All Trade Ideas and trading scenarios found on FX360.com are hypothetical. FX360.com has not placed these Ideas in a live trading environment. Forex Trading involves high risks, with the potential for substantial losses that exceed your initial deposit and is not suitable for all persons. Past performance is not necessarily indicative of futures results.

US Dollar: Big Week Ahead and Current Positioning

Last updated 5/29/2009 5:05 PM ET (GMT -5) 1 Comments

• Share this:

Kathy Lien

Director of Currency Research, GFT

THE STORIES IN THE CURRENCY MARKET

• U.S. DOLLAR: BIG WEEK AHEAD AND CURRENT POSITIONING
• EUR/USD: HOW MUCH FURTHER CAN IT RISE?
• GBP/USD: SPECULATORS GROW LESS SHORT
• AUD/USD: POSITIVE COMMENTS EXPECTED FROM RBA
• USD/CAD: CURRENT ACCOUNT DEFICIT BETTER THAN EXPECTED
• NZD/USD: S&P CREDIT OUTLOOK UPGRADE LEADS TO FURTHER GAINS
• USD/JPY: PRODUCTION BEATS ESTIMATES BUT TROUBLE LOOMS

EXPECTATIONS FOR UPCOMING FED MEETINGS

U.S. DOLLAR: BIG WEEK AHEAD AND CURRENT POSITIONING

Based upon Friday’s price action in the currency market, a weaker dollar could be something that the world will have to learn to live with.  The dollar fell to a year to date low against the Euro, a 6 month low against the British pound and 7 month lows against the commodity currencies.  While there have been no new risks to the dollar’s reserve status or credit worthiness, private investors and Sovereign Wealth Funds are collectively diversifying out of U.S. dollars.  Investors are realizing that there is a lot more to lose by sitting idle and waiting for an official announcement from Standard and Poor’s than to start diversifying now. Eventually the dollar will become less important and diversification will be necessary – so why not diversify now when it can also help avoid exposure to a country that could have its credit outlook slashed. South Korea announced last night that it plans to reduce its exposure to U.S. Treasuries while Russia pushes for $10 billion investment in the IMF’s SDR bond, a global currency that China supports.  On Thursday, a Brazilian Minister announced that alternatives to the dollar could be discussed at the June 16th BRIC meeting.  This is not only a fleeting trend amongst developed nations and therefore the dollar could remain under pressure over medium term.  

Speculators Add to Short Dollar Position s

In the short term, we expect the dollar to fall further, but the velocity of the move will decline rapidly and there is a decent chance that we could see a pullback in the near term, especially if the dollar falls by another 1 to 2 percent in the new week.  According to the latest Commitment of Traders report for the week ending May 26, speculators added to their short dollar positions last week, driving their long euro exposure to fresh 11 month highs.  This indicates that there are fewer traders waiting on the sidelines to sell dollars which means that the momentum could fizzle.  

Big Week Ahead: 4 Central Bank Meetings and Non-Farm Payroll s

Fizzling momentum however does not mean that we will have less volatility in the currency market next week.  Quite the contrary as the economic calendar includes four central bank announcements and the U.S. non-farm payrolls report.  The Reserve Bank of Australia, Bank of Canada, Bank of England and the European Central Bank are not expected to change interest rates, but their comments on the outlook of the global economy as well as any plans to deliver unconventional monetary easing could trigger big moves in the currency market.  Job losses are also expected to ease in the U.S. as weekly jobless claims start to decline.  In addition to the NFP report, the U.S. will be releasing manufacturing and service sector ISM along with personal spending and personal income.   

The bottom line is that the major currency pairs have hit all of our targets and even we think that the U.S. dollar could fall another 1 to 2 percent, we also believe that it could find near term support in the coming week.

EUR/USD: HOW MUCH FURTHER CAN IT RISE?

Apparently the fifth time was the charm for the euro as it finally stages a meaningful rally to close above the 1.40 level against the U.S. dollar.  Such a power move would normally suggest a retracement in the very near future but based upon the last 2 times that the currency pair broke above the psychological level after being below it for some time, there tends to be follow through.  In December, the EUR/USD rose another 700 pips before retracing after it closed above 1.40 and in September 2008, it rose 250 pips before seeing a mild retracement.  Of course this small sample set cannot be completely relied upon, but it does confirm our belief that we could see follow through early next week before a retracement.  The big event in the Eurozone is the European Central Bank rate decision on Thursday.  In fact, the ECB is the only central bank that still has the market guessing.  They are not expected to cut interest rates but they are expected to provide more details on the covered bond purchase program that they announced earlier this month.  The size and scope of the program will reflect on their aggressiveness and could determine the fate of the EUR/USD.  German retail sales increased in the month of May, but Eurozone consumer prices held steady.  Inflation is not a risk right now and therefore not an excuse for ECB President Trichet to use as a reason to be conservative with monetary stimulus.  Meanwhile resistance in the EUR/USD will come in at 1.4300.  

GBP/USD: SPECULATORS GROW LESS SHORT

The British pound has extended its gains against the U.S. dollar and Euro.  Economic data was mixed with consumer confidence holding steady and failing to improve like the market had anticipated.  House prices also increased this month according to the Nationwide report, providing hope for a bottom in U.K. real estate.  Based upon the latest Commitment of Traders report, speculators have reduced their short GBP/USD positions.  This suggests that there is scope for further gains in the currency pair if traders continue to sell dollars next week.  We also expect the pound to outperform the euro as long as the Bank of England does not rain on the party by making another unexpected announcement about their asset purchase program.  The U.K. economic calendar is exceptionally full next week with housing market data, service and manufacturing PMI, producer prices and the BoE rate decision due for release.  Even if the BoE leaves their asset purchase program unchanged, they could release a statement updating the amount of time it would take to complete the program. 

AUD/USD: POSITIVE COMMENTS EXPECTED FROM RBA

The commodity currencies were the biggest percentage movers in the currency market today.  The NZD/USD led the pack on the heels of a much larger than expected rise in building permits in the month of April.  Yesterday, we also talked about how the shift in New Zealand’s credit outlook from negative to stable will pave the road for further gains in the NZD/USD.  We have already begun to see the currency pair move higher and there is a very decent chance that we could see a move to 65 cents next week.  There are no significant New Zealand economic releases on the calendar and local markets will be closed on Monday for a holiday. The Australian dollar came in a close second in terms of gains even though private sector credit was less than expected.  This may be partially due to the sharp rise in gold prices and the prospect of positive comments from the Reserve Bank of Australia next week as well the potential for a stronger retail sales report.  As we expected, the Canadian dollar also sank below the 1.10 level against the U.S. dollar.  The current account deficit increased less than expected which was mildly encouraging but what really pushed the loonie higher was the continual gains in oil.  Crude prices closed above $66 a barrel, a new 6 month high.  Of the 3 commodity producing countries, Canada also has the most data due for release.  Not only will there be a central bank announcement but also GDP, IVEY PMI and the employment report. 

USD/JPY: PRODUCTION BEATS ESTIMATES BUT TROUBLE LOOMS

USD/JPY retreated today, sacrificing all of yesterday’s gains. In a slew of economic reports released last night, it is clear that while deflation remains an imminent threat, output is steadily improving. First the good news – Japanese Industrial Production jumped by the most in 56 years to 5.2%, from 1.6% a month earlier. This report alone blatantly indicates that Japanese growth may be picking up as everyone hopes. However, the usual troubles still remain. Annualized Tokyo Consumer Prices continue to fall, reaching -0.8% from -0.2%. Despite the added production and output, the Japanese economy will be indefinitely hindered if inflation does not pick up to normal levels. This adds significant strain to the BoJ, who will be conflicted by the deflationary threat and improving growth. Another theme for the day is that the domestic Japanese economy still looks to be fairly weak, and will most likely not be able to make any contributions to a turnaround for some time. We learned late last night that the Jobless Rate has reached a five year high of 5.0%. The effect is clearly having an impact on Household Spending which fell to -1.3% from -0.40%. Weak unemployment and declining spending continues to take its toll on the housing market. Housing Starts were far worse than expected, falling to -32.40%. These economic deficits will undeniably slow down any recovery efforts that may be in the pipeline.

AUD/USD: Currency in Play for Next 24 Hours

AUD/USD will be the currency in play for next Monday. The Australians are scheduled to release the AiG Manufacturing Index at 7:30 pm ET or 23:30 GMT, HIA New Home Sales at 9:00 pm ET or 1:00 GMT, and Retail Sales at 9:30 pm ET or 1:30 GMT. In the US, there will be the ISM Manufacturing Index at 10:00 am ET or 14:00 GMT.

AUD/USD continues to extend a remarkable rally that has consistently supplanted the pair in the Bollinger Band buy zone. The Fibonacci levels that appear most significant are drawn from the July 15th high to the October 27th low. The pair cleanly powered through the 50% retracement today, leaving the 61.8% retracement as the next level of resistance at about 0.8382. Using the same levels, we can define support at the 38.2% retracement, which was also a low placed on May 18th. At this point, the charts look very bullish for the Aussie. With the next major resistance lying nearly 400 pips above, the pair has ample room to continue its rally.  A break and close below 75 cents would be needed to invalidate the uptrend.  

The information, including Commentary and Trade Ideas, provided on FX360.com should not be relied upon as a substitute for extensive independent research which should be performed before making your investment decisions. Global Forex Trading and FX360 .com is merely providing this information for your general information. The information and opinions presented do not take into account any particular individual’s investment objectives, financial situation, or needs. All investors should obtain advice based on their unique situation before making any investment decision and should tailor the trade size and leverage of their trading to their personal risk appetite. Any projections or views of the market provided by FX360.com may not prove to be accurate.

The views of the authors and analysts are not necessarily those of Global Forex Trading, its owners, officers, agents or other employees. FX360.com and the currency research team will not be responsible for any losses incurred on investments made by readers and clients as a result of any information contained on FX360.com. Global Forex Trading and the currency research team do not render investment, legal, accounting, tax, or other professional advice. If investment, legal, tax, or other expert assistance is required, the services of a competent professional should be sought.

• Share this:

Comments (1)

Rehan

May 31, 2009 at 07:34 AM ET

Hello Kathy

I hope you are well.

My name is Rehan and I just wanted to say that your FX Research and Commentary is absolutely excellent! I have been following your analysis on this website and also your email updates and they offer a really good insight into the markets.

Keep up the Great Work!
Cheers

Add Your Comment

Please login to post a comment or sign up for an FX360® account.

Loading...

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.