U.S. Dollar: 2 Extreme Cases

Last updated 11/10/2009 4:36 PM ET (GMT -5) 1 Comments

Forex Trading involves high risks, with the potential for substantial losses and is not suitable for all persons. Past performance is not necessarily indicative of future results.

Kathy Lien

Director of Currency Research, GFT

THE STORIES IN THE CURRENCY MARKET

• U.S. DOLLAR: 2 EXTREME CASES
• EUR/USD: ECB TALKS EXIT STRATEGIES
• GBP/USD: EMPLOYMENT NUMBERS AND INFLATION REPORT ON TAP
• USD/CAD: BIG GAINS DESPITE NO DATA
• AUD/USD: SHARP IMPROVEMENT IN BUSINESS CONFIDENCE
• NZD/USD: CREDIT CARD SPENDING DROPS
• USD/JPY: ECO WATCHERS SURVEY DROPS

EXPECTATIONS FOR UPCOMING FED MEETINGS

U.S. DOLLAR: 2 EXTREME CASES

Profit taking across the financial markets helped to lift the U.S. dollar against nearly all of the major currencies. The lack of market moving economic data and Veteran’s Day in the U.S. has led to very quiet trading. Stocks for example ended the U.S. trading session virtually unchanged while none of the major currency pairs saw a move in excess of 0.5 percent. Compared to the 1.5 to 2 percent moves on Monday, the drop in volatility is reflective of the consolidation in the forex market following the big events last week and the outcome of the G20 meeting. Although many instruments are hovering near significant levels such as 1.50 in the EUR/USD, 1100 in the S&P, $80 in oil and $1100 in gold, nothing has changed to alter the downtrend in the U.S. dollar. These contention levels are certainly important but given last week’s disappointing labor market report and the Federal Reserve’s plan to keep monetary stimulus in place for the foreseeable future, there is little reason for traders to pile back into U.S. dollars. Although the biggest story in the currency market today was the announcement from ratings agency Fitch that of the 4 large AAA rated countries, the U.K. is the closest to being downgraded, the British pound was not the biggest mover. Instead the Canadian dollar rose to the strongest level in 2 weeks on little news.

2 Extreme Cases for the Dollar

As the dollar continues to fall, traders may be wondering what could alter the trend in the greenback. There are only a handful of factors that could alter the outlook for the currency. We have previously mentioned that one of those factors would be cohesive concern by policymakers around the world, which we will discuss in further detail tomorrow. Aside from that, there are also 2 extreme cases that could alter the dollar’s trend. The first would be a double dip recession in the U.S. economy. The jobless rate in the U.S. has exceeded 10 percent and the fact that more companies are announcing layoffs means that unemployment may not have reached its peak. The difficult economic environment foreshadows a weak holiday shopping season that in turn could lead to more layoffs. Many retailers are banking on spending in November and December to stem their losses. The U.S. economy could handle a jobless recovery but a recovery without spending is not much of a recovery at all. The second scenario where the dollar could reverse its downtrend would be if U.S. growth accelerates beyond that of its peers. Given the current circumstances or even future circumstances, this is unlikely unless there is a sharp contraction in the Chinese economy or if the unwinding of monetary stimulus by other countries coupled with strong currencies start to take on toll on those economies.

Fed Comments and Economic Data

As we discussed in our piece this morning, the tone of the Federal Reserve is relatively downbeat. Both Fed Presidents Lockhart and Yellen expressed their concern about major losses in the commercial real estate sector. They believe that the recovery will be modest at best and according to Yellen, there may be a good chance that the U.S. economy will face a jobless recovery. Fed President Rosengren also said that now is not the point yet to tighten which confirms the overall dovishness of the FOMC. The only piece of economic data on the calendar today was the Investors Business Daily / TechnoMetrica Market Intelligence index of Economic Optimism which deteriorated in the month of November. Since the beginning of the year, the IBD index has had a greater than 85 percent correlation with the University of Michigan consumer confidence survey which suggests that we could also see weakness in the more widely watched UMich index. Federal Reserve President Fisher is scheduled to speak this evening and there are no meaningful pieces of economic data on the calendar. The U.S. equity market and currency market is open for trading tomorrow; only some of futures market will be closed.

EUR/USD: ECB TALKS EXIT STRATEGIES

The ZEW survey, which measures German investor confidence dropped materially in November as optimism in the European economy fades. Analysts and investors are still more optimistic than pessimistic but the prospect of the central bank unwinding their easy monetary policy and a strong currency is creating a cloudy outlook for the region’s economy. The expectations component of the ZEW survey fell from 56 to 51.1 but the current situation component rose from -72.2 to -65.6 reflecting the robustness of the latest trade numbers from Germany. Price pressures continue to fall as evidenced by the downward revision of Germany’s harmonized CPI numbers and the drop in wholesale prices. However that has not stopped ECB officials from talking exit strategies. Monetary policy member Paramo said not all liquidity measures will be needed in the future and the central bank will phase them out in a timely and gradual manner. Data indicates that the global slowdown is bottoming and there are signs that the slowdown in lending has also halted. However Paramo was careful to say that just because the central bank is preparing an exit strategy doesn’t mean that they are ready to implement one. Yet they appear to be much closer to doing so than the Federal Reserve which is part of the reason why the euro is hovering near its year to date highs. Looking ahead there are no Eurozone economic releases on the calendar tomorrow which means that it should be another quiet trading day for the EUR/USD.

GBP/USD: EMPLOYMENT NUMBERS AND INFLATION REPORT ON TAP

Sterling traders were unfazed by the warning from ratings agency Fitch that of the four major economies, the U.K. is the closest to being downgraded. Part of the reason why the currency has been so resilient is because Fitch downplayed their warning by saying that even though the U.K. is closest to being downgraded, it doesn’t mean that they will. In fact, Fitch said there were no plans to change the country’s AAA sovereign debt rating. The drop in the GBP/USD in the month of September also failed to help offset the trade deficit which ballooned from GBP 6.07B to GBP 7.19 billion. However other parts of the U.K. economy appear to be doing well which is another reason why the GBP/USD has managed to sustain its gains. The BRC retail sales monitor rose materially in October which suggests that consumer spending is recovering. Meanwhile the trend of house prices is also improving. Tomorrow will be a big day for the U.K. economy and the British pound. Employment numbers are due for release along with the Bank of England’s Quarterly Inflation report. The rise in the employment component of manufacturing and service sector PMI suggests that job losses may have moderated. Traders will also be watching the Quarterly Inflation Report closely for any of signs of the central bank’s plans to increase their Quantitative Easing program at their next monetary policy meeting. The U.K. is the only country with any major data due for release tomorrow which means that the British pound will be the currency in focus.

USD/CAD: BIG GAINS DESPITE NO DATA

It is not often that we see such divergent performance amongst the 3 commodity currencies. Against the greenback, the Canadian dollar extended its gains while the Australian dollar remained unchanged and the New Zealand lost value today. The Canadian dollar rose to the strongest level in 2 weeks despite the lack of economic data and the drop in oil prices. Economic conditions in Australia continue to look promising with business confidence climbing to 16 in October and Business Conditions rising to 12 from much lower levels. The positive sentiment came in the midst of improving business conditions and optimism for robust growth in 2010. Australia’s Trade Minister even stated that there are “no plans to move to any sort of regulatory environment in terms of exchange rate” as exporters are still doing well amidst the rise in the Aussie. Westpac’s Consumer Confidence is on tap later this evening. Given improving conditions and a relatively healthy job market Consumer Confidence may rise. New Zealand’s Credit Card Spending on the other hand dropped in October signaling negative pressure on Retail Sales, which is due for release later this week. Despite the proximity of these countries and the fact that Australia is New Zealand’s largest trade partner, the Kiwis have not been able to materially benefit from the recovery in Australia’s economy.

USD/JPY: ECO WATCHERS SURVEY DROPS

For the third consecutive day, USD/JPY lingered near the increasingly important 90.00 threshold as economic data printed mixed results. The trade and current account surplus both increased as government spending helped to offset declines in exports. However the improvement in the trade has not filtered down to an improvement in sentiment. The Eco Watchers survey which measures the sentiment of taxi drivers and waiters fell from 43.1 to 40.9 for current conditions and from 44.5 to 42.8 for future conditions. Meanwhile Japanese Finance Minister Hirohisa Fujii, deviated from his usual stance on higher Yen by commenting on a need for a stronger U.S. Dollar. The domestic economy has not yet been a major factor in the recovery which the newly elected government planned for. Adding to the pressures, ratings agency Fitch also warned Japan could face a possible downgrade if public debt continues to escalate. With increasing concerns of deflation, tomorrow’s Domestic CGPI will be closely monitored by investor’s and government officials.

GBP/USD: Currency in Play for Next 24 Hours

For the next 24 hours the GBP/USD will be the currency in play. The UK will release its labor market numbers at 9:30GMT or 4:30AM EST followed by the Quarterly Inflation Report at 10:30 GMT or 5:30AM ET. The US will release the Bloomberg Global Confidence figures at 12:00GMT or 7:00AM EST. The sharp rally in the GBP/USD on Monday has lifted the currency pair into the Buy Zone, which we determine using Bollinger Bands. Despite today’s sharp intraday moves, the uptrend in the GBP/USD remains intact. There is no major resistance in the currency pair until 1.70, which is a psychologically important level and this year’s high. If the GBP/USD breaks Monday high of 1.6843 and it looks likely to, there is a good chance that it could make a run for that key level. However if the GBP/USD reverses and breaks today’s low of 1.66, then the door is open for a move towards 1.63.

Comments (1)

Semaj

November 10, 2009 at 07:08 PM ET

K, does B&K buy into a rumor that the Obama admin is driving the dollar into the ground for export reasons while the fed is being dollar optimists at least short term? If so for the Obama admin there would seem to be alternate reasons other than exports since long term it seems to be a weak plan. Anything to add? Thanks.

Add Your Comment

Please login to post a comment or sign up for an FX360® account.

Loading...

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.