US Dollar: Where are the Sellers?

Last updated 5/27/2009 5:49 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: WHERE ARE THE SELLERS?
• GBP/USD: HITS 6 MONTH HIGH
• EUR/USD: FAILS AT 1.40
• NZD/USD: SHRUGS OFF STRONGER BUSINESS CONFIDENCE
• AUD/USD: LEADING INDICATORS RISE
• USD/CAD: OIL PRICES HIT 6 MONTH HIGH
• USD/JPY: SIGNS OF IMPROVEMENT IN JAPAN

EXPECTATIONS FOR UPCOMING FED MEETINGS

U.S. DOLLAR: WHERE ARE THE SELLERS?

The U.S. dollar strengthened against all of the major currencies primarily because forex traders have been overly short dollars.  We have recently mentioned on a few occasions that long euro positions according to the Commitment of Traders report is at the highest level since July 2008.  Profit taking on short dollar positions need to occur before we can get some fresh sellers in the market. However on top of the overstretched positioning, there are number of reasons why investors grew cautious on the outlook for the global recovery.

5 Drivers for the Dollar’s Recover y

1)     China: One of the preconditions for a global recovery was stability in China.  Chinese economic data was improving and the general belief was that China would deliver another stimulus package to achieve their 8 percent growth target, reenergizing the local and international economy.  However this morning, the central bank of China warned that the Chinese economy still faces serious downward pressure and that the recovery is not yet well grounded because the world economy hasn’t bottomed and there is great uncertainty over commodity prices.  This lack confidence in the outlook for their own economy threatens the outlook for the global recovery.

2)     GM Bankruptcy:   Here is the U.S., we had to contend with the strong possibility that General Motors will be forced to file for bankruptcy over the next few days.  Bondholders rejected a debt-swap offer that was absolutely essential to the survival of GM.  At stake are not only GM’s equity holders but also GM’s dealers and employees.  Another bankruptcy would provide more reasons for investors to be skeptical of a U.S. recovery.

3)     Sharp Decline in Equities and Treasuries:   Despite strong demand for the 5 year bond auction, investors have aggressively sold 10 year Treasuries.  This indicates that demand is waning at least on one end of the curve.  The 2 percent decline in equities also suggests that investors could still be shunning U.S. assets even though the dollar is rising.  Treasury Secretary Geithner has warned that it will be a long road to recovery and therefore we believe that U.S. interest rates will remain at ultra low levels for some time.  This may encourage investors to look for higher yielding opportunities elsewhere.  

4)     Oil Prices Hits 6 Month High:   Oil prices also hit a 6 month high of $63.82 intraday.  As we know, high oil prices act as a tax for consumers and could hit corporate profitability at a time when U.S. corporations are struggling to turn profits.  Typically, oil prices rise because of a weaker dollar, but today the dollar has strengthened and yet oil prices refuse to fall indicating that speculative demand for oil is strong.  If crude prices manage to rise back above $70 a barrel as some members of OPEC have suggested, it would pose a risk to the global recovery.

5)     VAT Tax in U.S.? – The Washington Post is also carrying an article reporting that Congress and the White House is considering the possibility of imposing a national sales tax similar to the VAT tax in other parts of the world.  A new tax would be received poorly by the markets.  

Existing home sales were better than the market expected and in line our call on Tuesday.  We believe that new home sales will see a similar rise as existing home sales and a similar decline in house prices. Durable goods orders are also due for release on Thursday and even though the market is looking for orders to rebound, the cancellation of Boeing orders could drag the data lower. 

GBP/USD: HITS 6 MONTH HIGH

The British pound broke the 1.60 level and surged to a 6 month high against the U.S. dollar intraday before taking a sharp U-turn that took the GBP/USD back below the key price level.  The only piece of U.K. economic data released this morning were mortgage approvals which increased less than expected.  The U.K. Treasury also warned about a GBP70 billion hole in public finances.  Given these less than positive reports, many traders may be surprised to see that the British pound was the only currency to strengthen against the U.S. dollar today.  Much of the strength of the pound is actually tied to EUR/GBP selling.  In yesterday’s Daily Currency Focus, we talked about the strong chance of the euro underperforming the British pound because of the big divergence in positioning as well the fact that the euro was far more overvalued than the pound on a purchasing power parity basis.  Looking ahead, the CBI distributive trades survey is due for release. The data should have a minimal impact on the currency pair and therefore pose little threat to further losses in EUR/GBP.  The rally in GBP/USD on the other hand is losing steam and there is a very strong chance that we could see a retracement back to the 1.5750 level.  

EUR/USD: FAILS AT 1.40

Yesterday we wondered loudly whether the EUR/USD& #8217;s third test of the 1.40 level would trigger a meaningful break.  Unfortunately that has not been the case and instead of extending its gains, the euro has fallen more than 1 percent against the U.S. dollar.  The euro came under heavy selling pressure as deflation threatens the Eurozone. German Consumer Prices hit record lows on an annualized basis at 0%. The drop in Germany’s inflation rate almost surely means that similar pressures will be felt across the Euro-Zone. This presents new difficulty for the ECB at their upcoming meeting and will be a strong force behind the argument to take rates lower. Nevertheless, the ECB is still sharply divided about whether to allow for more easing. Ironically, it is Germany’s own Axel Weber that is adamantly opposed to rate cuts. Luckily the EZ received some economic salvation today from the news released in France. The country showed that both Consumer and Business confidence showed improvement in the month of May. Consumer confidence in particular was boosted to a 13 month high, but still remains deeply negative. France’s Production Outlook Indicator declined rapidly to -50 from -18, indication that industrial production may remain weak. What this data shows is that while there are a few bright spots, the economy is still suffering from a severe recession. It seems that we are only embarking on the stabilization phase rather than the recovery phase. Germany will release Unemployment data tomorrow while Consumer Confidence is released for the euro-zone as a whole.

NZD/USD: SHRUGS OFF STRONGER BUSINESS CONFIDENCE

Despite all of the good economic news and rallies in crude oil, the commodity currencies fell victim to risk aversion. New Zealand’s NBNZ Business Confidence survey turned positive for the first time since September 2008.   The market was looking for confidence to remain very weak, printing at -14.5, but instead the index jumped to 1.9 in the month of May.  New Zealand businesses are seeing the pressure easing and plan on slowly returning to normal operating conditions. The report also showed a surprise jump in the measure of firms’ own expectations. Since this component can be an important factor in the country’s growth, it is very possible that output failed to contract as much as expected in the second quarter. New Zealand will release its Money Supply report tomorrow. Australians also produced some good data with the Westpac Leading Index advancing to 0.3% compared to -0.5 percent the previous month. The schedule for tomorrow includes the CB Leading Index, HIA New Home Sales, Private Capital Expenditures, and construction Work Done. Even though the Canadian Dollar gave back its gains, it did reach new levels not seen since mid-October 2008 earlier in the day. Crude oil reached its highest level since early November, surpassing the $63 level.

USD/JPY: SIGNS OF IMPROVEMENT IN JAPAN

USD/JPY is largely unchanged on the day. This contraction is surprising because it comes in an environment with substantial volatility in both equity and currency markets. The Bank of Japan Minutes were released last night and painted an optimistic view of the Japanese economy. It appears that policy makers are acknowledging the signs of improvement and are ready to adapt their policies to the potential recovery phase. Many BoJ members were quoted expressing the fact that the days of advanced monetary stimulus may be at its end. The signs of stabilization no longer require such severe easing. Even more interesting was other comments about the possibility of gradually ending some of the more unconventional policies that were put into place only a few months ago. It appears that the bank will have little reason to change these views as economic data consistently surprises. Last night we received notice that the country’s Trade Surplus unexpectedly widened, as the decline in exports continues to slow. Furthermore, Small Business Confidence was better at 34.1. If things continue to improve, this can be a good sign for Japan.  The next tests will be tonight’s Retail Trade and tomorrow’s Jobless Rate, CPI, and Industrial Production reports.

Standard and Poor's Expects Japan to Grow in 2010

EUR/USD: Currency in Play for Next 24 Hours

EUR/USD will be the currency in play for tomorrow. We are in store for a packed day of EZ economic releases which includes German ILO Unemployment at 2:00 am ET or 6:00 GMT, the German Unemployment Rate at 3:55 am ET or 7:55 GMT, and Consumer Confidence and Economic Confidence at 5:00 am ET or 9:00 GMT. The US will release Durable Goods Orders at 8:30 am ET or 12:30 GMT and New Home Sales at 10:00 am ET or 14:00 GMT.

EUR/USD is breaking into the range-trading zone for the first time in a week. The pair’s inability to withstand itself over the 1.4000 level seems to be a hit to momentum. Therefore, the 1.4000 should continue to act as a strong resistance boundary because of its obvious psychological effect. Support for continued declines stands at 1.3737 which is the high placed on March 19th. With the bevy of economic news waiting for tomorrow, there is a strong chance that one of these levels will be tested.

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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.