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THE STORIES IN THE CURRENCY MARKET

• U.S. DOLLAR: ROCKY WEEK ENDS ON POSITIVE NOTE
• EUR/USD: CONFIDENCE ON THE RISE
• GBP/USD: UK BECOMES TARGET OF CREDIT RATERS
• USD/CAD: CARNEY WARNS OF QUANTITATIVE EASING
• AUD/USD: OIL RISES TO $51.55 AMID SLOW DEMAND
• NZD/USD: RETURN OF RISK APPETITE
• USD/JPY: JAPAN-MANUFACTURING CONTINUES TO STRUGGLE

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	76.0%	70.8%
CUT TO 0BP	24.0%	21.6%
INCREASE TO 50BP	0.0%	7.6%
INCREASE TO 75BP	0.0%	0.0%

U.S. DOLLAR: ROCKY WEEK ENDS ON POSITIVE NOTE

The greenback faces broad selling today as risk tolerance improves along with equity rallies. The equity rallies were primarily fueled by the gradual uncovering of stress test details and upbeat earnings. The same story of components have been the major market driver for the entire week .Today however, we threw some new factors into the mix including some of the only relevant economic data to be released this week. Even though markets are still net losers since Monday, the voice of optimism is still clearly audible. The Dow today advanced by about 100 points. The dollar was stronger against the pound and yen, but lower against the euro, cad, aussie, and kiwi.

Auto Industry Outloo k

Things look very mixed when looking at the health of the auto industry. There is no denying the fact that the companies are in a very difficult position as massive unemployment has been steadily eating away at any disposable income necessitated for the purchase of a new vehicle. Nevertheless, Ford managed to surprise today. The legendary and struggling auto-maker announced earnings that were not nearly as bad as analysts’ estimates. The company accredits their massive cost cutting efforts for the improvement. Ford constructed $1.9 billion in such initiatives, which included opting against incentive plans to draw in bargain searching consumers. The main thing to take away from this is that it looks like Ford will be able to survive without a government handout. This should ultimately provide for a much more efficient and profitable corporation once the economy improves. On the other side of the story stand General Motors and Chrysler. The two companies are edging closer and closer to what seems to be inevitable bankruptcy filings. Chrysler in particular is running out of time. The company has been in merger talks with the Italian auto maker Fiat. However, a lot stands in the way of a successful resolution. The company must first finish deliberations with Fiat, in addition to reaching agreements with the UAW and various lenders. Bankruptcy may soon be the only option. General Motors, after receiving an additional $2 billion in government loans this week, announced that it will begin cost-cutting proposals in order to avoid impending bankruptcy proceedings. In a drastic measure of desperation, GM will temporarily close thirteen assembly plants during the summer months in order to recoup operating expenses for cars that are simply not selling. Clearly the auto industry is not doing well, but Ford was the one glimmer of hope everyone was looking for.

Better Than Expected ?

This week has been pretty empty of any true major US economic events. Nevertheless, today we did receive New Home Sales and Durable Goods Orders. Both numbers supported the wave of end of economic slump speculation. Durable Goods Orders declined less than expected to -0.8%, while New Home Sales reached 356K, up from 337K. The Durable Goods report showed that Capital Spending accelerated by 1.5%, a great sign that businesses are finding that they either have the funds or the access to financing to invest in new equipment. The driving force behind hopes for stabilization is that these reports, while they still are bad, are not as bad as the worst that we have experienced. We can only hope that this condition holds throughout next week. The upcoming schedule shows Consumer Confidence for Tuesday, GDP and Rate Decision for Wednesday, and ISM Manufacturing PMI on Friday. The Fed’s decision should still be the highlight of the week. After the Quantitative Easing surprise last month, we cannot count the Fed out of new inventions. Any progress reports on Quantitative easing and TALF should also add to the excitement surrounding the decision.

EUR/USD: CONFIDENCE ON THE RISE

The euro soars for the fourth straight day in a row, casting doubt in the eyes of euro critics. The main economic driver for today’s gains is undeniably the surprise boost in confidence as exhibited by the Ifo Survey. The reported was lifted off of last month’s 26-year low of 82.1 to 83.7. The stars seem to be aligning for the economies of the Euro-zone, as earlier reports of PMI and ZEW all beat expectations. Of course the immediate question that comes to mind is whether the EZ is basing and approaching the recovery stage. The German Bundesbank President Axel Weber may think otherwise. Weber predicts that Germany, the EZ’s largest economy, will contract by at least 3.0% in the first quarter. This would be an unprecedented slump in the economy; the worst GDP number on record. Nevertheless, the Ifo was enough to help the euro extend for some impressive gains. At least for now, ECB squabbling has been put on the back-burner. For next week, we will be keeping an eye on the GfK Consumer Confidence for Monday, German Consumer Prices for Tuesday and Consumer Confidence on Wednesday. Clearly much of the European calendar is being driven by confidence estimates which should prove to be a very telling indication for the regions progress toward the rejuvenation of economic growth. Judging by the improvement in Ifo, we may be in for more surprises ahead.

GBP/USD: UK BECOMES TARGET OF CREDIT RATERS

Even with exaggerated dollar weakness across the board, the pound is unable to capitalize and remains depressed on the day. The credibility of the British economy took a huge hit when it was announced that Moody’s and Standard & Poor’s are delving into the health of the country’s finances. The fact that Britain’s finances are deteriorating so rapidly may make it difficult for them to sustain their pristine AAA credit rating. The rating companies have made headlines lately after downgrading the credit of many European countries, including Spain and Greece. It appears that the UK is the next on the list. A downgrade of their credit would not only make it more difficult for them to sustain their levels of borrowing, but would be a huge hit to confidence. As Alastair Darlings recent tax hike budget proposal left markets in shock, the government may in fact have to do more to limit the extent of the budget deficit. As a further problem for the pound today, GDP came in weaker than expected at -1.9%, the weakest level since 1979. Clearly things are not looking well. The road to recovery is being forever marred by impassible obstacles. As expected, this week’s packed schedule of economic reports will give way to a relatively empty schedule for next week.

USD/CAD: CARNEY WARNS OF QUANTITATIVE EASING

The Australian, New Zealand, and Canadian Dollars continued its advance against the US Dollar as risk appetite returned to the markets. Prices of oil closed well above $50 a barrel despite a vast surplus and weak global demand, helping to lift the commodity pairs higher. Meanwhile, Australian officials warned of A$115 Billion or $82 Billion shortcoming in tax receipts. The government will run A$22.5 Billion or $16 Billion budget deficit during the year ending June 30 as tax revenue falls amid lack of global demand for exports. During next week, Australia will release the figures for New Home Sales alongside Conference Board Leading Index. NZD/USD happened to be the biggest mover of the day, advancing over 2% as traders flocked back into the riskier currency. Next week will present abundance of economic information, starting with Trade Balance figures, expected to decline from the previous month. Thereafter, the Reserve Bank of New Zealand is expected to reduce the interest rate by 50 basis point to 2.50% on Wednesday. Bank of Canada Governor Mark Carney warned that delays to stabilize international banking system may induce a quantitative easing approach in order to relieve tightness of credit. During the next week, GDP figures will be released that are expected to contract for the fifth consecutive month, prompting BoC to counteract the deteriorating conditions by any means necessary.    

USD/JPY: JAPAN-MANUFACTURING CONTINUES TO STRUGGLE

The Yen was mixed against other major counterparts, appreciating to a level not seen against the greenback since March 30th while losing ground to the Euro. Japanese economy continues to struggle amid global downturn as overall production by all sectors of the economy continued to tumble in February. All Industry Activity Index fell 2.0%, registering fifth consecutive month of declines. The Japanese ruling party in order to prop up ailing domestic property market aims to allocate ¥800 Billion yen or $8.2 Billion to reverse the price declines. The government plans to buy out ailing REIT’s in order to sustain deteriorating conditions in the housing spectrum. Next week renders important information about the current situation in the economy starting with Retail Sales figures which will elaborate on the state of consumer spending. Later in the week, the Bank of Japan will release Semi-Annual Economic Outlook Report, followed by the interest rate decision which should leave rates stable at 10 basis points. During the conclusion of the next week, the markets will pay a close attention to the inflation figures as deflationary fears still linger in the economy.

USD/JPY: Currency in Play for Next 24 Hours

USD/JPY will be the currency in play for the upcoming Monday. U.S. will release Dallas Fed Manufacturing Activity at 14:30GMT or 10:30AM EST. Thereafter, Japanese Retail Sales figures will come in at 23:50GMT or 7:50PM EST.

After an extensive rally in the beginning of the year, the short-term trend reversed as the pair lingers within Sell Zone of the Bollinger Bands. In order to continue its decline the pair needs to pierce through the support level which happens to be 61.8% retracement of this year’s low and high at 96.00. The sell zone will be negated upon a break of resistance which happens to be 200-day SMA at 98.70.  

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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.