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Dollar Strength Depends on US GDP

Last updated 1/29/2010 5:09 AM ET (GMT -5) 15 Comments

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• Almunia streeses that Greece will default calming market fears
• All eyes on US GDP eyed at 4..6%
• Nikkei falls by more that -2% but Euro bourses up on the open
• Oil trades back toward $74/bbl
• Gold consolidates at $1183/oz.

Overnight Eco

• AUD CB Leading Index -0.3% vs. -0.3%
• AUD NAB Quarterly Business Confidence
• JPY Manufacturing PMI 52.5 vs. 53.8
• JPY Household Spending 2.1% vs. 1.6%
• JPY Tokyo Core CPI 1.4% vs -1.4%
• JPY Unemployment Rate 5.1% vs. 5.3%
• EUR CPI Flash Estimate 1.0% vs 1.2%
• EUR Unemployment Rate 10.0% vs. 10.1%

Event Risk on Tap

• CAD GDP expected at 0.3%
• CAD RMPI
• CAD IPPI
• USD Advance GDP expected at 4.6%
• USD Employment Cost Index expected at 0.4%
• USD Chicago PMI expected at 57.2
• USD Revised UoM Consumer Sentiment expected at 73.3

Price Action

• USD/JPY recovers the 90.00 handle as risk flows improve into Europe
• AUD/USD holds support at .8900 as risk aversion stabiizes
• GBP/USD rallies to 1.6200 as short covering and ME demand pulls it off lows
• EUR/USD trades better targeting 1.4000 as Almunia calms fears on Greece

Risk FX made a round turn in early European trade after selling pressures in Asia sent EUR/USD to a fresh six month low. EUR/USD tumbled to 1.3912 in morning Tokyo dealing after Nikkei dropped more than -2% on weakness in the exporter sector, but the pair staged a recovery in Europe after EU Monetary Affairs Commissioner Joaquin Almunia calmed fears regarding the fiscal problems of Greece.

“Greece will not default. Please. In the euro area, the default does not exist," Mr. Almunia told Bloomberg TV. Asked if there was any possibility Greece would leave the euro zone he said: "no chance." Although Mr. Almunia stated publicly that  there was no special European plan for Greece, privately European monetary and fiscal officials appear to be moving towards a consensus for some  type of a rescue package for the Greek economy. Greek GDP comprises only 3% of total EZ output, but officials fear that the political cost  of Greece’s exit from the European monetary union would be far greater than  the economic  numbers suggest. Officials worry that a default in Greek debt could  trigger a domino effect for the possible exit of other southern European nations facing similar fiscal deficit problems.

With little economic data on the European calendar, the macro flow was centered on Japan were the latest results painted a mixed picture. Consumption in Japan continued to improve with household spending rising 2.1% vs. 1.6% eyed, no doubt driven by better than expected labor market conditions which saw the unemployment rate decline to 5.1% , its best reading in more than 6 months. On the corporate side however, the rise in yen has clearly crimped demand as Manufacturing PMI slipped to 52.5 from 53.8 and Industrial Production data missed its mark at 2.2% vs. 2.5% forecast.

We noted earlier that the 3 month LIBOR rate between Japan and US may be key to the future direction of the USD/JPY especially if Japanese rates slip below those of the US making yen once again the least expensive  funding currency for the carry trade within the G-3. To that end today’s US GDP data could set the tone for trade in the week to come if it beats the market expectation of 4.6% q/q growth.

While the markets are clearly optimistic  in their growth estimates for the US economy we think the chance of  a downside surprise is reasonably good given the lack of improvement in the Trade Balance numbers, the slowdown in ISM Services gauges in Q4 of last year. If the US GDP data misses market expectations printing  at only 4% or less,  risk aversion flows could return with a vengeance and USD/JPY could once again probe the 89.00 level as the day progresses.

FX Upcoming

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Comments (15)

alexjbrandt

January 29, 2010 at 08:39 AM ET

Well, I'm a bit surprised GDP printed stronger. I guess the rise in inventories helped.

bschlossberg

January 29, 2010 at 08:41 AM ET

Inventories were 60% of the number

alexjbrandt

January 29, 2010 at 08:52 AM ET

Ah, that would explain it. Now lets just hope that people buy up that inventory!

milanh-fx

January 29, 2010 at 09:24 AM ET

Hi Boris, how match are the inventories in a normal Q. Thanks, Milan

wwwin

January 29, 2010 at 08:52 AM ET

so does the fact that inventories were 60% of the number make it less bullsih for $$?

alexjbrandt

January 29, 2010 at 08:53 AM ET

I think it would be unsustainable for a significant time period, unless consumer spending drastically increased.

schultzz.at

January 29, 2010 at 09:20 AM ET

Change in private inventories contributed 3.39 percentage points. Personal consumption 1.44. Fixed investment 0.43, the first positive contribution since Q2/07.Net Exports: 0.5. Government Consumption: -0.02.
Tom Schultz.

milanh-fx

January 29, 2010 at 09:26 AM ET

thanks, Tom, gut work. Milan

bschlossberg

January 29, 2010 at 10:04 AM ET

Now they have to move them off the lot. If the end demand isn't there the rally fizzles.

margaret

January 29, 2010 at 04:35 PM ET

I read somewhere that the US government has only spent 1/3 of their original 750bill stimulus package. This means there is still alot to be spent and one would presume it would be spent on infrastructure activities. Seems to me there alot of juice in the tank to really get the economy going. Which countries will benefit the most. I'm thinking of the boost to AUD when China wound up internal spending. I'm in NZ so barely familiar with your politics. The general feeling is that the whole China thing will negatively effect the AUS but isn't there some kind of preferential trading arrangement in place between aussie and the US for there Military support.

schultzz.at

January 29, 2010 at 11:27 PM ET

In general, I am very critical about deficit spending, but some public investment in roads, bridges and the power grid make sense to me. If president Obama encourages the construction of nuclear power plants, this will reduce the U.S. dependence on imported fossil energy, even if the technology has problems of its own.
The GDP number may have sparked some Reagan era nostalgia when the U.S. economy grew 4.5% in 1983 and 7.2% in 1984 after the 1981/82 recession.

However, turning to the labor market any euphoria is premature. Non farm payrolls will turn positive in the coming months, because of government hiring for the census, but these are temporary jobs. Unfortunately, I can't imagine any substantial private sector job growth.
The average work week is still at 33.2 hours, so factories will be able to meet any increase in demand without hiring additional workers.
The services sector is still trailing manufacturing, I see not enough growth there to offset the damaging job losses of 2009.

I am currently operating on the assumption that the best part of the risk rally is over. My preferred scenario sees the stock market and commodity currencies retracing their 'summer of 2009' rally. I see the euro trading at 1.25 and sterling trading at 1.45 versus the dollar.
Tom Schultz.

alexjbrandt

January 30, 2010 at 09:36 AM ET

The eur/usd has already retraced almost half of last years rally in just the last two months. I think that the momentum down will slowly dissipate.

schultzz.at

January 30, 2010 at 10:00 AM ET

D'accord. The EUR/USD short game has become crowded. I see support in EUR/GBP and EUR/CHF. A short squeeze in EUR/USD is very likely. I see the next major resistance at 1.42.
Tom Schultz.

margaret

January 31, 2010 at 05:57 PM ET

Mr Shultz - are you suggesting that the AUD and the NZD will sink to .77 and .62 (or lower) respectively. Do you have a time frame? The Aussies seem to be certain that they will reach parity by July and i read alexjbrant giving a similar view. Australia is in very good shape and it seem hard to relate to (pattern, clouds, candlestick , elliot waves , fibs or not).

schultzz.at

February 01, 2010 at 04:13 AM ET

Hi Margaret,
This is only a scenario and I am never 'certain' about anything in financial markets.
However, I am currently tilted to a major correction in 'risk assets' (equities, energy, industrial metals, commodity currencies, even precious metals).

My reasoning is based on the weakness of the U.S. labor market. Even if there is some job growth, these jobs are low paid and often temporary.
I think we can no longer count on the U.S. consumer being the main driver of global demand. I also think that emerging market consumers will not make up for this lack of demand.
Disappointing global growth may favor fixed income markets and lower yielding currencies.

Regarding the timeframe: Many central banks still pursue accommodative policies. The same can be said about fiscal policies. Therefore, any moves may be limited in the first half of the year and during the summer months.
On the other hand, we saw the EUR/USD give back all its gains from July to November 2009 in just 2 months. So vigilance is warranted in any case.
Tom Schultz.

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.