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THE STORIES IN THE CURRENCY MARKET

• U.S. DOLLAR: FED STEPS IN TO SAVE THE DAY
• EUR/USD: ECB IS CLEARLY DIVIDED OVER POLICY MEASURES
• GBP/USD: SPECULATION ERUPTS OVER POTENTIAL IMF LOAN
• AUD/USD: RECESSIONARY PATTERNS ARE DEVELOPING
• USD/CAD: RALLIES MORE THAN 100 PIPS
• NZD/USD: AWAITING CONSUMER PRICES
• USD/JPY: ECONOMIC DATA COMES IN AT BOTH EXTREMES

EXPECTATIONS FOR UPCOMING FED MEETINGS

CURRENT US INTEREST RATE: 0.25%					Rates Expected to Remain Unchanged In April and June
	4/29 Meeting	6/24 Meeting
NO CHANGE	74.0%	67.3%
CUT TO 0BP	26.0%	22.4%
INCREASE TO 50BP	0.0%	10.3%
INCREASE TO 75BP	0.0%	0.0%

U.S. DOLLAR: FED STEPS IN TO SAVE THE DAY

US stock markets finished the day strongly. For most of today’s trading, markets expressed uncertainty about the latest flood of economic reports, most of which did not improve as much as anticipated. By the end of the day, the Fed was able to step in and console investors as to the current stage of stabilization in the US economy. The Fed’s Beige Book, a tabulation of conditions reported within each Federal Reserve District opened with the usual words of concern but then introduced the notion of stabilization. The markets took this news and decided to rally with it by more than 100 points. Currency markets reflected stern euro weakness in turn for broad based pound strength. The dollar was higher against the yen but lost more than 100 pips against the Canadian dollar.

Beige Book and Stress Test s

The Federal Reserve’s Beige Book was able to boost the Dow on talks of stabilization. While the report showed that “overall economic activity contracted further or remained weak,” five of the twelve districts did note a “moderation in the pace of the decline.” Several even saw stabilizing signs. Nevertheless, while these statements are encouraging, the Fed noted that almost every sector in the economy remained sluggish. The report noted that manufacturing, nonfinancial service, retail spending, and residential real estate were met with continued weakness with only a few exceptions. House prices continued to decline and credit conditions remained tight. Unfortunately, at second glance, the report did not invoke too much optimism. Even after a month of equity rallies and some improvement in economic data, it does not appear that much has changed.

Q1 earnings from large banks have so far been above expectations, despite today’s announcement that UBS posted a loss and will be forced to cut jobs. However, the government’s stress tests still remain the outstanding concern among investors. The total uncertainty of not only how these stress tests were conducted but how they will be released is a serious impediment for the industry. At this point, it is being considered that some of the test results will be made public to investors. However, insecurity is still in control, with transparency a particular concern. It is still a question of how the government will use these results to adapt their various fiscal and monetary programs. It is expected that the “top performers” will start programs in which government money will start to be paid back. Nevertheless, the treatment of those that did not make the grade is ambiguous. Regardless, the governments continued desire to keep at least some components secretive may indicate the fact that many companies did not fare well. This should ultimately place a big weight on equities.

Stabilization in Economic Data is Hard to Fin d

Today presented one of the most eventful days in terms of economic data in months. Among the many reports released today, we are inevitably left with the feeling that, although many show signs of stabilization, the economy is still worsening. After yesterday’s disappointing Retail Sales, we received notice that Consumer Prices fell on an annualized basis for the first time in a half-century. Deflation fears, which have been quiet in recent months, have all of a sudden reintroduced a strain on the US economy. Even the Fed’s massive liquidity injections through their Quantitative Easing plans were not able to push inflation up as expected. A deflationary environment will present largely unchartered territory for the Fed and government to approach. Even though Industrial Output came in as expected, Capacity Utilization fell to a 42 year low. Luckily, the Empire State Manufacturing Survey showed some strength in production and rose off of its record low. Economic data was not reserved solely for disappointing data, as TIC Flows rebounded and showed capital inflows in the amount of $22.0B. This number was a big relief to investors, whom after last month’s $36B outflow were concerned that the US government would start to have trouble financing their massive spending programs. Nevertheless, complete US vulnerability has not been negated.

EUR/USD: ECB IS CLEARLY DIVIDED OVER POLICY MEASURES

EUR/USD was sent lower for the second straight day. EUR/GBP is an even more glaring indication behind the negative euro sentiment, which has seen the pair reach two month lows. The euro is clearly suffering in the face of what appears to be strong British optimism. Nevertheless, it appears that situations are equally troubled on both sides of the spectrum. Comments from the ECB in the past week have been a confounding factor for markets. At one point, we were met with a steady stream of dovish comments, indicating that the bank had plenty room to cut further. Now ECB Council Member Weber reintroduces the banks usual hawkish tone. Weber believes that a floor for the bank’s target rate should be set immediately, and adamantly opposes rates falling below 1.0%. Weber’s logic surrounds the fact that even though the ECB has offered banking institutions unlimited liquidity, they are hesitant to borrow, assuming that rates would only continue to fall. Nevertheless, it is clear at this point that the bank is divided over how much rates should be cut and over the potential introduction of further nonconventional measures. Concerns over the European continent as a whole have resurfaced once again at the hands of the S&P. They have made the prediction that more than a third of European junk bonds will go into default as these companies either go bankrupt or just opt to miss payments. These companies chose to take advantage of the easily accessible financing of pre-credit crisis days and are now left with obligations in which they cannot pay. The main EZ event for tomorrow will be the release of Consumer Prices.

GBP/USD: SPECULATION ERUPTS OVER POTENTIAL IMF LOAN

The pound stages a daring move, and at least for a fleeting moment was trading above the pivotal 1.5000 level. GBP/USD has not reached these highs since the beginning of this year, but the ultimate test will be whether or not the pair can sustain itself above these levels. The bullish nature of this surge may not be warranted when examining new comments and speculation surrounding the economy. Sentiment for stabilization may make a turn for the worse at the expense of the British Pound. The serious injury inflicted by last month’s failed gilt auctions are starting to rise again as many expect that the British economy will not be able to finance its activities based solely on public finances. This leads to the prediction that the UK will be forced to make a direct loan from the International Monetary Fund, a move that it has not taken since an embarrassing episode in 1976. As the countries budget deficit rises to about 11%, the UK may be forced to look elsewhere for funds. Of course, if speculation becomes reality, any stronghold in British sentiment may be defeated and send the country’s currency even lower. UK House Prices also took a hit as shown in the DCLG House Price Index which fell to -12.30% from -11.50%.

AUD/USD: RECESSIONARY PATTERNS ARE DEVELOPING

Price action among the commodity currencies is mixed in today’s trading. While the Australian rallied off of sustained selling pressure, the New Zealand dollar sustains losses. The Canadian dollar is advancing for the fifth consecutive day by more than 100 pips. Commodities showed mild rallies. Australia’s Leading Index has fallen at the fastest pace since 1982. The aggressive economic deterioration in the past month is going to be a problem for an economy desperately trying to keep its head out of recession territory. The Chief Economist from the Westpac Banking Corp indicated that this trend in the index has been seen during previous recessions. Nevertheless, Luci Ellis, the head of the Reserve Bank’s Financial Stability Department reintroduced some of the optimism that has surrounded the country in prior weeks. Ellis is convinced that Australian householders will be able to withstand any continuous declines in housing prices, indicating that the economy has largely been stable because it did not enter a housing bubble like the United States. Canadian New Motor Vehicle Sales were released worse than expected, at -2.2% from 5.50% last month. The main economic release for tomorrow will be New Zealand’s quarterly Consumer Price Index.

USD/JPY: ECONOMIC DATA COMES IN AT BOTH EXTREMES

USD/JPY is currently trading higher in a 150 pip trading range after yesterday’s selloff. Unfortunately, at least for this moment, the pair has lost its hold on the 100.00 level. The fact that it did not hold may spell trouble for the Japanese economy, which will be under pressure in the event that the yen strengthens further. Japanese data for today came in at both extremes. The bad news was that Tokyo Condominium Sales slid from -27.5% to -46.2%. Nevertheless, Industrial Production came in at expectations for both the monthly and yearly figures. The number may have been boosted by last month’s depreciation in the yen, regaining the country some of its competitive edge. Production will continue to be very sensitive to moves in the yen. Capacity Utilization on the other hand came in better than expected at -11.90%. The Japanese are expected to release tomorrow their Machine Tool Orders in addition to the Tertiary Industry Index. The stabilization in production may be enough to lift the Tool Orders figure.

EUR/USD: Currency in Play for Next 24 Hours

EUR/USD will be the currency in play for the next 24 hours. The primary economic data will be in the form of the Euro-Zone’s Consumer Price Index and Industrial Production, both expected for 5:00 am ET or 9:00GMT. US data will be Housing Starts at 12:30 am ET or 12:30 GMT and the Philly Fed Manufacturing Survey at 10:00 am ET or 14:00 GMT.

EUR/USD is barely hanging in the range bound trading zone. Strong support is in place to cushion the pair against further losses. Taking the Fibonacci retracement from March 4th lows to March 19th highs yield a 50% retracement at 1.3097. Combined with the retracement is the prior low on April 9th, and presents a strong area of support. Resistance can be represented as the two prior highs at 1.3582 and 1.3738. With CPI expected for tomorrow, there is a distinct possibility that one of these levels will be tested.

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.