Dollar Returns with Vengeance

Last updated 10/23/2009 4:56 PM ET (GMT -5) 6 Comments

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Kathy Lien

Director of Currency Research, GFT

THE STORIES IN THE CURRENCY MARKET

• DOLLAR RETURNS WITH VENGEANCE
• EUR/USD: STRUGGLING TO KEEP ABOVE 1.50
• GBP/USD: A WEEK OF GAINS GOES DOWN THE DRAIN
• USD/CAD: BUDGET DEFICITS RUN WILD
• AUD/USD: IMPORT AND EXPORT PRICE INDEXES REMAIN WEAK
• NZD/USD: OIL DROPS TO $80 A BARREL
• USD/JPY: WEAKLY WEAKNESS IN YEN PERSISTED

EXPECTATIONS FOR UPCOMING FED MEETINGS

DOLLAR RETURNS WITH VENGEANCE

The potential for a substantial rise above 10,000 in the Dow seems to be elusive for the markets. Stocks fell more than 1.10% today and managed to erase all of this week’s gains providing an ample boost for the dollar. Investors are dealing with a lot of uncertainties right now, not the least of which includes a rampant regulatory over hall headed by the Fed. After yesterday’s announcement that the bank is working on a plan to reshape the compensation system among the financial services industry, Bernanke indicated that higher capital requirements could be another possibility in the regulatory framework. Adding to investor woes is the mass skepticism that is following the current earnings season. Even though an overwhelming majority of companies are reporting better earnings, per share profits were down significantly from last year. To top things off, oil took a tumble, landing more than one percent lower on the day. Today’s decline still does not mask the fact that we are in the mists of a serious rally, but similar tremors could add some strength to the dollar as it did today. The dollar held its head higher across the board but saw its most substantial gains against the pound which surrendered 1.8 percent.

Existing Home Sales Fail to Keep Market Afloat

Today’s one piece of economic data was not enough to keep stocks on track. Existing Home Sales shot through the roof in the month of September, far surpassing even the most optimistic of expectations. Data on homes for resale showed a climb of 9.4% compared to the average consensus of a rise of only 5.5%. What seems to be like some short-term stability in the employment market has added to the willingness of buyers to take the plunge on what will be the biggest investment of their lives. Furthermore, the temptations to take advantage of mortgage rates that are lying below 5.0% are too much for potential buyers to resist. Overall, combined with a constant stream of positive data coming from housing indicators, the market seems to be in very good shape and could lead the recovery charge. However, there is one factor that makes continued improvement in housing a little less certain. That is the $8,000 in government incentives for first-time homebuyers that are set to expire in the next month. It is very likely that this could be the main source of the buying frenzy, which would cast an uncertain view on whether demand will be able to hold up.

The Countdown to NFP Begins

Next week’s schedule will be a busy one from the very start. The first item on the list will be Consumer Confidence on Tuesday, followed by Durable Goods and New Home Sales on Wednesday. Things really pick up into the end of the week when we see the first indication of third quarter growth on Thursday. Our fingers are crossed that third quarter data does indeed prove that the recession has ended, with current consensus pointing to a 3.1% expansion. However, not even that holds a light to the Non-Farm payrolls report the following Friday (Nov 6). A worsening in the employment picture would make even the most optimistic growth report of little significance. However, judging by the stability in the latest round of jobless claims, next week could potentially produce the most discernable signs of recovery than what we have seen so far.

EUR/USD: STRUGGLING TO KEEP ABOVE 1.50

A packed session of economic data left little for the euro to run on, forcing the pair to lose sight of its new 14 month high. Indicators from today were largely an improvement over last month, but many key pieces failed to meet expectations. We first received a round of Purchasing Manager reports which showed that the European composite reached the highest levels since late-2008 while Manufacturing finally headed into the +50 territory. French services PMI was a huge surprise, surging to 57.8 from 53.2. However, even though German manufacturing made further headway, services PMI managed to decline for the first time in five months. We also received the crucial IFO report which showed that even though the Business Climate looked the best in about 12 months, it was not enough to reach market consensus. The IFO expectations component looked very impressive with a surge to 96.8. IFO economists did make one comment that soured some of the good news in that they expect that the exchange rate could start to cause some problems down the line. For right now, exporters looked fairly resilient with orders jumping by the most since early-2008, as the PMI report showed. All in all, today’s events neither excited or disappointed markets and left the euro subject to the strong downward pressure driven from the dive in equities. Data for next week starts off with German GFK Confidence, followed by German Consumer Prices for Wednesday, Unemployment for Thursday, and Retail Sales to wrap things up on Friday.

GBP/USD: A WEEK OF GAINS GOES DOWN THE DRAIN

The entirety of the past five days of rallies, driven by the enthusiastic optimism surrounding the possibility for a more hawkish BoE, has been completely reversed in a spectacular 300 pip dive. Leading the plunge was the terribly disappointing growth figures which dashed expectations that the recession has officially come to an end. Preliminary growth figures showed that the UK contracted by about 0.4% in the third quarter, compared with the expansion of 0.2% that was expected. The report was weaker at all ends, and showed that production, construction, and services all added to the overall deterioration. Total activity in the economy has shrunk 5.9% since the recession started, which is just shy of the 6.0% record reported during a recession in the eighties. Nevertheless, the more important issue on traders’ minds than economic health is quantitative easing considerations. Expectations for the central banks program were reversed instantaneously, with many economists now looking at an expansion in the program past the current £175 billion allotment. Such a decision, something that only a few days ago looked unlikely, would indicate that the country is falling way behind its peers. In addition, it is also important to keep in mind that the report had major political implications that made the reelection of current Prime Minister Gordon Brown even less likely as approval rating continue to fall. Signs of instability and uncertainty could only amount to weakening the pound further. The calendar for next week is relatively light, with the bulk of data coming out on Thursday with Net Consumer Credit and GFK Consumer Confidence.

USD/CAD: BUDGET DEFICITS RUN WILD

There was a broad weakness in the Australian, New Zealand, and Canadian Dollars against the US buck. Declines in gold and oil which slid to nearly $80 a barrel helped to push commodity currencies lower. Canadian Budget Deficits widened to C$5.34 billion or $5.07 billion in August as tax revenue continued to drop and jobless benefits rise. Canadian Prime Minister Jim Flaherty promised to eliminate record budget deficits in the medium-term as the economy recovers from a recession. Echoing yesterday’s comments from the BOC, the IMF claimed strength in the Loonie may dampen economic recovery and lower inflation. So far, BOC Governor Mark Carney’s threat of intervening in the foreign exchange fell on deaf ears. The last time BOC intervened in the markets was in 1998. Therefore, traders remain skeptical that the bank will pull the trigger on such a plan. Canadian monthly GDP is the only relevant piece of economic information during the next week. Australia’s Import and Export Price Indexes fell at faster than anticipated pace in October suggesting that inflation may remain sluggish for some time. Next week’s PPI, Inflation, and HIA New Home Sales will keep investors monitoring the aussie. Market attention will shift to the Kiwi next Wednesday due to release of Interest Rate Decision and Trade Balance. No interest rate change is expected, but the RBNZ might take a more hawkish stance on the future of interest rates. Market anticipates 25 basis point hike by the beginning of next year.

USD/JPY: WEAKLY WEAKNESS IN YEN PERSISTED

Throughout the week the Yen showed considerable weakness which continued in today’s trading. USD/JPY reached a fresh 1-month high by breaking above 92.00 on greenback strength. EUR/JPY rose to a level not seen since early August. Meanwhile, CHF/JPY rose eleven times out of last twelve sessions, quickly approaching this year’s highs. The newly elected government continues to keep itself busy. The Japanese officials pledged to create up to 100,000 jobs by March in order to mitigate continuing job losses which is pushing unemployment rate to a record high. Prime Minister Yukio Hatoyama commented that the program will not require any additional spending. The program is predicted to use the earmarked funds first as the government focuses on supporting the labor market during the upcoming year. Next week’s unemployment rate, which is expected to rise to 5.6%, will fully elaborate on the labor picture. Other economic events for the upcoming week include a BoJ Interest Rate Decision, Consumer Price Index, Industrial Production, and Housing Starts.

AUD/USD: Currency in Play for Next 24 Hours

AUD/USD will be the currency in play for the upcoming Monday. Australia will release Producer Price Index at 00:30GMT or 4:30AM EST. Thereafter, Dallas Fed manufacturing Activity will be released from U.S. at 14:30GMT or 6:30PM EST.

After staying within the Buy Zone established through the Bollinger Bands for nearly a month, AUD/USD finally slipped into Range Trading Zone. The pair is deemed to retrace from a remarkable rally in the near term future. If AUD/USD solidifies its presence in the Range Trading Zone expect it to drift lower to psychological support of 0.9000, which also coincides with the 20-day SMA. However, the pair may remain in the uptrend if this year’s high of 0.9325 is breached. Thereafter, there is a lack of concrete resistance until parity.

Comments (6)

FXDragon

October 23, 2009 at 06:11 PM ET

Nfp next Friday, Oct 30 ?!? I would like it reported on Nov 6 please:)

Thanks,

hsbc

October 23, 2009 at 07:49 PM ET

Dow fell 100 points and EUR went from 1.506 to 1.4996 and its USD returning with a vengence?? seems a bit exagerated.

druski

October 23, 2009 at 10:29 PM ET

Hi Kathy, thanks for posting while on vacation, you are a real trooper and we all appreciate you! I saw your last video where you forecasted aud/usd to reach 93, but now what do you see in the near future? Of course the moves are overextended by a technical perspective but fundamentally since China is going strong how probable is a move to 94-95? Keep buying dips or step aside? Are we finally seeing a top in equities and the bottoming of the dollar? I've been waiting for fundamentals to shift into gear but the dollar just wont budge and thanks to Boris' advice I've respected the price action lately and have been able to stay afloat. Its time to cash in, what do you think, a dollar reversal soon? Thanks and enjoy the rest of your time down under!

GAG

October 24, 2009 at 03:53 AM ET

Thanks for article. Kathy, on site FX360 or GFK there was your article about researches interrelation between recessions in the world and rate USD/JPY.
This article is very necessary to me, help me to find it.
It is in advance grateful to you.
Yours faithfully Alexander.

FXDragon

October 24, 2009 at 07:55 AM ET

Interesting. I would like to read that article too. Whats the link?

GORODN

October 24, 2009 at 12:17 PM ET

Personally, I think were overdue for a fed fund rate increase because of where the Markets have come from. This in turn will cap equities and in the long run will produce a stronger Market. I also believe its part of a normal Market cycle and when Markets don't cycle we get out of control Markets. This will also help control inflation, prevent the price of oil from skyrocketing higher and tame the price of Gold and other currencies. the s&p is slowing now and the end of the year is approaching.

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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.