Euro Takes Out Pre Lehman Highs

Last updated 10/13/2009 9:38 AM ET (GMT -5) 1 Comments

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Kathy Lien

Director of Currency Research, GFT

Based upon the latest price action in the currency market, it almost appears as if traders cannot stop selling dollars. Lack of demand for dollars has driven the euro, Australian, and New Zealand dollars to 13 month highs, taking out levels last seen during Lehman’s bankruptcy. A lot has changed in the past year and perhaps that is the reason why the U.S. dollar has performed so poorly. One year ago, volatility in the financial markets was through the roof and on this very day, the Dow Jones Industrial Average closed up more than 900 points. A move of that magnitude was certainly significant, but daily swings in excess of 500 pips happened regularly in October 2008. However today, there is a slim to nothing chance of that type of move happening again. The drop in volatility is a credit to the efforts of the central banks around the world and their once controversial programs have been rewarded with emergence out of recession. At the same time, the drop in volatility has helped to restore sentiment and risk appetite in the financial markets, helping to drive equities higher and the dollar lower. Whenever risk appetite is strong, investors sell low yielding currencies and buy high yielding ones. Since the dollar is one of the lowest yielding G20 currency, it is an exceptionally cheap funding vehicle for buying higher yielding currencies like the euro and Australian dollar. As we said in our report yesterday, Newton’s Law fully applies right now – the dollar will continue to fall unless it has a good reason not to. With no U.S. economic data on the calendar today, outside of a sharp fall in the U.S. equity markets, there is not much in the way of further dollar weakness. Investors expect another round of positive earnings reports, which should sustain the momentum in stocks. The only risk is the tomorrow’s busy economic calendar and because of that we may see some profit taking towards the end of the day on short dollar positions ahead of Wednesday’s U.S. retail sales report and the minutes from the latest FOMC meeting.

The market currently expects a sharp drop in retail sales following the expiration of the cash for clunkers program but a surge of new data, including better-than-expected comparable retail sales and the International Council for Shopping Centers index suggests a pick up in back to school sales. The ICSC retail index reported a rise in sales for the first time in more than a year while Retail Metrics announced that more than two-thirds of retailers are reporting better-than-expected September results. Among these outperformers includes companies like Kohl’s, who reported a rise in sales of 5.5%, compared with expectations for a modest decline. There was also American Eagle who reported that sales were unchanged, compared with expectations for a significant decline of 4.4%. Similar results were followed by major retail players like Macy’s, Limited Brands, and Aeropostale. Macy’s actually said that they believe they have “a better handle” on where the company is going. In fact this is a truth across the industry. It took awhile, but companies have finally come to the realization that consumers have moved away from big-ticket items. This does not necessarily mean they are not spending as the switch has been rapid to a more thrifty and frugal customer base. However, before betting on surprising September Retail Sales, or a rejuvenated holiday shopping season for that matter, there are some things to consider. First, there are good reasons why September sales may be artificially boosted. Since Labor Day came late this season, much of back-to-school shopping was postponed until early September. Furthermore, there is the consideration that last September, the month in which these companies are comparing their performance, was a particularly terrible month for retail. In addition, Redbook Retail showed a 1.9% decline in chain store sales, which although is not a devastating figure, still does not support a complete recovery.

Will the Minutes Confirm a Hawkish Fed?

As for the FOMC minutes, the last Federal Reserve meeting produced nothing groundbreaking but did manage to clear up some uncertainties of where the Fed is heading. The main difference between the September and August statement was that the Fed plans to “gradually slow the pace” of purchases of mortgage backed securities and agency debt. These programs will be finalized at the end of the first quarter of 2010. The Fed added that “economic activity has picked up following its severe downturn”, housing market activity is increasing, and business are cutting back at a slower pace. Overall, the assessment was better than the previous statements, but any consideration of exit strategies and rate hikes were left out completely. However, many are hoping that the minutes will clarify these initiatives.

Last week, the market interpreted Ben Bernanke’s comments about the need for tighter monetary policy as a sign that the Fed may not be as behind the curve as investors previously thought, but we still expect the Federal Reserve to sit on their hands for longer than most of their peers. The minutes should show the repeated emphasis that rates will be kept unusually low of an extended period of time, but any hint that of hawkishness could temporarily stop the freefall in the U.S. dollar.

Comments (1)

jojoba

October 13, 2009 at 11:51 AM ET

EUR/USD has been hovering around 1.4800 region for quite a while and is not able to break above. I expect the US retail news to shake things up a "little bit".

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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.