U.S. Dollar: One Wild Ride!

Last updated 10/30/2009 5:06 PM EST (GMT -5) 2 Comments

Kathy Lien

Director of Currency Research, GFT

THE STORIES IN THE CURRENCY MARKET

• U.S. DOLLAR: ONE WILD RIDE!
• EUR/USD: RETAIL SALES AND UNEMPLOYMENT ADD TO EURO’S PLIGHT
• GBP/USD: GOOD DATA PROVIDES NO DEFENSE TO POUND’S ASSAULT
• USD/CAD: GDP DROPS UNEXPECTEDLY
• AUD/USD: BANK LENDING DROPS FIRST TIME IN NINE MONTHS
• NZD/USD: OIL PLUNGES BY 3.5%
• USD/JPY: BOJ INITIATES A GRADUAL PULLOUT FROM CREDIT MARKETS

EXPECTATIONS FOR UPCOMING FED MEETINGS

U.S. DOLLAR: ONE WILD RIDE!

Tremendous volatility is the easiest way to sum up the events that have taken place in the last 24 hours. With the VIX accelerating by the most in a year, fear has definitely taken over in the markets. It is rare to see almost all major currency pairs slipping by more than 100 pips against the dollar, that’s to say except for USD/JPY which was driven into the ground by 1.6%. The worst performer has been the kiwi which lost more than 2.0% against the dollar and 3.75% against the yen in today’s trading alone. Stocks have also reached a number of milestones: The Dow has fallen the most since April, gains in the month of October have been completely reversed, and the S&P has seen its first monthly decline since April. Things have definitely taken a different tone, but the ultimate direction that the market decides to pursue heavily depends on some key events for next week.

Clearly Not a Consumer Led Recovery

Yesterday’s surprising GDP report may have indicated that a more substantial recovery is underway, but a series of economic indicators from today showed that consumers will not be leading the rise. The idea that a consumer led recovery may not be the case this time around is very troubling because it is unclear if there is any another sector that would be able to recharge growth like the consumers have in the past. Personal Spending was today’s first sign of concern, dropping for the first time in five months by 0.5%. To add insult to injury, wages and salaries declined and the savings rate rose, adding to the indication that consumers have their wallets sealed tight. Likewise, spending on durable goods took a nosedive by 7.2%, giving added evidence to the theory that government assistance has been the main driver that turned up spending in the third quarter. Ironically, another sign that trouble is ahead was produced by a report that blew away expectations. Chicago Purchasing Managers’ reported a significant rise to the highest level in more than a year. However, the optimism that the headline number exuded was quickly forgotten because the employment component actually fell last month. As a harbinger for next week’s employment report, the PMI wound up reinforcing the idea that continued job losses will substantially curtail expenditures now that some forms of government support have been eliminated. The preceding factors, accompanied by substantial market swings and volatility, have already started to weight down confidence. The University of Michigan’s Consumer Sentiment Index fell off of yearly highs to reach 70.6. It seems that the market has a right to be worried that growth is composed of artificial factors rather than a dynamic rebirth of activity. That is not to say that we are not on the road to recovery, it’s just that there may be a few extra bumps along the way than many expected.

One Big Week Ahead

If some of the biggest reports that the world has to offer excites you, then you will not be disappointed next week. The U.S. alone has a packed schedule that could include some of the most market moving factors for the coming month. To start off, on Monday we will receive the ISM Manufacturing report which is expected to make further progress into the +50 expansionary levels. On Wednesday, the FOMC will provide the markets with some clarifications on current initiatives. Now that the deadline for Treasury purchases has approached, the Fed will have to determine what their next step will be in the Quantitative easing unwinding process. Wednesday will also produce the ISM Non-Manufacturing index which will have grave implications for Friday’s Non-Farm payrolls report. Now that the market has reached an inflection point where uncertainty has replaced confidence, the employment report will be key in providing markets direction for the coming month. That is just the schedule for the US. When accounting for the fact that the RBA, BoE, and ECB will all be announcing rates, it becomes clear how pivotal next week will be in ironing out some loose ends of the current economic landscape.

EUR/USD: RETAIL SALES AND UNEMPLOYMENT ADD TO EURO’S PLIGHT

EUR/USD makes a rapid turn, falling enough to negate most of yesterday’s gains. The world-wide stock market selloff, including the sharpest decline in European stocks in four months, has led to renewed interest in the safety of the dollar at the expense of the euro. However, it is not like the Euro-zone has had no hand in sinking their currency. For the most part, several high profile economic indicators foreshadowed troubles ahead for the sixteen country region. The first disappointment was that German Retail Sales fell for the second time in a row, adding to the realization that the recovery will not be assisted by the consumer. Even though German government initiatives have focused on keeping people at work, employers were forced to cut working hours in order to prevent such layoffs. The result is obviously a cut in income, and likewise reduced spending. To add on to consumer difficulties across the Euro-zone, the unemployment rate rose to 9.7% which is the highest rate on record. Since last September, the report indicated that a total of 3.2 million jobs have been lost in spite of government support. An estimate on Consumer Prices showed a slight uptick to -0.1% from -0.3%, hardly the rise that would signal increased interest by the ECB. Speaking of the ECB, the central bank has become a lot more vocal about their distaste over the euro’s persistent strength. Comments from the ECB’s Christian Noyer have surfaced and indicated that “problems are stemming from the weakening of the dollar and the pound.” However, it is still unclear what the central bank will be willing to do to prevent a continued rise. Next week’s big event will be the ECB’s rate decision which is scheduled for Thursday.

GBP/USD: GOOD DATA PROVIDES NO DEFENSE TO POUND’S ASSAULT

Like most other currencies, excluding the dollar and yen, the pound was forced to anguish in the revived environment of risk aversion. The notion that economic growth has been overstated in recent months has sent Britain’s stock markets spiraling, facing their worst week in six months. Even though it would be hard to tell by looking at price action alone, today’s set of economic releases pointed toward a slightly more optimistic outlook for the troubled economy. Nationwide’s House Price Index posted its first yearly advance in more than a year and a half. Furthermore, the report showed that prices have been consistently rising for the past six months. Nationwide noted that historically low interest rates have mitigated some of the effects of a disastrous employment market. However, it is questionable how long this trend could be sustained without a rebound in the job market. GFK Consumer Confidence was also reported today and showed a slight advance from -16 to -13, its highest level in ten months. Former BoE policy maker Charles Goodhart said in an interview that he believes “quantitative easing will be reduced in scale.” We have been subjected to a whirlwind of comments lately, too much of which have contradicted each other to provide a reliable explanation of what the BoE plans to do. This brings us to the bank’s meeting on Thursday which may actually render a discernible change to the bank’s quantitative easing policies. Otherwise, we will have Manufacturing PMI and Industrial Production to keep things busy for next week.

USD/CAD: GDP DROPS UNEXPECTEDLY

Yesterday’s minor rally in the commodity dollars seems like nothing more than a fluke, as the greenback continued to rally against the Australian, New Zealand, and Canadian Dollars. The Canadian economy unexpectedly shrank in August by 0.1%, suggesting that recovery remains in a “fragile” stage. Finance Minister Jim Flaherty cautioned that economic stimulus packages were crucial to the recovery’s success and need to be continued. However, Flaherty noted that “we are seeing some stability of late, which is to be desired, and so we're all comfortable.” A rapid rise in the Canadian Dollar undoubtedly dampened a drastic turnaround in growth. However, the loonies’ recent selloff does offer some solace to policy makers. Meanwhile, Australia’s Bank Lending unexpectedly dropped for the first time in nine month during September. Weaker demand for business credit enhanced declines as entrepreneurs and companies temporarily reduced their borrowing. Next week, the Reserve Bank of Australia is expected to increase their target rate by additional 25 basis points even though recent inflation reports have been disappointing. Building Permits in New Zealand rose for the fifth time in the last half-year which is pointing to a recovery in the housing market. The country has their employment report on tap for the middle of next week.

USD/JPY: BOJ INITIATES A GRADUAL PULLOUT FROM CREDIT MARKETS

The Bank of Japan initiated a gradual retreat from unconventional measures, triggering a massive rally in the Yen against all other major counterparts. The central bank plans to let its temporary program to acquire corporate bonds and commercial paper to expire at the end of December as initially planned. The overnight interest rates remained intact at 10 basis points. Economic signs have started to point toward stabilization as the economy emerges from its deepest recession in more than half a century. The Jobless Rate unexpectedly fell to 5.3% from 5.6% in September and job-to-application ratio rose for the first time in more than two years. Meanwhile, Household Spending continued its positive trajectory rising for second consecutive month. An increase in domestic demand has been a welcome sign for Japan’s newly elected government which continues its push for a more consumer driven economy. However it’s not all sunshine and butterflies for current stage of economic recovery. The Bank of Japan forecasted deflation to persist into 2011 in its half-year economic outlook report. Core CPI dropped to -2.3% in September, remaining in a negative territory for seventh month in a row. On another note, Annualized Housing Starts came in line with predictions as construction sector is bottoming out.

GBP/USD: Currency in Play for Next 24 Hours

GBP/USD will be the currency in play for the upcoming Monday. U.K. Hometrack Housing Survey will be released on Sunday at 7:01 pm ET or 00:01 GMT, followed by the release of Manufacturing PMI at 4:30 am ET or 9:00 GMT. Thereafter, U.S. will release ISM Manufacturing and Pending Home Sales at 10:00 am ET or 15:00 GMT.

After a large decline GBP/USD managed to drop into the Range Trading Zone established through the Bollinger Bands. The pair must break a swing high resistance at 1.6700 in order to continue its uptrend. However, the tide might change if GBP/USD drops below 23.6% retracement of March’s low and this year high at 1.6250, which also coincides with 50-day SMA.

Comments (2)

bertobull

October 30, 2009 at 11:33 PM ET

Great analysis as usual Kathy. I really do think the GBP/USD pair is due for a rise - change of trend, mostly based on the general environment of the British economy. Their largest trading partner is the EU...and if that zone is seeing better days while additionally their currency is strenthening against the Pound...then I think it will be a short time before the there's some positive news out of England and the Pound turnaround. Ofcourse nothing is certain...and I'll be using stops, just in case.

raulsm

October 31, 2009 at 12:05 PM ET

Excellent Kathy. How much of this was due to the huge Treasury sale this week, how much are the markets manipulated due to this, or is it simply an effect?

It is quite interesting to note as well that the GBP is perfectly uncorrelated to the Canadian dollar, with a score of 0.0, which I had never seen before (this for September and October 2009, full table of all currency ETF correlations, plus gold at http://shockedinvestor.blogspot.com/2009/10/correlations-among-all-currency-etfs.html

In fact, the GBP is the most uncorrelated of all currencies (does this indicating chaos over there)?

And gold is most uncorrelated with the Yuan. As usual, the Aussie dollar is most correlated with the New Zealand and Brazilian Real.

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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.