Good Data, Bad for the Dollar

Last updated 5/18/2009 5:36 PM ET (GMT -5) 6 Comments

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Kathy Lien

Director of Currency Research, GFT

THE STORIES IN THE CURRENCY MARKET

• GOOD DATA, BAD FOR THE DOLLAR
• EUR/USD: EXPORT SECTOR IMPROVES
• GBP/USD: REASONS TO BE BULLISH
• NZD/USD: PPI FALLS BY RECORD
• USD/CAD: OIL PRICES SURGE
• AUD/USD: RBA MINUTES AND SPEECHES ON TAP
• USD/JPY: JAPANESE OFFICIALS WORRIED ABOUT YEN STRENGTH

EXPECTATIONS FOR UPCOMING FED MEETINGS

GOOD DATA, BAD FOR THE DOLLAR

As we expected, dollar weakness has resumed.  Last week, we argued that on a short and long term basis , the dollar should continue to weaken against higher yielding currencies.  This week, housing and manufacturing data dominates the calendar and therefore the improvements from those sectors of the U.S. economy should drive the dollar lower.  Good data is bad for the dollar because it encourages risk appetite, which is why the dollar sold off against all of the major currencies except for the Japanese Yen.  In fact, the divergent price action of USD/JPY only confirms that last week’s pullback in currency pairs such as the EUR/USD, GBPUSD, and AUD/USD represents just a pause before further gains.  Oil prices are also higher while LIBOR rates and gold prices are dropping all of which are in line with safe haven demand easing.  

Optimistic Outlook for Housing and Bank s

The optimism across the financial markets has stemmed from positive reports from the housing and financial sectors.   The NAHB index which measures the sentiment of homebuilders rose to the highest level since September, when Lehman Brothers collapsed. The improvement in builders’ expectations for present and future sales is encouraging but the index remains at very low levels.  It will be difficult to see a material improvement in builder confidence because there are a lot of inventory on the market and home owners are still cautious.  With that in mind however, housing starts and building permits are expected to increase as they have fallen to very low levels.  Earnings from home improvement retailer Lowe’s indicates that the improvements in the housing market have extended beyond construction and sales.  As for the banking sector, there is talk that Bank of America has raised $4 billion in a share offering. As more banks meet their capital needs privately and start repaying their TARP loans, it could inject some new optimism in the currency market. The minutes from their April monetary policy meeting are due for release this week and given that no major announcements were made at the last monetary policy meeting, a more optimistic tone is expected from the central bank.

Housing Market Sentiment

Dollar Positionin g

The only thing that currency traders need to be careful of is positioning.  According to the latest Commitment of Traders report, speculators have reduced their implied long dollar positions and increased their long positions in Euros, Australian, New Zealand and Canadian dollars. This suggests that the sell-off in the dollar could slow against some of the key currencies.   The Commitment of Traders report is usually a good leading indicator of extremes or tops and bottoms in the currency market. Net long positions in the dollar are the lowest since 2008. Traders have also increased their net long positions in Euros by 142 percent in the last week, which is why the EUR/USD is having a difficult time rallying. The British pound on the other hand saw an increase in net short positions which suggests that the GBP/USD has plenty of room to rise.

Geithner: Things Have Stabilized

EUR/USD: EXPORT SECTOR IMPROVES

Trade is improving according to the latest figures from the Eurozone.  The seasonally adjusted trade deficit shrank to EUR2.1 billion from EUR2.8 billion in March thanks to a 1.4 percent rise in exports.  Most countries have been reporting smaller trade deficits because imports dropped more than exports but that was not the case in the Eurozone where exports increased for the second month in a row.  The improvement primarily comes from Germany, who also reported better trade numbers.  If exports continue to grow, we could see a rebound in second quarter GDP growth. On Friday, the Eurozone reported the weakest GDP growth on record, which is part of the reason why the rally in the euro is mild compared to other major currencies.  Traders may be hesitant about turning completely bullish euros after such a gloomy report.  The German ZEW survey of analyst sentiment is due for release tomorrow.  Given the increase in exports and the recent uptick in the PMI surveys, we expect analyst sentiment to improve which could help fuel further gains in the EUR/USD.  Meanwhile, comments continue to come from ECB officials.  Weber who previously said that the EUR60 billion asset purchase program is sufficient is now saying that unless things get noticeably worse, the package of measures decided until now is sufficient.  In general, we do not expect an overly aggressive announcement from the ECB next month.  

UK House Prices Rise: Rightmove

GBP/USD: REASONS TO BE BULLISH

The British pound incurred strong gains against the U.S. dollar, Japanese Yen and Euro thanks to better than expected economic data, positioning and reports that the currency pair is undervalued.  House prices rose 2.4 percent this month according to Rightmove, bringing the annualized pace of house price decline from -7.3 percent to -6.2 percent.  Like the U.S., the U.K. housing market is improving.  The improvement has been so significant that many analysts are stressing the undervaluation of the British pound.  According to a report by Citigroup, the British pound is among the most undervalued major currencies with some analysts even calling for a 20 percent rally in the currency pair.  The more optimistic outlook is supported by recent improvements in the service and manufacturing PMI surveys.  Unlike other major currencies, the British pound could see sharper gains as long positions in the currency pair remain limited.  Even though we also believe that the GBP/USD could see further gains, we expect these gains later in the week after tomorrow’s inflation report and Wednesday’s BoE minutes.  Producer prices were mixed and shop prices fell in April which suggests that consumer prices may have been tepid last month. 

NZD/USD: PPI FALLS BY RECORD

The commodity currencies are the big gainers today as the equity rally brings relief after last week’s losses. USD/CAD pushed lower by 140 pips, while the AUD/USD reached higher by about 160. Advances have definitely been accelerated due to the 5% surge in Crude Oil. NZD/USD however is a little restrained considering the latest string of economic data. Clearly the deflationary threat is becoming a very real risk as Producer Prices (Inputs) fall by a record 2.50%. The market was looking for inflation to remain flat.  PPI Outputs also faced similar decline by a record 1.4%. This latest development will undeniably present new challenges for the Reserve Bank of New Zealand.  RBNZ Governor Alan Bollard has left monetary policy open for continued easing and he may compelled to pull the trigger after the latest PPI numbers. However the advances in the kiwi today indicate that the overall optimism in the financial markets and risk appetite is enough to offset the weak economic report. There was no Australian data released last night, but we are expecting a speech by the RBA Governor Glenn Stevens and the RBA Minutes this evening. At the last meeting, the central bank left interest rates unchanged and did not rule out cutting interest rates further.  No economic data is due for release from Canada until Wednesday.  

USD/JPY: JAPANESE OFFICIALS WORRIED ABOUT YEN STRENGTH

The 95 level is proving to be significant support for USD/JPY.  The currency pair has tested that level 3 times but failed to close below.  Since the beginning of April, the Japanese Yen has risen more than 6 percent against the U.S. dollar prompting Japanese Finance Minister Sugimoto to say last night that he is watching FX moves carefully. In particular, he doesn't want the value of the Yen to have a negative impact on the economy. As an export dependent nation, Japan has been hit hard by weaker global growth. There have been mild signs of improvement, but this week's GDP number should highlight the depth of the problems plaguing the Japanese economy. The country is expected to have endured its sharpest contraction ever in the first quarter. Consumer prices are also teetering around negative territory. However the Japanese have been all talk and no action since 2004, the last time they intervened in the Japanese Yen. Granted, the intervention happened above current levels in USD/JPY, hedges by exporters are mostly established around the 95 level and therefore USD/JPY would need to fall below 90 before the Bank of Japan and the Ministry of Finance would be compelled to step in.  Meanwhile improvements were seen in Japanese economic data.  Consumer confidence reached a 10 month high of 33.2 while department store and condominium sales in Tokyo fell at a slower pace.  

EUR/GBP: Currency in Play for Next 24 Hours

EUR/GBP is the currency in play for tomorrow thanks to a very packed schedule for tomorrow.  In the Euro-Zone, we have the ZEW surveys for both Germany and the Eurozone at 5:00 am ET or 9:00 GMT. The UK will release Consumer Prices and Retail prices for 4:30 am ET or 8:30 GMT.

EUR/GBP has reentered the Bollinger band sell zone for the first time in about two weeks. However, the selling pressure will definitely be tested at the pivotal 0.8800. The combination of a psychological level and previous low could keep prices from continuing lower. Resistance is strong as well at the previous high at 0.9037. This level is also the 38.2% retracement from March highs to May lows. With such strong levels placed on either side, we will need a surprise tomorrow to surpass either boundary.

Comments (6)

raulin

May 18, 2009 at 06:06 PM ET

Kathy. You have got to be crazy if you think that the housing market has bottomed out. All that is happening same as in miscalculated UK CPI stats (admiited by the Offices of Statistics in last weekends FT which are not adjusted for inflation) is that bargain hunters are buying low (they think , but wait till they see the price in 2 years!) but houses over a million are not being sold so they will have to drop their prices and consumers are purchasing cheaper products.There is deflation everywhere. You forget about unemployment and underemployment and subsequent default rate, the ALT-A loans hugely underestimated by the phoney stress tests hence you cannot calculate accurately a banks assets and you cannot say what they owe and as we know the banks are the lifeblood of businesses. This is a suckers rally!

klien

May 19, 2009 at 09:47 AM ET

Thanks for your 2 cents. If U.S. data was miscalculated like the U.K. data (which was a rare embarrassing acknowledgment), we would have even more trouble at hand. In the meantime, single family home data is stabilizing (NAHB increased, starts and permits for this sector rose as well). We cant expect the entire housing market to stabilize at once, but at least there is evidence that one part is.

raulin

May 19, 2009 at 02:34 PM ET

Funny how the same data gets interpreted 2 different ways:46% sounds like a bigger number to me than 2.8% . Multifamily housing plunged 46% to an annualized pace of 90,000 from 167,000 accounting for the decline. Single family homes actually saw a modest increase of 2.8% for the month....some housing recovery !

klien

May 20, 2009 at 09:03 AM ET

It has to start somewhere =)

Dario Fuentes

May 19, 2009 at 11:10 AM ET

Hello Kathy,
Can you please tell me where I can find the commitment of traders report?
Thanks in advance
Best wishes
Dario

klien

May 19, 2009 at 11:55 AM ET

You can find it at: http://www.cftc.gov/marketreports/commitmentsoftraders/index.htm

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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.