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FX Strategy Briefing: Dollar Index Reaches 81-Area Resistance

Featured \ Hans Nilsson \ 6:04 PM EST \ February 19th, 2010
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  • The dollar pared overnight gains after tame US consumer-price inflation data on Friday. The lower-than-expected CPI calmed worries that the Federal Reserve is going to raise its federal funds rate after yesterday’s discount rate announcement. Still, the Fed’s normalization of lending means that quantitative easing is winding down and the rising dollar is a tightening of monetary policy even if the Fed keeps its rates low for an extended period. This may threaten the still fragile economic expansion. The S&P 500 rose 2.42 to 1,109.17. Although rising for a second week, the USD/JPY was unable to penetrate important resistance and declined modestly today. The euro reversed sharp overnight losses on Friday but declined for a sixth straight week on continuing concerns over the fiscal deficits in Europe’s weakest economies. Sterling, declining in four out of the last five weeks, fell on worries about the UK fiscal deficit and weak retail sales. The Australian and Canadian dollars rose today and gained for a second week, supported by recovering commodity prices.
    • >migns of a continuing US economic expansion, the dollar index rose this week and reached the highest level since June 2009. Although in a strong uptrend and nearly 9% above its December low, the dollar index was overbought and unable to break its strong resistance at the 81 handle today. Some consolidation is expected before a new attempt to penetrate this important resistance. If this resistance is broken, the dollar index will possibly rise to the 83 area.
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>><>Ssumer prices grew a slightly less-than-expected 0.2% m/m in January after an upwardly revised 0.2% m/m increase in December, according to CPI data from the Labor Department, which also showed a 0.2% m/m consumer-price increase for a fifth consecutive month; thus, suggesting US consumer-price inflation is well contained. The CPI rate slowed to 2.6% y/y from December’s 2.7% y/y. The January month-on-month CPI increase was due to a 2.8% m/m rise in energy costs. Food prices were up 0.2% m/m in January after a 0.1% m/m increase in December. The core CPI, which excludes food and energy, unexpectedly slipped 0.1% m/m in January, the first decline since 1982, after a 0.1% m/m increase in December. The core CPI rate decelerated to 1.6% y/y from December’s 1.8% y/y. Real average hourly earnings declined 0.1% m/m in January and fell 0.9% y/y, a separate report from the Labor Department showed. yee <=">
  • ">nsding economic indicators index, a measure of future economic activity, rose a slightly less than-expected 0.9% m/m to 231.1 in January, an eighth consecutive monthly rise, after a 1.5% m/m December gain that was the largest in almost 27 years, LEI data from Statistics Canada showed, pointing to continuing Canadian economic growth. Eight of the 10 LEI components climbed in January, led by a 1.3% m/m advance in the housing index.
  • Canadiaaales increased 0.4% m/m to C$35.3 billion ($33.6 billion) in December after a revised 0.5% m/m decrease in November, led by a 3.3% m/m gain at general merchandisers such as department stores, Statistics Canada reported. December retail sales climbed 6.7% y/y. Excluding car and parts dealers, retail sales increased 0.4% m/m in December after a revised 0.2% m/m decline in November. The numbers were in line with forecast.

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    Th>o onally adjusted current account recorded a €1.9 billion ($2.6 billion) surplus in December, improving from a revised €0.5 billion deficit in November, the European Central Bank reported.
  • The eurozoneo PMI unexpectedly remained at 53.7 in February, advance February PMI data from Markit Economics showed, indicating euro-area manufacturing and service industries expanded for a seventh straight month. The manufacturing PMI increased to a higher-than-expected 54.1 in February from 52.4 while the services PMI unexpectedly declined to 52.0 from 52.5.
  • The German mcng PMI rose to a higher-than-expected 57.1 in February from 53.7 in January indicating the manufacturing sector in Germany expanded at a faster pace, while the services PMI unexpectedly slipped to 51.7 from January’s 52.2 suggesting the services sector grew at a slightly slower rate, according to advance February PMI data from Markit Economics.
  • Germany’s prodps rose a more-than-expected 0.8% m/m in January, the second rise in three months, after a 0.1% m/m decline in December, according to PPI data from the Federal Statistical Office. January PPI fell 3.4% y/y, an eleventh consecutive year-on-year fall, following a 5.2% y/y December slide.

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      >l<>In January the >eaadjusted value of retail sales declined 1.3% m/m and grew 3.2% y/y, while the seasonally adjusted volume of retail sales fell 1.8% m/m and increased 0.9% y/y, according to data from the Office for National Statistics. The ONS used new methodology, noting that “from this release, the headline estimate for ‘All retailers’ now includes the sale of automotive fuel.” Excluding automotive fuel, the seasonally adjusted retail-sale volume declined a more-than-expected 1.2% m/m in January and rose 2.6% y/y.

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  • Japai x unexpectedly declined 0.3% m/m in December after an upwardly revised 0.2% m/m increase in November, indicating overall production by all sectors of the Japanese economy fell for the first time in three months, according to data from the Ministry of Economy, Trade and Industry.
  • The Japanese economy is “pgmainly due to various policy measures taken at home and abroad, although there is not yet sufficient momentum to support a self-sustaining recovery in domestic private demand,” the Bank of Japan said in its latest monthly report, adding that economic conditions will possibly “continue improving, although the pace of improvement is likely to remain moderate for the time being.” The financial environment has shown “signs of improvement,” according to the BOJ report.

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    *Experroaaiion are provided by Hans Nilsson of Globicus International, Inc., a registered third party CTA, are intended for educational purposes only and do not constitute trading recommendations.

    Past performance is not indicattults. Trading OTC Forex on margin carries a high level of risk, and may not be suitable for all investors. Please contact a registered trading advisor if you have any questions.

    This report is intended solely ito customers of Capital Market Services, L.L.C. Any information in this report is based on data obtained from sources considered to be reliable, but no representations or guarantees are made by Capital Market Services, L.L.C. with regard to the accuracy of the data. The opinions and estimates contained herein constitute our best judgment at this date and time, and are subject to change without notice. Capital Market Services, L.L.C. accepts no responsibility or liability whatsoever for any expense, loss or damages arising out of, or in any way connected with, the use of all or any part of this report. No part of this report may be reproduced or distributed in any manner without the permission of Globicus International, Inc.

    ©2004-2010 Globicus Internationatal Market Services, L.L.C.

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