USD Pares Early Losses- Index Remains at Risk as Volume Diminishes

By Michael Boutros, Currency Analyst

The greenback was marginally higher at the close of North American trade with the Dow Jones FXCM Dollar Index (Ticker: USDollar) squeezing out a fractional advance of just 0.06% on the session. Euphoria from the ECB’s Long-Term Refinancing Operations or LTRO was short lived in early US trade as markets pared early gains on extremely low volume to trade in negative territory for the majority of the session before a late day rally saw Dow the S&P close higher by 0.3% and 0.19% respectively. The NASDAQ was unable to recoup losses with the index off by nearly 1% at the close. The ECB’s move to offer three-year loans to banks at an interest rate of just 1% temporarily eased liquidity concerns after the LTRO saw much stronger demand than expected with 523 banks borrowing a staggering €489 billion, dwarfing consensus estimates for €310 billion in loans from the central bank. However speculation regarding whether or not banks would use the funding in a synthetic carry trade to buy sovereign debt at higher yields continues to weigh on market sentiment. The mere fact that more than 500 banks requested funding suggests that the situation in Euro region may be worse than expected and that banks may see further significant risks as we head into 2012. Treasury yields on periphery sovereign debt also continued to climb despite the central bank’s lending facility with yields on Italian and Spanish 10-year paper toping 6.7% and 5.2% respectively.

The dollar managed to pare early losses after rebounding off trendline support dating back to the October lows to close above the key 61.8% Fibonacci extension taken from the August 1st and October 27th troughs at 9950. Key daily support continues to hold at the 50% extension at 9853 backed closely by the 50-day moving average at 9825. The daily relative strength index looks to be reversing to the topside with a break above RSI resistance likely to see the dollar gain enough momentum to breach the 76.4% extension at 10,070.

An hourly chart shows the index breaking below short-term channel support in overnight trade before closing back within the confines of the channel formation dating back to the December 14thhigh. Interim resistance stands at the 10,000 mark with a breach here eyeing topside targets at 10,040 and the 76.4% Fibonacci extension at 10,070.So long as the index holds above the 50% extension at 9853 our medium-term bias remains weighted to the topside as traders seek refuge in the perceived safety of the reserve currency amid ongoing concerns over the European debt crisis and stronger US data.

The greenback advanced against two of the four component currencies highlighted by a 0.27% against the euro which moved a full 117.54% of its daily ATR. Debt concerns continue to plague the region despite the ECB’s new record breaking liquidity measures as investors remain reluctant to move into the single currency. The yen was also heavy against the greenback today as dollar advances put pressure on the low yielder which fell 0.26% on the session. The aussie and the sterling were the top performers of the lot with modest advances of 0.13% and 0.09% respectively.

Tomorrow’s economic calendar is highlighted by the 3Q annualized GDP, personal consumption, and the University of Michigan confidence survey. Both the 3Q GDP revision and the GDP price index is expected to hold at 2.0% and 2.5% respectively with the personal and core consumption also seen holding at 2.3% and 2.0% respectively. Consensus estimates call for the University of Michigan confidence survey to top last month’s read with a print of 68, up from 67.7, with leading indicators expected to weaken for 0.3% from 0.9%. If the data continues to improve, look for the dollar to remain well supported as domestic prospects improve and European concerns persist. However as liquidity dries up ahead of the holiday break, the possibility for a risk rally of some magnitude continues to threaten the reserve currency as we head into the close of the week.

Upcoming Events

Date	GMT	Importance	Release	Expected	Prior
12/22	13:30	LOW	Chicago Fed National Activity Index (NOV)	-	-0.13
12/22	13:30	HIGH	Gross Domestic Product (Annualized) (3Q T)	2.0%	2.0%
12/22	13:30	HIGH	Gross Domestic Product Price Index (3Q T)	2.5%	2.5%
12/22	13:30	MEDIUM	Personal Consumption (3Q T)	2.3%	2.3%
12/22	13:30	MEDIUM	Core Personal Consumption Expenditure (QoQ) (3Q T)	2.0%	2.0%
12/22	13:30	LOW	Initial Jobless Claims (DEC 17)	375K	366K
12/22	13:30	LOW	Continuing Claims (DEC 10)	-	3603K
12/22	14:55	HIGH	U. of Michigan Confidence (DEC F)	68	67.7
12/22	15:00	MEDIUM	Leading Indicators (NOV)	0.3%	0.9%
12/22	15:00	LOW	House Price Index (MoM) (OCT)	0.2%	0.9%

Courtesy: DailyFX

FOREX: Euro Outlook Hinges on ECB LTRO Allotment, BOE Minutes on Tap

By Ilya Spivak, Currency Strategist

Talking Points

• US Dollar Sold as Asian Stocks Followed Wall Street Higher
• Euro May Rise on Signs of Strong ECB 3-Year LTRO Demand
• Bank of England Minutes Unlikely to Boost QE Expectations

The US Dollar (ticker: USDollar) traded broadly lower overnight as Asian stock exchanges followed Wall Street higher, weighing on the safe-haven currency. The news wires chalked up the pick-up to unexpectedly strong German IFO as well as US Housing Starts andBuilding Permits, which were said to collectively temper fears about the slowdown in global economic growth. Lower borrowing costs at aSpanish bill auction also helped, offering a bit of a respite from Eurozone debt crisis fears. In truth, while none of these events amounted to anything materially game-changing. Indeed, the improvement in US data has been underway since June while comparing the IFO Expectations and Current Conditions components points to downswing in business activity over the coming 6 months, albeit a less severe one than economists expected. Finally, the short tenor of the Spanish bond auction is hardly indicative of the degree of funding stress likely to arise as the bond expiry calendar fills up next year. With this in mind, year-end profit taking seems to be a far more plausible catalyst.

Looking ahead, all eyes are on the European Central Bank as policymakers announce the allotment results of its new 3-year long-term refinancing operation (LTRO), a program offering cheap loans to banks experiencing cash shortages courtesy of the turmoil in Eurozone debt markets over recent months. Signs of strong demand are likely to prove initially supportive for the Euro in that the probability of a credit crunch in the immediate term would be relatively diminished but likely transform into something negative with time as traders take stock of the depth of the liquidity shortfall and the degree of reliance on ECB funding in the banking system. Alternatively, soft uptake will probably produce the opposite effect, producing downward pressure on the single currency as an initial outcome followed by rosier sentiments in the weeks ahead.

On the economic calendar, minutes from December’sBank of Englandmonetary policy meeting are in the spotlight. Traders will focus on the voting pattern across the rate-setting MPC committee to gauge whether a consensus toward expanding quantitative easing (QE) is starting to emerge. Significant changes to the outlook are unlikely this time around however, with policymakers once again voting unanimously to maintain the benchmark interest rate and asset purchase target unchanged. The tone of recent economic data has pointed to stability rather than deterioration. In fact, economists’ consensus forecast for 2012 UK economic growth (as polled by Bloomberg) has been essentially unchanged since late October, ending a dramatic slide beginning in July. This suggests Governor Mervyn King and company are likely to remain in wait-and-see mode at least for now.

Asia Session: What Happened

GMT	CCY	EVENT	ACT	EXP	PREV
21:45	NZD	Current Account Balance (3Q)	-4.599B	-3.750B	-0.844B (R+)
21:45	NZD	Current Account Deficit-GDP Ratio (3Q)	-4.3%	-3.9%	-3.7%
21:45	NZD	Net Migration s.a. (NOV)	-50	-	-650
23:30	AUD	Westpac Leading Index (MoM) (OCT)	0.1%	-	-0.3%
23:50	JPY	Merchandise Trade Balance Total (¥) (NOV)	-684.7B	-484.7B	-280.2B (R-)
23:50	JPY	Adj Merchandise Trade Balance (¥) (NOV)	-537.9B	-305.7B	-495.7B (R-)
23:50	JPY	Merchandise Trade Exports (YoY) (NOV)	-4.5%	-4.3%	-3.8% (R-)
23:50	JPY	Merchandise Trade Imports (YoY) (NOV)	11.4%	8.3%	17.9%
0:01	GBP	GfK Consumer Confidence Indicator (DEC)	-33	-32	-31
2:00	NZD	Credit Card Spending (YoY) (NOV)	3.2%	-	7.8% (R-)
2:00	NZD	Credit Card Spending SA MoM (NOV)	-3.4%	-	2.6%
3:16	JPY	Bank of Japan Rate Decision	0.10%	0.10%	0.10%

Euro Session: What to Expect

GMT	CCY	EVENT	EXP	PREV	IMPACT
7:00	EUR	German Import Price Index (MoM) (NOV)	-	-0.3%	Low
7:00	EUR	German Import Price Index (YoY) (NOV)	5.3%	6.8%	Low
8:00	CHF	Money Supply M3 (YoY) (NOV)	-	8.2%	Medium
9:00	EUR	Italian GDP s.a. and w.d.a. (QoQ) (Q3 F)	-0.2%	0.3%	Low
9:00	EUR	Italian GDP s.a. and w.d.a. (YoY) (Q3 F)	0.4%	0.8%	Low
9:30	GBP	Public Finances (PSNCR) (Pounds) (NOV)	10.3B	-0.6B	Low
9:30	GBP	Public Sector Net Borrowing (Pounds) (NOV)	16.6B	3.4B	Low
9:30	GBP	PSNB ex Interventions (NOV)	19.7B	6.5B	Low
9:30	GBP	Bank of England Meeting Minutes	-	-	High
10:15	EUR	ECB Announces 3yr LTRO Allotment	-	-	High
10:15	EUR	ECB Announces 3mo Repo Allotment	-	-	Medium

Critical Levels

CCY	SUPPORT	RESISTANCE
EURUSD	1.3007	1.3207
GBPUSD	1.5540	1.5827

Courtesy:DailyFX