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THE STORIES IN THE CURRENCY MARKET

• U.S. DOLLAR: GETTING BACK ON TRACK
• EUR/USD: GERMAN RETAIL SALES SPOILS PMI
• GBP/USD: MANUFACTURING EXPANDS
• AUD/USD: REACHES 10 MONTH HIGH
• NZD/USD: TREASURY PREDICTS GROWTH RETURNS BY YEAR-END
• USD/CAD: PLUMMETS TO OCTOBER LOWS
• USD/JPY: LABOR MARKET STILL STRESSED

EXPECTATIONS FOR UPCOMING FED MEETINGS

CURRENT US INTEREST RATE: 0.25%					Rates Expect to Remain Unchanged in August and September
	8/12 Meeting	9/23 Meeting
NO CHANGE	59.7%	55.0%
CUT TO 0BP	40.3%	30.5%
INCREASE TO 50BP	0.0%	14.5%
INCREASE TO 75BP	0.0%	0.0%

U.S. DOLLAR: GETTING BACK ON TRACK

All of today’s themes point toward global economic recovery. We have received so many indications from around the world that the recession may be reaching its final days. Manufacturing was the big story, with almost all countries reporting that manufacturing has staged a strong comeback in the month of July. Even though the industry is still contracting in most instances, the improvement is undeniable. The news has combined to send the S&P 500 above 1000 for the first time since November 2008 while the dollar plummets against almost all other currency pairs. The pound, euro, aussie, kiwi, and loonie are all reaching major new highs as risk aversion becomes a distant memory.

Manufacturing Does Not Disappoin t 

Manufacturing ISM helped investors forget about the recent plunge in consumption that was shown in Friday’s GDP. The release automatically spurred impressive equity rallies both nationally and internationally. The ISM release came in at 48.9, far above the 46.5 consensus. Even though the number has reached a 10-month high, it is important to keep in mind that manufacturing is still shrinking. Manufacturing has been shrinking for the last 12 months consecutively, but the pace of contraction has slowed considerably since the beginning of the year. Perhaps the most promising aspect that this report has to offer is the improvement in employment. The employment component rose by 4.9 points to 45.6, serving as a good indicator that Friday’s Non-Farm Payroll report may receive a boost. The figure was strong at all levels, with New Order rising by 6.1% and Production jumping by 5.4%. The only component that did not improve was Customers’ Inventories. In addition to the manufacturing optimism coming from the Fed’s recent Beige book, Manufacturing ISM does serve as an indication that the manufacturing recession is reaching its end. 

Is the Recession Really Over ? 

It would be a stretch to proclaim the definitive end of the U.S. recession. However, there have been many signs in today’s trading alone that might make such an argument feasible. For one, we had a much stronger Manufacturing ISM report. There was also the Construction Spending report which was much stronger than expected. However, the good news goes beyond the usual economic data. Ford noted today that their July auto sales posted the first monthly increase since 2007. The TED Spread, an indicator of financial stress and concern, fell to the lowest in about two years. This an extremely important indication that credit markets are starting to return to normal operating conditions. Alan Greenspan also made comments today calling an end to the recession much sooner than other economic forecasts. Even though Mr. Greenspan’s latest predictions have been shaky at best, he finds that the economy may grow 2.5% in the current quarter. He says that “it’s clear that we’ve turned”. In any event, today’s market has seen so much optimism gather in only a day. If this path continues, we will have to reevaluate the theory that the recession has already ended. 

Can the Rally Continue ? 

Today has been driven primarily by improved manufacturing. However, tomorrow we will receive information about some other sectors. Firstly, there is Personal Income and Personal Spending. The deficit in consumer spending is probably the most troublesome part of the economy right now as it is doubtful if a recovery can be completed without it. There will also be Pending Home sales which will depend largely on spending, but considering the recent dismal personal consumption figures, it may be unlikely that housing stages a strong comeback.

 

EUR/USD: GERMAN RETAIL SALES SPOILS PMI

The euro finally breaks to the upside to reach the highest level since mid-December when the currency spiked by almost 2000 pips in the matter of nine days. Unlike the unusual events that took place in late 2008, the most recent euro rally seems to be much more sustainable. Euro-zone Manufacturing Purchasing Managers Index was released today at 46.3, slightly better than last month’s 46. Despite the only marginal improvement, this still marks the fifth month that manufacturing activity has accelerated, reaching the highest level in nearly a year. Germany’s PMI was also slightly better at 45.7 adding to the signs of a European manufacturing recovery. Unfortunately, the optimism that the PMI numbers created is at least partially offset by what appears to be a troubled German consumer. Retail Sales in Germany tumbled from -1.3% to -1.8%. Clearly, persistent advances in unemployment are to blame. However, we did see that the unemployment rate held steady last week which may prove to accelerate consumer spending in next month’s figure. However, a true rebound in spending should only follow consistent declines in the unemployment rate. The only data on the docket for tomorrow will be French Producer Prices. Wednesday will present a much more important schedule in which we will see if weakness in German Retail Sales is fully translated into dismal Euro-zone retail sales.

GBP/USD: MANUFACTURING EXPANDS

The pound is yet another example among many currency pairs that have broken major monthly highs. GBP/USD has punctured through to nine-month highs and seems destined to take hold of 1.7000. Sterling is currently higher by an impressive 225 pips. The U.K. also submitted manufacturing data that probably surpassed all other countries in terms of its performance. Manufacturing PMI reached 50.8 marking the first time that manufacturing has expanded since March of 2008. Comparatively, the UK was the only country to show an above 50 reading out of all the manufacturing reports today, except for China. In fact, most countries have yet to cross back into a +50 reading. Furthermore, the battered financial sector is on the rise as well. HSBC, the biggest European bank, and Barclays reported better than expected earnings. We have mentioned how dependent the country is to the financial sector and how it has been holding the country back. These new developments should count as a strong indication that the U.K. economy is finally coming around. In response, stocks are on a tear, reaching the highest levels since last October. The only report due for release tomorrow will be Nationwide Consumer Confidence.

AUD/USD: REACHES 10 MONTH HIGH

Data was light for the commodity currencies but the moves were no less impressive. The aussie continues a rally to reach the highest levels since September while the kiwi retakes levels not seen since October. USD/CAD plummets reaching October 2008 lows. There is no clearer indication that risk aversion has been temporarily dissolved than in the persistent rallies of the commodity currencies. The only important data to be released was Australian AiG Manufacturing easily added to the global sign of a manufacturing recovery. The report showed that manufacturing is showing its best performance since September even though the contraction continues for the thirteenth straight month. Other news showed that New Zealand’s treasury expects a return to growth by as soon as the end of this year. In a promising statement, the treasury says that the third quarter may mark the end of the contractionary cycle. They do point out that unemployment might not peak until the latter half of 2010. News for tomorrow will be crucial for the aussie. Not only are we expecting Retail sales, but we will also have the RBA rate decision. It would be very unlikely for the RBA to do anything but keep rates unchanged. However, a surge of optimistic comments and the potential for talks about a rate hike may provide new legs for the aussie rally. We will also see New Zealand’s ANZ Commodity Price Index.

USD/JPY: LABOR MARKET STILL STRESSED

USD/JPY makes little to no effort in response to today’s wave of improved manufacturing reports and the complete reduction to risk aversion. Even with the consistent declines in volatility and talks of ending recessions, USD/JPY maintains only a slight but contracted uptrend. Japan reported that Vehicle Sales were improving coming in at -4.20% from -13.5%. This substantial shift may indicate that international demand has been revitalized enough to make the unrelenting USD/JPY weakness less of an issue. Labor Cash Earnings on the other hand looked terrible, dropping to -7.10% from -2.50%. This is the largest decline on record, marking the thirteenth consecutive slide. Clearly with the weakness of the labor market, any demand for Japanese production will have to come internationally. Fortunately, this may actually be the case. China reported today that Manufacturing PMI reached the highest level in about a year. The speedy Chinese recovery will only add growth to one of Japan’s largest sources of production. Even though employment will continue to be an ongoing problem, the international economic pick-up should help lift the countries activity. No data is set to be released in Japan until Thursday’s Leading Index.

AUD/USD: Currency in Play for Next 24 Hours

AUD/USD will be the currency in play for tomorrow. The most important event risk in the next 24 hours will be the RBA’s rate decision at 12:30 am ET or 4:30 GMT. In addition, Australia will also report Retail Sales at 9:30 pm ET or 1:30 GMT. The U.S. will be releasing Personal Income and Spending at 8:30 am ET or 12:30 GMT as well as Pending Home Sales at 10:00 am ET or 14:00 GMT. 

AUD/USD has rightfully taken hold of the Bollinger band buy zone as rallies continue for the third day. The pair is currently trading at levels not seen since September as the June 3rd high has clearly been broken. In fact, the significance of the level may result in it becoming an important support should AUD/USD retrace some of its gains. This puts our support at 0.8262. Resistance for the pairs surge should come in at 0.8518 which is the high from September 22nd. Even though the RBA is likely to remain unchanged tomorrow, any sign of increased optimism should send the currency higher.

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.