U.S. Dollar: Recovery Hopes Dwindle

Last updated 7/10/2009 4:30 PM EST (GMT -5) 6 Comments

Kathy Lien

Director of Currency Research, GFT

THE STORIES IN THE CURRENCY MARKET

• U.S. DOLLAR: RECOVERY HOPES DWINDLE
• EUR/USD: FRANCE GIVES THE EURO-ZONE HOPE
• GBP/USD: STERLING BRUISES EASILY
• USD/CAD: TRADE DEFICIT PLUMMETS BY THE BIGGEST AMOUNT ON RECORD
• AUD/USD: OIL FALLS BELOW $60 AS DRIVING SEASON BEGINS
• NZD/USD: PRICES OF GOLD RETREAT TO $912.50
• USD/JPY: YEN CROSSES CONTINUE TO PLUMMET

EXPECTATIONS FOR UPCOMING FED MEETINGS

U.S. DOLLAR: RECOVERY HOPES DWINDLE

The classic risk aversion trade is well in place. As the S&P 500 losses for the fourth consecutive week, mounting a 7% slide, investors have little to be cheerful about. It is starting to become obvious to everyone that the events of March to June spurred by recovery hopes were over-extended. However, our situation seems more like a correction than a complete retaliation of downward pressure. Volatility has spiked but is still miles below what we experienced only a few months ago. Recovery is still in the air, it is just going to take longer to get here than previously expected. As a result, the dollar is a broad winner on risk aversion flows against every major currency except the yen.

GM is Rebor n

General Motors has emerged from bankruptcy as what many hope to be a more efficient and competitive company. After committing about $50 billion dollars to the GM bailout, the US government will retain the majority stake with a 60.8% ownership. The rest is owned by parties like the Canadian government and the UAW. The question is whether any company can possibly compete and profit while being under government control. In order to do so, the new GM has implemented massive cost cutting strategies. The new company will consist of only four brands down from the eight that existed earlier this year. The survivors include Chevrolet, Cadillac, Buick, and GMC. In addition, the workforce has been cut significantly, Only 64,000 employees remain from the 91,000 of earlier this year. In addition, the ranks of white-collar workers have been cut dramatically by 35%. However, cost cutting alone will not make GM the company it once was. It will take real innovation to regain global dominance, an act that will most likely take years. The new management did indicate that they intend to pay loans back as soon as possible and even plan on reissuing shares once things have settled. In any event, GM’s restructuring may have given Ford the winning edge, conceivably surpassing their sales for the first time since 1931. Of course, Ford was the company that resisted government involvement.

The Effects of a Weak Dolla r

The Trade Balance proved to be a very positive sign for the US as the deficit narrowed to the smallest amount in nearly a decade. However, there is an ambiguous distinction between whether or not the improvement was the result of resurgence in economic demand or just the benefits of a weak dollar. The most likely scenario is the latter. We have regularly talked about the pros and cons of a weak dollar. Even though policy makers usually contend that a strong greenback is in our best interest, a weaker dollar does have certain benefits during recessionary times. As the dollar’s value declines, it becomes easier for international purchasers to buy American made goods. The result is an increase in production and economic activity. This is definitely something that we need right now. The Trade report also showed that exports jumped by 1.6%, the strongest performance in about a year. The Import Price Index rose by 3.2%, its best month in about 20 years.

Confidence Takes a Div e

The University of Michigan Consumer Confidence report destroyed much of the optimism that was palpable after the Trade Balance report was released. The index fared terribly, declining from 70.8 to 64.6, ruining a four month run. It does not take much to draw the conclusion that employment is to blame. With unemployment quickly approaching double digits, consumers are rapidly losing confidence in their job security, and ultimately in the economy’s ability to recover.

The major event risk for next week includes a crucial Tuesday session that holds both the Producer Price Index and Retail Sales. Retail Sales have yet to contribute consistent performance, and with this month’s job losses and declines in confidence it is unlikely that salvation will come soon. Consumer Prices follow for Wednesday accompanied by Industrial Production, the Empire State Manufacturing Index, and the Fed’s Minutes. Housing Starts are expected to finish off the week. Hopefully the S&P’s losing streak will not extend for a fifth straight week. The deciding factor may be corporate earnings.

EUR/USD: FRANCE GIVES THE EURO-ZONE HOPE

The euro was hammered earlier in the day, but has since recovered most of its losses. Nevertheless, the directionless trend continues. Despite the downfall in the euro, the main economic theme in the Euro-zone is signs of recovery. This optimism was rooted in French Industrial Production, which was far better than expectations at 2.6%. This marks the first time in nine months that production has increased for the French economy and serves as an indicator that growth for the second quarter will not be as bad as expected. Furthermore, French Manufacturing Production also beat expectations with Italy following suit. Referring to the French report, the French Finance Ministry is confident that a secure and solid base has been set for the impending recovery. However, they also mentioned that employment will be a persistent problem that will probably not be revitalized until 2010, effectively keeping the country’s improving record in doubt. Employment has been a wild card for much of the global economy, seeing only marginal improvement despite some expansion in production. The big reports for next week include the ZEW report on economic sentiment on Tuesday, Consumer Prices for Wednesday, and the Trade Balance for Friday.

GBP/USD: STERLING BRUISES EASILY

Despite yesterday’s very promising reaction to the Bank of England monetary meeting, the pound has been sent to the downside once again. This week will end in the red even with yesterday’s more than 300 pip rise. Negative economic data continues to get in the way of recovery hopes. This time the culprit was Producer Prices. Even though the input figure did improve marginally on the month, rising from 0.4% to 1.5%, the more important output numbers were disastrous. For the first time since December 2008, monthly PPI outputs slipped into negative territory at -0.2%. Furthermore, the annualized figure declined by the largest amount since 2001. The threat of deflation is clear and proves that speculation about the end of Quantitative Easing may have been exaggerated. The fact of the matter is QE may be the BoE’s only hope to stop the continued decline in prices. In addition, since commodity prices continue to slump, the downward pressure will be even more dramatic. In response to what appears to be deteriorating conditions, the FTSE 100 index is under direct assault, declining for the fourth consecutive week. The concentration on price instability will only be amplified next week because of Tuesday’s Consumer Price Index. If the number should reiterate the weakness in the PPI, we may be forced to abandon QE exit strategies completely. We will also have the Retail Price Index, Jobless Claims, and the Claimant Count rate for next week.

USD/CAD: TRADE DEFICIT PLUMMETS BY THE BIGGEST AMOUNT ON RECORD

Risk aversion dominated the markets making the Australian, New Zealand, and Canadian Dollars lose ground against the greenback. Canadian trade deficit widened by a record amount in May as exports plunged. A rapid rise in Canadian Dollar over the course of May along with diminishing demand for goods coming from abroad added to C$1.42 Billion or $1.22 Billion in deficit, printing almost three times worse than projections. Adding to the concerns, government officials declared that exports may fall as much as 21% over the course of the year. However, the economic picture does not seem as bleak when considering that labor situations deteriorated at slower pace than anticipated. A mere 7.4K Canadians lost their job in June versus anticipated 40K, pushing the unemployment rate to 11 year high of 8.6%. Next week boasts some important information about the progress of the economy as CPI, Leading Indicators, and Business Outlook Future Sales are all due for a release. With a lack of economic releases, both the Australian and New Zealand Dollars dropped as commodity prices retreated. The prices of oil tumbled below $60 a barrel, falling over 10% during the week, while gold prices retreated $3.70 to $912.50 an ounce. In the following week, Australia expects the release of Westpac Leading Index and NAB Business Conditions. Meanwhile, New Zealand’s Retail Sales along with Consumer Price Index will contribute to the future direction of the currency.

USD/JPY: YEN CROSSES CONTINUE TO PLUMMET

The Yen crosses continued to drift lower across the board with USD/JPY finishing the day at its lowest level since February. Economists predict that the Yen will continue to appreciate throughout the upcoming month as uncertainty surrounding global recovery intensifies. This poses an immense dilemma for the world’s second largest economy as competitiveness of Japanese exports will diminish drastically. Over the course of the later stages of 2008, traders feared the BOJ intervening in the currency markets as Yen appreciated. Similar conditions are emerging; however, the central bank stated that the velocity of rise in the Yen will determine whether or not the intervention is required. On the economic front, Corporate Goods Price Index, a benchmark of wholesale prices, fell by the widest margin on record from previous year in June. A drop of 6.3% in the benchmark ignited concerns of deflationary spiral that may pull the economy into deeper turmoil. Next week’s economic releases will be detrimental to the fluctuation in the Japanese Yen as BOJ Rate Decision, Tertiary Index, and Consumer Confidence are due for release.

NZD/USD: Currency in Play for Next 24 Hours

The currency in play for the upcoming Monday will be NZD/USD. New Zealand expects the release of Retail Sales at 22:45GMT or 18:45PM EST on Sunday.

NZD/USD

Comments (6)

Erik L

July 12, 2009 at 02:19 PM ET

Thanks for the analysis Kathy! Very insiteful.
If the banks report strong earnings, could this alone be enough to revive risk appetite and significantly weaken the dollar for an extended length of time?

klien

July 13, 2009 at 09:27 AM ET

Yes. The financial sector is particularly important

PLAYJT

July 12, 2009 at 10:07 PM ET

Kathy,

How will the Political Changes in Japan impact the yen?

http://www.marketwatch.com/story/japan-leader-to-dissolve-lower-house-report?siteid=rss&rss=1

JT

klien

July 13, 2009 at 09:28 AM ET

Japan has been plagued by political problems and low approval ratings for some time. However unless Japan's Prime Minister gets replaced, the impact is limited

Aquiles

July 13, 2009 at 08:13 AM ET

Kathy, Could you provides me next Euro's important resistance level?

klien

July 13, 2009 at 09:29 AM ET

Support and resistance levels are outlined in our technical analysis report which is updated twice a day

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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.