DJ FXCM Dollar Index

The Dow Jones-FXCM U.S. Dollar Index (Ticker: USDollar) is 0.40 percent higher from the open after moving 104 percent of its average true range, and the shift away from risk-taking behavior should prop up the reserve currency as renewed fears of a Greek default drags on trader sentiment. However, as the 30-minute relative strength index falls back from a high of 72, it looks as though there will be a short-term correction before another move to the upside, and we will be closely watching the upward trending channel from earlier this year as the index struggles to push above 9,900. In turn, the USDOLLAR may fall back towards the lower Bollinger Band (9,839) going into the end of the week, but we maintain a bullish outlook for the greenback as the recovery in the world’s largest economy continues to gather pace.

Although the existing home sales report for January struck a mixed outlook for the housing market, the more robust recovery in employment paired with the ongoing expansion in production should help to encourage a stronger recovery, and we expect the Fed to further soften its dovish tone for monetary policy as the outlook for growth and inflation improves. As we’re expecting to see a slew of positive developments coming out of the U.S. economy, the data should curb speculation for another large-scale asset purchase program, but the event risks could fuel risk-taking behavior, which would dampen the appeal of the USD. Nevertheless, we will be watching for a close above the 50-Day SMA (9,884) to reinforce our bullish forecast for the dollar, and we may see the index make another run at the 78.6 percent Fibonacci retracement (10,118) as the Fed comes closer to concluding its easing cycle.

The greenback advanced against three of its four components, led by the 0.70 percent decline in the Japanese Yen, and the bearish sentiment underlining the low-yielding currency may gather pace over the near-term as the fundamental outlook for the world’s third-largest economy deteriorates. Indeed, the widening spread between U.S. and Japanese bonds has fueled the recent rally in the USDJPY, and the pair looks poised to appreciate further during the first-half of 2012 as the Bank of Japan expands its easing cycle. As Japanese policy makers scramble to stem the risk for deflation, the BoJ may continue to ramp up its asset purchases over the coming months, but the weakening outlook for the region is likely to produce headwinds for the Yen as market participants see the central bank maintaining the highly accommodative policy for a prolonged period of time.

— Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong

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Gold and silver started off the week with very sharp gains. Yesterday’s gains were the sharpest this month (so far), which only goes to show how February is much less volatile than January.. Today, Euro Area Manufacturing PMI report will be published along with the Minutes of the last MPC Meeting, and the U.S. Existing Home Sales.

See here for the complete report on gold and silver daily setup.

Gold sharply increased by 1.89% to $1,758.5; silver also rose by 3.66% to $34.50. During February, gold rose by 1% and silver by 3.72%.

The ratio between gold and silver sharply decreased on Tuesday, February 20th at 50.97. During February the ratio slightly declined by 2.59% as silver has moderately outperformed gold.

On Today’s Agenda

U.S. Existing Home Sales: in the previous report regarding December the number of homes sold rose by 5% to a seasonally adjusted annual rate of 4.61 million home sales (see here the recent review);

Euro Area Manufacturing PMI (January 2012): In the recent flash report regarding January 2012, the Euro Zone Manufacturing PMI changed direction and reached 50.4 – a move toward the positive for the first time in five months. This report will provide an indicator to the economic development of the Euro zone’s manufacturing conditions;

Forex / Gold & Silver– February

Yesterday, the AUD and CAD also depreciated against the U.S. dollar by 0.86% and 0.34%, respectively. The correlation between AUD, CAD and metals is still strong. Therefore, if the AUD and CAD will continue resume their upward trend; it could indicate that precious metals will also trade up.

Daily Outlook

Gold and silver started off the week with very sharp gains; this rally might be related to the recent development in Europe regarding the approval of the Greek bailout package and the effect it had on the Euro and other currencies on Monday when the market had anticipated this news. The upcoming reports regarding the U.S. home sales and EU manufacturing PMI might affect the direction of gold and silver via their relation with USD and Euro.

For further reading:

Weekly Outlook for 20-24 February

By: Lior Cohen, M.A. in Economics, Commodities Analyst and Blogger at Trading NRG

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Talking Points

• Crude Oil Likely to Remain Well-Supported on Iran-Linked Tensions
• Gold, Silver Buoyed by Inflation Bets But US Dollar Gains May Weigh
• Copper Vulnerable as S&P 500 Futures Point Toward Risk Aversion

Tensions between Western powers and Iran continue to push crude oil prices higher, with the WTI contract touching the highest since May 2011 yesterday. Scanning recent developments, the situation remains volatile. While Tehran has at least delayed (if not cancelled) planned military exercises in the Strait of Hormuz initially slated for this week, it is conducting another set of war games meant to prepare to counter “all possible threats, especially to public, important and nuclear centers,” according to private intelligence firm Stratfor. The exercises are reportedly focusing on surface-to-air missile systems, anti-aircraft artillery, radar systems and warplanes.

This kind of display suggests Iran may be starting to legitimately expect an attack on its nuclear facilities in the near term and could be brandishing an appearance of readiness as a deterrent. While it’s next to impossible to meaningfully predict where the situation will go from here, it seems highly unlikely that tensions will be unwound quickly, meaning a significant geopolitical risk premium will continue to amplify crude prices for some time.

Gold and silver rose sharply yesterday as 3-year US inflation expectations (measured by “breakeven rates”, which are the difference between yields on nominal and inflation-adjusted Treasury bonds) rose to the highest in 9 months, stoking store-of-value demand for precious metals. The outlook for price growth in 3 years – significant because it marks the conclusion of the Fed’s stated period when rates will be held “exceptionally low” – has been marching steadily higher recently.

The move likely reflects US economic data’s broad tendency to surprise higher relative to expectations since October, hinting an accelerating recovery against a backdrop of ultra-loose monetary policy will let loose inflationary pressure. More of the same may be on tap today with US Existing Home Sales expected to print at a 20-month high in January. A stronger US Dollar may act as an offsetting factor however. The greenback rose in European trade as Eurozone PMI figures disappointed, weighing on risk appetite and stocking safe-haven demand for the benchmark currency. S&P 500 stock index futures are trading lower ahead of the opening bell on Wall Street, arguing for more of the same ahead.

Copper also shot higher yesterday after a deal on the second Greek bailout removed the uncertainty that prevented prices from fully capitalizing on a Chinese interest rate cut announced in the previous day. China is the world’s largest copper consumer, so an easing of monetary conditions there that may boost economic activity naturally bodes well for the cycle-sensitive metal. Headwinds from Eurozone PMI figures are being felt today however, and the weakness in US stock futures ahead of the opening bell suggests that will continue into North American trade.

WTI Crude Oil (NY Close): $105.84 // +2.60 // +2.52%

Prices broke resistance at 105.61, the 123.6% Fibonacci extension, with the door now open to challenge the 138.2% level at 106.81. The 105.61 level has been recast as near-term support, with a reversal back below that exposing 103.66 once again.

Daily Chart – Created Using FXCM Marketscope 2.0

Spot Gold (NY Close): $1759.13 // +24.18 // +1.39%

Prices pushed higher after putting in a Bullish Engulfing candlestick pattern above support 1714.60, with buyers once again testing resistance at 1763.00. A break above this boundary exposes the November 8 high at 1802.80.

Daily Chart – Created Using FXCM Marketscope 2.0

Spot Silver (NY Close): $34.31 // +0.73 // +2.17%

Prices are testing range resistance at 34.37, the February 2 swing high, with a break higher exposing the October 28 closing high at 35.30. Support remains at 32.60, the 23.6% Fibonacci retracement level. A Bearish Engulfing candlestick pattern completed against a backdrop of negative RSI divergence on February 3 continues to suggest the path of least resistance favors the downside, with a daily close above 34.37 needed to invalidate.

Daily Chart – Created Using FXCM Marketscope 2.0

COMEX E-Mini Copper (NY Close): $3.836 // +0.128 // +3.45%

Prices pushed higher after putting in an Inverted Hammer candlestick above support at 3.696, the 38.2% Fibonacci retracement level reinforced by a rising trend line set from mid-December. The bulls have cleared initial resistance at 3.789 and now aim to challenge 3.909. The 3.789 level has been recast as near-term support.

Daily Chart – Created Using FXCM Marketscope 2.0

— Written by Ilya Spivak, Currency Strategist for Dailyfx.com

To contact Ilya, e-mail ispivak@dailyfx.com. Follow me on Twitter at @IlyaSpivak

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