Weekly Trading Forecast - 01.17.11

Subject: Weekly Trading Forecast - 01.17.11 Sun Jan 16, 2011 1:21 am

* Dollar Fully Retraces its Opening Gains for the Year with its Biggest Weekly Drop in 4 Months
* Euro: Can Official’s Promises Stabilize the Euro Zone Markets and Rally the Currency?
* British Pound’s Borrowed Strength Needs to be Supplemented by Next Week’s Data
* Canadian Dollar Looking at Volatility with Top Event Risk in the BoC Decision and Retail Sales
* New Zealand Dollar Faces Inflation and Retail Data to Benchmark Rate Potential
* Swiss Franc: The SNB Reports a 21 Billion Franc Loss on the Year, Does It Matter?

Dollar Fully Retraces its Opening Gains for the Year with its Biggest Weekly Drop in 4 Months

Through the opening week of the new trading year, the trade-weighted
Dollar Index staged its biggest rally in five months. Therefore, is it
particularly shocking to see the greenback suffer its largest weekly
loss in four months this past week? If the opening move were the genesis
of a new and lasting trend, we would expect a moderate correction at
best. Yet, there is reason to believe that this bullish burst of life
for the FX market’s most liquid currency was merely a reaction to the
unusual trading conditions related to the time of year. Indeed, if the
rally was founded on temporary grounds; it makes sense that the market
would quickly correct to its ‘fair value.’ And so, we find the Dollar
Index is back at the same level it started the year on a trade-weighted
basis.

That said, we need to once again consider the composition of this
weighted-index. Representing 60 percent of the dollar gauge, EURUSD’s
chart unsurprisingly looks like the exact inflection of the Index. Most
other pairs, though, are significantly off the starting mark. For
AUDUSD, USDJPY and USDCHF, gains have proven to be sticky.
Alternatively, GBPUSD and USDCAD have traded steadily against the
greenback. This suggests that there is a little more going on in
background than a mere fluctuation in liquidity. Though it may not seem
so given the S&P 500’s unwavering climb; but the dollar’s safe haven
status has been tested these past weeks – specifically as it pertains
to the benchmark counterpart to the euro. Revived concerns surrounding
the Euro Zone’s financial health and the subsequent recovery in
confidence seem to line up nicely to the performance of EURUSD. That
being the case, we should expect this fundamental driver to play a
significant role going forward. Yet, restraining our focus on the dollar
specifically, we should reflect on the outcome and meaning of Friday’s
round of US event risk. The 0.6 percent increase in the advanced retail
sales report for December (referred to as ‘advanced’ because it is
actually a preliminary reading) was a smaller improvement than expected
and the University of Michigan’s consumer sentiment survey for the same
period unexpectedly fell for the first time in three months.
Disappointments though they may be, both indicators reflect a general
trend of improvement for the American consumer – the backbone of the
world’s largest economy. As for the December consumer inflation report,
the 1.5 percent annualized growth puts the eventual return of rate hikes
closer into reach. On the other hand, considering the yearly reading of
the core report is just off its lowest level on records going back over
half a century; that hike is hawkish turn is likely further down the
line than many think.

Looking ahead to next week, the dollar’s performance will likely remain a
derivative of larger and more ‘exciting’ developments. Monday’s session
will be distorted as US banks are offline in recognition of the Martin
Luther King Jr. day holiday. Beyond this void in activity, the economic
docket will be heavily concentrated on housing data. The potential
trouble still facing this sector is underappreciated; but that also
means it isn’t market moving. Interestingly enough, the biggest event of
the week could be the Chinese 4Q GDP report.

Related:Discuss the Dollar in the DailyFX Forum, John’s Analyst Picks:
EURUSD, GBPJPY and GBPAUD Offer Pressing Trade Opportunities

Euro: Can Official’s Promises Stabilize the Euro Zone Markets and Rally the Currency?

It’s as if policy officials have breathed life back into the euro. At
least, that is how it seems after the euro’s incredible run this past
week. More likely, they have merely bought themselves time. Talk of the
proposals the EU is discussing as a “comprehensive” solution to the
region’s ever-devolving financial situation sets the bar very high.
Promise of a larger EFSF program, lower rates on emergency loans, direct
support to Portugal and Greece, and guarantees among other things would
represent a very complete effort to snuff out doubts over the troubles
Europe faces. However, an agreement on these very aggressive policies
will be difficult to realize; and that doesn’t even account for the fact
that even these efforts are merely a salve and not an answer to the
underlying problems. Yet, for now, it is all about how long officials
can maintain a sense of relief across the market. They are not expected
to make real progress until March – if at all. In the meantime, we
should also keep an eye on rate expectations. Friday’s CPI reading
confirmed inflation is above target; and officials have warned that
rates can be firmed up.

British Pound’s Borrowed Strength Needs to be Supplemented by Next Week’s Data

This past week, the sterling has seen little fundamentally to justify
the remarkable strength it has enjoyed against the dollar, yen and
franc. That is because much of its performance can be linked to the
apparent improvement of the Euro Zone’s health (particularly via Irish
exposure). Next week though, the burden is back on the pound’s own
docket. Consumer confidence, inflation and jobs are all big-ticket
releases to watch.

Canadian Dollar Looking at Volatility with Top Event Risk in the BoC Decision and Retail Sales

In general, the FX economic docket is relatively light next week. Yet,
if we were to pick a top currency for fundamental potential; it would
have to be the Canadian dollar. Overnight index swaps from Credit Suisse
suggest there will be three quarter-point rate hikes over the next 12
months, and the BoC will have the chance to tell us whether that is
reasonable or not Tuesday. Retail sales though will likely be more
influential.

New Zealand Dollar Faces Inflation and Retail Data to Benchmark Rate Potential

Riding on the coattails of the Aussie dollar has worked well for the
kiwi; but this passive relationship is starting to breakdown.
Fundamental concern is starting to warp the outlook for the Australian
currency; and that is putting the focus back on the weaker New Zealand
unit. This week, we have a round of housing data, retail sales and
confidence figures. Our real interest rests in the 4Q CPI numbers with a
4.0 percent forecast.

Swiss Franc: The SNB Reports a 21 Billion Franc Loss on the Year, Does It Matter?

The Swiss National Bank reported Friday that it had suffered a 21
billion franc loss through 2010 (25 billion francs on FX intervention).
If this were a bank or trader, this mark-to-market would be disastrous.
However, this is a central bank and such conventions don’t apply. The
take away is their failed effort to halt the franc’s appreciation. This
stands as a good reflection of the power that the market encompasses.

» Weekly Trading Forecast - 01.17.11
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