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U.S. Dollar: Late Day Action

Last updated 10/21/2009 4:47 PM ET (GMT -5) 1 Comments

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Kathy Lien

Director of Currency Research, GFT

THE STORIES IN THE CURRENCY MARKET

• U.S. DOLLAR: LATE DAY ACTION
• EUR/USD: EURO ABOVE 1.50!
• GBP/USD: NOT SO DOVISH ANY MORE
• NZD/USD: RBNZ SHOWS HAWKISH SIDE
• AUD/USD: CAR SALES IMPROVE
• USD/CAD: AWAITING RETAIL SALES
• USD/JPY: TRADE NUMBERS SHOULD REFLECT YEN STRENGTH

EXPECTATIONS FOR UPCOMING FED MEETINGS

U.S. DOLLAR: LATE DAY ACTION

The last hour of trading was by far the most frantic as stock gains disappeared almost instantaneously thanks to a barrage of economic concerns. The Dow finished the day down more than 90 points after reaching a new high above the 10,100 level. The dollar received a quick burst of buying as a result; taking a notch out of what was substantial weakness. However, even the combination of a disappointing Beige Book and comments from Larry Summers indicating that he stands behind a strong dollar could not reverse dollar losses entirely. In fact, today was another momentous day for selling the greenback. EUR/USD, in particular, penetrated the critical 1.50 level to reach a new high. Meanwhile, the pound finally started to join the action, posting a sizable 200 pip advance against the dollar. The kiwi was also a strong performer today and broke through to a new fifteen month high. The evidence of dollar weakness is even more substantial in light of the fact that rallies did not falter in the face of a complete reversal in stocks.

A Bleak Beige Book

Today’s release of the Federal Reserve’s Beige Book, which analyzes economic conditions across the Fed’s 12 districts, left little to get excited about. Stock market rallies did not fare well in light of an economy that does not look as upbeat as everyone had hoped. The Fed notes that even when they saw improvement, it was “either small or scattered.” They did give credit to residential real estate and manufacturing for its improvement over the summer, but there was far too much cause for concern to signal any change in monetary policy would be required. The Fed indicated that the worst performing sector by far was commercial real estate, which weakened across all regions. The report also brought the weakness in the labor market back into market consciousness. Consumer spending as a result was mixed as job uncertainties continue to curtail expenditures. The list of problem spots goes on with continued softness in the financial services industry followed by little to no increase in prices. Even though the Fed indicated that all districts reported “stabilization or modest improvement,” the question is whether or not we can expect a sustainable return to growth in the third quarter with these weak spots. It is possible, that as fiscal stimulus starts to unwind the economy could hit a wall like what the Beige Book seemed to demonstrate. In any event, today’s release was a real wakeup call that indicated that we are not as far along the road of recovery as expected.

Quiet Week to Come

The remainder of this week is poised to be a lull in the action for U.S. economic data. Only the Leading Indicators report and the House Price Index are expected to come for tomorrow. That leaves Existing Home Sales as the only report to wrap up the week on Friday.

EUR/USD: EURO ABOVE 1.50!

EUR/USD finally bit the bullet and surged passed the 1.5000 level after resisting the temptation for the last couple of days. Now that the euro is at the highest level since August of 2008, the obvious question that is circulating through the markets is whether it will be able to maintain its performance. The answer seems to depend on two factors: whether the improvement in data will be sustained and the threat of an ECB reaction. It is undeniable that with Germany returning to growth, economic data has picked up lately. However, not all things look too impressive, especially in light of the growing ranks of the unemployed. Furthermore, the ECB may be the next impediment for the pair to face. The sheer velocity in which the euro has appreciated would pose a great threat to any central bank, especially to one that is highly concerned with the health of the region’s exports. Such a strong currency could eventually serve to cut off growth and send the unemployment rate skyrocketing further. It would be hard to believe the ECB would let this happen, leaving the possibility of intermittent verbal interventions a real threat to continued rallies. Data was at a minimum today and will be for tomorrow as well except for the Euro-zone Current Account. We will be able to better assess the euro’s sustainability after some critical data expected Friday.

GBP/USD: NOT SO DOVISH ANY MORE

GBP/USD has continued a surge to reach five-week highs after a substantial 200 pip rally. Almost single-handedly, today’s Bank of England Monetary minutes managed to flip trader’s expectations. Today’s minutes showed that the decision to keep the quantitative easing target unchanged was supported unanimously by all board members – a big relief after what we saw in August. An even greater jolt was injected into the pound when BoE Governor Mervyn King cautioned that investors should take into account that at some point rates will return to normal levels. This may seem obvious, but considering how dovish the markets expected the bank to be, any comment about higher rates at some point in the future is a big deal. Nevertheless, this does not actually signal the end to anything. The minutes also described a laundry list of underlying problems that seem to expand the lifespan of such extraordinary policy techniques indefinitely. Most likely, we will have to wait until November’s Inflation report and the BoE meeting that follows to get a clearer picture of where the bank is headed. Aside from monetary policy, Mervyn King is heading a push to enact legislation that would split up Britain’s largest banks into their commercial and investment banking components. The governor hopes that the result would led to better oversight and more effective regulation of excessive risk taking decisions. The issue presents another political divide, one in which Prime Minister Brown’s Labour Party strongly opposes. Retail Sales will be the main event for tomorrow and should hold particular importance considering the BoE’s optimistic outlook for spending.

NZD/USD: RBNZ SHOWS HAWKISH SIDE

Much of the rallies seen in the commodity currencies dried up by the end of trading thanks to the sharp reversal in US stocks. Nevertheless, the New Zealand dollar was a particular outperformer, surging about 80 pips to retake 15-month highs. Oil prices definitely did not hurt, rising to a fresh one-year high. Today’s comments from RBNZ Governor Alan Bollard were received with excitement by kiwi traders. Bollard said that the strong rallies in the currency do not particularly prevent them from raising rates. Since many expected that this was perhaps the one major reason keeping rates low, the outlook for future decisions changes dramatically. The hawkish comments confirm a similar move earlier this month when the RBNZ ended certain relief programs like the Term Auction Facility. Even though Bollard said rates would be on hold until late 2010 as recently as September, the latest course of action may have signaled a shift in the banks outlook. Unfortunately, today’s surprise was met with one piece of bad news in that Credit Card Spending declined for ten out of the last eleven months. In Australia, data was limited to New Motor Vehicle sales which rose dramatically from 0.3% to 2.9% last month. In Canada, we can expect two vital reports for tomorrow which include Retail Sales and the Monetary Policy Report which should reiterate the bank’s concern over the loonie’s strength.

USD/JPY: TRADE NUMBERS SHOULD REFLECT YEN STRENGTH

USD/JPY shows continued uncertainty as it has held motionless for the last four trading days. The pair has clearly been confused by the latest barrage of comments that have yielded the threat of intervention in absolute ambiguity. There has been no data from Japan today but we are waiting on the Trade Balance to answer some questions for tonight. The one thing the release might be able to clear up is whether the persistent yen strength is starting to have a noticeable effect on the country’s exports. Judging by the fact that many key Japanese firms have stepped forward and warned about the damage the yen has wrecked, this may very well be the case. Another upcoming event risk for Japan will be a string of key economic data coming from China. Within the next couple of days, China will produce both GDP and Industrial Production figures that will not only impact Japan, but the entire Asian continent. Since the country is the predominant driver of growth across the region, disappointing figures could indicate that Japan will be having an even harder time finding a buyer for its exports.

USD/CAD: Currency in Play for Next 24 Hours

USD/CAD will be the currency pair in play for Thursday. In Canada, we are expecting Retail Sales to come out at 8:30 am ET or 12:30 GMT followed by the BoC’s Monetary Policy Report at 10:30 am ET or 14:30 GMT. In the US, Leading Indicators and the Home Price Index will be released at 10:00 am ET or 14:00 GMT.

USD/CAD visited both extremes today which rightfully puts it in the Bollinger band range trading zone. Today’s high has confirmed a substantial level of resistance at about 1.0582. Not only was this level already hit as a low on September 17, but it is also where the 20-day simple moving average is located. To the downside, the lower one standard deviation Bollinger band could provide some support, but the low of October 15 at 1.0205 will be the ultimate level to watch. Tomorrow’s events should help cure the loonie’s indecisiveness.

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Comments (1)

FXDragon

October 21, 2009 at 10:54 PM ET

Gold looks undervalued 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.