US Dollar: Bearish Markets Fuel Gains

Last updated 4/20/2009 4:28 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: BEARS IN CONTROL
• EUR/USD: EURO PIERCES 1.3000 ON DIVIDED ECB
• GBP/USD: CREDIT MARKETS NEED REVIVING
• USD/CAD: BoC MEETING MAY INTRODUCE QUANTITATIVE EASING
• AUD/USD: PPI UNEXPECTEDLY DECLINES
• NZD/USD: PLUMMETS 4.30% AGAINST YEN
• USD/JPY: YEN RALLIES AS VOLATILITY SPIKES OFF NEW LOWS

EXPECTATIONS FOR UPCOMING FED MEETINGS

U.S. DOLLAR: BEARS IN CONTROL

Global equities took a severe pounding in today’s trading. For the U.S., concerns over another wave of banking crises seem to take hold of investor’s sense of fear and uncertainty. The Dow was sent down more than 3.0%, while crude prices plummeted nearly 9.0% on the day. With economic data at a minimum for this week, the primary driver in the U.S. will remain to be the flood of corporate earnings. While news has been primarily promising thus far, many are still convinced that this will be the seventh consecutive monthly decline in corporate earnings. Accordingly, the standard risk adverse formation took shape in favor of dollar and yen strength. Crosses bared the brunt of the selling, sending AUD/JPY spiraling down by more than 4.5%.

Focus On Earning s

Even with today’s negative sentiment, the improvement in corporate earnings is still a noteworthy development. Companies exceeding their estimates have reached 64% of those that have reported so far. Even more promising is that the best performers have been financial companies, namely Bank of America and Goldman Sachs. Nevertheless, fear over the credit losses incurred by these banks is largely negating the force behind the upbeat figures. Bank of America was the main reporter for today. The largest US lender showed that profit tripled this month. Nevertheless, the company warned that an additional $6.4B was pooled by the company to cover the enlarging ranks of uncollectible loans. This factor was enough to reintroduce credit fears and the potential for additional corporate write-downs. The second blow to the markets came in the form of a Goldman Sachs statement that mentioned the fact that Citigroup’s credit losses were growing at an accelerated rate. The company, which recently topped earnings estimates, has received more than $45 billion in government aid. Even though Treasury Secretary Geithner ensured that another crisis was not on the horizon, credit woes continued to occupy investor focus. With more than 40% of the S&P scheduled to report this week, the true strength of the earnings season will shortly be revealed.

Government Stresses Market s

In addition to earnings, the effects of the upcoming stress test results are still affecting market psyche. Even though financial earnings are better than expected so far, there is still some perceived market risk that the stress test will reveal that the US financial sector is largely insolvent. An outbreak of this magnitude could potential offset the infusion of optimism that we have received in prior months. At this point governmental actions are definitely posing as problematic to continued rallies. In addition to the stress tests there is still uncertainty as to how and when banks will be allowed to make an exit from government assistance. Furthermore, White House Chief of Staff Rahm Emanuel and director of the White House Economic Council Larry Summers made statements recently that add emphasis to the theory that we are experiencing only a bear market rally, not a full recovery. Leading Indicators was the only economic release reported today and fell more than expected to -0.3%, indicating the recession may linger for longer than expected.

EUR/USD: EURO PIERCES 1.3000 ON DIVIDED ECB

The euro unhesitatingly plummeted through the 1.3000, even to temporarily pierce 1.2900. Without any economic new to speak of today, we can point our finger at only one reason for the sell off – the ECB. ECB comments are becoming more and more contradictory as the month goes on. Over the weekend, Jean Claude Trichet announced his preference that the target rate be brought down by 25bp to 1.00%, even though his remarks indicate zero rates are currently off the table. Meanwhile Lorenzo Bini Smaghi was quick to counter, stating that the ECB’s target rate was very close to its absolute floor. Even though council members have all been active in their preferred recommendations for rate cuts, we have yet to hear any concrete definitions of what the central bank is considering for the non-conventional measures that many are eagerly awaiting for the upcoming meeting. With their next meeting scheduled for May 7th, the central bank is running out of time and faces a grave risk if a bargaining point cannot be established. For one, continued declines in the euro will most noticeably be the primary effect, possibly dragging to a multi-year low. Until that day, economic data and continued ECB squabbles will be the primary market moving force. Tomorrow’s schedule includes German Producer Prices and the ZEW Economic Sentiment Survey.

GBP/USD: CREDIT MARKETS NEED REVIVING

The pound drops for the third consecutive day against the greenback. Visions of the 1.5000 level were quickly thwarted by an amount that surpasses 600 pips. Alastair Darling, the Chancellor of the Exchequer, is preparing yet another asset-backed security mortgage guarantee program. As an additional effort to revive the countries damaged credit market, the Treasury will be announcing a 50 billion pound package when the annual budget is announced later this week. It is quite disconcerting that massive efforts, such as Quantitative Easing and the Credit Guarantee Scheme, are so insufficient that further resources are required to fill the gap. Even though this program is only targeted for those banks who have already tapped treasury support, it should serve to limit the confidence surrounding already prescribed governmental efforts. Meanwhile, the Rightmove House Price Index declined less than expected to -7.3%, versus the -9.0% reported last month. Nevertheless, clearly price action has been willing to disregard evidence for the UK recovery. Once again, as we mentioned on Friday, the UK schedule for this week is consistently packed with important economic data. Tomorrow’s event will be in the form of the Consumer Price Index.

USD/CAD: BoC MEETING MAY INTRODUCE QUANTITATIVE EASING

Commodity currencies are suffering tremendous losses in today’s accelerated pace of global equity declines. Crosses in particular are facing exaggerated decline, with AUD/JPY and NZD/JPY losing more than 4.0% each. Risk aversion has not been seen to this extent for awhile, and represents the glaring uncertainty as to whether the global economy is in fact close to the recovery stages. USD/CAD jumps to a one week high as speculation behind tomorrow’s Bank of Canada Monetary Policy Meeting are mounting. The main uncertainty is whether or not, and to what extent, the central bank initiates Quantitative Easing. Nevertheless, it should be expected that the size of such measures do not nearly reach the amounts used by the BoE and Fed to initiate similar policies. To that extent, QE could be a particularly controversial option for the bank considering no government aid has been sent to Canada’s banks thus far. Even though, the BoC has expended its rate cutting ammunition, QE is still a policy of last resort. Considering the fact that the banking sector is in a much better condition than the US, the initiation of QE is a statement that the bank wishes to take immediate action. The Australian dollar is under tremendous pressure today, breaching 0.7000 for the first time since the beginning of the month. Producer Prices fell by -0.40%, the first quarterly decline in more than five years. This will be an additional factor that will weigh on the RBA’s hesitant rate cutting stance. Kiwi plummets for the fifth straight day in a week barren of economic news.

USD/JPY: YEN RALLIES AS VOLATILITY SPIKES OFF NEW LOWS

USD/JPY is reacting in accordance with the standard risk adverse strategy. The pair declined by more than 100 pips as investor fear clearly created demand for the countries safe haven status. The Volatility Index spiked by 15.0% today, after hitting a seven-month low. Of course, as usual, the Japanese economy only worsens as its currency strengthens. It is expected that during a BoJ Press Release for next week, the Bank of Japan will announce newly downgraded forecasts for the economy. Even with a ¥15.4 trillion stimulus package ready for release, the BoJ expects the economy to contract this year, and into 2010. Even though Shirakawa mentioned that the declines in exports are moderating, the outlook still looks grim. The fact that little has been said about Japanese recovery, or even stabilization, is a strong testament to the countries weakness. Even in the countries that have been hit the hardest by the crisis, talks about recovery have at least temporarily surfaced. Economic data for today showed that the Leading Index declined more than expected to 75, while the Coincident Index fell to 86 from 86.8.

USD/CAD: Currency in Play for Next 24 Hours

USD/CAD will be the currency pair in play for the next 24 hours. The Bank of Canada is set to announce their rate decision at 9:00 am ET or 13:00 GMT. In addition, Canada will release Wholesale Sales at 8:30 am ET or 12:30 GMT.

USD/CAD has easily broken the bands of the sell zone to reenter the Bollinger band range trading zone. The thrust of momentum seen in today’s trading has helped the pair reemerge above an important trendline, only broken a few trading days ago. Support for the pair is in place at the 1.2000, which was successful in calling an end to CAD rallies last Thursday. The next resistance that comes into play is the 1.2715 level which was a high placed on April 1st. Momentum behind today’s trading could be sustained into tomorrow for a testing of the 1.2715 if the BoC meeting disappoints.

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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.