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Daily Report: Dollar Strengthens on Risk Aversion and Euro Concern

12:10 AM

Daily Report: Dollar Strengthens on Risk Aversion and Euro Concern

Risk aversion drives market in Asian today on news that China has told banks to limit lending to restrict overall credit growth. Weaker than expected CPI report from New Zealand also put some pressure on both Aussie and Kiwi. Meanwhile, Euro remains the weakest currency this week and dives through 1.4217 support against dollar and is now pressing 0.8700 level against Sterling. EUR/USD's break of 1.4217 serves as an early alert that dollar is staging a broad based rebound and we'd expect Euro's weakness to be spread over to broad based dollar rally in near term if dollar index breaks 78.19 resistance.

China's bank regulator intends to limit overall credit growth to CNY 7.5T this year after a record of CNY 9.59T new lending in 2009. Banks who failed to meet regulatory requirements are asked to rein in credit. Some banks are already asked to limit lending even though not all of the banks. China and Hong Kong stocks are broadly lower after the news which also drags down yen crosses on risk aversion.

New Zealand CPI unexpectedly dropped -0.2% in Q4 versus expectation of 0.0%. Year-over-year rate climbed to 2.0% but fell short of expectation of 2.1%. The inflation outlook reinforces RBNZ Bollard's stance to keep benchmark interest rate at record low until the middle of the year to stimulate the economy. Australian westpac consumer confidence rose 5.6% in January.

Euro continued to be pressured by the "Euro-without-Greece" speculation. Some traders are betting on Greece's failure to contain its budget deficit and continue to lightening up Euro longs, in particular against dollar and Sterling. Meanwhile, pound remains supported by yesterday's strong CPI reading as well as speculation that BoE will pause the quantitative easing program in February. Nevertheless, Sterling's strength against Euro will very much depends on today's BoE minutes.

Dollar index rises sharply to as high as 78.02 today and is set to take on 78.19 resistance. As noted before, consolidation from 78.45 has likely completed at 76.60 already and break of 78.19 will suggest that whole rise from 74.19 is resuming for 38.2% retracement of 89.62 to 74.19 at 80.08. On the down side, below 77.44 minor support will delay the bullish case and bring more consolidations first. But downside should be contained by 76.60 to conclude the consolidations.

On the data front, in addition to BoE minutes, focus in European session will also be on German PPI as well as UK job report. UK claimant count is expected to drop -4.6k in December while unemployment rate is expected to climb further to 8.0%. In US session, Canadian CPI is expected to jump to 1.8% yoy in December with core CPI up to 1.9% yoy. US PPI is expected to accelerate to 4.6% yoy in December but core PPI is expected to drop to 1.0% yoy. Housing starts and building permits are expected to be steady at 574k and 580k annualized rate in December.

EUR/USD Daily Outlook

Daily Pivots: (S1) 1.4222; (P) 1.4318; (R1) 1.4384;

EUR/USD dives further to as low as 1.4171 today and the break of 1.4217 support confirms that whole decline from 1.5143 has resumed. Intraday bias remains on the downside and further fall should now be seen to 38.2% retracement of 1.2329 to 1.5143 at 1.4068 next. On the upside, above 1.4304 minor resistance will turn intraday bias neutral and bring consolidations. But recovery is expected to be limited below 1.4578 resistance and bring fall resumption.

In the bigger picture, medium term rise from 1.2456 has completed at 1.5143 on bearish divergence conditions in daily MACD. Focus now turns to 1.3737 cluster support (50% retracement of 1.2329 to 1.5143 at 1.3736). Decisive break there will also confirm the case that three wave consolidation from 1.2329 has finished at 1.5134 too. In other words, whole medium term term fall from 1.6039 should be resuming for a new low below 1.2329. On the upside, above 1.5143 resistance is needed to invalidate this view. Otherwise, outlook will now remain bearish.

EUR/USD 4 Hours Chart

Economic Indicators Update

21:45NZDCPI Q/Q Q4-0.20%0.00%1.30%
21:45NZDCPI Y/Y Q42.00%2.10%1.70%
23:30AUDWestpac Consumer Confidence Jan5.60%---3.80%
23:50JPYTertiary Industry Index M/M Nov-0.20%-0.20%0.50%0.40%
7:00EURGerman PPI M/M Dec0.20%0.10%
7:00EURGerman PPI Y/Y Dec-5.10%-5.90%
9:30GBPBoE Policy Meeting Minutes0--0--90--0--9
9:30GBPClaimant Count Change Dec-4.6K-6.3K
9:30GBPClaimant Count Rate Dec5.00%5.00%
9:30GBPILO Unemployment Rate (3M) Nov8.00%7.90%
12:00CADCPI M/M Dec0.20%0.50%
12:00CADCPI Y/Y Dec1.80%1.00%
12:00CADBoC CPI Core M/M Dec0.10%0.40%
12:00CADBoC CPI Core Y/Y Dec1.90%1.50%
13:30CADManufacturing Shipments M/M Nov1.40%2.00%
13:30USDPPI M/M Dec0.00%1.80%
13:30USDPPI Y/Y Dec4.60%2.40%
13:30USDPPI Core M/M Dec0.10%0.50%
13:30USDPPI Core Y/Y Dec1.00%1.20%
13:30USDHousing Starts Dec574K574K
13:30USDBuilding Permits Dec580K584K

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