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THE STORIES IN THE CURRENCY MARKET

• WILL THE U.S. DOLLAR RALLY BE SHORT-LIVED?
• EUR/USD: WHY WAS THE REFINANCING SO SIGNIFICANT?
• GBP/USD: BOE KING TALKS OF LONG AND PAINFUL RECOVERY
• NZD/USD: CURRENT ACCOUNT DATA ON TAP
• USD/CAD: USD/CAD BACK ABOVE 1.15
• AUD/USD: OIL PRICES LOWER, GOLD PRICES STEADY
• USD/JPY: JAPAN IS LOSING ITS GRIPS

EXPECTATIONS FOR UPCOMING FED MEETINGS

CURRENT US INTEREST RATE: 0.25%					Rates Expected to Remain Unchanged In Aug and Sept
	8/12 Meeting	9/23 Meeting
NO CHANGE	80.9%	72.0%
CUT TO 0BP	10.9%	9.5%
INCREASE TO 50BP	8.2%	17.4%
INCREASE TO 75BP	0.0%	0.0%

WILL THE U.S. DOLLAR RALLY BE SHORT-LIVED?

It has been a roller coaster ride in the foreign exchange market that was filled with sharp intraday reversals.  The dollar ended the U.S. trading session higher against the Euro and Swiss Franc but virtually unchanged against the other major currencies. Yet the lack day to day change in the value of the GBP/USD and USD/JPY masked wild fluctuations intraday.  The dollar had sold off aggressively ahead of the U.S. durable goods report but then lost its footing during the rest of the session.  Although the Federal Reserve’s interest rate decision was suppose to be the day’s most important event risk, the ECB refinancing operation and the intervention by the Swiss National Bank also had a lasting impact on the currency market.  EUR/CHF and USD/CHF are among the  best performing currency pairs and largest percentage movers.

Will the U.S. Dollar Rally be Short Lived ?

Looking ahead, the most pressing question is whether the rally in the dollar can last.  Although the reversal was very significant today, the lack of even minor changes to the Federal Reserve’s view fails to justify the strong rally in the greenback. Although the Fed’s failure to mention an exit strategy implied that the U.S. economy is not recovering strongly enough for them to start openly considering ways to remove their monetary stimulus, no one doubts that the recovery in the U.S. economy is fragile.  Therefore the central bank has more to lose by appearing too optimistic only to possibly have to retract their optimism in the future.  Nonetheless, the uncertainty drove equities lower and the dollar higher.  Another reason why the greenback rallied was because the Fed did not increase the size and scope of their asset purchases, which drove bond prices lower and yields higher.  So if the Fed did nothing, then we can expect nothing to alter the near term outlook in the currency market.  As we indicated in our FOMC Instant Insight , the “rally in the dollar may not have significant follow through because at the crux of it, the statement remains virtually unchanged.”  For the time being, the technical breakouts in currency pairs such as the EUR/USD, USD/CAD and AUD/USD still hold and as long as that remains true, further dollar gains may be limited.  

 Fed Rate Decision

Green Shoots or Yellow Weeds ?

Mixed economic data leaves the debate of Green Shoots versus Yellow Weeds intact.  Durable goods orders were surprisingly strong considering the GM and Chrysler shutdowns but new home sales declined.  Orders for goods made to last more than 3 years increased 1.8 percent in May while sales of new homes fell 0.6 percent.  The final figures for first quarter GDP and initial jobless claims are due release on Thursday.  Any revisions to the GDP figures could impact the dollar but the most important figure tomorrow will be continuing claims.  Last week, continuing claims fell for the first time this year.  One decline does not make a trend but two increases the odds of it becoming one.  Continuing claims have always stabilized or peaked at the end of the recession. The lag between the end of the recession and the official peak in claims has ranged from 0 to 3 months.  

Question of the Da y

In the Trader Talk section of FX360.com , a reader asks, “Why is it that stressing the risks to the recovery (by the FOMC) and the need for interest rates to remain low for a long period of time over the improvements in the economy likely to cause the EUR/USD to give back its gains?” This is a question that is probably baffling many traders because the Fed’s lack of urgency to raise interest rates should be dollar positive and not negative.  However that is not the case because the dollar is looked at as a "safe haven." The idea is that a recovery in other countries is contingent upon a recovery in the U.S. Therefore if the Fed suggests that the economic outlook is worse or still uncertain, it would imply that a more delayed recovery for other countries, sending investors back into the safety of U.S. dollars. If they are more optimistic, it would ease safe haven flows.  

 

EUR/USD: WHY WAS THE REFINANCING SO SIGNIFICANT?

The EUR/USD was crushed by the ECB’s 12 month refinancing operation this morning.  In yesterday’s Daily Currency focus, we talked about how the refinancing would prevent the EUR/USD from extending its gains.  The auction of was the largest ever and the first of 3 auctions with the second two scheduled for September and December.  Demand was exceptionally strong with bids from all 1,121 banks filled at a fixed rate of 1 percent.  This auction basically puts money into the hands of banks at a rate of 1 percent, allowing them to turn around and lend at higher rates.  With interest rates already at very low levels, the refinancing operation is widely considered quasi Quantitative Easing which is bearish for the euro.  Although the operation was scheduled, the ECB poured 25 percent more money into the financial system than in December.  This drove Euribor rates to a record low.  The EUR/USD would have probably fallen further if not for intervention by the Swiss National bank in EUR/CHF and USD/CHF.  Switzerland’s central bank is at it again .  No matter what the central bank has said about not focusing on a "fixed threshold," 1.50 is the line in the sand. EUR/CHF fell to a low of 1.5007 on Tuesday evening, ringing alarm bells throughout the SNB.  Meanwhile the April Eurozone current account deficit narrowed to the smallest level in a year as their goods turned a surplus for the first time in 6 months.  ECB officials were out in force today saying that deflation is not even close to being a threat even though inflation could turn negative in the near term.  There are no major European releases on the calendar over the next 24 hours.

GBP/USD: BOE KING TALKS OF LONG AND PAINFUL RECOVERY

The British pound hit a one week high against the U.S. dollar before the comments from Bank of England Governor King drove the currency pair sharply lower.  The head of the central bank downplayed the recent improvements in U.K. economic data and instead warned that it will be a “long, hard slog” back to solid growth.  He urged the government to take more aggressive action to reduce the country’s burgeoning budget deficit and because they may involve tax hikes or other painful remedies, he does not expect to tighten monetary policy anytime soon.  Interestingly enough, he also said that previous weakness in the British pound will help to mitigate but not fully offset a weak world outlook.  Following these comments, speculation of a further increase to the BoE’s Quantitative Easing program has reemerged.  U.K. economic data is light this week which means that King’s comments could have a lasting impact on the British pound.  The CBI Distributive trades survey was released this morning and the index remained unchanged, reflecting little improvement in the retail sector.  

NZD/USD: CURRENT ACCOUNT DATA ON TAP

The commodity currencies are all off of earlier gains, as declining US stock markets have taken a bite out of risk tolerance. The only significant piece of data to be announced today was New Zealand’s Westpac Consumer Confidence report which came in better than expected at 105.4. We are expecting another important release this evening from New Zealand – first quarter Current Account. Since trade has marginally improved, the current account deficit should narrow. Nevertheless, it is expected that any trade improvement will soon be offset by the dramatic run in the kiwi that has ensued over the last few months. Aside from tonight’s figure, we are awaiting the more important GDP release on Friday. The Organization for Economic Cooperation and Development released an economic outlook report that made many recommendations as to changes in monetary policy. The report surprisingly indicated that the RBA should ease further in order to mitigate what they expect to be a 0.4% contraction in growth this year. This is despite recent speculation that the RBA has officially ended rate cuts due to the fact that they miraculously reported growth in the first quarter. The OECD also advised that the BoC keep rates at their historically low levels, but they need not venture into “unconventional” policy techniques. Even though it is unclear whether or not these central banks pay attention to this advisement, it paints a slightly bleaker picture for the commodity currency nations. Aside from New Zealand’s current Account we will receive the Australian CB Leading Index tomorrow.

USD/JPY: JAPAN IS LOSING ITS GRIPS

USD/JPY is trading only marginally positive on a day that has seen much Japanese optimism held in doubt. The most important economic release in the last 24 hours showed that Japan’s Achilles heel has not faded from being problematic to the nation’s chances at recovery. Japan’s Trade Balance swelled to 299.8B yen from 67.7B yen. However, the figure is meaningless considering the fact that exports have reassumed what seems to be an endless slide. Merchandise Trade exports fell by more than 40%, a factor that will most likely cap hopes for a relatively speedy recovery. Perhaps the most concerning factor is that to other Asian nations exports are aggressively declining. In particular, Japanese shipments to China fell by nearly 30%. Many economists were counting on China’s recent stimulus programs and infrastructure development projects to drive Japanese production. However, this does not seem to be the case. In response, Seiji Nakamura, a BoJ Board Member, held that “extraordinary” projects like Quantitative Easing should be continued as long as necessary. This is contradictory to recent talks about setting up an exit strategy for monetary stimulus. The OECD is also imploring the BoJ to continue such policy measures in efforts to control the threat of deflation. An end to unconventional strategies would have been a true testament to the BoJ’s success, one that does not seem to be coming any time soon. Data for tomorrow includes Consumer Prices which should show how exaggerated the deflationary threat really is.

 Japan's Exports Show Deeper Decline in May

NZD/USD: Currency in Play for Next 24 Hours

NZD/USD will be the currency pair in play for the next 24 hour. New Zealand will be releasing their current account figures at 6:45 pm ET or 22:45 GMT. The US will also be releasing annualized GDP along with Personal Consumptions at 8:30 am ET or 12:30 GMT.

The NZD/USD remains very tightly constrained and therefore falls within the Bollinger band range trading zone. The pair is forming a channel of price action that is only 200 pips wide. If the upper channel should be broken, 0.6600 is the next area of resistance. The level is significant for psychological reasons and because it was a high on June 2nd. The most defined level of support is at 0.6153 which was the low placed on June 8th.

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.