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U.S. Dollar: Risk Adverse Mentality

Last updated 10/28/2009 4:53 PM ET (GMT -5) 2 Comments

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Kathy Lien

Director of Currency Research, GFT

THE STORIES IN THE CURRENCY MARKET

• U.S. DOLLAR: RISK ADVERSE MENTALITY
• EUR/USD: SELLOFF INTENSIFIES
• GBP/USD: UNEXPECTED RESILIENCE
• NZD/USD: RBNZ KEEPS IT STEADY
• AUD/USD: 50bp RBA HIKE LOOKS UNLIKELY
• USD/CAD: CARNEY REITERATES DISAPPROVAL IN CAD
• USD/JPY: BIG WINNER ON WAVE OF RISK AVERSION

EXPECTATIONS FOR UPCOMING FED MEETINGS

U.S. DOLLAR: RISK ADVERSE MENTALITY

Another day of trading brought many markets to their knees, with the dollar and yen emerging as the true victors. The risk adverse patterns have clearly been brought back in to play. The most glaring example of this would have to be the large declines in the commodity currencies like NZD/USD which lost 2.6%. However, the one unexpected component of today’s trading was that the pound managed to resist the downward pressure. Risk tolerance was obliterated on weak New Home Sales and a continued selloff in stocks. The S&P fell for the fourth consecutive day, a decline that has almost completely erased the gains made earlier this month.

Housing Trouble

The report on New Home Sales accelerated the pace of this week’s decline in currencies like the euro and Australian dollar. The number was so far below expectations that the shock single-handedly took all the life out of the markets. Sales of new homes, which account for only 10% of the housing market, slid by 3.6% compared with a consensus that the figure would actually rise by 2.6%. To top things off, median prices fell at an accelerating rate and inventories fell to the lowest levels in more than twenty-five years as construction has come to a grinding halt. The main fear factor that this report provides is that buyers have turned away knowing that first-time buyer rebates would soon come to an end. On that note, the theory that government efforts have been the only factors supporting housing are an unwelcomed thought in any investors mind. Government uncertainty on whether the program will be extended is only adding on to market stress. Nevertheless, this one report does not spell the end of the housing market or predicts another cataclysmic drop. Considering the fact that existing home sales, which represents a much larger portion of the housing market, was much better than expectations suggests that all is not lost in the troubled industry.

Signs of renewed housing distress completely overshadowed the slight improvement in Durable Goods Orders. The figure was in-line with expectations and increased to 1.0% from -2.4%, posting its fourth improvement in the last six months. However, durables were unable to excite markets because ex-defense capital goods, an important component in GDP calculations, actually shrunk by 0.2%.

Will GDP be as good as Expected?         

The big event for tomorrow will be the advance report on third quarter Gross Domestic Product. The exceptional improvement in our economic conditions, largely led by significant stock rallies, has made a very probable case for the quarter marking the end of one of the most devastating recessions since the Great Depression. However, current expectations of a 3.2% growth rate seem a little too optimistic. Even though it is very likely the economy will show growth, there are too many loose ends like employment and today’s reports on housing and durable goods for the economy to expand at such a fast pace. Coming in short on the GDP front may be a big disappointer for the already depressed markets. We will also be met with Core Personal Consumption Expenditures, which is the Federal Reserve’s preferred inflationary gage. As always, it will be important to keep an eye on jobless claims for any clues as to next week’s employment report.

EUR/USD: SELLOFF INTENSIFIES

A more significant correction in EUR/USD seems to be forming with today’s drop marking the fourth straight day of declines. The 1.50 level has proven its strength so far, but the pair still has room to fall before we can deem the uptrend invalidated. Once again, the euro’s retreat is coming on little economic news from the region. The only thing that we did receive today was German Consumer Prices which saw a marginal uptick thanks to higher energy prices. Annualized consumer prices came in unchanged in the month of October, versus a decline of 0.3% in September. Even though Germany’s report relaxes some of the fears surrounding the possibility of a more substantial dip into deflationary territory, it should not do much in terms of convincing the ECB that they may have to revise their current monetary course. It is really equity flows that are running the euro into the ground so far. Aside from the declines American stocks, European indices have been struggling as well. Both German and French markets are now looking at their fifth consecutive day of declines thanks to the widespread opinion that stocks have become unreasonably overvalued. Tomorrow will be much more important in terms of the economic schedule which is highlighted by German Unemployment and Euro-zone Consumer Confidence.

GBP/USD: UNEXPECTED RESILIENCE

Oddly enough, the pound comes away unscathed in a market that is clearly willing to decimate any currency in the name of risk aversion. The pound is actually higher on the day, and was able to reverse significant losses that were incurred in early trading. One explanation for the surprising resilience could be related to the unabashed weakness in the euro. EUR/GBP has now slipped for the last three consecutive trading days, giving sterling enough of a lift to offset the selling frenzy. With the Bank of England’s next meeting scheduled for later next week, it is possible that the pound is holding out until a more definitive explanation of where quantitative easing is going is explained to markets. On the other hand, stock markets definitely have not added anything to the pound’s momentum. The FTSE 100 index has not been spared from the global selloff and fell by more than 2.0% today, enough to reach a three week low. Economic data has been at a minimum, but we will receive some salvation in time for tomorrow. Thursday’s schedule includes M4 Money Supply, Net Consumer Credit, and Net Lending Secured on Dwellings. Gfk Consumer Confidence will also be released tomorrow night.

NZD/USD: RBNZ KEEPS IT STEADY

All commodity currencies are under significant pressure, with the aussie plummeting more than 2.0%. Meanwhile, the Canadian dollar has dropped to the lowest in more than three weeks against the dollar. The RBNZ unsurprisingly decided to keep rates unchanged but introduced an unexpected dovish tone. RBNZ Governor Bollard indicates that there is no urgency to take rates higher and that they will probably stay unchanged until the latter part of 2010. The bank notes that while inflation remains comfortably within their targets, the rising kiwi is starting to cut into exports. Disappointed trader’s accelerated NZD/USD losses to total 2.6%. New Zealand will be releasing their Trade Balance later tonight. Australia’s quarterly inflation report proved to be ineffective in keeping the pair elevated. Consumer Prices showed a 1.0% jump, its largest increase so far this year. However, the rise is simply not enough to fuel speculation behind the possibility that the RBA makes a full 50bp hike at their next meeting. Furthermore, on an annualized basis, prices increased at their slowest rate in about a decade. The combination of that and the dismal Producer Price index reported earlier this week, puts less urgency on the RBA’s part to cut off rising prices. Australia will be releasing their Leading Index tonight which will hopefully show that the country’s growth is on track. Canadian officials have been holding an unusual number of conferences, the latest of which reiterates the troubles stemming from the strong CAD. The BoC’s Mark Carney states in Senate Testimony that current conditions in the currency market will slow growth, resulting in rates remaining at 0.25% throughout the first quarter of 2010.

USD/JPY: BIG WINNER ON WAVE OF RISK AVERSION

USD/JPY plummets for the second day as the classic patterns of risk aversion are taking a strong hold on trading. Declines were even more substantial in pairs like AUD/JPY which suffered more than a 3.15% decline. On the economic front, reports from today indicate a broad based improvement in Japanese retailing. Retail Trade came in at -1.4%, the smallest decline in ten months. Furthermore, Large Retailers’ Sales increased to -5.6% from -6.8%. Although these numbers are not stunning, it does indicate that the economy may be able to rely on the consumer a bit more to boost growth. Since the yen seems uninterested in giving up gains, this added benefit will be crucial in keeping economic hopes alive. We will receive more insight into the health of the consumer with the Jobless Rate which is scheduled for tomorrow night. Vice Finance Minister Noda has added to the fervor of recent comments, indicating that “keeping easy monetary conditions are important in supporting Japan’s economy”. Noda believes that a change is currently not warranted, an opinion that may have an impact on the BoJ’s meeting later this week. For tonight, we are expecting Industrial Production along with Manufacturing PMI.  

EUR/USD: Currency in Play for Next 24 Hours

EUR/USD will be the currency pair in play for tomorrow. On its way from the Euro-zone include the German Unemployment at 4:55 am ET or 8:55 GMT and Consumer and Economic Confidence at 6:00 am ET or 10:00 GMT. The US, on the other hand, will be releasing Gross Domestic Product and Personal Consumption for 8:30 am ET or 12:30 GMT.

EUR/USD suffered a sharp fall today which kept the pair deeply within the Bollinger band range trading zone. The euro will encounter two major levels of support if the selloff continues to gain momentum. The first will be at the psychological level of 1.4600 followed by 1.4500, a low from earlier this month. Resistance stands at 1.4843 or the high from September 23 ^rd . If support is breached, the uptrend in EUR/USD may be invalidated in turn for a more severe correction. However, at this point, the trend is still intact.

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Comments (2)

joseph meguerdiche

October 29, 2009 at 02:57 AM ET

Dear kathy it seems your strategy for the 2 bollingers band is working.
I have 2 questions:
1-Is your chart a daily chart or hourly?
2-I use to find through the web only the classical bollinger band,how to find the second one to use for the range buy or sell and on what webside?
thanks

jtoon58

October 30, 2009 at 03:44 AM ET

Kathy. Do you see the trend is still for a strengthening EUR? I need to do a short term (1 week max) trade from $ to EUR and then back to $ sometime soon before 17 Dec, and am trying to pick the best time when the EUR is trending stronger. Thanks ;)

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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.