Mid-Day Report: Dollar Extends Rebound as Stocks Fall for Another Day

The risk appetite/risk aversion theme is still the main drivers in the forex markets. Dollar extends yesterday's rally as US stocks open lower for another day and breaches 7800 level briefly in early trading. Investors are taking profits on concerns of poor first quarter earnings reports from banks. IMF said that banks' toxic assets could spiral up to $ 4 trillion, up from prior forecasts of $2.2 trillion. In an interview, George Soros called recent rise in the stock markets a "bear-market rally" because the economy has not turned around yet. The current rally is not sustainable.

Dollar index extends yesterday's rise to as high as 85.50 in early US session today. Intraday bias is mildly on the upside for the moment but after all, break of 86.13 resistance is still needed to confirm underlying momentum. Overall outlook remains unchanged. As long as key support of 82 level (cluster support of 61.8% retracement of 77.69 to 89.62 at 82.24 and 38.2% retracement of 70.70 to 89.62 at 82.39, as well as long term rising trend line at 82.03) holds, the long term up trend from 70.70 is still intact. Above 86.13 will affirm this case and bring rally to retest 89.62 high. Below 84.67 will turn intraday outlook neutral again and risk another fall. Also, note that sustained break of 82 will argue that whole up trend has completed and will open up the case for deeper decline to 77.78 cluster support level.

Euro is one of the weakest currency today as the common currency drops against dollar, yen and even sterling. Eurozone GDP contracted -1.6% qoq and -1.5% yoy in 4Q08, signaling economy in the 16-nation region deteriorated more than market anticipated during the last 3 months in 2008. Leading the decline was sharp fall in exports and shrinking domestic demand while Germany, France and Italy were countries with the largest contractions during the period. ECB Provopoulos said 1 percent is not a "threshold for the ECB benchmark rate" and no decisions have been made regarding unconventional measures the bank would take.

UK’s industrial production dropped -1% mom in February, better than market expectation of -1.2% and a downwardly revised -2.7% in the previous month. On annual basis, the -12.5% was inline with consensus while January’s reading was revised down to -11.6%. Looking forward, industrial production will remain in sluggish as orders from both in UK and from abroad are weak. Manufacturing production slid -0.9% mom in February, also better than consensus of -1.5% and a downwardly revised -3%. From a year-ago, the gauge was down -13.8%, compared with consensus of -14.2% and -12.9% in January.

Earlier in Asian session, RBA surprised the market by cutting cash rate by 25 bps to 3% as policymakers judged economic conditions would deteriorate more severely than previously estimated. Aussie remains steadily in range though.

BoJ left rates unchanged at 0.10% as widely expected. The bank will expand the range of eligible e assets as collateral for loans to bolster the current liquidity boosting measures. BoJ Governor Shirakawa said the Japanese economy has worsened since the central bank released its January growth forecasts. FM Yosano said the issuance of new bonds to cover stimulus package costs is inevitable.

USD/CHF Mid-Day Outlook

Daily Pivots: (S1) 1.1266; (P) 1.1336; (R1) 1.1432; More

USD/CHF's rebound from 1.1239 extends further to as high as 1.1463 in early US session. At this point, intraday bias remains on the upside as long as 1.1344 minor support holds. Break of 1.1547 will indicate that rise from 1.1158 has resumed. As discussed before, we're maintaining the view that correction from 1.1963 should have completed at 1.1158 and rise from there is expected to resume to 61.8% retracement of 1.1963 to 1.1158 at 1.1655 first and then retest 1.1963 next. On the downside, below 1.1344 will turn intraday outlook bearish again. Note that break of 1.1158 support will invalidate the bullish case and indicate that whole decline from 1.1963 is still in progress.

In the bigger picture, USD/CHF pulled back after completing an impulsive five wave rally from 1.0366 to 1.1964. Subsequent correction might have completed after drawing support from 50% retracement of 1.0366 to 1.1963 at 1.1165. Break of 1.1963 will confirm that whole rise from 1.0366 has resumed for retest of 1.2229 high. On the downside, though, below 1.1158 will indicate that fall from 1.1963 is still in progress but even in such case, downside is still expected to be contained above 1.0864 support and bring rise resumption. However, note that sustained break of 1.0864 will dampen this view and will turn focus to 1.0366 low.

Forex News Digest

• Morning Market Recap: Stocks Fall on Profit Worries
• IBD/TIPP Economic Optimism Index Rises to Highest Since November 2008
• ECB's Provopoulos Says Central Bank Could Cut Below 1.00%
• Japan's Yosano Says New Bond Issuance Inevitable to Fund Stimulus Plan
• Euro Zone GDP Falls by a Record 1.6% in Fourth Quarter
• UK Industrial Production Falls at Record Speed February
• Japanese Economy Worsened Since January Growth Forecasts, Says BOJ's Shirakawa
• Australian Official Reserve Assets Fall to A$47.33 Billion in March, Says RBA
• RBA Cuts Cash Target Rate to 49-Year Lows, Sees Scope for Further Adjustment
• Yen Rises on Speculation Stock Losses Will Reduce Demand for Higher Yields
• Swiss Franc Advances Against Euro as Stock Losses Boost Search for Safety
• Euro May Drop 5% on Dollar Snap Back, Citigroup Says: Technical Analysis
• Canada Currency Weakens for Second Day as Investors Shun Risk, Seek Havens
• Dollar Likely to Rise to Eight-Month High Against Yen: Technical Analysis
• Euro to Weaken Versus Pound on ECB's Reluctance to Buy Debt, Barclays Says

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