U.S. Dollar: More Protectionism is Bad

Last updated 10/7/2009 4:56 PM ET (GMT -5) 7 Comments

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Kathy Lien

Director of Currency Research, GFT

THE STORIES IN THE CURRENCY MARKET

• U.S. DOLLAR: MORE PROTECTIONISM IS BAD
• EUR: COULD TRICHET TALK CURRENCIES?
• GBP/USD: CONSOLIDATION AHEAD OF BoE
• AUD: EMPLOYMENT NUMBERS ON TAP
• CAD: HITS 1 YEAR HIGH INTRADAY
• NZD: OIL PRICES FALL, GOLD PRICES HIT NEW HIGHS
• USD/JPY: FUJII IS AT IT AGAIN

EXPECTATIONS FOR UPCOMING FED MEETINGS

U.S. DOLLAR: MORE PROTECTIONISM IS BAD

It is not surprising to see the dollar recover after selling off significantly in the beginning of the week. In every downtrend there will be relief rallies which is what we have witnessed today. The dollar traded higher against the euro, Australian, New Zealand and Canadian dollars, but not before each of the 3 commodity producing currencies hit fresh year to date highs. The U.S. economic calendar was once again devoid of any major economic releases, giving investors the opportunity to let their imaginations run wild. Although there are many reasons why the dollar should continue to weaken, the primary reason is the improvement in risk appetite. So if risk aversion returns and equities give back their recent gains, the relief rally in the dollar could become a full blown turn. Concerns about losses in the commercial real estate sector and the unrealistic expectations of a V shaped recovery have made investors a bit nervous. However with no major U.S. economic reports due for release this week and 2 central banks making monetary policy announcements tomorrow, we still believe that interest rate differentials will drive the currency market.

More Protectionism

Unfortunately, protectionism continues to rear its ugly head. The U.S. is now considering imposing import duties on certain seamless steel pips from China. If you recall, last month, China and the U.S. engaged in a mini trade war over tires and chickens. The U.S. slapped a 35 percent tariff on tire imports from China and in response China threatened to either restrict imports of chicken feet or tack on their own tariffs. Believe it or not, chicken feet trade between the U.S. and China is a $400 million industry. However China is much more interested in making this a public spat than an economic war because chicken feet trade pales in comparison to the $2 billion tire trade between the 2 countries. Last week, the U.S. increased tariffs on Chinese solar panels and now they are branching out to other products. Granted that steel imports are estimated to be only $382 million, but a little here and a little there becomes a lot. So far, China has only shot back with the equivalent of a BB gun, but if the U.S. continues to push them, they may retaliate with something stronger such as reluctance to continue purchasing U.S. government debt. In fact, they may not even need to follow through with it but a simple threat may be enough to shake the markets. In the end, protectionism is dollar negative by reducing foreign demand for dollars.

Employment and Spending

Although there are no major U.S. economic releases on the calendar tomorrow, there are 2 U.S reports worth watching – Jobless Claims and ICSC Chain Store Sales. After the acceleration of job losses reported last week, traders will be looking for clues to whether the trend of improvement in the labor market has ended. If jobless claims increase more than the previous week, investors could grow concerned about another month of massive job losses. In addition, there have been a lot of reports that spending this holiday season will be weak and because of that, retailers are just looking to breakeven. However, based upon the SpendingPulse index, a service by MasterCard Advisors, retail sales rebounded in September. Costco and Family Dollar Stores also posted better than expected quarterly results which give hope to Thursday’s report which will include back to school spending. Meanwhile consumer credit fell for the seventh month in a row due to mounting job losses and tight credit. If not for the cash for clunkers program, the data would have been even weaker.

EUR: COULD TRICHET TALK CURRENCIES?

The euro traded lower against the U.S. dollar on the fear that European Central Bank President Trichet could reiterate his support for the U.S. dollar. There is no question that reporters will jump at the opportunity to ask Trichet about his take on the recent weakness of the dollar and there is no reason why he would change his stance. Although this would be nothing new, it could be enough to tip the EUR/USD over. Based upon recent economic reports from the Eurozone, the recovery remains "bumpy." The expiration of the car scrapping program in Germany has driven retail sales sharply lower while his morning's Eurozone GDP report revealed that growth in the second quarter fell more than initially anticipated. Weakness in other parts of the region has offset growth in Germany and France, triggering a 0.2 percent drop in GDP. Aside from comments on the currency, the market will also be looking at what Trichet says about the economy and the results of their second one year refinancing operation which was met with lackluster demand. The question of adding a spread to the one year tender is once again an issue. If the ECB adds a spread to the December operation, it would be perceived as a hawkish move. Given the recent trend of economic data and the appreciation in the EUR/USD, Trichet may postpone this decision until November. In terms of exit strategies, ECB officials have said repeatedly that now is not the time for an exit and we expect Trichet to reiterate this stance. Aside from the monetary policy announcement, German industrial production is also due for release. The increase in factory orders suggests that there is a good chance that production rose as well.

GBP/USD: CONSOLIDATION AHEAD OF BoE

The British pound continued to consolidate ahead of tomorrow’s Bank of England meeting while EUR/GBP reversed much of yesterday’s strong rally. The pair will be of particular importance ahead of the BoE and ECB rate decisions. The only economic indicator reported today from the U.K. was Nationwide Consumer Confidence which continues its string of excellent performance. The report showed that confidence hit the highest level in 18 months, while economic expectations reached nearly a four year high. Nationwide attributed the improvement to “continued positive news about the housing market and the strong rally seen in equities.” Of course, the BoE rate decision will be the focus of tomorrow’s calendar. After the surprise decision to expand the asset purchase program in August many traders are approaching the decision with caution. However, even though the bank is still the most dovish in town, there is not much that could be expected. The main points to look out for will be any mention of the pound or any discussion about the possibility of lowering the banks deposit rate.

AUD: EMPLOYMENT NUMBERS ON TAP

The Australian, New Zealand and Canadian dollars raced to fresh year to date highs before giving up their gains to end the day lower against the U.S. dollar. Australian economic data continues to outperform, adding validity to the Reserve Bank of Australia’s decision to hike interest rates earlier this week. Construction sector PMI jumped from 42.4 to 50.8, putting the index into expansionary territory for the first time since February 2008. Home loans continued to fall while investment lending surged. The housing market in Australia has been fueled by not only Australian but also Chinese demand. This evening, employment numbers are due for release and we believe that the data will help to reignite the rally in the Aussie. With the employment component of service, manufacturing and construction sector PMI all rising in September, there is a good chance that Australia experienced positive job growth last month. Meanwhile the Canadian dollar came under pressure as oil prices gave back their earlier gains. Housing starts are also due for release tomorrow and the rise in building permits suggests a recovery in Canada’s real estate market which could help to lift the loonie.

USD/JPY: FUJII IS AT IT AGAIN

The U.S. dollar fell to a 9 month low intraday before rebounding to end virtually unchanged against the Japanese Yen. Despite the dollar’s recovery against other major currencies, it remains weak against the Yen which suggests that the market is still bearish dollars. As the currency pair continues to fall, the market will increase its focus on comments by Japanese officials. Finance Minister Hirohisa Fujii’s is at it again - the incoming administration’s rules about foreign exchange intervention seem to change day by day. Mr. Fujii explained that while he does not believe governments should intervene, there are certain exceptions to the rule. In the cases where currency fluctuations are “outrageously reckless” authorities will need to take appropriate measures. However, he does not regard the yen’s strength as being “extremely abnormal.” In an attempt to keep the dollar from falling too far, Fujii mentioned that he does not expect to reduce the level of dollars in Japan’s reserves. These latest comments are on the back of signs of distress coming from Sony Electronics. The company predicts that the yen will continue to strengthen, giving them “no moment to breathe”. Economic data released today included the Coincident Index, which jumped to its highest in eleven months, and the Leading Index which improved to 83.3. On the way for tomorrow will be the Current Account and Trade Balance along with the Eco Watchers Survey.

EUR/GBP: Currency in Play for Next 24 Hours

EUR/GBP will be the currency pair in play for the next 24 hours. The Bank of England is set to announce its rate decision at 7:00 am ET or 11:00 GMT. The ECB will follow with its decision at 7:45 am ET or 11:45 GMT. There will also be German Industrial Production at 6:00 am ET or 10:00 GMT.

EUR/GBP

Comments (7)

Eddie09

October 08, 2009 at 08:22 PM ET

Well, I wish the Chinese government officials could use the decisions on U.S. government debt as their bargaining chip for certain important issues. Unfortunately they are not able to. Something behind the scene do not allow. Even some US financial commentators have mentioned, the Chinese officials do not necessarily want to continue to buy the US debt (after they have already owned unprecedented huge amount of it), but they have to. Well, it's up to the readers about how to understand the comments. At least you know they have no choice but continue to deliver hundred of billions$ to the central bank each month...

You can see a lot of peculiar things happening these days (including the trade issues you pointed out) while the Chinese officials simply have no real action or reaction. People will learn why in the future.

FXDragon

October 07, 2009 at 05:56 PM ET

What is chicken feet? What do americans do with it? Dont they grow thieir own chicken? I like wings and legs

hsbc

October 07, 2009 at 07:46 PM ET

i live in china and no one has really heard of US chickens. china has a huge poultry sector and its hard to imagine why anyone would want an imported chicken

Clover

October 07, 2009 at 06:07 PM ET

It is the feet of the Chicken...and because you like wings and legs, but not the feet, the US sells them to China where it is as usual as hot-Dog in America.

usman

October 08, 2009 at 12:50 AM ET

whats happening with the Gold? tell me the reasons for current trents ? why is this happening so quickly?

FXDragon

October 08, 2009 at 03:24 AM ET

Gold is roofing because investors wanna protect their dollar investments. Gold and dollar are rivals, euro and gold are brothers. They also hedge against hyperinflation which might come because of low fed rates and huge trade deficit.

klien

October 08, 2009 at 09:52 AM ET

one answer - Dollar Weakness

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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.