Is The Dollar Shrugging Off Its Role As A Funding Currency?

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Forex News and Events:

European stocks have maintained the early momentum from Asia, as sentiment remains elevated by this morning’s better than expected China data. Interestingly however, the rally in equities and gold has not been echoed ubiquitously in FX markets; and indeed the DXY is unchanged on the day. Instead, the main mover has been JPY, taking on the USD’s role as the predominant funding currency on better risk sentiment. This is an encouraging sign for our theory that the JPY will weaken significantly more throughout 2010 as Japan’s retarded pace of recovery compared to other peers is gradually reflected in the currency. This resonates with our view that the USD should not remain the carry trade’s whipping boy indefinitely. Although last week’s Non Farm Payroll surprise was quickly dismissed by Bernanke as insufficient to warrant a change in Fed stance, the impact on FX trends has subconsciously lingered. No longer is the USD behaving like a failsafe short for carry trades; selling off on risk appetite and rallying on risk aversion. With the economic recovery progressing in the US, and data ever more liable to yield upside surprises (acutely demonstrated last Friday), the prospect of nasty unwinds in USD shorts is much higher going into 2010 – and volatility is the enemy of carry. In contrast, the JPY cannot hope for such redemption from the Japanese economy. Only last week, the Japanese government had to unveil its latest substantial stimulus package to prop up growth, inflation is still plunging deeper into negative territory (-2.5% YoY at the last reading), and there are warning bells aplenty emanating from the BoJ and MoF that currency intervention would be necessary at these current relatively strong levels. If the chances of a Fed hike next year are slim, the prospect for an increase in Japan’s rates is non-existent. In our minds, this equates to a formidable ceiling to JPY gains – and what cannot go up, must come down. Looking ahead to this afternoon, the main data event will be US Retail Sales. With the behavior of the USD in the face of US data being slightly unpredictable of late, it is difficult to see this number forcing a breakout of ranges. One scenario we would expect however, is that if we get another exceptional upside surprise, then this shift from relying on the USD shorts to JPY shorts will be cemented; and the JPY will find itself under renewed selling pressure from investors eager to fund risk asset trades, but wary of the USD’s bite.

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Today's Key Issues (time in GMT):

13:00 USD Retail sales, % m/m Nov exp: 0.6 prev: 1.4 14:00 USD U.Mich consumer sentiment index Dec exp: 68.8 prev: 67.4 14:00 USD Business inventories, % m/m Oct exp: -0.2% prev: -0.4%

The Risk Today:

EurUsd We mentioned yesterday EURUSD's loss of bearish momentum below the 1.47 handle, and yesterday it consolidated in an ever tighter 1.4685-1.4760 range. This morning we look to be nudging the upper bound of that range, but any rallies higher are likely to be capped by significant resistance at 1.4900. Expect more range trading from here between 1.4625-1.4900; just above that major downside support we should get some bids around 1.4640 where the 100 day moving average now comes in. If we are lucky enough to get a break out, the downside level to watch is 1.4480, while a break above 1.4900 would neutralize this bearish tone and send us back into the November ranges between 1.4800-1.5150.

GbpUsd GBPUSD continues to meander either side of the 1.6250 pivot level, but the bias seems neutral in the nearest term. A break above 1.6375 is needed to threaten the bearish outlook of the pair, while key support lies at 1.6125 and resistance at 1.6375 and 1.6484 (previous support). 

UsdJpy USDJPY has climbed above the pivotal 88.50 levels overnight (50% retracement of the rally from 84.80 to 90.76), leaving us looking for targets towards the post-payroll 90.76 highs. Supply at 89.00 is hindering the rally somewhat this morning, but the 2 week uptrend has now crept up to 88.00 which should give us some reassuring support on the downside. Below there are plenty of support levels to lean on; coming in at 87.10 (61.8% fib retracement level), 86.55 and 85.85. 

UsdChf USDCHF still trading within the minor ascending channel on the hourly chart, so far unable to break convincingly above the 1.0300 resistance despite a few attempt post-SNB. A break below 1.0220 is needed to confirm the reversal in the nearest term. Key resistance stands at 1.0337, where a break above would indicate further bullish movement targeting 1.0400-1.0450 

Resistance and Support

EURUSD
GBPUSD
USDJPY
USDCHF

1.5000
1.6880
92.30
1.0400

1.4904
1.6744
91.30
1.0337

1.4850
1.6484
89.00
1.0300

1.4760
1.6315
88.95
1.0250

1.4668
1.6250
87.10
1.0220

1.4625
1.5990
86.55
0.0140

1.4480
1.5600
85.85
0.9915

S: Strong, M: Minor, T: Trendline, K: Keylevel, P: Pivot

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