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Currencies Benefits from Positive U.S. Data Despite Trichet Comments

Last updated 10/15/2009 9:20 AM ET (GMT -5) 0 Comments - Add your comment

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Kathy Lien

Director of Currency Research, GFT

The U.S. dollar surged against the Japanese Yen at the onset of NY trading following stronger than expected economic data and comments from ECB President Trichet. We have long said that the only external factor that could stop the dollar from falling are critical comments from central bank Presidents.

Are Trichet's about Euro Comments Politically Motivated?

This morning, ECB President Trichet reiterated that it is very important for the U.S. to pursue strong dollar policies and he pointed out that the euro was not created to be a global reserve currency. These are comments that we have heard from the ECB President before but this is the first time in a while that we have also heard him say that "excess forex volatility is an enemy of stability." Whenever Trichet used the words "excess forex volatility" in the past, the EUR/USD's rally came to a screeching halt. However we are not so sure that the central bank President is entirely convinced that the strong euro is hurting the economy. In the same speech, he also reminded the market that the ECB's primary mandate is price stability and that is most likely the "one needle" in their "compass." If inflation is his primary focus, then Trichet's comments on exchange rates may only be politically motivated because a strong euro helps to prevent inflationary pressures from getting out of hand. So far he is satisfied with the results of non-standard measures and believe that rate cuts have transmitted well into the economy. As a result, there are "more and more signs of the economy stabilizing" and the substantial policy stimulus will be withdrawn when the economy normalizes. Yet given that uncertainty around the economic outlook is still high, now is not the right time to exit. The marginally upbeat tone of Trichet's speech offset his warnings about exchange rate volatility and has limited the decline in the EUR/USD.

Unambiguously Positive Data Should Sustain Forex Momentum

Meanwhile the first batch of U.S. numbers were unambiguously positive, helping to keep the fire going under the currency and equity markets. The dollar has appreciated against the yen but these days, stronger risk appetite is negative for the dollar against currencies like the euro, British pound and Australian dollar. Deflationary pressures are easing with consumer prices rising 0.2 percent in September. The annualized pace of CPI growth is still negative at -1.3 percent but core price growth accelerated by 1.5 percent. Manufacturing conditions in the NY region also improved dramatically with the Empire State survey rising from 18.88 to 34.57, the highest level since May 2004. The weaker dollar is helping to extend the recovery in manufacturing which is a major reason why the Fed has not done anything to stop the freefall. Jobless claims also fell from 524k to 514k while continuing claims broke below the 6 million mark for the first time since March. All of these stronger reports should help sustain the positive tone in the equity and currency markets.

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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.