U.S. Dollar: Taking a Breath

Last updated 8/4/2009 4:25 PM ET (GMT -5) 8 Comments

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Kathy Lien

Director of Currency Research, GFT

THE STORIES IN THE CURRENCY MARKET

• U.S. DOLLAR: TAKING A BREATH
• EUR/USD: ECB MUST ADMIT DEFLATIONARY THREAT
• GBP/USD: ECONOMY CONTINUES EXCELLENT PERFORMANCE
• AUD/USD: RBA’s OPTIMISM MAY SIGNAL HIKES ARE SOON TO COME
• USD/CAD: FLAHERTY SENDS LOONIE TUMBLING
• NZD/USD: COMMODITY PRICES STAGE COMEBACK
• USD/JPY: TOYOTA ADDS TO POTENTIAL AUTO RECOVERY

EXPECTATIONS FOR UPCOMING FED MEETINGS

U.S. DOLLAR: TAKING A BREATH

The dollar is largely immobile after yesterday’s declines as rallies became too overextended. The extremely small moves of the euro and pound provided a stark contrast to the tremendous rallies from yesterday. In addition to the release of some troubling indicators, traders are using the day to take some profits off the table. U.S. markets had a rocky day, swinging between gains and losses. The Dow finally ended up 33.33 points. A pause is probably the best thing right now to ensure the survivability of stock market rallies. An overheated rally could explode if news suggests that the optimism in not warranted and conditions are much worse than expected.

Consumer Spending Unlikely to Help Recover y

Personal income this morning was probably the main driver that shifted markets out of their optimistic psychological state. With federal stimulus wearing off, it is unclear whether the consumer will come around quick enough to support a recovery. Personal Income declined by 1.3%, its largest slide in four years. The report also showed that wages and salaries declined by a record 4.7%. Personal Spending rose by 0.4%, but was driven mostly by the inflationary pressures of rising gasoline prices. When accounting for inflation the spending figure sinks to -0.1%. To some extent the harsh reality of spending has been masked by government stimulus which creates the possibility for continued declines in the future. With the employment number coming up for Friday, we are left with the impression that conditions definitely are not improving. The job market will continue to be the main problem that will keep consumers weary and our economy in the recessionary state. The report also noted that the personal savings rate fell to 4.6% from 6.2%. Obviously, the deficit in income has given the individual less money to save.

Pending Home Sales Offer Some Solac e

The Pending Home Sales figure was good enough to send US stock markets back into positive territory after earlier declines, offsetting the impact of personal income. The figure advanced by 3.6%, easily beating expectations and rising for the fifth straight month. Even though the rise can mostly be attributable to declines in home prices, it is still a good sign that the housing market has stabilized. However, several troubling signs still exist. The first problem stems for today’s report on Personal Income. Even though house prices have come down dramatically, salaries are starting to take a similar descent. Even cheap homes will be out of reach to the consumer if incomes continue their spiral. Furthermore, mortgage rates have been slowly moving up, making borrowing costs another impediment for home ownership. The largest home builders, like D.R. Horton, also say that the housing outlook remains challenging. They note that “rising foreclosures, high inventory levels, and tight credit conditions” are still affecting their ability to sell homes. Therefore, today’s number is promising, but there is just so much that stands in the way of a revitalized housing market, chief among those factors are the employment market.

The Employment Conditio n

As we have regularly pointed out, the employment report for Friday is of utmost importance. In many ways, the job situation is the one factor holding us back from a more noticeable recovery. Without a return of consumer spending, the retail market as well as housing market will continue to be strained. Tomorrow’s schedule includes several reports that will give us a good indication of where the employment market is headed. For one, we have the Non-Manufacturing ISM. The employment component of this report is highly correlated with the NFP release, and is one of our must trusted leading indicators. Furthermore, there will be Challenger Layoffs as well as ADP Employment.

EUR/USD: ECB MUST ADMIT DEFLATIONARY THREAT

EUR/USD weakened only by about 20 pips, as yesterday’s rally remains completely intact. However, as momentum dries up, it is unclear as to whether the pair will be able to push higher for more gains. The main economic release coming from Europe today is the EZ Producer Price Index. Even though the monthly index ticked up slightly, the annualized figure fell by the most on record since it was established 28 years ago. From this time last year, producer prices plummeted -6.6% from the -5.8% reported last month. The deflationary threat has once again reappeared at the top of economic priorities and may eventually warrant ECB reaction. The ECB has maintained their stance that deflation is not a real issue, which does not seem to be the case at this point. With this month’s CPI and German PPI all declining aggressively, the central bank must face the reality that deflation is a possibility. European stocks fell off of nine-month highs as recent data and BMW’s troubling 76% decline in net income took a small toll on investor confidence. However, this is one of the many signs that markets are taking a breath after yesterday’s all around good mood, as rallies have gotten a bit overextended. Tomorrow’s data is composed of the PMI Services and Composite index as well as Retail Sales.

GBP/USD: ECONOMY CONTINUES EXCELLENT PERFORMANCE

Pound trading ended completely unchanged today. The remarkable last three days have amounted almost 600 pips in gains, so today we are taking a much needed break. The only piece of data that we received today was the PMI Construction report. Construction activity made a large improvement in the last month and came in at 47.0 versus the 44.5 from a month earlier. This pace of contraction is the slowest that we have seen in the last sixteen months. The report noted that the outlook for construction in the next twelve months reached the highest in more than two years. After yesterday’s report showing that manufacturing actually expanded in July, the U.K. is off to a very good month as far as economic data is concerned. Despite the upbeat release, the FTSE mimicked the slight selloff in European markets, but managed to recoup most losses by the end of the day. News for tomorrow will be a little more substantial with PMI Services, Industrial Production, and Manufacturing Production. It is likely that with the apparent strength of manufacturing, industrial and manufacturing production may receive a substantial boost.

AUD/USD: RBA’s OPTIMISM MAY SIGNAL HIKES ARE SOON TO COME

The aussie and kiwi managed to push for slight gains on the day, while the loonie weakened by 75 pips. The RBA did the expected by leaving rates unchanged for the fourth straight month at 3.0%. With an improving economic situation speculation has mounted about how long rates will stay at this half century low. RBA Governor Glen Stevens said that consumer spending and exports were just some of the primary drivers behind the pickup in the economy. Stevens mentioned that “the risk of a severe contraction in the Australian economy has abated.” The good news is plenty to spur rate hike speculation, but the fact that they did not include the possibility of lowering rates should conditions worsen introduces the possibility of higher rates by the end of this year. However, even as Mr. Stevens points out the resilience of consumer spending, Retail Sales surprisingly fell by -1.4% after posting a 1.0% gain last month. This is the first decline in four months and suggests that consumers may be less able to lift the economy than previously thought. Nevertheless, on a quarterly basis, Retail Sales was better at 2.0%. The quarterly home Price index as also released today and showed that prices increased by 4.2%, the first gain in more than a year. The loonie was a big mover in today’s markets because Finance Minister Jim Flaherty expressed concerns about the currencies movement and warned that measures can be taken to dampen the volatility. The Trade Balance will be released tomorrow morning. New Zealand’s ANZ Commodity Price Index saw a rise to 1.0% from 0.2%.

USD/JPY: TOYOTA ADDS TO POTENTIAL AUTO RECOVERY

The move in USD/JPY was much more erratic that the rest of the currency market. Even though prices are little changed on the day, the dollar rallied off of a significant loss that was incurred in early trading. The 100 pip range in USD/JPY is one of the largest that we have seen in today’s markets. Nevertheless, the theme for the yen has not changed as it continues to hold on to considerable strength against the dollar. AUD/JPY managed to reach a new intraday nine-month high, but was unable to hold on to the new milestone. The Japanese have planned a rather quiet week for economic releases. The only thing reported today was a slight drop in the Monetary Base that had little to no impact on the markets. We learned today that Toyota improved its expectation for its full-year losses. The global auto industry seems to be reaching a turning point as recent result from Ford and Honda point to a recovery. It is likely that the U.S. cash for clunkers program may have helped jump start the troubled industry, both nationally and internationally. As mentioned, economic data will be unusually light until Thursday’s Leading Index.

EUR/USD: Currency in Play for Next 24 Hours

EUR/USD will be the currency pair in play for tomorrow. The Euro-zone is set to release the PMI Services and Composite index at 04:00 am ET or 08:00 GMT. In addition, they will also provide Retail Sales at 05:00 am ET or 09:00 GMT. The U.S. will have Challenger Job Cuts at 7:30 am ET or 11:30 GMT, ADP Employment at 8:15 am ET or 12:15 GMT, and Non-Manufacturing ISM at 10:00 am ET or 14:00 GMT.

EUR/USD

Comments (8)

Egidio

August 04, 2009 at 06:24 PM ET

Kathy. I am new to trading and thought I had been doing a decent job of following how the currencies react to market news until today. Besides a crystal ball how do you normally prepare your predictions based on positive or negative news? I normally watch the EUR/USD and GBP/USD pairs. Today no matter which direction I went based off of todays announcements, the market kept proving me wrong.

klien

August 06, 2009 at 09:24 AM ET

I usually watch sentiment and flow in the market as well and try to anticipate news by looking at prior releases

drugbarron

August 04, 2009 at 06:29 PM ET

Kathy, with regard to the ECB accepting there is a deflationary issue, i’ll put money on it that this is not on the cards. Trichet has always stated that any deflation - or as the ECB prefers to say - disinflation will only be a temporary phase. Therefore they will down play the claim of a deflationary threat to the EZ. The hope is that the rest of the world has QE'd and stimulated its way out of economic woes and the EZ will piggy back of any global recovery without having to debase their currency – skilfully played by the ECB – however global consumption will not return as we know it and the ECB will, IMHO, be proved too hawkish and ultimately pay the price as CEE states default and EU banks reign in lending later in the year. That said, there is little evidence that the EUR/USD rally has stalled, in fact, it’s a pause before going much higher – for no good reason other than a momentum trade based an anti dollar move on the back of a crazy senseless risk rally.

Jeff Burke

August 04, 2009 at 07:23 PM ET

I am trading the EUR/USD and before this run up, it was already overbought and now more so. The financial pundents talk about the bull market recovery like they are trying to convince themselves that it's true. I'm not drinking the Kool Aid. I say the EUR/USD will make a huge drop in the next week.

Jon Kurta

August 04, 2009 at 08:02 PM ET

Kathy,
First thanks for the commentaries and insights you and Boriss have been making here and (before you moved to gftforex) on dailyfx that I have been following for over three years.
There was always something to learn from them besides a simple restating numbers. Consequently, I found and still find your and Boris comments to be the most relevant in the forex comments world (comparing to Gordon and Dolan at forex.com, Jamie and David at your old place dailyfx, ACM etc, etc).
However, I do have question I have been wanting to ask you. Given your experience and a cool head, I am puzzled why a day in which USD gains against its peers you call someting like a "bad day", "dark clouds" or similar?
I would assume that direction of the moves cannot be interpereted as bad or good since some traders are long and some short dollars, unless, of course, you are an eternal dollar bear :)

Thanks,
Jon Kurta

Black&WhiteFX

August 05, 2009 at 06:49 AM ET

I had a profitable day trading the zone, I like sideways scalps.

Whilst I'm here can I ask what size stop traders use? I originally used just 10 pip stops on my day trades but found I was getting stopped out too early, a move from 15 improved things slightly but it appears I need 20 pips to safeguard my entry. I use standard lots ($10 pip) and look for 2.5-5x risk/reward.

What does everyone else use?

klien

August 06, 2009 at 09:26 AM ET

I am a dollar bear!

Darrell

August 05, 2009 at 08:21 AM ET

HI Kathy, I see only 1 way to trade any more. If it is going up get in and if it is going down get in that way. The fundementals are a joke and the ECB wants their currency high period.The most overpriced currencys on earth are the EUR and The GBP. I wonder if they really care if they do trade with the US or not.Also do they not think deflation will slow down if not stop the recovery.Economy 101 Thanks Darrell PS 3,500 pips gain for the GBP since January 2000 pips for the EUR. The GBP gained 3more than a third of the Dollar in value during this time . At this rate soon Dollar will equal=000.00

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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.