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THE STORIES IN THE CURRENCY MARKET

• CONSOLIDATION IS DOLLAR POSITIVE
• EUR/USD: THE PRESSURE OF REFINANCING
• GBP/USD: HOUSE PRICES BREAK TREND
• USD/CAD: DRIVEN HIGHER BY LOWER OIL PRICES
• AUD/USD :GOLD PRICES DROP $11 TO $922.65
• NZD/USD :OIL PRICES DOWN 4 PERCENT TO $67.10
• USD/JPY: MANUFACTURING HOLDING TOGETHER DESPITE YEN

EXPECTATIONS FOR UPCOMING FED MEETINGS

CURRENT US INTEREST RATE: 0.25%					Rates Expected to Remain Unchanged In June and August
	6/24 Meeting	8/12 Meeting
NO CHANGE	90.0%	82.5%
CUT TO 0BP	10.0%	9.1%
INCREASE TO 50BP	0.0%	8.4%
INCREASE TO 75BP	0.0%	0.0%

CONSOLIDATION IS DOLLAR POSITIVE

With no major U.S. economic data released on Monday, consolidation remains the predominant theme in the foreign exchange market.  That is true for every major currency pair except for the Canadian dollar which fell close to 1.5 percent against the greenback.  The Australian and New Zealand dollars are also down sharply but both currencies failed to break their monthly lows.  Traders bought dollars against the Euro, British pound and Japanese Yen as risk aversion or flight to safety remains synonymous with dollar strength.  Consolidation is more positive than negative for greenback because traders are skeptical about the strength of the global recovery.  Doubt is a sentiment that can have a powerful impact on the financial markets because it represents confidence and a crisis of confidence is what toppled the financial markets between 2007 and 2008.  It is also the primary focus of central bank’s efforts and only when the majority of investors are convinced that the global recovery is happening will we get a more material rally in the major currency pairs.

WSJ and World Bank Fuel Dollar Rall y

In the meantime, the lack of economic data has shifted investors to a bearish article published in the Wall Street Journal today and the latest forecasts from the World Bank.  The article titled “Is the Bull Run Pulling Up Lame” questions whether the rally in U.S. equities is backed by fundamentals and its conclusion is no because equities have rallied 40 percent since the March low and there hasn’t been a 40 percent improvement in the outlook for U.S. corporations.  A grim report from the World Bank added fuel to skepticism, driving the dollar higher across the board.  As recently as March, the bank had only expected global growth to contract by 1.7 percent but now they believe that the world economy could shrink by 2.9 percent this year. What is even worse is that for high income countries such as the Eurozone, the U.S. and Japan, total growth could contract 4.2 percent.  This represents a 3 percent contraction in the U.S., 4.5 percent contraction in the Eurozone and 6.8 percent contraction for Japan.  The bank does expect the global economy to grow in the second half of the year but growth will be very “subdued,” which is the magic word.  Most central banks echo the forecasts of modestly positive growth over the next 6 months but this growth will not be felt on Main Street and only marginally felt on Wall Street.  However with that in mind, we believe that a recovery is in place and the worst is behind us.

World Bank Talks About Outlook

 

How Could the Treasury Auction Impact the Dollar ?

One of the big focuses of foreign exchange traders this week is the massive Treasury auction.  The U.S. government will be issuing a record $104 billion of 2 year, 5 year and 7 year Treasury notes between Tuesday and Thursday.  The reason why currency traders are watching these auctions is because of its scale and also because it will shed some light on investor’s willingness to fund the U.S.’ large and growing budget deficit.  The auctions will be a big hurdle for the U.S. dollar this week because if demand comes up short, the dollar could get hit but it is not that simple because at the same time, weak demand could drive up yields, which is dollar positive. Either way, over the next couple of days, there will be a lot of focus on the Treasury auctions.  Existing home sales and the Richmond Fed Manufacturing index are due for release on Tuesday.  Improvements in housing starts and building permits suggest that the housing market is gradually turning and inventories are moving, although the transactions are probably still happening at lower prices.  

An Indepth Look at the Fed's Balance Sheet

 

EUR/USD: THE PRESSURE OF REFINANCING

German business confidence has improved marginally which should have been bullish for the euro, but unfortunately the most actively traded currency pair in the forex market has remained under pressure throughout the European and U.S. trading sessions.  So if the EUR/USD is not responding to economic data then what is driving it lower? Three primary factors – comments from ECB President Trichet, the first ever 12 month ECB refinancing and reports that Germany could have a major budget shortfall next year.  The refinancing is the biggest story because the 12 month offer is seen by bond traders as a quasi quantitative easing effort by the ECB because the operations are most likely going to be collateralized by government bonds which can then be posted as collateral to the ECB for funding.   Although ECB President Trichet warned that their monetary policy actions can be easily unwound if needed, he also said that policy makers must remain alert despite signs that the slump is decelerating because “there are still risks of a sudden emergence of unexpected financial turbulence.”  As for Germany, Deputy Finance Minister Werner Gatzer said that total new debt could exceed EUR100 billion next year, which would be much larger than this year’s record financing needs of EUR80 billion.  Looking ahead, we could see further weakness in the EUR/USD if Tuesday’s PMI figures fall short of expectations.  Despite the improvement in business confidence, which was driven entirely by the expectations component of the report, current conditions remain weak.  German industrial production, factory orders and retail sales have all declined which could prevent a meaningful pickup and possibly even deterioration in manufacturing and service sector PMI.  

GBP/USD: HOUSE PRICES BREAK TREND

Although the sell-off in the British pound against the U.S. dollar was more significant than the Euro or Japanese Yen, the currency pair remained squarely within its 9 day long trading range.  The only piece of economic data released over the past 24 hours was the Rightmove House price report which showed a 0.4 percent drop in the month of June.  This brought the annualized pace of house price contraction down to 5.5 percent from 6.2 percent.  Before becoming too concerned however, the decline comes after 4 months of growing house prices.  Meanwhile BBA Loans for House Purchases are due for release tomorrow.  The amount of loans issued has been increasing for the past 5 months and if this trend continued in May, it would offset the weaker house price report.  The U.K. economic calendar is very light this week and therefore we expect the British pound to be at the whim of the U.S. dollar, just like today.  

USD/CAD: DRIVEN HIGHER BY LOWER OIL PRICES

The Canadian, Australian, and New Zealand dollars have sold off sharply against the greenback on the heels of broad dollar strength and plunging commodity prices.  Oil prices fell to a 2 week low of $67 a barrel while gold prices dropped more than $11 an ounce.  The more than 4 percent decline in oil prices has driven the Canadian dollar sharply lower against the U.S. dollar and Japanese Yen, exacerbating the pessimistic tone that followed Friday's weak retail sales report. International Securities Transactions increased more than expected in April, but the uptick in foreign demand for Canadian dollar denominated assets or the positive comments from Prime Minister Flaherty has not helped the loonie. Flaherty believes that the positive signs in the economy suggest that it may start growing again this year. If USD/CAD stays above 1.15, that may be possible.  In the meantime, the more important question for currency traders is whether oil prices have topped. From a dollar perspective, we expect the greenback to recover further this week after having become very oversold. There are also concerns that China will become less of a buyer in the second half of the year after having filled their coffers at low prices between January and May. We will be watching the Baltic Dry Goods Index for more evidence of this new trend. In the meantime, keep watching the commodities market for clues on where the Canadian, Australian and New Zealand dollars are headed next.  There are no economic reports expected from any of the 3 commodity producing countries over the next 24 hours.

USD/JPY: MANUFACTURING HOLDING TOGETHER DESPITE YEN

To the dismay of Japanese policy-makers, USD/JPY resumes its downward slide. However, it seems that if Japan keeps on producing positive economic data, talks about currency intervention will be kept quiet. On Sunday, Japan released the BSI Large All Industry report which indicated that manufacturing conditions are improving. The index jumped from -22.4 to -51.3, highlighting the fact that the Japanese industrial engine is once again being put to work. It is likely that much of the improvement can be accredited to Chinese government stimulus and economic recovery which created a revitalized consumer for Japanese products. Even though the BSI report by itself usually does not hold much weight, it creates a positive outlook for next week’s more important Tankan Manufacturing Index. Other economic data showed that Japan’s Services sector is strengthening as the Tertiary Industry index rises to 2.2%. Meanwhile, Supermarket Sales improved to -2.0% from last month’s -3.7%. Releases on the docket for tomorrow include the Leading Index as well as the Merchandise Trade Balance. The trade balance in particular should give us insight into the effects of the strengthening yen.

EUR/USD: Currency in Play for Next 24 Hours

EUR/USD will be the currency pair in play for the next 24 hours. From the Euro-Zone we can expect Gfk German Consumer Confidence at 2:10 am ET or 6:10 GMT and PMI Manufacturing and Services from France at 3:00 am ET or 7:00 GMT (Germany at 3:30 am ET or 7:30 GMT, and EZ at 4:00 am ET or 8:00 GMT). There will also be the PMI Composite at 4:00 am ET or 8:00 GMT. The US will release Existing Home Sales at 10:00 am ET or 14:00 GMT.

The EUR/USD has reentered the sell zone once again in today’s trading. Support for more losses stands at 1.3739, or the high of March 19th. There is also the 38.2% retracement from March lows to June highs standing at 1.3619.  The closet level of resistance is the psychologically important 1.40 level followed by the June 3rd high of 1.4339. The pair has formed a downward channel which may keep continued price action biased to the downside.

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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.