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US Dollar: Holiday Dries Up Volatility

Last updated 4/10/2009 4:43 PM ET (GMT -5) 0 Comments - Add your comment

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Kathy Lien

Director of Currency Research, GFT

THE STORIES IN THE CURRENCY MARKET

• U.S. DOLLAR: HOLIDAY DRIES UP VOLATILITY
• EUR/USD: WELLINK IS YET ANOTHER DOVISH ECB MEMBER
• GBP/USD: BOE MEETING MAY BECOME A NON-EVENT FOR FOREX MARKETS
• AUD/USD: RBA DECISION STILL BEING DIGESTED BY TRADERS
• USD/CAD: ENDS THE DAY UNCHANGED
• NZD/USD: AWAITING RETAIL SALES
• USD/JPY: ANOTHER ATTEMPT TO REVIVE LENDING

EXPECTATIONS FOR UPCOMING FED MEETINGS

U.S. DOLLAR: HOLIDAY DRIES UP VOLATILITY

Today’s markets have seen some of the most sustained inactivity in months. With US equity markets closed and new economic data at a minimum, the currency market decided to take a breath and allow time for this week’s developments to filter through. We are left with some time to further contemplate the notion of whether or not we are in the midsts of a bear market rally or a complete market reversal. The yen strengthens by less than 40 pips while the pound was virtually unchanged today. The euro advanced by about 60 pips, hardly making up for this week’s 400 pips in losses. Commodity currencies are virtually unchanged on the day.

The Consumer Price Index and Retail Sales

The highlight for next week’s US data will be rooted in Consumer Prices, which are due for release on Wednesday, and Retail Sales for Tuesday. The inflation rate has displayed a comeback from the low of -1.7%. The last three months have all shown consecutive improvement. Last month’s number came in above the zero line at 0.4%. There is a possibility that this month will once again push up consumer prices. In addition to the massive amounts of money supply that the federal government has pumped into the economy, the rebound in oil prices may provide the underlying foundation for a more sustained rise in inflation levels. Since hitting lows in February of under $40, crude has since rallied through the month of March to more than $50. However, the likely boost of inflation that may result could be short lived. The International Energy Agency recently announced estimates that global oil demand will decline by more than 2 million barrels a day for the remainder of 2009. In the end, this may pressure oil prices to revisit lows, pushing inflation down with it.

Retail Sales have been volatile as of late, dropping 2.7% in January only to rebound by 1.0% in February. March however showed renewed pressure on consumer spending. There may be an argument that poses the probability for a better expected sales number on Tuesday. Sales at retailers like the Limited Brands and the Gap surprised to the upside in the month of March. Revenue projections have even been increased by chains like American Eagle. The International Council of Shopping Centers optimistically predicted that sales in April will increase by 1.0%. Similarly, the Johnson Redbook Retail Survey showed a yearly 0.4% rise in sales. This may be the glimmer of hope that President Obama was referring to in a press conference today. Nevertheless, optimism is fleeting when examining recent employment reports. In addition, the nation’s largest retailer - Wal-Mart - came up short in their announcement of comparable store-sales. That being considered, Retail Sales may prove to surprise this month.

EUR/USD: WELLINK IS YET ANOTHER DOVISH ECB MEMBER

The EUR/USD pushes higher by about 60 pips by the end of the trading day, after remaining relatively quiet throughout the morning. There have been some market moving information presented in an otherwise quiet day. ECB Governing Council Member Nout Wellink said that the ECB has more room to cut its benchmark rate. These dovish comments have been bombarding the markets lately. It is ironic that in the clear exhibition that the ECB is not as hawkish as people expected, they only cut by 25bp at their last meeting. It is possible that they are trying to buy some time until May’s meeting in which the closely guarded deliberations of non-conventional monetary actions will be formally announced. Wellink was kind enough to also ensure that these measures are in consideration. Economic data showed that French Industrial Production fell 0.5% in the month of February, its sixth consecutive monthly decline. Nevertheless, the number is much better than the -3.1% reported last month, and in addition was better than the -1.0% forecast. French CPI was worse than expected, rising only 0.2%. These numbers are important leading indicators because the same reports will be released next Thursday for the Euro-zone as a whole, most likely showing upbeat production but renewed deflation fears.

GBP/USD: BOE MEETING MAY BECOME A NON-EVENT FOR FOREX MARKETS

The pound is well contained in today’s trading showing only a slight move to the upside. It does not appear to just be the holiday weekend that is keeping GBP/USD motionless, as weekly price action has been hesitant to show any clear direction. As a better indication of pound sentiment, a look at EUR/GBP shows that the pair has staged a steady downward drift for most of this week. This situation is a rare find in a week with a BoE decision, among other central bank decisions. It is apparent that yesterday’s meeting presented nothing new for the markets to move on. The BoE only reaffirmed their backing of the quantitative easing program that they initiated last month. It is a real possibility that, judging by this week’s decision, the BoE meeting will become a non-event like the BoJ and even the Fed. It seems that at this point, all has been dispensed in their efforts. For future meetings, any surprise will come from either change in the asset purchases or in the event that the policy shows some signs of success. UK data will be sparse next week, emphasizing the housing market with DCLG House Prices and RICS House Price Balance.

AUD/USD: RBA DECISION STILL BEING DIGESTED BY TRADERS

The aussie and kiwi are facing typical price action in today’s trading, moving less than 10 pips each. USD/CAD fades from being the biggest mover among commodity currencies to entirely unchanged. Focusing on the Australian dollar, what was posed to be a big week in terms of economic events, resulted in little response by the currency that has staged impressive rallies over the last few weeks. The RBA rate decision is still largely being digested by traders. In large part, the RBA made a safe decision on Tuesday, perhaps proving to be bullish to the aussie. Nevertheless, the disappointing economic data expressed in the employment report has been enough to negate any continued movement to the upside. Economic data for the commodity currencies next week is highlighted by New Zealand’s Retail Sales on Monday, Canada’s Consumer Prices on Friday, and Australian Westpac Leading Index for Wednesday.

USD/JPY: ANOTHER ATTEMPT TO REVIVE LENDING

Even though price action in USD/JPY is unsurprisingly lackluster, ending the week above the pivotal 100.00 line may be a testament to the end of exaggerated yen strength. At this point, more than 50% of the losses in USD/JPY that occurred during the worst of the financial crisis have been reversed. This can only be good news for the Japanese economy, which is hemorrhaging from the loss in international competitiveness because of an unreasonably strong currency. The Bank of Japan has announced new policy initiatives that will see the creation of ¥1 Trillion in subordinated loans for badly hit banks to use to bolster their capital. This additional monetary stimulus plan is yet another attempt to revive lending in the economy. Nevertheless, with the stimulus package coming from the prime minister, the Japanese economy may be over-leveraging itself in its fight against a recession. The most important Japanese release for the week to come will be Wednesday’s Industrial Production, which should act as a good proxy for whether the declines in the yen have elicited enhanced economic activity.

NZD/USD: Currency in Play for Next 24 Hours

Even though data will be light on Monday, we are choosing NZD/USD as our currency in play. The reason is that New Zealand will be releasing Retail Sales at 6:45 pm ET or 22:45 GMT. Otherwise there is no US data until Tuesday’s Retail Sales and Producer Price Index.

NZD/USD is at the borderline of the one-standard deviation bollinger band, but is still definitively in the bollinger band range trading zone. For resistance, we are looking at the 0.6000 level. Even though the highs of April 6th failed to reach the level before retracing, the sheer psychological bearing makes it the ideal resistance. Support can be identified as two levels. The first is the April 8th low of 0.5689 followed by the previous low of 0.5528. Nevertheless, the 0.6000 level is the one to watch in the coming week.

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About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.