge in the Asian giant’s benchmark money-market rate as lenders ran short of cash as they deal with four raises in reserve requirements has limited the potential for tightening and helped foster a return of risk appetite. The broader demand for yields and the prevailing bearish sentiment is limiting the risk for a breakout, creating an ideal scalping environment. However, the higher spreads that the pair generates will limit profit potential for high frequency trades and should be taken into account when generating and closing positions.

Key Technical Levels

Charts created using Strategy Trader– Prepared by John Rivera

The 100-Day SMA at 0.7532 is proving short-term support and could limit downside risks for the pair. We also see the lower bound of a developing range as potential support. The 50-Day SMA at 0.7587 has helped slow bullish momentum and could provide a short-term resistance level. Meanwhile, an ascending intra-day channel is providing target level for traders to enter and exit positions.

Charts created using Strategy Trader– Prepared by John Rivera

Key Support/ResistanceLevels to Watch

Pair	S/R	Level	Spot	Valid Since	Market Influence
EUR/JPY	Resistance	200-Day SMA	112.30	12/08/09	High
NZD/USD	Support	100-Day SMA	75.38	12/23/10	Low
GBP/JPY	Resistance	200-Day SMA	132.72	11/19/09	High

Quantitative Metrics

The NZD/USD’s Bollinger band width has narrowed to 325 pips as the pair has settled into a short-term range. Its level of variance ranks near the bottom of the most active pairs, enhancing its attractiveness as a scalping target. However, recent volatility has pushed the ATR to 90 pips which on a relative basis are the highest amongst the majors as it accounts for 1.18% of spot. Overall implied volatility levels are on the decline which is potentially reducing risks for high frequency traders.

Charts created using Strategy Trader– Prepared by John Rivera

Volatility / Activity Indicators

	EURUSD	GBPUSD	USDJPY	USDCHF	USDCAD	AUDUSD	NZDUSD	GBPJPY	EURJPY
ATR(14)	0.0154	0.0154	0.7422	0.0113	0.0075	0.0111	0.0090	1.2400	1.2294
ATR%	1.13%	0.96%	0.90%	1.18%	0.76%	1.12%	1.18%	0.94%	1.10%
20-5 Day SMA	-0.0196	-0.0292	-0.0274	-0.0039	0.0029	0.0067	-0.0018	-2.4438	-1.6599
Boll. Band Width	0.0740	0.0847	2.5158	0.0473	0.0235	0.0422	0.0325	8.3773	5.4748
1 wk Implied Vol	12.4950	9.9850	10.2875	12.0075	8.8300	12.1400	12.8300	10.7900	11.6450

Click For Additional Info On Scalping Strategies

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To discuss this report or be added to the email list, contact John Rivera, Currency Analyst: jrivera@fxcm.com

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Dollar Slowly Weighed down by Risk Trends, Stimulus, Euro Recovery

http://www.dailyfx.com/forex/fundamental/article/what_fed_watches/2011/01/21/Dollar_Slowly_Weighed_by_Risk_Stimulus_Euro.html

Be sure to join DailyFX Analysts in discussing their outlook for the Fed and its impact on the dollar in the DailyFX Forex Forum

Credit Market	Previous	Current	Change	% Change	Outlook *
DJ Credit Default Swaps	86.003	82.429	-3.574	-4.16%	Improving
10 Year Junk-Bond Spread	459.35	455.75	-3.6	-0.78%	Improving
Credit Card Delinquencies	4.15	3.91	-0.24	-0.24%	Improving
Mortgage Delinquencies	9.85	9.13	-0.72	-0.72%	Improving
US 3 Month Libor Rate	0.303	0.303	0	0.00%	Deteriorating
Total Money Market Funds	2835.77	2796.47	-39.3	-1.39%	Improving
Stock Market	Last Week	Current	Change	% Change	Outlook
Dow Jones Industrial Average	11637.45	11837.93	200.48	1.72%	Improving
Dow Jones Real Estate Index	216.17	220.99	4.82	2.23%	Improving
Dow Jones Financial Index	377.48	389.82	12.34	3.27%	Improving
Dow Jones Retail Index	88.98	90.79	1.81	2.03%	Improving
S&P Volatility	17.54	15.87	-1.67	-1.67%	Improving
Put-Call Ratio	1.59	1.48	-0.11	-0.11%	Improving
Market Breadth (Adv - Dec)	0.4346	0.6249	0.1903	19.03%	Improving
Economic Indicators	Previous	Current	Change	% Change	Outlook
GDP (Annualized)	2.8	2.6	2.6	2.60%	Improving
Mortgage Applications	2.3	2.2	2.2	2.20%	Improving
Initial Jobless Claims	423	445	22	5.20%	Deteriorating
Consumer Confidence (CB)	74.5	72.7	-1.8	-2.42%	Deteriorating
ISM Manufacturing	56.6	57	0.4	0.71%	Deteriorating
ISM Services	55	57.1	2.1	3.82%	Deteriorating
ISM Services - Employment	52.7	50.5	-2.2	-4.17%	Deteriorating

An Improving outlook means the Federal Reserve coulduse thisindicator

to support a rate hike. The opposite stands for a deteriorating outlook.

The Economy and the Dollar

There are times when a currency is the master of its own destiny; but more often than not, larger fundamental themes overshadow those innate developments that lull many into expecting a straightforward path. This is the condition that the dollar now finds itself in. While, it could be said that the greenback has leveraged its strength and weakness primarily through its role as a liquid safe haven, we can see these drivers have started to firm up substantially this past week. Acting as a constant pressure, risk appetite has extended the S&P 500’s consistent advance to scale heights not seen in over two years. And yet, consistent as the climb may be; the conviction in this bearing is noticeably flimsy. This leaves the responsibility of substantial dollar selling to fall to another major function of the benchmark currency: acting as the primary counterpart to the euro. Just as surely as this role helped the dollar gain ground when the Ireland bailout accelerated a deterioration of market conditions; the subsequent suite of proposals aimed at stabilizing the Euro-area’s finances have leveraged a euro (and therefore dollar) correction. Looking forward, the euro’s indirect influence will remain a dominant force behind the dollar’s performance. Yet, we should also consider the impact that native event risk could have on the currency as well. The FOMC rate decision can tap into speculation surrounding the warping stimulus efforts; while the advanced reading of 4Q GDP can revive an interest in comparative growth (or perhaps leverage risk appetite).

A Closer Look at Financial and Consumer Conditions

Financial market conditions seem to have improved substantially over the past few weeks. Aside from the taste of risk appetite seen in many of the capital market benchmarks; we have seen a couple of the global market’s biggest threats temper. At the top of list for concern, European Union officials have made open-ended promises for boosting support of their financial system. And, while the likelihood of the most critical proposals finding a popular vote is low; the crowd’s bloodlust has been satisfied for now. From China, the strong 4Q GDP numbers have temporarily offset concerns that the additional measures will likely be taken to cool inflation. And, in the US, a relatively strong 4Q earnings season so far has pushed back the threat of remuneration for stimulus for the time being.

US economic data crossing the wires over the past week has produced a modest impact on the dollar itself. However, the influence on the appetite for risk has once again proven itself to be meaningful. Among the highlights were a drop in the trade deficit, the sixth consecutive monthly rise in retail sales, a strong industrial production figure and a surge in existing home sales. And, while the University of Michigan consumer sentiment survey would slip somewhat from the previous reading, it was still well into positive territory. The net effect: we are seeing the evidence of a slow but true recovery. That said, the cumulative influence of all the data from this past week will not measure up to the single report of the advanced 4Q GDP reading. Growth is essential for return; but it is also the a prerequisite for withdrawing stimulus.

The Financial and Capital Markets

The markets have driven the proliferation of risk appetite even further this past week. However, deviation in a few key places draws concern that fundamental conviction may be less durable than the S&P 500’s climb would suggest. If we were to look solely at the benchmark US indexes; we would be left with the impression that there is little question about conviction. However, it is important to maintain a global macro perspective when there are distorting factors like stimulus that need to be accounted for. It should strike any investor as concerning that the Chinese equity market is itself is at three-month lows; because this particular economy has stood as a benchmark for what optimal returns could be had given current global conditions. And, back in the US, we have seen earnings take center stage. And, once again, the results seem generally promising. For the most part, financial and general industry benchmarks seem to be booking meaningful profit despite a dependency of stimulus and unquestionable lack of domestic demand. A year ago, the numbers alone would be enough to drive risk-taking efforts. However, skepticism is starting to seep in. Creative accounting and reliance on temporary factors (government aid, a cheap currency as a subsidy, emerging market demand) will not be able to sustain the world’s largest economy through a true multi-year growth phase. Yet speculators will be happy to take advantage of cheap capital and stimulus-led returns as long as they can.

A Closer Look at Market Conditions

The general trend between physical and financial assets remained relatively tight through the past few weeks. This in itself is an oddity though considering commodity inflation necessarily degrades growth. This simply fundamental reality, however, must fight the forced interest in risk appetite that keeps capital seeking out the highest return. For the benchmark S&P 500, 28-month highs were tested intra-week and crude marked its own relative high. And, though a late week correction seems as if it may shake some long-term sense into market participants; the draw of high returns will likely keep the larger trends in place.

Checking the standard measures of risk, we continue to see a market content on maintaining their yield-bearing positions with comparatively little regard for the risks it involves. From the S&P 500-based VIX, lows last seen in 2007 are just in sight while the currency equivalent slipped to four-month lulls of its own. In the meantime, even credit default swap spreads have shown marked improvement in Europe (which happens to be one of the most threatening areas for global finance). It should be remembered that the need for protection from risk exposure is at its highest when the markets are at their zenith. Yet, that is inevitably the time when trades try to squeeze as much leverage out as they can for greater returns.

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

To receive John’s reports via email or to submit Questions or Comments about an article; email jkicklighter@dailyfx.com

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