U.S. Dollar Downtrend Resumes

Last updated 5/14/2009 5:43 PM ET (GMT -5) 1 Comments

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Kathy Lien

Director of Currency Research, GFT

THE STORIES IN THE CURRENCY MARKET

• U.S. DOLLAR DOWNTREND RESUMES
• EUR/USD: ECB DOES DAMAGE CONTROL
• GBP/USD: 1.50 SUPPORT STILL HOLDING
• NZD/USD: RETAIL SALES ON TAP
• AUD/USD: GOLD AT $926.35 AN OUNCE
• USD/CAD: OIL PRICES REBOUND
• USD/JPY: ASTONISHING WEAK GROWTH FORECASTS

EXPECTATIONS FOR UPCOMING FED MEETINGS

U.S. DOLLAR DOWNTREND RESUMES

After a much needed rebound that took some of the steam out of the runaway moves in the currency market, the U.S. dollar is selling off once again. Although jobless claims increased more than expected and inflation pressures remain muted, investor confidence has improved. In our article this morning titled Dollar Unfazed by PPI and Claims , we talked about how the decline in LIBOR rates, which was underway before the stock market opened, provided the first clue that investors were growing less nervous. This has transformed into a broader rally that spans, the currency, equity and commodity markets. The U.S. dollar weakened against every major currency except for the Japanese Yen, which confirms that the improvement in risk appetite was the predominant theme in the currency market today.

More Short Term Dollar Weakness Ahead

The U.S. dollar should continue to weaken against higher yielding currencies. Although we don’t talk about technicals often in this report, it is important to mention that all of the major currencies have held above their breakout points against the U.S. dollar which means that their up trends are intact. There is growing evidence that the worst is behind us and the global recession is easing. Many countries with higher yields have seen improvements in different parts of their economies. Australia and Canada both reported positive job growth last month and if this trend continues, we can expect the AUD and CAD to extend their gains against the U.S. dollar. As for the U.S. economy, the efforts of the Obama Administration are beginning to pay off and we expect to see the fruits of their labor next week with housing and manufacturing sector reports due for release. Of course before that we still have a barrage of U.S. data on tap for Friday. This includes consumer prices, the Empire State manufacturing survey, the Treasury International Capital flow report of foreign investment, industrial production and the University of Michigan consumer confidence index. The dollar’s weakness in March and April should help bolster the manufacturing sector while the push above 8000 in the Dow should keep consumers happy. Inflation pressures on the other hand should remain muted and in general, we expect most of the data to confirm that the U shaped recovery is still on track. According to a survey conducted by the Wall Street Journal, most economists expect the recession to end in August of this year. There should be another quarter of negative growth followed by slow growth for most of 2010, which is basically in line with our U shaped recovery theory.

WSJ Forecasts

As for this morning’s data, they did not help or hurt the dollar. Although producer prices rose month over month it declined on an annualized basis. Jobless claims also rebounded from 605k to 637k. For optimists hoping for another reduction in claims, this latest data absorbs the Chrysler plant closing. Bankruptcies mean layoffs and the more U.S. companies that are forced into bankruptcy, the greater the layoffs. The four week moving average increased to 624k while continuing claims hit another record high of 6.56M.

Arguments for Long Term Dollar Weakness

At the same time, this past week, a number of arguments have surfaced questioning the long term viability of the U.S. dollar. On Wednesday, the Financial Times carried an Op-Ed piece about how the U.S.’ Triple A credit rating could be at risk which if true would crush the confidence of foreign investors. Today, the NY Times carried its own Op-Ed piece by Nouriel Roubini, aka “Dr. Doom” about how the Renminbi could challenge the dollar’s reserve status. Although he does not believe that the Renminbi would replace the U.S. dollar as the reserve currency within the next 10 years, he does argue that the U.S. government’s aggressive spending and borrowing habits puts the dollar’s status at risk. He also lays out why he believes the U.S. is following the path of Britain, whose currency was once the dominant reserve currency before losing that title to the U.S. after becoming a net debtor and a net borrower nation in World War II. We also believe that the dollar will not be “replaced” in the next 10 years, but central banks will start increasing their holdings of other currencies at the expense of the U.S. dollar.

Geithner Discusses Details on Homeowner Assistance

EUR/USD: ECB DOES DAMAGE CONTROL

European Central Bank officials were out in force today doing damage control after newspapers around the world covered the clashing of words between Weber and Kranjec. Although ECB President Trichet declined to comment on the asset purchase program in his speech this morning, the other members of his Governing Council made it clear that the announcement that Trichet made earlier this month are the only terms that the central bank has decided thus far. No less than 6 ECB officials commented on the asset purchase program. ECB member Stark told the market to “listen to the ECB President” while other members confirmed that EU60 billion is enough for now and the technical details have not been decided. The great deal of uncertainty about what the central bank plans to do will undermine their credibility. In addition to the asset purchase program, ECB officials all agreed that the very low level of interest rates is appropriate. There was no major Eurozone economic data released today but the central bank released their monthly bulletin. In the report, they say that forecasters cut inflation and growth projections significantly for 2009 and 2010. The region is now expected to contract by 3.4 percent in 2009 and grow by 0.2 percent next year. These forecasters are worth remembering when the Eurozone GDP and CPI numbers are released tomorrow. The market is looking for a further contraction in growth during the first quarter.

GBP/USD: 1.50 SUPPORT STILL HOLDING

In Wednesday’s Daily Currency Focus, we talked about the importance of the 1.50 level in the GBP/USD. This morning, the currency pair hit a low of 1.5059 right before the NY Trading session open and almost immediately reversed course to end the day above 1.52. No U.K. economic data was released which means that the rally in the GBP/USD was driven entirely by the improvement in investor confidence. The lack of economic data on Friday will also leave the currency pair at the whim of the market’s overall risk appetite. In general, we believe that the recent improvements in U.K. economic data are a new trend and therefore despite the bearish Quarterly Inflation report, we believe that the GBP/USD could still test 1.55. The currency could also outperform the euro in the near term as the uncertainty about ECB monetary policy clouds the outlook for the euro.

NZD/USD: RETAIL SALES ON TAP

Following the sharp sell-off in the Australian, New Zealand and Canadian dollars on Wednesday, the Commonwealth currencies have regained footing. The best performing currency pairs today involve both the Australian and New Zealand dollars. Gold and oil prices are higher which is helping to fuel the rally in combination with the overall improvement in risk appetite. New Zealand was the only country to report economic data. Their business or manufacturing PMI index increased from 41.9 to 43.7. Although the index remains in contractionary levels, it is the strongest reading since December, which reflects slower contraction in the sector. Retail sales are due for release tonight and we believe that consumer spending will continue to fall as visitor arrivals and credit card spending plummet. There are no Australian or Canadian economic reports until next week which means that like the GBP, the commodity currencies are at the whim of the market’s risk appetite.

USD/JPY: ASTONISHING WEAK GROWTH FORECASTS

After a strong rally this week, the Yen has finally given back some of its gains. A fear of world’s second largest economy shrinking by a record figure in the previous quarter continues to build anxiety in investors. The Cabinet Office expects the economy to contract by an astonishing 16.1% in the three months ending on March 31st. In part, the sluggish growth in the GDP was attributed to the largest drop in domestic consumption since 1974 and the worst business investment on record. However, the Bank of Japan continues to be optimistic about a turnaround in the economy towards the end of this year. Bank of Japan Governor, Masaaki Shirakawa, cited an improvement in global economies and an eventual pick-up in demand for goods as well as the positive impact of an oversized ¥15.4 Trillion or $160 Billion stimulus package. This evening, Japan will release figures for Machine Orders and Domestic Corporate Goods Index. A prompt recovery in China could also drag Japan out of its downward spiral. Chinese data suggests that a healthy stimulus plan along with record bank lending is helping to support the economy even as exports plunge. A resurgence of growth in the Asian Giant would provide a great jumpstart for the ailing economies in the Asia/Pacific region.

EUR/USD: Currency in Play for Next 24 Hours

EUR/USD will be the currency in play for the next 24 hours. German GDP figures are due out tomorrow at 6:00GMT or 2:00AM EST, followed by Euro-zone GDP and CPI at 9:00GMT or 5:00AM EST. In the U.S., CPI and Empire Manufacturing figures will be released at 12:30GMT or 8:30AM EST. After an attempt to test 1.3500, EUR/USD continued to rally higher as it remains within the Buy Zone of Bollinger Bands. Tomorrow’s data can lead to further volatility. The level next level of resistance is at 1.3855, which is the 61.8% retracement of December’s high and this year’s low. However, if the pair falls out of the Buy Zone, the next level of support hovers around the 200-day SMA at 1.3425.

Comments (1)

Dr. Mahmoud

May 15, 2009 at 02:49 AM ET

Thanks Kathy for your interesting comments

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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.