Dollar Bears Ignore Bernanke, Takes Buck to 15 Month Lows

Last updated 11/16/2009 4:46 PM ET (GMT -5) 3 Comments

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Kathy Lien

Director of Currency Research, GFT

THE STORIES IN THE CURRENCY MARKET

• DOLLAR BEARS IGNORE BERNANKE, TAKES BUCK TO 15 MONTH LOWS
• EUR/USD: STILL BATTLING WITH 1.50
• GBP/USD: HITS 3 MONTH HIGH
• NZD/USD: WEAK ECONOMIC DATA TO KEEP RBNZ ON HOLD TILL MID 2010
• AUD/USD: HITS FRESH 15 MONTH HIGHS, GOLD AT RECORD HIGH
• USD/CAD: STRONG RISE IN MANUFACTURING SHIPMENTS
• USD/JPY: GROWTH PROVES JAPAN’s RESILIENCE

EXPECTATIONS FOR UPCOMING FED MEETINGS

DOLLAR BEARS IGNORE BERNANKE, TAKES BUCK TO 15 MONTH LOWS

Leave it to Federal Reserve Chairman Ben Bernanke to give currency traders some excitement. For most of the European trading session and into the early U.S. session the dollar quietly grinded lower against the major currencies. Weaker economic data failed to trigger any major move in the dollar but when Bernanke said the Fed will use policy to “ensure that the dollar is strong,” the greenback recovered dramatically. However the gains were short lived once traders realized that Bernanke’s pessimistic outlook for the economy was inconsistent with a strong currency. The selling exacerbated when Federal Reserve President Fisher spoke and ultimately drove the dollar index to 15 month lows. As a consequence, gold prices hit record highs and oil prices rose more than 3 percent. U.S. stocks also hovered at 13 month highs for most of trading session. The dollar dropped the most against the British pound and the least against the Australian dollar which suggests that the GBP/USD may be making up for lost time.

Bernanke and Fisher’s Comments: Dissecting What Really Matters

In our instant insight to Bernanke’s comments, we talked about how traders should consider his words to represent verbal intervention in the dollar. However verbal intervention with no major threat of physical intervention or rate hikes really means nothing. As our good friend Andy Busch of Bank of Montreal keenly points out, Bernanke’s “comments on the dollar are 2 sentences out of a 6 page paper and occur near the end.” Coming on the heels of President Obama’s trip to Asia, this is clearly a move to appease Asian trade partners. Foreign exchange policy is usually the Treasury Secretary’s domain and we are sure that Bernanke is aware of that. Bernanke was also very pessimistic on the economy which reduces the likelihood that he would actually tighten monetary policy (which is all that he has control over) and risk the recovery just to prevent the dollar from sliding further, which would have been supportive for the U.S. economy. Based upon Bernanke's tone, the central bank has more reasons to keep monetary stimulus in place for as long as they can. Therefore from an interest rate perspective, the dollar carry trade should remain in place. Yet, the U.S. government is trying to trigger some two-way action in the dollar by suggesting that they could take measures to stem the currency's decline and unfortunately traders are too smart to be scared by empty threats. Their skepticism was further confirmed by the comments from Fed President Fisher who called the dollar depreciation “gradual” and pointed out that the dollar is returning to a depreciating path. He also said the Fed was “fully aware” of carry trade risks that come from low interest rates even though a goal of the Fed is to “maintain the dollar’s purchasing power.” Ultimately there was nothing new in Bernanke’s comments for dollar bears to feel threatened.

Economic Data: Review and Preview

This morning’s economic data helps us to understand why members of the Federal Reserve are so pessimistic. Both Bernanke and Fisher expect the unemployment rate to stay “painfully high” for a while and for the recovery to be extraordinarily slow. If anything, Bernanke believes that future setbacks are possible. Retail sales increased 1.4 percent in the month of October, but excluding autos, sales grew by only 0.2 percent, half the pace of the previous month. Car purchases single handedly drove up spending. The September data was also revised down materially (from -1.5 to -2.3 percent for advance retail sales) and discounts the optimism in the headline number. Meanwhile the Empire State Manufacturing Survey fell short of expectations with the index falling from its 5 year high of 34.57 to 23.51. As one of the first manufacturing sector releases for November, it paints an ugly picture. The only silver lining came from the outlook component which increased from 55.69 to 57. Looking ahead it will be another busy day for U.S. traders. Producer prices are due for release along with the Treasury International Capital flow report and industrial production. China’s top banking regulator has criticized the U.S.’ financial management and the TIC will show whether their concerns have affected into their reserve management.

EUR/USD: STILL BATTLING WITH 1.50

The 1.50 level in the EUR/USD still continues to be a major resistance point for the currency pair. For the ninth time over the past 30 trading days, the currency has tested but failed to close above the 1.50 level. Some traders may look at the repeated tests and think that it will just be a matter of time before the barrier is broken while others may look at it as a sign that a top is in progress. We believe that the dollar is headed lower over the long term and 1.50 will only be a temporary barrier. The more times that the EUR/USD unsuccessfully tests the 1.50 level, the more significant the breakout could be when it ultimately happens. There is a tremendous amount of economic data this week to set off the move. Eurozone consumer price growth accelerated in October and that may be part of the reason why ECB officials are talking about exit strategies. Although a rate hike is not on the table right now, the ECB is gearing up to unwind their easy monetary policies. ECB member Weber said point blank this morning that the central bank “must start preparing to exit from emergency measures” because there is risk of more turmoil if they miss the “right time to exit.” Quaden agrees that a too-late exit would sow seeds of inflation risk. The central bank is sending out a cohesive message that currency traders need to pay attention to. The Eurozone trade balance is due for release tomorrow and given the rise in the German and French numbers, we expect an improvement in the region as a whole, which could fuel another test of the 1.50 level.

GBP/USD: HITS 3 MONTH HIGH

It is a big week for the British pound which may be one of the reasons why the currency hit a 3 month high against the U.S. dollar and 2 month low against the euro. The only piece of U.K. economic data released overnight was the Rightmove House Price index which reported a drop in house prices compared to the previous month and a rise compared to the same month last year. More importantly though were the comments from Bank of England member Sentance who basically ruled out any FX intervention by saying that the BoE does not set pound rate, markets do. This clearly implies that the central bank is perfectly comfortable with weakness in the pound. Sentance even credited the nation’s recovery to the competitive level of the pound versus the euro. He was relatively optimistic about the economy and believes that the Q3 drop in GDP growth was a shock and may be unreliable. There are signs that financial conditions and consumer spending have improved. Even though there is another monetary policy decision in December, Sentence said the next major QE decision will be in February. If this is true, then the minutes from this month’s meeting could help the pound by revealing that the last bout of QE from the BoE could be the last. However before that report is released, consumer prices are scheduled for Tuesday. A strong rise in producer prices suggests that consumer prices may have picked up as well.

NZD/USD: WEAK ECONOMIC DATA TO KEEP RBNZ ON HOLD TILL MID 2010

All commodity currencies are making a move higher today, with the Australian dollar reaching levels not seen in fifteen months. Alongside these currencies has been a significant commodity rally which saw gold soar to a new record and crude higher by nearly 4.0%. However, today’s risk taking enthusiasm has masked some pretty disappointing figures coming from New Zealand. Producer Prices from the country actually fell substantially by -1.1% from 0.0% reported in the second quarter. Price pressures are certainly not picking up, which can only mean that the RBNZ will be unable to follow in the footsteps of a hawkish RBA. To make things worse, the service sector PMI index fell from 53.2 to 49.9, which indicates that the industry has fallen back into contractionary mode. Combined with persistent strength in the kiwi, and falling price pressure as indicated by today’s report, the RBNZ will obviously have their hands tied in coming decisions. Prime Minister Key confirmed that interest rates will are unlikely to rise before mid 2010. Data out of Canada was a bit better with Manufacturing Shipments rising 1.4%, far above last month’s dismal -2.1%. This report backs up last week’s narrowing trade deficit that exports have picked up in spite of the slow recovery in the U.S.. However, even though New Orders have risen to a 13 month high, auto sales accounted for the entire improvement. In fact, taking out the impact of automotive-related sales, the manufacturing number actually fell. Perhaps the biggest event risk for tonight will be Australia’s Monetary Policy Minutes. At their last meeting, the RBA announced that they would gradually lessen monetary stimulus. However, their conclusion is very vague and will need some clearing up in tonight’s report.

USD/JPY: GROWTH PROVES JAPAN’s RESILIENCE

The dollar fell sharply against the yen, reaching the lowest in about a month. However, this example of yen strength was isolated, as most other crosses remained little changed as the effects of increased risk appetite offset some pretty impressive Japanese economic data. Japanese Gross Domestic Product blew away expectations, recording a 4.8% in the third quarter. This is not the quickest rate of growth seen in over two years and accounts for the second straight quarter of improvement. The report showed that capital spending actually rose for the first time in six quarters, which indicates that companies may start feeling secure enough to start hiring. In addition, consumer spending rose 0.7% while domestic demand itself single-handedly made up for half of third quarter growth. It seems that the new Democratic Party of Japan’s initiatives are already being realized, as the new administration plans to engineer a shift from an export to a consumer driven economy. However, the one disappointing component showed that the domestic demand deflator fell at the fastest rate since 1958. Even though many industries are showing improvement, the downward price pressure will continue to be one of the weak points that Japanese policy makers will have to cope with. On the way for the next 24 hours will be Housing Loans and the Tertiary Industry Index.

GBP/USD: Currency in Play for Next 24 Hours

GBP/USD will be the currency pair in play for tomorrow. The UK is set to release the Consumer Price Index at 4:30 am ET or 9:30 GMT. The U.S. will be producing Producer Prices at 8:30 am ET or 13:30 GMT and Industrial Production at 9:15 am ET or 14:15 GMT.

GBP/USD

Comments (3)

Stephan Smith

November 16, 2009 at 05:49 PM ET

I don't know what the $1.50 EUR/USD mark is? Is it going to be just another barrier that will be broken or is it the top where a major, major reversal occurs.

If the Fed doesn't nothing but talk, the $1.50 mark will be just another barrier to be broken. But if the Fed takes actual action, then it will be a major reversal. I may sell the USD soon because I don't believe the FED won't do anything, anytime soon.

FD

November 17, 2009 at 08:28 AM ET

Current USD rally, turning point or flash in the pan on route to GBD/USD 1.70?
Thoughts anyone

BW

November 19, 2009 at 11:41 AM ET

Smith I agree, I think there is enough opposition to a weak dollar that will pressure the FED to do "something" just to make the "others" happy. I guess that is politics.
What that "something" is, we probably really have no way of knowing. I watched a video where Kathy suggested that FX traders should get out at a point and ask questions later. I like your strategy and I am also going to take her advice as we hover near the 1.50 mark. On the other side of that, how violent will the push through 1.50 be if it does break out? I guess we keep an eye on the momentum as we react to daily news at this point. By the way this is my first post on the site, I joined last night and i LOVE the amount of detail they have provided for us. Thank you very much =)
Oh and this is just my opinion. I have only been trading forex for 5 months now. Don't blast me to hard.

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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.