Greenback to Take A Hit on Friday As Investors Digest Latest Fed Speech

By Joel Kruger, Technical Strategist Fri Nov 19 06:36:00 GMT 2010 Fed Chair Bernanke has been under some intense scrutiny over the past several days, with pressure and criticisms on the latest injection of liquidity into the system coming both domestically and internationally. Most recently, a letter from the Republicans calling into question the current ultra-accommodative policy has been getting a lot of attention, and the Fed has been forced to step up and defend its actions. The Fed has released the prepared text of a speech the Fed Chair is set to deliver at the European Central Bank conference in Frankfurt today, and the message is clear. The central bank will continue with the current policy as it is the only way to help the economy recovery from the latest crisis. There are two key takeaways from the speech. The first is that the central bank will continue to lower long-term rates, and the second is that foreign central banks are interfering with the Fed’s current policy through intervention efforts to weaken their own currencies.

The net takeaway from the speech is very USD bearish, and we would expect the buck to come under some more pressure on Friday once market participants take time to fully digest the text of the Fed speech. We have written in recent commentary of the likelihood for some broad based USD selling following the latest rally in the buck, and this should help to put more pressure on the Greenback into the weekend. However, we have still not given up on the buck, and feel that the USD will once again find bids into the early stages of next week.

On the surface, the tone of the speech is certainly very USD bearish, but the speech is also more likely than not in reaction to criticisms of current policy decisions that would only provoke a necessary defense from the Fed of such policy. It therefore stands to reason that the Fed would not come out and make a statement that calls into question their current efforts as that would only serve to undermine their decision making. But we do believe that there is another side to the Fed that is very much concerned with the longer-term threats of current monetary policy actions, and is looking for signs to start to reverse policy and rein in QE. Unfortunately, the Fed believes that current market conditions still do not warrant a reversal in policy, with the recovery still too fragile, and the priority still needing to be on the shorter-term threats to the economy. But irrespective of this latest speech, we have seen signs of a more balanced and reserved central bank in recent weeks. After all, the Fed only pumped in what they felt was necessary despite pressures from the markets to pump in more, and they also made it clear that they could rein in these measures at any time.

In the end, the latest speech is very USD bearish on the surface and we believe should open more USD selling on Friday. At the same time, we believe that the speech should be taken into the proper context as its intention is to highlight and defend current policy efforts. There clearly is another side to the Fed (not included in this speech) that is also very aware of the threat of current policy and looking to see more signs of recovery in the US economy so that it can begin to reverse policy. Economic data over the coming weeks in the US will be critical and this ultimately will determine what direction that Fed takes going forward. We believe that data will continue to show signs of improvement and this will allow the Fed to begin the long, slow and steady path of reversing policy, which should ultimately narrow yield differentials back in favor of the Greenback.

Elsewhere, it is worth noting that the Australian and New Zealand Dollars have been relatively underperforming in early Friday trade on the back of growing speculation and fear that China will once again look to tighten policy. Looking ahead, the economic calendar on Friday is basically non-existent, and the key focus will be the many central bankers that are slated to speak throughout the day, with many coming from the ECB conference in Frankfurt. US equity futures are trading flat into the European open, while commodities are mixed.

Written by Joel Kruger, Technical Currency Strategist

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Fri Nov 19 06:36:00 GMT 2010

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FOREX: Dollar Rally Cools Post Breakout as Investors Mull Financial Cracks, US Inflation

By John Kicklighter, Currency Strategist 18 November 2010 03:22 GMT Dollar Rally Cools Post Breakout as Investors Mull Financial Cracks, US Inflation Euro Buys Time with Irish Bailout Rebuke but Region-Wide Troubles will Force the Issue British Pound Traders Find Little Confidence in Employment Figures, What about Deficit Progress? Canadian Dollar Prepares for Capital Flows, Growth Forecast and BoC Quarterly Review New Zealand Dollar Boosted by Accelerated Inflation and Improved Consumer Confidence Dollar Rally Cools Post Breakout as Investors Mull Financial Cracks, US Inflation

Most experienced traders are familiar with the concept that a significant breakout is often followed by a short-term correction whereby the market makes it ultimate decision to catalyze the new-found trend or reverse the move to draw price back into a comfortable trading range. Both the dollar and risk appetite trends are currently in this transition period. Looking for the logic behind this pause during a period that many would think is a clear signal to plow into a new trend, there is both a technical and fundamental motivation. From the technical side of things, former support is often treated as new resistance (and vice versa) as the initial breakout flashes through momentum by clearing nearby entry and stop orders. As this accelerant is burnt off, the many speculators used to the old trend will attempt to jump back in on what they think is a ‘cheap’ price. Yet, as it becomes evident that the market is struggling to overtake that former floor, reality begins to set in and the eager traders capitulate. That said, a false breakout is the scenario where there is enough participation to push beyond the technical boundary and put the market back on its original path. We can see that most market benchmarks are in the process of determining which scenario will prevail. The Dollar Index, is pulling back towards the five-month trend and 50-day moving average that it just recently overtook. Reflecting on a broader theme, the S&P 500 marked a very tentative and modest bounce after posting its biggest drop in months to break a preternaturally consistent, two-month bull trend.

The fundamental aspect of this trading phenomenon is unique to our current situation. There are still very serious reasons to doubt the outlook for economic activity, financial stability and the prospect for returns; but it is difficult for market participants to throw in the towel on the impressive trend of the past few months. Since the beginning of September, considerable leverage was dedicated to taking part of the steady climb ahead of the Fed’s second stimulus program. Eventually, investors in equities, corporate debt and other risky assets will submit to the troublesome forecast; but there is currently a lull that is allowing traders to ignore reality. The most prominent threat, European financial stability, has recently found a temporary period of calm after Ireland refused stimulus at Tuesday’s EU meeting. However, this doesn’t improve the situation in the country’s banking system. In fact, it merely postpones a solution while financing costs across the region continue to balloon and the lines of support start to breakdown. Another building threat to risk appetite trends exists in China’s threats to curb inflation. This may seem a prudent economic policy; but the side effect is curbed speculation in one of the market’s favorite trading destinations.

The US is providing its own contribution to the global risk scheme. Adding credence to the Fed’s decision to add a second round of stimulus this month, the core measure of annualized CPI growth slowed to its weakest pace on record at 0.6 percent. This doesn’t really diminish the dollar any further because the expansionary policy has been largely priced in at this point; but it does remind us that there are lasting economic and market troubles related to deflation or stubborn disinflation. The data that we should pay more attention to is the housing starts data. Construction on new developments plunged 11.1 percent to its second lowest level on record owing largely to multi-home dwellings. Yet, this data should be put into context of the larger US housing sector problems. Not only is construction activity anemic; the wealth in home prices is further curbing confidence, a backlog of reposed properties is threatening to keep this sector from contributing to a recovery and ongoing issues with foreclosures threaten to trigger the financial mess tied up in real estate-based mortgages. US housing may pose a second wave crisis.

Related:Discuss the Dollar in the DailyFX Forum, John’s Analyst Picks: AUDUSD and AUDCHF offer Short-Term Setups in Eerily Quit Markets

Euro Buys Time with Irish Bailout Rebuke but Region-Wide Troubles will Force the Issue

Have conditions improved in Europe? It would seem so with the euro slowly retracing its steps after its significant decline of the past week. However, this tentative recovery is more accurately attributed to a pause in more pervasive financial concerns. Ireland is still the most immediate threat to the future of the shared currency. Finance Minister Lenihan’s decision to snub financial support from the EU at the group’s monthly meeting late Tuesday has not improved the situation. In fact, the uncertainty increases the risk for instability for the broader region. However, as the market awaits the EU, ECB and IMF’s assessment of the country’s ability to stabilize its own banking sector, there is time for reflection.

Yet, the market may not simply wait for policymakers to give them the official assessment of the market’s health. It was reported Wednesday that LCH.Clearnet – one of the largest clearing houses for European fixed income – raised its margin on Irish government debt by 15 percent for the second time in a week. The steps to smother confidence are progressive in this way. In the meantime, Ireland isn’t our only concern. Following up on its threat to withhold its next tranche of support to bailout Greece, Austrian officials said the EU was pushing back its December payment to January. Elsewhere, Portugal struggled in its recent bond auction; and it was rumored that the ECB had to buy Portuguese and Greek bonds.

British Pound Traders Find Little Confidence in Employment Figures, What about Deficit Progress?

Even though risk appetite took a slow turn north, the British pound was still struggling to gain traction. This was particularly surprising given a surprise decline in jobless claims through October; though the noncommittal BoE minutes help offset that fundamental marker. Perhaps speculation of a future stimulus program will carry more weight as we look ahead to public borrowing figures.

Canadian Dollar Prepares for Capital Flows, Growth Forecast and BoC Quarterly Review

The Canadian dollar has merely been following risk appetite and US dollar-based trends the past few days; but perhaps the currency’s own fundamental backdrop will carry more weight over the coming 24 hours. On the docket for Thursday are the Leading Indicators index and capital flows figures. For actual market influence though, the BoC’s quarterly review will likely carry the most weight for policy and growth forecasts.

New Zealand Dollar Boosted by Accelerated Inflation and Improved Consumer Confidence

It certainly helps that risk appetite trends were bullish; but the New Zealand dollar found an extra push through its own fundamental docket early Thursday morning. For interest rate hawks, the 1.2 percent reading on the 3Q producer price index output doesn’t necessarily promise future hikes; but it sets up the CPI numbers for the occasion. Also, consumer confidence would show relief in a bounce from a year low.

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ECONOMIC DATA

Next 24 Hours

Average Weekly Wages (QoQ) (AUG)

Average weekly wages rose in May by the smallest amount since 2006.

Average Weekly Wages (YoY) (AUG)

ANZ Consumer Confidence Index (NOV)

Sits at lowest reading since 2009.

Trade Balance (Swiss franc) (OCT)

Swiss exports declined in September, as European slowdown and strong franc hurt exports.

Euro-Zone Current Account s.a. (euros) (SEP)

Euro-Zone posted a current account deficit in the last 8 months.

Euro-Zone Current Account n.s.a. (euros) (SEP)

Retail Sales ex Auto Fuel (MoM) (OCT)

U.K. retail sales unexpectedly fell in September for a second month as consumers braced for the deepest budget squeeze since World War II.

Retail Sales ex Auto Fuel (YoY) (OCT)

Retail Sales inc Auto Fuel (MoM) (OCT)

Retail Sales inc Auto Fuel (YoY) (OCT)

Public Finances (PSNCR) (Pounds) (OCT)

U.K. posted the largest budget deficit for any September since modern records began in 1993.

Public Sector Net Borrowing (Pounds) (OCT)

Public Sector Net Borrowing ex Interv. (OCT)

Fell to six-month low in October.

Leading Indicators (MoM) (OCT)

Fell in Sept. for first time since '09.

International Securities Transactions (C$) (SEP)

Increased in the last two months.

Sales beat expectations in August.

Initial Jobless Claims (NOV 13)

Jobless claims fell last week to the lowest level in four months.

Increased in the last three months.

Likely rose for a third month in Nov.

RPX Composite 28 Day (YoY) (SEP)

RPX composite declined annually in August for a second straight month.

RPX Composite 28 Day Index (SEP)

ECB's Yves Mersch Speaks at Euro Finance Week

ECB's Trichet, Gonzalez-Paramo, Bini Smaghi Speak on Policy

BoE's Adam Posen Speaks on Monetary Policy

Bank of Canada Publishes Quarterly Review

Fed's Kevin Warsh Speaks on Financial Markets

Fed's Narayana Kocherlakota Speaks on Monetary, Fiscal Policy

Fed's Charles Plosser Speaks on Monetary Policy

SUPPORT AND RESISTANCE LEVELS

CLASSIC SUPPORT AND RESISTANCE - 18:00 GMT

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

INTRA-DAY PIVOT POINTS 18:00 GMT

INTRA-DAY PROBABILITY BANDS 18:00 GMT

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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

DailyFX provides forex news on the economic reports and political events that influence the currency market.
Learn currency trading with a free practice account and charts from FXCM.

18 November 2010 03:22 GMT Nov, 17 02:36 GMT FOREX: Dollar Rally Fortified by Crucial Reversal in S&P 500, Risk AppetiteNov, 16 02:36 GMT FOREX: Dollar Index Scores a Meaningful Bullish Breakout but European Issues, Risk Trends Still BlurredNov, 13 04:27 GMT FOREX: Dollar Ready to Rally as Europe Devolves into Crisis, G20 Sanctions Speculative Capital CurbsNov, 12 02:36 GMT FOREX: Dollar Finds Traction but Momentum Requires Risk Trends, G20 Surprises or Euro WeaknessNov, 11 02:36 GMT FOREX: Dollar Climb Winded as Reserve Diversification Calls Grow ahead of G20, Fed Reminds of QE2

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