How Will Dollar Trade On July 4th Holiday?

Last updated 7/2/2009 5:18 PM EST (GMT -5) 4 Comments

Kathy Lien

Director of Currency Research, GFT

THE STORIES IN THE CURRENCY MARKET

• HOW WILL DOLLAR TRADE ON JULY 4TH HOLIDAY?
• EUR/USD: TESTS 1.40 AFTER ECB COMMENTS
• GBP/USD: WAITING FOR PMI SERVICES
• AUD/USD: EXPORT DECLINE SIGNALS CURRENCY WOES
• NZD/USD: GOLD PRICES DOWN $10
• USD/CAD: OIL PRICES AT $66.67
• USD/JPY: YEN THE ONLY SAFE HAVEN LEFT?

EXPECTATIONS FOR UPCOMING FED MEETINGS

HOW WILL DOLLAR TRADE ON JULY 4TH HOLIDAY?

The U.S. non-farm payrolls report and the ECB interest rate decision did not disappoint us by generating a tremendous amount of volatility in the currency market. The U.S. dollar rallied against every major currency except for the Japanese Yen which indicates that risk aversion drove the dollar higher. Equities fell more than 2 percent after job losses exceeded the market’s forecast by more than 100k. A total of 467k Americans lost their jobs in June, driving the unemployment rate up 9.5 percent to the highest level since 1983. The Australian dollar was hit the hardest as the drop in gold prices exacerbated the selling. U.S. equity, futures and commodity markets are closed for trading on Friday in observation of the July 4th holiday. Forex markets will be open as usual but the absence of NY traders will certainly be felt.

How Does the Dollar Trade on July 4th Holiday?

It should be no surprise that the volatility in the EUR/USD tends be significantly lower on the July 4th holiday. Taking a look at 10 years worth of data and using the day that the market observes the holiday if it is not a weekday, we found that the intraday trading range in the EUR/USD is approximately 50 percent less than its average daily trading range over the past 10 years. To be more specific, between 1999 and 2008 the average daily trading range in the EUR/USD is 114 pips. On the July 4th holiday, the average trading range shrinks to 57 pips. The data does not mask any outliers as the largest move in the EUR/USD on that day did not exceed 80 pips. A similar reduction in volatility can be found in USD/JPY. Over the past 10 years, the currency pair has had an average daily trading range of 110 pips. On the July 4th holiday, the trading range shrinks to 83 pips. However if you strip out the two large breakout moves in 1999 and 2000, the average daily range on the holiday is only 63 pips. This is in line with the strong possibility of consolidation that typically accompanies large moves like we have seen today. In terms of the dollar’s direction, there is a mild bias towards dollar strength. In 6 out of the past 10 years, the dollar strengthened against the euro but in 8 out of the last 10 years it strengthened against the Japanese Yen.

Recognizing the Market’s Reaction to Non-Farm Payrolls

Meanwhile we think that it is very important to recognize the market’s reaction to the non-farm payrolls report. Even though we believe that the increase in job losses represents a correction after the sharp improvement the previous month and an expected road bump towards positive job growth, the larger than expected decline has made traders nervous. It has raised doubt about the recovery and the results of President Obama’s stimulus package. In addition to the number of jobs lost, the labor market report also revealed a decline in average hourly earnings and weekly hours. Therefore traders and investors may need some good news before they can be convinced to buy stocks and sell dollars once again. Lost in shuffle but just as important were the decline in continuing claims and the improvement in factory orders. We have previously said that a top in continuing claims is necessary for the economy to recover. Weekly jobless claims fell to 614k, driving the 4 week moving average lower as well. Factory orders rose for the second month in a row by the largest amount since June 2008. The manufacturing sector which contracted sharply in the beginning of the recession is finally turning and the latest report confirms that we are moving in the right direction.

China Driving Markets Mad With Flip Flop Comments on Dollar

Meanwhile China continues to go back and forth with the whole reserve diversification issue. Yesterday, Reuters reported that China has asked for a new global reserve currency to be discussed at next week’s G8 Summit. Today, Vice Foreign Minister He Yafei downplayed the discussion by saying that it is normal for the issue to be raised but he did not hear these directives from the Chinese government. Japan’s Vice Finance Minister confirmed that he too had not heard that the dollar would be discussed. China is driving the markets mad with their flip flop comments on the dollar. Not only is it clear that reserve diversification is not a dead issue, but it certainly smells like there is a significant amount of internal strife about the U.S. dollar within the Chinese government. Although China knows very well that selling dollars at this stage of the recession / recovery benefits no one, there is still a strong case to be made for diversification in the long term and they may be just advancing the issue because they know that it could take years before it comes to fruition. By the same token, any diversification will be slow and gradual. China will probably engage in more direct currency swaps with their trading partners. As China becomes a greater powerhouse, their footprint in global trade will grow and with it the incentives to deal directly in the Chinese Yuan. The ASEAN and their BRIC counterparts will probably be the first to side with China in the call for reducing the significance of the U.S. dollar.

EUR/USD: TESTS 1.40 AFTER ECB COMMENTS

The euro was hit from all sides today. Economic data was very weak, the ECB meeting provided no help for the euro and the weaker than expected non-farm payrolls number drove currency traders to take profits on their long EUR/USD positions. We needed either a really good NFP number or positive comments from ECB President Trichet to drive the EUR/USD above 1.42 and unfortunately we didnt. Interest rates in the Eurozone remained unchanged at 1 percent and in the post meeting press conference, Trichet said that one percent may not be the lowest rate and kept the size the scope of the central bank’s covered bond purchase program unchanged. He was satisfied with the results of the one year refinancing operation but remained cautious about the outlook for growth. As our colleague Boris Schlossberg said in our ECB Instant Insight , Mr. Trichet’s press conference provided no fodder for euro bulls and the price action in the EUR/USD reflected the generally downcast tone of the message with the pair testing the 1.40 level. Eurozone producer prices also fell for the tenth month in a row while the unemployment rate in the Eurozone rose to the highest level in 10 years. Eurozone retail sales are due for release tomorrow. The smaller increase in German consumer spending and the sharp decline in French consumer spending should lead to a contraction in retail sales for the region as a whole.

GBP/USD: WAITING FOR PMI SERVICES

Amidst all of the volatility in the currency market, what we find amazing is the fact that the British pound has held steady against the U.S. dollar. Unlike some of the other major currencies which collapsed against the dollar today, the GBP remains caught well within its three week trading range. The GBP/USD currency pair is prime for a breakout and tomorrow’s service sector PMI report could provide the catalyst. Last month, activity in the service sector expanded for the first time since March 2008 with the index rising back above the pivotal 50 mark. If service sector activity grows for the second month in a row, it would offset some of the pessimism that emerged following the downward revisions to first quarter GDP growth. The PMI numbers provided a more “current” look into how the economy is doing. Manufacturing sector PMI continued to increased but remains in contractionary territory while construction sector PMI, which was released this morning dipped. After gaining some footing over the past few months, the housing market is beginning to struggle once again as credit is difficult to attain. If the PMI services index remains above 50 and especially if it rises above last month’s levels, we could not only see strength in pound against the dollar but also against the euro and Japanese Yen.

AUD/USD: EXPORT DECLINE SIGNALS CURRENCY WOES

Considering the pessimism in the markets today, it is not surprising to see the commodity currencies underperform the dollar. The Australian and New Zealand dollars slipped approximately 1.8 percent while the Canadian dollar fell 1 percent. The Australian Trade Balance certainly did not help the already dour mood of the markets. The country’s Trade Balance failed to meet expectations, as the deficit widened to -556M. This is a large margin considering last month’s figure was revised to -282M. The trade balance is now at the lowest level in fourteen months, with exports declining by 5%. The question at this point is whether the rapid advance in the aussie is to blame for the deficit. The Australian dollar has appreciated more than 25% since March, making it more expensive for international importers to purchase Australian goods. We can add Australia to a growing list of countries that are struggling because of the rapid fluctuation in their currencies over the last six months. New Zealand released ANZ Commodity Prices which showed that prices have been increased for the fourth straight month. Even though this is a good sign for the country’s trade, the figure has deteriorated considerably in the last month. Data will be light for the next few days, with next week’s highlight centered around the RBA’s rate decision. Now that the country has released some less than impressive data, it will be interesting to see if the RBA holds steady once more.

USD/JPY: YEN THE ONLY SAFE HAVEN LEFT?

USD/JPY sheds about 70 pips today, as the yen wins out as safe haven favorite. Considering the weakness of US data, the yen has warranted new levels of demand in an environment that now seems uncertain. It is likely that any moderate to severe shock to the system would send the yen skyrocketing at the expense of the dollar. Yen crosses are not faring well either, sending AUD/JPY and NZD/JPY plummeting. Risk aversion has clearly taken control of the markets once again. Volatility, as measured by the VIX index, spiked more than 6% today after reaching a 10 month low yesterday. Japanese data is thin today, with only the Monetary Base which came in below last month’s figure. This is just another sign that deflation is creeping its way back in. Toyota reported that US sales did not reach expectations, declining by about 32%. Even though global conditions have improved year-to-date, it is clear that international demand is still depressed. Toyota’s hybrid sales were the only factor keeping the number from worsening. The Japanese will have nothing to release until next Monday’s leading Index.

GBP/USD: Currency in Play for Next 24 Hours

GBP/USD will be the currency in play for the next 24 hours. Due to upcoming holiday weekend the U.S. will not be releasing any economic data. However, U.K. will be releasing of Service PMI and BOE’s Housing Equity Withdrawal at 8:30GMT or 4:30AM EST. Over the past few weeks, the GBP/USD has lacked a sense of direction. Currently, the pair roams within the Range Trading Zone which we determine using Bollinger Bands. As volatility diminished with horizontal resistance acting as the resistance level and higher lows continuing to be established, the pair has carved out an ascending triangle formation. If the pair manages to enter the Buy Zone of the Bollinger Bands 1.6650 will serve as resistance. A break of that level could take the currency pair to the psychologically important 1.70 mark. However, if the pair drifts lower the next level of support lingers between 1.6300 and 1.6325, which are the base of the ascending triangle and 1st Standard Deviation, respectably. A break below that level opens the door for a possible move down to 1.60.

Comments (4)

Aquiles

July 02, 2009 at 06:26 PM ET

Kathy, after the NFP data, what can we expect about EUR/USD next week?

klien

July 02, 2009 at 07:48 PM ET

Odds favor further weakness if this 1.40 break holds

aramolmez

July 02, 2009 at 06:38 PM ET

Hi Kathy,

Excellent comments as usual! I closely follow the statistical data you regularly provide. I am going to run my automated trading engines for narrow channel trading in majors.

Aquiles

July 04, 2009 at 03:41 AM ET

Thanks kathy. Enjoy your weekend!

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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.