Tuesday March 15, 2005 - 09:32:34 GMT
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FX Daily Technical Strategy
Dollar's rally stalls ahead of U.S. capital flows
The dollar's recovery was put on hold ahead of U.S. capital flows data on Tuesday as investors worried about whether the United States could keep financing its massive current account deficit.
The U.S. currency had rallied on Monday from last week's two-month low against the euro partly on the belief that a dollar sell-off on weak U.S. trade data on Friday may have been overdone.
By Tuesday, traders where firmly focused on U.S. Treasury International Capital data for January due at 14h00 GMT, as well as current account data slated for Wednesday.
Net capital inflows to U.S. assets eased to $61.3 billion in December barely covering the trade deficit from a revised $89.3 billion in November.
As of 06h30 GMT, the dollar bought around 104.85 yen, flat from late U.S. trade.
The dollar raised around 0.9 percent against the yen on Monday, rebounding from a fall on Friday when data showed the U.S. trade gap widened in January to $58.3 billion, the second-largest monthly deficit on record.
Investors had also jumped on the dollar as U.S. long-term interest rates rose to a 7-½ month high around 4.58 percent on Monday.
Higher interest rates generally attract more capital from overseas, which leads to increased demand for the dollar.
The euro changed hands at around $1.3355, versus $1.3369 in late U.S. trade. It fell 0.6 percent against the dollar on Monday after having hit a two-month high of $1.3483 late last week.
The single European currency fetched 140.00 yen, easing from 140.16 yen in late U.S. trade and a 2-½ month high of 140.71 yen hit on Monday.
Japanese exporters were happy to take advantage of the euro's rise above 140 yen. The last time it topped 140 yen was when Tokyo markets were closed for the year-end and New Year holidays, and many exporters were unable to sell the euro at such levels.
The market showed little reaction to comments from Japanese Finance Minister Sadakazu Tanigaki, who repeated that Japan would take steps against excessive movements in currencies.
Asked about the currency market roughly a year after Japan's last known intervention, he referred to volatility caused by geopolitical risk at that time and said: "Right now the market seems to be reacting less to one specific factor than at that time."
Ahead of the U.S. capital flows data, traders awaited the ZEW institute's German investor confidence index, due at 10h00 GMT. It is expected to show a slight dip to 34.0 in March from 35.9 in February.
EURO/DOLLAR: The market has not sustained the minor breach of key Fibonacci resistance at $1.3470. There is a large divergence on the daily RSI and it is possible that the market may have topped near term, loss of $1.3280/40 would add weight to that view. Rallies will need to regain $1.3480 rapidly in order to restore upside pressure and re-target $1.3670.
DOLLAR/YEN: The dollar remains underpinned by support at 103.65 it has held the downside for the last 4 trading days. This is Fibonacci support - it is key and while it holds it maintains the recent range (favored). However any breach of this level will cast immediate attention onto the 101.65/25 key support, which represents the recent low and 1999 low. Rallies will need to regain 105.60 to restore upside pressure to 106.86, the recent high.
DOLLAR/SWISS: The dollar saw a small bounce higher, as expected. The rebound will encounter stronger resistance at 1.1650/60, 1.1680 and will need to overcome this zone in order to alleviate immediate downside pressure and signal scope for further recovery to 1.1850/1.1925 (favored). Yesterday's price action constituted a key day reversal. Interim support lies at 1.1475 and this protects the 1.1280 December low.
STERLING/DOLLAR: Sterling has failed at key resistance at $1.9330 as suspected; this is the 78.6 percent retracement of the move $1.9550 to $1.8510. The market failing here is key, as it implies that recent strength is likely to have been an extended correction only. A break below $1.9050 last week's low would add weight to that view. Only a break above $1.9330 would negate this view and target $1.9550, the recent high.
@13h30 GMT: U.S. February Retail Sales, U.S. March Empire Manufacturing Survey
@14h00 GMT: U.S. January Net Foreign Security Purchases
@15h00 GMT: U.S. January Business Inventories
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