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U.S. Dollar: All Eyes On Asia

Last updated 11/12/2009 5:15 PM ET (GMT -5) 3 Comments

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Kathy Lien

Director of Currency Research, GFT

THE STORIES IN THE CURRENCY MARKET

• U.S. DOLLAR: ALL EYES ON ASIA
• EUR/USD: GDP NUMBERS CRITICAL TO CURRENCY
• GBP/USD: RESILIENCE IN THE FACE OF NOTHING
• USD/CAD: TRADE AND HOUSING
• AUD/USD: EMPLOYMENT GAINS LED BY PART TIME HIRING
• NZD/USD: HOUSE PRICE AND SALES GROWTH DECLINE
• USD/JPY: DEFLATIONARY PRESSURES STILL EXIST

EXPECTATIONS FOR UPCOMING FED MEETINGS

U.S. DOLLAR: ALL EYES ON ASIA

Profit taking has been the name of the game in the currency market for the past week.  With only jobless claims on the calendar today, the U.S. dollar extended its gains against nearly of the major currencies. The biggest loser was the Canadian dollar which staged a sharp rally on Wednesday for no particular reason.  The most resilient currency was the British pound which actually managed to strengthen against the dollar.  The turn in the U.S. stock market exacerbated the rally in the greenback by triggering concerns about risk aversion.  However we want to point out that today’s move is a story about the dollar and not risk appetite because if that was the case, USD/JPY would be trading lower.  

All Eyes on Asia

With Treasury Secretary Geithner in Asia for the Asia-Pacific Economic Cooperation - or APEC – Summit, all eyes are on China.  Over the past few months, we have learned how the world can subsist without growth in America as long as China is chugging along.  Earlier this week, strong industrial production from China helped to lift higher yielding currencies which indicate that currency traders are watching Chinese reports almost as closely as economic data from some of the G7 nations.  Although Chinese revaluation has long been the elephant in the room for any meetings between the U.S. and Asian nations, now dollar weakness is also a big problem.  Therefore Geithner went to great lengths to ease these concerns by repeating the U.S.’ strong dollar policy.  He also stressed the need for “market-oriented” currencies in Asia that allow exchange rates to be in line with fundamentals.  China preempted any further criticism by adjusting their language about currency flexibility in their Q3 monetary policy report to suggest that they will “improve the yuan exchange rate formation mechanism” to follow the principles of initiative, controllability and gradualism, with reference to international capital flows and changes in major currencies.”  We would not be surprised to see an even bigger announcement from China ahead of President Obama’s first official visit next week.  China is notorious for announcing major changes prior to a U.S. Presidential visit such that when the President arrives, he has no choice but to applaud China’s move and downplay any intended criticisms.  In China, its all about face.

Finally, Some U.S. Data

We will finally see some meaningful U.S. economic data tomorrow with the trade balance and the University of Michigan Consumer Confidence survey due for release.  The U.S. dollar weakened materially in the month of September and there is a good chance that the currency’s depreciation helped to boost exports.  Manufacturing activity also accelerated materially in October which confirms our belief that trade activity improved that month.  However, we also expect a drop in the University of Michigan Consumer confidence survey.  As indicated by the chart below, 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. This suggests that we should see deterioration in the more widely watched UMich index.

Source: FX360.com

EUR/USD: GDP NUMBERS CRITICAL TO CURRENCY

The euro fell sharply against the U.S. dollar despite the ECB Monthly Bulletin’s relatively optimistic tone.  According to the report released on Thursday, the region’s recovery could be stronger than previously forecasted. Forecasters now see GDP growth in 2009 contracting by 3.9 percent instead of 4.5 percent and for the economy to grow by 1 percent instead of 0.3 percent in 2010.  These represent relatively sharp improvements that should ultimately be positive for the euro.  Inflation on the other hand will remain muted thanks in part to the strength of the currency.  Although one may think that the lack of inflation risk would reduce the central bank’s urgency to unwind monetary stimulus, the report reiterates that not all of its liquidity measures will be needed to the same extent and they will be removed in a gradual and timely manner.  There were only two pieces of Eurozone economic data released today – French current account numbers and Eurozone industrial production.  The current account deficit in France shrank from EUR4.0B to EUR3.7B while industrial production in the region as a whole grew by 0.3 percent in September.  GDP numbers are due for release tomorrow from France, Germany and the Eurozone.  Growth is expected to pick up materially in the third quarter.  Don’t forget that Q3 growth in the U.S. was the strongest since December 2007.  The third quarter marked a period of recovery for many countries around the world and if the Eurozone comes through with solid numbers, the EUR/USD could resume its uptrend.  

GBP/USD: RESILIENCE IN THE FACE OF NOTHING

The British pound was the only currency that did not decline against the U.S. dollar.  However the currency’s resilience is not necessarily a reflection of the economy’s resilience. With no major economic data released today and nothing expected for Friday, the price action of the GBP/USD suggests that many pound traders are just waiting on the sidelines.  Last week’s Commitment of Traders report from the CFTC revealed that short GBP/USD positions fell significantly.  The U.K. economic calendar heats up next week and we expect the abundance of event risks to entice some sterling traders back into the market.  In the meantime, 1.6370 is the most significant support level in the GBP/USD.  If the currency pair rises back above 1.6650, there is no major resistance until this week’s high of 1.6843.  

USD/CAD: TRADE AND HOUSING

Up until today, the Canadian dollar had been appreciating for no particular reason.  However the streak has ended despite strong housing market numbers.  In the month of September house prices in Canada rose 0.5 percent, the third consecutive month of positive growth.  Trade numbers are due for release tomorrow along with new motor vehicle sales.  Unfortunately we believe that the CAD will continue to give back its gains as the sharp drop in the IVEY PMI index and supplier deliveries suggest that trade may be weak.  The Australian and New Zealand dollars also fell against the U.S. dollar although not before the AUD/USD hit a fresh 15 month high.  For the second month in a row, Australia reported positive job growth.  However most of growth appears to be seasonal as 21.5k of the 24.5k Australians who found new work secured part time jobs; only 2.9k Australians found full time work.  The unemployment rate also rebounded to 5.8 percent from 5.7 percent after dipping last month.  There is no question that Australia is one of the best performing G20 nations and part time job growth is better than no job growth, but the employment report is not unambiguously positive.  Nonetheless we still expect the Reserve Bank to bring interest rates back above 4 percent. With the economy heating up at an accelerated rate the market is already pricing in another 25 basis point rate hike to 3.75% on December 1st. Despite an overall great outlook, a “two-speed” economy is emerging. While, the western side of the country enriched with natural resources is picking up steam, the eastern side is accelerating in its unemployment. As for New Zealand, the pace of house prices and sales growth slowed in October.  Economic activity in New Zealand continues to trail Australia.

USD/JPY: DEFLATIONARY PRESSURES STILL EXIST

Today’s rally in USD/JPY and USD/CAD indicates that the dollar is driving the currency market and not risk appetite.  Of all the Japanese Yen pairs, the only ones that did not join the sell-off in equities were USD/JPY and GBP/JPY.  However even though the others ended the day in negative territory, the losses were nominal.   The primary release from Japan last night was the Domestic CGPI index which measures inflationary pressures.  Unfortunately prices fell by 0.7 percent, which suggests that deflationary pressures still exist.  Government officials seem to be optimistic on the issue, Bank of Japan Deputy Governor Hirohide Yamagushi commented last week that falling prices will not hamper the economic recovery. His theory would be put to a test early next week, when 3rd Quarter GDP will be released.  This evening, industrial production and consumer confidence are due for release.  Given the recovery in China, if the Japanese IP numbers were to be revised, the odds favor an upward revision over a downward one.With a worse than expected Eco Watchers survey, overall consumer confidence could also decline.  

USD/CAD: Currency in Play for Next 24 Hours

USD/CAD will be the currency in play for the next 24 hours. Tomorrow, Canadian International Merchandise Trade and U.S. Trade Balance are due for release at 13:30GMT or 8:30AM EST. Shortly after, the University of Michigan Sentiment will be released at 15:00GMT or 10:00AM EST. USD/CAD seems to be reluctant to drift lower, remaining in the Range Trading Zone of the Bollinger Bands. Resistance for the pair hovers at 50-day SMA of 1.0650. The downward trend may once again ignite if the pair drops below support of 1st Standard Deviation at 1.0445. With undecided direction for the time being, the probability is equal for either of the levels to be tested.     

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Comments (3)

Stephan Smith

November 12, 2009 at 06:56 PM ET

I can't wait until France releases those numbers. I think Kathy is right...if those numbers are strong, it could push the EUR/USD back into an uptrend.

FXDragon

November 13, 2009 at 02:27 AM ET

Calm down, the uptrend is not until next week technically:) Anyway

Kathy,
If us supports strong dollar, why would they want strong yuan? Isnt that contradictory exchange wise?

Thanks,

Also, i think usdjpy rises occasionally on risk appetite, not only on dollar strength.
Regards,

klien

November 13, 2009 at 08:56 AM ET

Aha! Good question indeed. That is the conundrum and why what they REALLY want is a weak dollar

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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.