U.S. Dollar: What Could Trigger The Next Break?

Last updated 7/14/2009 5:37 PM ET (GMT -5) 2 Comments

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Kathy Lien

Director of Currency Research, GFT

THE STORIES IN THE CURRENCY MARKET

• U.S. DOLLAR: WHAT COULD TRIGGER THE NEXT BREAK?
• EUR/USD: HIT BY WEAKER ECONOMIC DATA
• GBP/USD: LABOR MARKET REPORT ON TAP
• USD/CAD: HITS 3 WEEK HIGH
• AUD/USD: SHARP IMPROVEMENT IN BUSINESS CONFIDENCE
• NZD/USD: RBNZ BELIEVES NEW ZEALAND COULD LEAD RECOVERY
• USD/JPY: NO FIREWORKS EXPECTED FROM BOJ

EXPECTATIONS FOR UPCOMING FED MEETINGS

U.S. DOLLAR: WHAT COULD TRIGGER THE NEXT BREAK?

For the past 6 weeks, the U.S. dollar has been trading in a relatively tight range against currencies such as the euro and British pound.  Today’s retail sales report had the power to trigger big moves across the currency market but the only currency pair that responded with a 1 percent move or larger was USD/CAD.  The problem was the underlying weakness – consumer spending accelerated in June but stripping out the more volatile components of auto sales and gas station receipts, spending actually fell 0.2 percent. Tack on some other news that supports the notion of the recovery receding and we can understand why there was a downcast mood in the currency market today.  Although earnings reports are our big focus this week, the Federal Reserve will be releasing their latest quarterly economic forecasts tomorrow afternoon.  Like the revisions to the IMF’s forecasts, changes to U.S. growth expectations and unemployment projections could trigger some volatility for the U.S. dollar.  It is earnings season and the stronger Goldman numbers kept stocks in positive territory throughout the U.S. session.  After the bell, stronger earnings from Intel drove equity futures higher and the dollar lower.  

Will the U.S. Face a Jobless Recovery?

The Federal Reserve’s projections will be released with the minutes from the June FOMC meeting. The big question that traders will be looking for an answer to is whether the U.S. economy will be facing a jobless recovery.  This risk has been raised by different members of the Obama Administration and well respected economists but many traders are still skeptical.   They have good reasons to be in denial because only recently have we seen economic data suggest that the recovery may be receding.  Last night, Senator Shelby, the ranking Republican on the Senate Banking Committee said Ben Bernanke told him that he’s concerned about the possibility of a jobless recovery.  There is a very decent chance that the Fed’s revised forecasts will reflect Bernanke’s sober mood.  The last projections were released in April and at that time the central bank said they expect the unemployment rate to hit a mid point of 9.4 percent in the fourth quarter.  The third quarter has just begun and the current unemployment rate of 9.5 percent has already exceeded that forecast.  We would not be completely surprised if the Fed said that the unemployment rate could hit 9.9 or even 10 percent by the end of the year. However the dollar could escape a rush of safe haven flows if the growth forecasts are revised higher.  These uncertainties could trigger some fireworks when the FOMC minutes are released at 2:00pm ET.

However before we get to the Fed minutes, consumer prices, the Empire State manufacturing survey and Industrial production reports will be released.  Higher gasoline and vehicle prices could drive up CPI.  Manufacturing is a bit of a wild card since activity has been improving globally.  As for the reports that came out this morning, both consumer spending and inflation beat expectations.   However, a closer look at both indicates that the improvements were not driven by a material increase in real activity. Without the 10 percent increase in oil prices last month, the reports would have been much weaker. Retail sales rose 0.6 percent in the month of June, the strongest pace of growth since January. However the increase in overall consumer spending masked underlying weakness with sales of core goods which excludes sales of cars rose only 0.3 percent (the sale of cars can be sensitive to discounts by dealers). The unseasonably cool weather in the Northeast left spending on clothing unchanged and unsurprisingly the biggest contributor to consumer spending was gas station receipts. The national average for a gallon of gasoline hit a high above $2.67 last month compared to a current price of $2.50. Meanwhile Producer prices rose by the strongest level since November 2007 with the annualized pace of PPI growth rising from -5.0 to -4.6 percent. Yet once again, core prices saw a far more modest rise. On a monthly basis, core prices rose only 0.5 percent, less than a third of headline price growth. The annualized pace of core growth rose from 3.0 to 3.3 percent.

EUR/USD: HIT BY WEAKER ECONOMIC DATA

Weaker economic data has driven the euro lower against the U.S. dollar and British pound.  For the first time since October, German investor confidence deteriorated.  With the EUR/USD trading not far from its five month highs and the IMF forecasting a contraction in the region next year, it is not surprising to see deterioration in investor confidence.  The combination of a strong currency and higher commodity prices deals a double blow for the Eurozone economy, delaying the inevitable recovery.  For future activity, the ZEW index fell from 44.8 to 39.5 while the index for current conditions dropped from -89.7 to -89.3.  Eurozone industrial production increased but fell short of expectations.  Economists had expected manufacturing activity to jump 1.5 percent, but instead it rose only 0.5 percent.  Although disappointing, this is still the first rise in 9 months and confirms a general improvement in manufacturing activity.  Eurozone consumer prices are due for release on Wednesday and the drop in producer prices foreshadows a decline in CPI.  In the grand scheme of things, the EUR/USD still remains fairly resilient despite the weak ZEW report and is trading well within its 1.38 to 1.42 trading range.  We believe that the June low of 1.3834 will be challenged before the June high of 1.4340.  

GBP/USD: LABOR MARKET REPORT ON TAP

The British pound traded higher against the euro and U.S. dollar despite easing inflationary pressures.  Consumer prices grew by only 0.3 percent last month, driving annualized CPI growth down to 1.8 from 2.2 percent, the lowest annual rate since September 2007.  Even though core prices remain unchanged, the inflation report clearly indicates that weak demand is preventing wholesalers from passing on higher commodity prices.  The new member of the monetary policy committee Adam Posen expressed his views on quantitative easing and the outlook for the British pound.  Posen downplayed the speculation that Quantitative Easing is over by saying that "much too much is being made of this so-called pause."  BoE member Bean seemed to agree when he said that “people shouldn't read anything into the decision last week ... In August, we will have the benefit of the latest activity and inflation projections ... That's a natural point to take stock of whether we need to do more or have a pause."  On the economy, Bean expects a drawn out long haul recovery that won’t permit the central bank to unwind QE anytime soon.  As for Adam Posen, his term does not begin until September 1st and therefore his comments have a limited impact on the currency market because he has yet to participate in a MPC meeting.  Nonetheless, Posen is a support of further GBP strength. He expects the currency to rise against the euro over the long term.  The U.K. employment report is due for release tomorrow and the decline in the employment component of service and construction PMI suggest that job losses are expected to accelerate.  A weak report could erase some of the recent gains in the British pound.  

USD/CAD: HITS 3 WEEK HIGH

One of the biggest movers in the currency market today is the Canadian dollar, which soared to a 3 week high against the greenback.  Other than new motor vehicle sales, which rose 1.0 percent (right in line with expectations), there was no major economic data released from Canada.  Oil prices ended the day virtually unchanged and below $60 a barrel.  This leads traders to wonder what stoked the massive rally in the Canadian dollar. Unfortunately there is little to explain the move other than higher Canadian bond yields and speculation that oil prices have bottomed.  The Canadian dollar has also been tracking the rally in U.S. equities.  When Intel earnings were released after the bell, the Canadian dollar fell to a new intraday low.  Manufacturing shipments are due for release tomorrow. Despite the pickup in new motor vehicle sales, shipments are expected to drop 2.5 percent.  The Australian and New Zealand dollars also participated in the risk rally.  Business confidence improved materially in Australia with the NAB business conditions index rising from -14 to -2 and the confidence index edging back into positive territory.  In an interesting shift, RBNZ Governor Bollard said that early signs of recovery have emerged and therefore New Zealand could start recovering ahead of the pack.  This positive news has helped to break the AUD/USD and NZD/USD out of their downtrend.  

USD/JPY: NO FIREWORKS EXPECTED FROM BOJ

The yen crosses rebounded for the second day in a row as U.S. equities edge higher.  At their upcoming monetary policy meeting, the Bank of Japan may extend an emergency credit program to struggling companies. Both, BOJ Governor Masaaki Shirakawa and Finance Minister Kauro Yosano agree that purchase of corporate debt is necessary even as markets return to normal conditions. Unlike, the Federal Reserve or Bank of England, Japan’s central bank is not in a position to end their credit lending. Therefore, the Bank of Japan will try to refrain from showing any signs that they are ready to end quantitative easing as the economy remains in the worst downturn since World War II. Some positive sentiment for world’s reserve currency came from the new Vice Financial Minister Yasutake Tango today. Tango confirmed that Japan will keep buying U.S. Treasuries and support the greenback as the reserve currency of the world.  Interest rates of course will remain unchanged at 0.10 percent.

GBP/USD: Currency in Play for Next 24 Hours

The GBP/USD will be the currency in play for the next 24 hours. U.K.’s unemployment figures are due for release at 8:30GMT or 4:30AM EST. The U.S. will release Consumer Price Index and Empire Manufacturing at 12:30GMT or 8:30AM EST followed by the, Federal Open Market Committee Meeting Minutes at 18:00GMT or 2:00PM EST. GBP/USD can’t seem to define a prominent trend and is currently lingering in the Range Trading Zone established through Bollinger Bands. However, the pair established a well-defined ascending triangle which is likely to develop more fully before being broken. Nonetheless, if the cable falls below support which is at 1st Standard Deviation as well as 23.6% retracement of this year’s high and April’s low at 1.6200, we may see the pair drop to 1.6000. However, if the pair rallies due to better than anticipated economic release coming from U.K., the pair could head to the next level of resistance hovering at 1st Standard Deviation of the Bollinger Bands at 1.6500.

Comments (2)

d

July 14, 2009 at 09:19 PM ET

So you think traders cannot deduce reasons why USD/CAD moved? Your candor is uncommon. I continue to study your book.

Tsadok

July 15, 2009 at 06:24 AM ET

I read you every day, keep up the great work.

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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.