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U.S. Dollar: FOMC and GDP

Last updated 4/27/2009 4:58 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: FOMC AND GDP
• EUR: TESTING 1.30
• GBP/USD: CRITICISM FROM IMF WEIGHS ON POUND
• AUD/USD: RISK AVERSION HITS COMMODITY CURRENCIES
• NZD/USD: DIFFICULT TO RALLY AHEAD OF RBNZ
• USD/CAD: OIL AND GOLD PRICES EASE
• USD/JPY: JAPANESE YEN OUTPERFORMS

EXPECTATIONS FOR UPCOMING FED MEETINGS

U.S. DOLLAR: FOMC AND GDP

The lack of any meaningful U.S. economic data along with fear that the swine flu has the risk of turning into a global health crisis has caused investors to flock into the safety of the U.S. dollar. We have always said that when it comes to currencies, investors and traders always sell first and ask questions later.   Even though the source of the swine flu is in Mexico and the outbreak has spread into the U.S., risk aversion has caused currency traders to sell higher yielding currencies and move into the U.S. dollar. We believe that the fears about the swine flu are overdone ( Dollar’s Reaction to Swine Flu Temporary ) as it can be treated with standard flu medications. However that does not mean that the dollar’s rally is over because there is a decent chance that we may see upside surprises in U.S. economic data this week. Although this would have normally meant a sell-off in the U.S. dollar against higher yielding currencies, fresh concerns about the Eurozone and the U.K. could help the dollar rally on the stronger U.S. data. 

Consumer Confidence, FOMC and GDP Week

After last week’s disappointments in U.S. economic data, there is a decent chance that we could see some positive surprises this week. The biggest event risks for the U.S. dollar will be consumer confidence, GDP, the FOMC meeting and manufacturing ISM. The rebound in the equity markets and University of Michigan consumer confidence suggests that the Conference Board’s report tomorrow could reflect a similar improvement in sentiment. As for GDP, the sharp improvements in retail sales and the trade balance in the first quarter indicates that growth has fallen by a slower pace in the first 3 months of the year. The Federal Reserve is not expected to alter interest rates, but the dollar could receive a boost as the central bank is expected to leave its growth forecasts unchanged. Recent comments from Federal Reserve officials suggest that they are growing less pessimistic, but it is far early too turn optimistic. 

No Surprises from G7 Statement

This weekend’s G7 meeting of finance ministers and central bankers passed without any major breakthrough.  According to the communiqué, even though economic activity could recover later this year, the downside risks persist with bank balance sheets posing the biggest threat to a global recovery. The group agreed that the most important part of their jobs is to restore lending and provide liquidity while ensuring that financial institutions remain sound. Their stance on currencies remains completely unchanged as the communiqué repeats that “ Excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability. We continue to monitor exchange markets closely, and cooperate as appropriate .” G7 statements have the power to cause rapid moves in the currency market, but only if there are changes to the currency language in the communiqué. 

Mexico’s Bad Luck to Rub Off on U.S.?

Mexico is certainly experiencing some bad luck. After the outbreak of the swine flu, the country was hit by a 6.0 magnitude earthquake this morning. Although the impact of the swine flu on the G10 currencies should be limited, the impact on the Mexican peso and the country’s economy as a whole could be severe. Tourism and trade are the life bloods of the Mexican economy and unfortunately both have been dealt a significant blow. The U.S. has also been impacted not only because the flu has spread into the country but also because six nations have already banned meat and pork products from some parts of the U.S. However we have faith that just like SARS, the Avian flu virus and Mad Cow Disease, it will be contained quickly by developed nations, pacifying global fears. For Mexico on the other hand may, the swine flu will deepen the slowdown and delay a recovery.

Swine Flu: Worries Justified?

EUR: TESTING 1.30

The EUR/USD tested the 1.3000 level intraday following comments from European Central Bank officials. With 2 weeks to go before the next European Central Bank rate decisions, traders are watching ECB comments very carefully. Of all the major central banks in the world, the ECB is the only one that can still surprise the currency markets. This morning, ECB member Nowotny confirmed the market’s general belief that the central bank will adopt unconventional monetary policy measures next month to give European firms and consumers better access to credit. He also added that interest rates will remain low for a long time. ECB President Trichet on the other hand was not as clear cut. He said that the central bank will make their decision about taking new measures next month and warned that taking rates to the lowest levels is not always the most effective option. This suggests that the next interest rate cut from the ECB could be their last as Trichet remains strongly reluctant to take Eurozone interest rates to U.K. let alone U.S., Canadian or Swiss levels. Recent economic data has shown very mild signs of improvement and according to Trichet, there is evidence that the money market is working better. German Consumer confidence held steady for the month of May following an upward revision to the April data. 

GBP/USD: CRITICISM FROM IMF WEIGHS ON POUND

The British pound sold off against the U.S. dollar following weaker economic data and criticism from the IMF. The latest report from the housing market indicates that banks are approving fewer mortgages despite falling house prices. The IMF believes that Chancellor Darling’s forecasts for the U.K. economy were intentionally over optimistic on the fear that weaker forecasts would cause the economy to collapse further.  Last week, the Chancellor revealed in his budget that GDP growth will be between -1.00 percent to -3.5 percent this year while the IMF forecasts that the economy will slow by as much as -4.1 percent in 2009. They also do not expect a recovery until 2011, which contradicts Darling’s forecast for a 2010 recovery. On Friday, the U.K. Telegraph also reported that the country is at risk of a credit downgrade by rating agencies Moody’s and Standard and Poor’s. This type of risk is exactly why the British pound has had difficulty rallying over the past week. The CBI Distributive Trades survey is due for release tomorrow and unfortunately more weakness may be likely. 

AUD/USD: RISK AVERSION HITS COMMODITY CURRENCIES

Heightened risk aversion has driven the Australian, New Zealand and Canadian dollars lower across the board today. The biggest percentage mover in the currency market today was AUD/JPY which fell over to 2 percent. There was no economic data from any of the 3 commodity producing countries but oil and gold prices are slightly weaker. This is the first day in 3 that the commodity currencies have sold off. With no economic data due for release over the next 24 hours, the price action of the commodity currencies should continue to be driven by the risk appetite in the currency market. On Wednesday, the action will heat up for the New Zealand dollars as the Reserve Bank gears up for an interest rate decision. With another 50bp rate cut priced into the market, it may difficult for the NZD/USD to rally. 

USD/JPY: JAPANESE YEN OUTPERFORMS

The best performing currency today was the Japanese Yen, which rose against all of the majors. The Japanese government announced on Monday that the economy is expected to contract by a record 3.3 percent this fiscal year, which started in the beginning of the month. This dismal forecast is part of the reason why the Japanese government has introduced a fresh JPY13.9 trillion stimulus package. At this pace, the government will be spending 8 percent of GDP. As much as Prime Minister Taro Aso tries to spend his way out of a recession, the Japanese economy is in a different situation that the U.S. or U.K. economy. Japan’s problem is plunging demand for exports and unfortunately that is problem that domestic stimulus will not resolve. The Japanese economic calendar is extremely busy this week. Retail sales and small business confidence are due for release this evening. The contraction in consumer spending is expected to continue but small business confidence could improve. 

USD/JPY: Currency in Play for Next 24 Hours

USD/JPY will be the currency in play over the next 24 hours with U.S. Consumer Confidence due for release at 10:00 AM ET or 14:00 GMT. Japanese retail sales data is due for release at 7:50 PM ET or 23:50 GMT followed by small business confidence at 1:00 AM ET or 06:00 GMT. 

USD/JPY is currently trading within the sell zone, which we determine using Bollinger bands. Although the currency pair has become oversold and a bounce is likely, any rise will be capped by the 98.00 level where we have a confluence of moving average (50-day SMA), Fibonacci (23.6% Fibo retracement of 87.00 – 101.50 rally) and Bollinger Band resistance. As long as the currency pair remains below that level on a closing basis, there is a decent chance that we could see it move to 96.00, a level that the currency pair bounced off of in March. 

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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.