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U.S. Dollar: Global Manufacturing Boom

Last updated 11/2/2009 4:46 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: GLOBAL MANUFACTURING BOOM
• EUR/USD: MANUFACTURING GIVES JOLT TO EURO
• GBP/USD: PMI UNABLE TO KEEP POUND ELEVATED
• AUD/USD: RBA FACES DIFFICULT DECISION
• USD/CAD: CRUDE HIGHER BY 1.4%
• NZD/USD: GOLD SOARS 1.8%
• USD/JPY: EMPLOYMENT TROUBLES REAPPEAR

EXPECTATIONS FOR UPCOMING FED MEETINGS

U.S. DOLLAR: GLOBAL MANUFACTURING BOOM

An erratic day of trading results in generally widespread dollar weakness after a barrage of world-wide manufacturing reports indicated that the sector will continue to aid the recovery charge. Right out of the gates, the dollar was a big loser, with a more than 100 pip move lower against the euro. However, the rallies in both currencies and stock were faded when the Associate Director of the Fed’s regulatory arm called the financial system “far from robust”. What was bad timing on the Fed’s part reversed much of the risk rally that was seen in early trading. However, a late day rally managed to revive some of the earlier gains. Even though most currencies are off their highs, the big mover of the day was USD/CAD which shed 0.61 percent. Furthermore, the pound, which was one of the only majors not to make some gains, fell by a third of a percent. The S&P 500 closed up 0.64 percent, after reaching highs of 1.5 percent.

Big Departure from Last Week’s Woes

Today’s string of data offered a sharp contrast with the sheer amount of disappointed that we were served on Friday. The tables have at least temporarily turned, as all of today’s indicators pointed toward improved activity. The most well received surprise was the surge in Manufacturing ISM to 55.7, which has managed to stay above the 50 expansion line for the last three months. The magnitude of the three year high in the ISM report was arguably eclipsed by the employment component which saw its first surge above 50 in a year. Since we often use the employment component as a leading indicator for the Non-Farm Payrolls report, the improvement is very significant. However, we will still need to see the ISM Non-Manufacturing report justify the argument for a stronger employment report for Friday. It seems that at least in the short-run, the continued performance in manufacturing may be able to sustain the recovery until the consumers start to come around. The only question is how long that might take.  Another good sign was found in Pending Home Sales. With the utter collapse in New Home Sales from last week, it is very surprising to see pending sales put economic estimates to shame. The report showed a rise of 6.1 percent, versus expectations that the index would be unchanged. However, with rebates to first-time home buyers expiring by month-end, we still have to assume that the improvement was the caused by the last attempts of potential buyers to take advantage before time runs out. The final report released today was Construction Spending which shows its largest rise in a year thanks to some renewed homebuilding projects.

Calm before the Storm

Tomorrow’s schedule will represent the calm before the storm as it includes little to get markets moving. However, Wednesday’s schedule will not only present the ISM Non-Manufacturing Index but the Fed’s rate decision. The ISM report is critical for supporting expectations for a significant improvement in employment for Friday’s report. Today’s release of better Manufacturing ISM is a step in the right direction, but no indicator for jobs is more significant than the employment component of Services ISM. Wednesday’s Challenger Job Cuts and ADP Employment will also give a clearer idea of where jobs are headed. The Fed, on the other hand, has reached an impasse where it has ended treasury purchases and must now decide what there next step will be in terminating the unconventional initiative for good. This process is unlikely to take effect anytime soon, but it will certainly be promising if the Fed holds extended deliberations on the issue. The FOMC is faced with an overall improvement in the economic climate, driven primarily by the huge GDP report and a slight improvement in annualized consumer prices. However, optimism has been hampered somewhat by key health of the consumer indicators like Consumer Confidence and Personal Spending.

EUR/USD: MANUFACTURING GIVES JOLT TO EURO

The Euro-zone adds to the manufacturing rebound that has refueled the recovery trade and helped traders forget about last week’s woes. However, even though the euro reacted favorably to the news, it has retraced about half of its early morning gains. The region’s manufacturing Purchasing Managers’ indices managed to come in-line with last week’s estimates but still managed to reaffirm the extent of what seems to be a manufacturing recovery. Euro-zone’s PMI breached into expansionary bounds for the first time in about a year and a half. Markit Economics, the organization that puts together the report, hailed the performance as indicating that the “longest and deepest downturn since PMI data were first collected”, has ended. The report was particularly strong in France, which saw its industrial sector post the best improvement in almost a decade. Furthermore, German New Orders helped confirm underlying strength by surging to the most since the middle of 2007. While markets rejoice, it’s important to realize that we have yet to receive one big half of the economic puzzle. Services PMI is still needed to verify today’s good news, and will be released on Wednesday. Services have added weight because its performance should give an added indication of the health of the consumer. Otherwise, tomorrow will be a very quiet day for European data.

GBP/USD: PMI UNABLE TO KEEP POUND ELEVATED

The pound suffers after posting one of the most superb manufacturing reports from across the globe. GBP/USD stuttered today, removing earlier gains after competing forces helped revive economic skepticism. However, the thing that is really hurting the pound is the uncertainty surrounding the BoE’s rate decision expected for later this week. Manufacturing PMI showed the best performance in about two years. In addition, the underlying components all improved. Markit economics indicated that growth of outputs increased to 23-month high while new orders hit a 69-month high. Today’s stellar release does manage to contradict a disappointing growth report that was released about a week ago, adding to the confusion of where the BoE is prepared to take asset purchases. Nevertheless, expectations are still pointing for an additional £50 billion to be tacked on to the quantitative easing initiative in an effort to head off a continued recession even with the risk of handing markets too much stimulus. Hometrack also released a report today that confirmed the latest indications that Britain’s house prices were escalating, rising for the third straight month. However, there is the risk that as bargains become harder to come by, house prices will fail to continue their sustained ascent. The only report that is expected to be released tomorrow is Construction PMI.

AUD/USD: RBA FACES DIFFICULT DECISION

All commodity currencies were pushed off of the day’s highs but still managed to finish unanimously stronger. The loonie was the best performer of the bunch and made a 0.61 percent advance against the dollar. Out of all the countries that reported manufacturing numbers today, Australia’s were arguably the most disappointing. The country reported that AiG Manufacturing had slipped slightly from 52 to 51.7, which represents the third straight month of expansion. Nevertheless, considering some of the very promising reports released elsewhere, Australian PMI served as an additional piece of evidence that suggest that the RBA will be conservative in any rate hikes that come tomorrow. The country also reported their quarterly House Price Index that showed that prices accelerated beyond expectations at 4.2%. The much anticipated RBA rate decision is on its way for tomorrow morning and stands to be the biggest event risk for the next 24 hours. Even though another hike is widely expected, the last month of economic data has proved to eat away at some of the aussie advantage. The big blow was the Consumer Price Index which increased at the slowest rate in about a decade, a trend that was mimicked by Producer Prices. That, combined with the Leading Index also taking a hit, creates a very unlikely scenario that the RBA will risk making a more substantial move. Furthermore, the benefit to the aussie is limited because the rate hike potential has all but been factored in already. Canadian and New Zealand data has been hard to come by so far, with only NZD ANZ Commodity Prices expected for tomorrow.

USD/JPY: EMPLOYMENT TROUBLES REAPPEAR

USD/JPY receives a minor jolt even as some stock markets reverse course off of earlier highs. Japanese stocks definitely have not helped the growing skittishness experienced across world markets, and plunged by the most in a month. Japanese Labor Cash Earnings came in at -1.6% today, marking the sixteenth straight month of declines. Even though the figure had improved mildly off of last month, it manages to expose difficulties in employment, which ironically follow a very upbeat unemployment report for September. The pattern that has emerged is that even though firms are hiring, company-wide cost cuts, enacted in order to stem problems arising from the strong yen, have deeply cut into wages. The news becomes even more concerning when considering that overtime hours actually rose 4.1%, indicating that employees must work longer to offset the declines in pay. One good piece of news for Japan happens to be rooted in the latest release of manufacturing data from China. Chinese PMI actually expanded by the most in a year and a half. Any signs that China is improving bodes especially well for Asian countries. Therefore, Japan might be a beneficiary of continued purchases of machinery for infrastructure projects. Data will be light in Japan for the next couple of days.

AUD/USD: Currency in Play for Next 24 Hours

AUD/USD will be the currency pair in play for tomorrow. The RBA is set to announce its much anticipated interest rate decision on Monday 10:30 pm ET or Tuesday 3:30GMT. The US will be providing Factory Orders at 10:00 am ET or 15:00 GMT as well as Domestic and Total Vehicle Sales.

AUD/USD manages to maintain price action in the Bollinger band range trading zone, but earlier rallies were unable to sustain themselves. Today’s high has established a pretty significant resistance level at 0.9122. The level happens to coincide precisely with the 20-day moving average. On the way down, we are looking at 0.8900, which is a psychological level and was very close to today’s low. If the RBA does anything unexpected tomorrow, we could see these levels being easily tested. However, a hike of 25bp is probably already priced in to markets.

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Comments (1)

FXDragon

November 03, 2009 at 02:06 AM ET

Hello,
If fed decided to start terminating the unconventional measures, would that be eurusd up or down and also why? I would greatly appreciate if you could answer before fomc meeting please.

Sincerely,

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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.