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THE STORIES IN THE CURRENCY MARKET

• U.S. DOLLAR: CAUTIOUS OPTIMISM
• EUR/USD: DIVIDE WITHIN THE ECB IS GROWING DEEP
• GBP/USD: WEEK OF JUDEGEMENT IN STORE
• USD/CAD: CANADIAN RATE DECISION APPROACHES
• AUD/USD: INFLATION FIGURES FOR NEXT WEEK
• NZD/USD: BIGGEST LOSER OF COMMODITY CURRENCIES
• USD/JPY: YEN GAINS DESPITE DOLLAR STRENGTH

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	72.0%	65.8%
CUT TO 0BP	28.0%	24.1%
INCREASE TO 50BP	0.0%	10.1%
INCREASE TO 75BP	0.0%	0.0%

U.S. DOLLAR: CAUTIOUS OPTIMISM

Cautious optimism is the perfect catch phrase for today’s events. Things are getting better but it is unclear whether or not this is just a break in the storm, or the very beginnings of stabilization. The Federal Reserve seems to believe that we are a long ways off, while recent economic data and earnings reports are pointing toward stabilization. The Dow spent much of the day trying to find the answer to this unanswerable question. In the end, the bulls were barely able to maintain control. The euro and pounds got hammered in today’s session, losing more than 150 and 120 pips respectively. Surprisingly, dollar strength was not enough to keep USD/JPY from sinking further. Commodity currencies were mixed on the day.

Treasury Refuses to Return Stake s

First quarter earnings are looking predominantly better than expectations. This should be a big boost for morale and the chances that recovery is near. Citigroup, the company that nearly imploded in the darkest days of the crisis, actually reported their first profit in five quarters of $16B. Even though the revenue was primarily earned through trading gains and accounting benefits provided to struggling companies, it is still a promising development.  General Electric beat estimates as well, even though first quarter profit fell 35%. Nevertheless, we cannot call for a complete victory as Google reported that profit and sales fell for the second straight quarter, its first consecutive loss since the company went public in 2004. At this point, where the banking sector appears to be reestablishing themselves, the Treasury Department is hesitant to give up their stakes earned during the bail-out programs. While companies such as J.P. Morgan whose CEO Jamie Dimon said he would gladly repay the government tomorrow, Treasury officials are adamantly holding on to their warrants even while preferred shares are being repurchased. It appears that even as our emergence from the crisis phase is an arguable occurrence, government intervention will be unavoidable.

Fed Members Preach Cautionary Outloo k

Lately, we have been met with many statements made by Federal Reserve members, and unfortunately for the markets, they do not express the same amount of contradiction as those from the ECB. In a speech today, Bernanke cautioned that the credit crisis will result in “long-lasting” injuries “in terms of lost wealth, lost homes, and blemished credit histories”. Dallas Fed President Richard Fisher described our current situation as a “bone crushing” recession. Fisher is convinced that presently, “the risk is deflationary job destruction”. Janet Yellen, the San Francisco Fed President, warned that recent signs of improvement do not mean that the US has seen the worst of what the recession has to offer. She even contemplated future monetary policy, opting for tighter measures when the economy is expanding, in order to prevent another catastrophic bubble. The Atlanta Fed’s Dennis Lockhart said that the economy is still weak, and that any promising factors should be viewed with “cautious optimism.” Clearly, Fed members are concerned. The calls for recovery within the year have all but evaporated from Fed rhetoric. Contrary to recent optimistic hope, it appears that we still have a long way to go, even before growth returns and recovery could start to set in.

Confidence Unexpectedly Rebound s

Even though the Fed is expressing heightened concern, optimism is still able to creep its way back into the economy. The University of Michigan Consumer Sentiment Survey was much better than expected, coming in at 61.9, versus 57.3 from last month. Stabilization once again appears to be settling in. Nevertheless, the health of the consumer is still highly uncertain, considering the recent plight in Retail Sales. Perhaps the Atlanta Fed President put it best when calling for “cautious optimism” when reacting to reports that may invoke euphoria. The main pieces of economic data for next week will be Thursday’s Existing Home Sales and Friday’s Durable Goods Orders.

EUR/USD: DIVIDE WITHIN THE ECB IS GROWING DEEP

 

The euro was sent plummeting for the fourth straight day, coming closer and closer to the crucial 1.3000 level. The divide within the ECB about future policy initiatives has been nothing short of obvious within the past few weeks. Day after day, we have received completely opposing statements from council members that has lead to a steady loss of confidence in the bank’s ability to successfully control the situation. Jean Claude Trichet weighed in today, of course denying the actuality of any disagreement within the central banks governing body. Mr. Trichet reined the ultimate blow on the euro, mentioning that rates may in fact be cut below the 1.00% level. With Mr. Weber’s comments still palpable, who recently expressed his firm belief that the ECB should not go lower than 1.0%, we have clear evidence that disputes run deep within the central bank. With the next meeting fast approaching, market expectations are high for some truly momentous action, but may be disappointed if the central bank does not come to an agreement. Such hesitation would all be at the expense of the euro. Economic data today showed that the EZ’s Trade Balance narrowed to -4.0B, versus the -4.7B last month. It is likely that if the euro remains depressed, the Trade Balance will continuously improve, and inevitably turn positive. The return to a trade surplus is vital for the European economy. Today’s report proved that they are one step closer to recovery.

GBP/USD: WEEK OF JUDEGEMENT IN STORE

The British pounds attempts to surpass the 1.5000 seem to be a fleeting memory at this point. GBP/USD has fallen for two consecutive days, exhibiting that negative UK sentiment is still plentiful. EUR/GBP on the other hand is in deadlock, as traders await true confirmation of which region is the closest to recovery stages. British economic data has been non-existent for the past few days. However, next week’s schedule is completely filled with vital reports, enough to negate today’s void. Next week’s list includes reports like Consumer and Retail Prices, the BoE’s Minutes, the Jobless Claims Change and Unemployment Rate, Public Finances, GDP, and Retails Sales. Combined, these reports will paint a full portrayal of not only if massive governmental stimulus programs are making an impact, but to what extent the economy is ready to engage the recovery phase. The BoE’s Minutes may provide a look into whether or not the bank’s quantitative easing program is making a difference. If this turns out to be the case, it would be a big boost, not only to UK morale but to all other countries currently participating in similar programs. The Unemployment Report and Retail Sales will provide information about the health of consumer spending and confidence, a crucial component to set the foundation for stabilization. However, the BoE’s Blanchflower warned that unemployment could rise well above 3 million. GDP finishes up the week, and is expected to show that the economy has contracted by an additional 1.5%.

USD/CAD: CANADIAN RATE DECISION APPROACHES

Commodity currencies were largely mixed today. USD/CAD gained ground on very marginal strength while NZD/USD was a big loser on the day. The aussie remained relatively unchanged. The BoC’s rate decision is on the block for next week, and is expected to maintain the current benchmark interest rate at a record low of 50 basis points on April 21st. Later next week, BOC’s Governor Mark Carney should announce the guidelines for quantitative easing approach in which the central bank will buy government debt attempting to revive economic growth. Canadian inflation unexpectedly dropped to 1.2% from 1.4% a month prior. Meanwhile, New Zealand’s inflation slowed to 3% in March as consumer demand dropped significantly. This puts additional pressure on RBNZ Governor Allan Bollard to reduce rates by additional 50 basis points to 2.5% in the upcoming meeting on April 30th. The Australian Dollar managed to maintain itself even as China, its largest trading partner, reported that growth fell to the lowest level in over 10 years. The following week presents a variety of important information on the state of Australian economy. Inflation, New Motor Sales, and PPI figures will elaborate further on the state of consumer and the economy in the midst of global downturn. Meanwhile, Reserve Bank of Australia Board Minutes will be released on Tuesday elaborating on actions of the bank. 

USD/JPY: YEN GAINS DESPITE DOLLAR STRENGTH

USD/JPY sank to the downside, despite broad dollar strength. The fact that Japan’s Consumer Confidence rose to a five month high was able to elevate the Yen. Nonetheless, Bank of Japan Governor Masaaki Shirakawa claimed that a rally will be short lived as economic conditions continue to worsen.  Meanwhile, Japanese authorities left economic assessment unchanged for a second straight month as weaker spending by businesses will negate a rise in exports and production. Finance Minister Kaoru Yosano added to pessimism by claiming that the economy has not yet reached a bottom as latest stimulus package would take time to stabilize the downturn. The Cabinet Office raised evaluations on exports coming out from the country as demand looked to decline at a slower rate in February. In order to counteract for “national emergence” in a form of falling stock market, the ruling Liberal Democratic Party proposed an emergency plan to buy equity. The plan would allow for the government to purchase securities until March 2012, in hopes to rotate the stock market which fell to a 26-year low a few months prior. Economic data showed the Tertiary Industry Index dropped by -0.8% in February as consumers tightened their wallets on services.

AUD/USD: Currency in Play for Next 24 Hours

AUD/USD will be the currency in play for Monday. Australia will release Producer Price Index at 1:30GMT or 9:30PM EST.

After surging to a 6-month high the pair lost some steam, currently lingering in the Range Trading Zone of the Bollinger Bands. AUD/USD could continue its uptrend upon reentrance to Bollinger Band Buy Zone and clearance of resistance. Current resistance hovers at 6-month high which coincides with 200-day SMA at 0.7325. The uptrend will be negated upon a break of support which is structured at a psychological level of 0.7000.

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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.