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Dollar Bulls Weigh Confidence Against Stress Tests and Swine Flu

Last updated 4/28/2009 10:14 AM ET (GMT -5) 0 Comments - Add your comment

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Kathy Lien

Director of Currency Research, GFT

Positive U.S. economic data is counteracting the strain that the swine flu and the initial results of stress tests are having on the currency markets.  Consumer confidence rose by the largest amount in 3.5 years from 26.9 to 39.2.  Both the Conference Board and University of Michigan surveys are reporting a material improvement in sentiment thanks to the rebound in the equity markets.  Activity in the Richmond Fed Manufacturing sector has also improved materially while house prices are falling at a slower pace.  The better than expected reports have driven the U.S. dollar significantly higher against the Japanese Yen, which tends to have the cleanest "reaction" to U.S. data.  However the positive economic news should play second fiddle to the stress tests and swine flu as it is far too early to scream for a recovery.  

The results for the stress tests are coming in and unfortunately Bank of America and Citigroup are the first to be singled out.  At the same time, the world is growing more and more fearful about the Swine flu and I think this is an overreaction.  Yesterday, I wrote about how the impact of the Swine flu on the U.S. dollar should be limited based upon the reaction of the G10 currencies to the Avian Flu and SARS.  However I did not rule out further dollar strength but only because of problems related to the global financial crisis and not the swine flu.

The stress tests on banks have caused a lot of jitters in the financial markets even before the outcomes were announced. Initially many investors believed that the tests were nothing more than a political move by the Obama Administration to boost investor confidence, with nearly all of the banks expected to pass the tests with flying colors.  

Instead the Obama Administration is not playing any games.  They realize that smoke and mirrors no longer work because  banks need to be financially sound in order to have a lasting recovery in the economy.  Expect more banks to fall under the knife in coming days but just because the regulators believe that BoA and Citi need to raise more capital doesn't mean that they are insolvent.  The Obama Administration has made it clear that they will not allow any of the top 19 banks to fail.  The banks have until the middle of the week to refute the findings and deliver a response.  They then have 6 months to raise capital either from the investors or the U.S. government.

The results of the stress tests will continue to hang over the market this week, which should limit any meaningful correction in the U.S. dollar.   

FOMC Meeting Beings

The 2 day FOMC meeting has also just begun and even though U.S. central bank is not expected to cut interest rates, they could leave their growth forecasts unchanged which may be dollar positive. On the other hand, if they expand their purchase program, that would be perceived as negative but given the stabilization in the credit markets we do not expect that to happen. 

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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.