U.S. Dollar: More Signs of Sobering Recovery

Last updated 11/18/2009 4:23 PM ET (GMT -5) 2 Comments

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Kathy Lien

Director of Currency Research, GFT

THE STORIES IN THE CURRENCY MARKET

• U.S. DOLLAR: MORE SIGNS OF SOBERING RECOVERY
• EUR/USD: ANOTHER FAILED TEST OF 1.50
• GBP/USD: STRONGER CONSUMER SPENDING COULD LIFT POUND
• USD/CAD: CPI FINALLY TURNS POSITIVE
• AUD/USD: DATA WEIGHS ON RATE HIKE CHANCE
• NZD/USD: GOLD AND CRUDE PUSH FOR GAINS
• USD/JPY: JAPAN IS BECOMING A “CAUSE FOR CONCERN”

EXPECTATIONS FOR UPCOMING FED MEETINGS

U.S. DOLLAR: MORE SIGNS OF SOBERING RECOVERY

*In Vegas for Traders Expo - no Daily Report on Thursday

Just like the economic data released from the U.S. data this morning, the performance of the U.S. dollar has been mixed. The dollar traded higher against the British pound, Japanese Yen and most of the commodity currencies but lost value against the euro and Swiss franc.  At one point in the morning, it appeared that the EUR/USD wanted to make another run for the 1.50 level but it fell 10 pips short.  U.S. stocks ended the trading session in negative territory while gold prices hit record highs intraday.  

How Important Are Bullard’s Comments?

One of the most interesting comments that came out of today’s trading was from Federal Reserve President Bullard who suggested that the FOMC may not raise interest rates until 2012.  When these comments hit the wires, the dollar fell against all of the major currencies.  However the dollar quickly recovered after traders realized that Bullard himself did not make the comment but rather the central bank’s press staff interpreted his comment “The FOMC did not begin policy rate increases until 2.5 - 3 years after the end of each of the past two recessions" to mean that "Assuming that the most recent recession ended this past summer, and assuming that the FOMC would behave in the same way that it's behaved in the past, this could mean the FOMC would not start increasing rates until early 2012.”  Also, Bullard is a non-voting member of the FOMC which makes his opinion less important for monetary policy.  Yet it is important to realize that Bullard is typically more hawkish than his peers so these comments represent a departure from his previous ones.  He also reminded us that we should be focusing on Quantitative Easing and not Interest Rate Policy.  The takeaway is that it is too early to speculate on when the Fed will raise interest rates if they haven’t even started to unwind their Quantitative Easing Program.  The Fed is mindful of the stigma and criticism that could come with keeping rates too low for too long but at the same time, they are clearly not in a rush to unwind their unconventional monetary policies let alone raise interest rates.  We don’t believe that they will wait until 2012 to hike but they are certainly further away from doing so than the central banks of other G20 nations.  

More Signs of Sobering Recovery

The latest U.S. economic reports provided more evidence of a sobering recovery.  Based upon the consumer price index, inflationary pressures increased in October which means that Americans are paying more even though they probably can’t afford to do so. Housing starts and building permits also took a big tumble which indicates that one of the first sectors to bottom in the U.S. economy is beginning to show pockets of weakness. Housing starts fell 10.6 percent to the lowest level since April while building permits dropped 4 percent to the lowest since May. The market had anticipated increases in both releases, but as we suggested in our Daily Report last night, the sharp decline in builder confidence in October points to weakness in the housing market. There is a lot of inventory on the market and more set to hit over the next year and therefore the lack of demand is discouraging new projects. Jobless claims, leading indicators and the Philadelphia index of manufacturing conditions are due for release tomorrow.  Given the drop in activity in the NY or Empire region and in industrial production across the nation, we could see similar weakness in the Philadelphia.  Leading indicators on the other hand may rise since equity prices hit a new year to date high in October, jobless claims fell and supplier deliveries decreased.  Another round of conflicting economic data could prevent new levels from being tested in the dollar.

EUR/USD: ANOTHER FAILED TEST OF 1.50

Despite earlier attempts, EUR/USD failed once again at eclipsing the 1.50 level. The pair is being lifted thanks to a surge in EUR/GBP rather than any significant weakness in the dollar. Overall, the Euro-zone released disappointing data today but was nonetheless shrugged off by traders. The Current Account showed a deficit of €5.4B even after Augusts’ account was revised to report a surplus. What is most concerning is the fact that the decline was driven primarily by slumping exports and rising imports. Even though this report lags the market a bit, any signs that export growth is starting to slow will raise red flags. If this becomes a consistent point of weakness, we can start to expect some more tough words on the part of the euro coming from the European Central Bank. The other report released today showed that Construction output dropped off 1.1% from last month’s -0.4%. Even though the euro seems hesitant to respond to today’s data, stocks took it hard and fell for the second straight day. Tomorrow’s schedule is extremely light with only the Italian Trade Balance. Friday should be a bit more relevant with German Producer Prices.

GBP/USD: STRONGER CONSUMER SPENDING COULD LIFT POUND

The Bank of England minutes provided little information as to where the central bank stands on further Quantitative Easing.  No one in the monetary policy committee voted in favor of a GBP50 billion extension to their current QE program.  Seven out of the nine members voted to boost the program by GBP25 billion, one by GBP40 billion and one voted to keep the program unchanged.  The BoE was split 3 different ways but ultimately the voting record was not as bearish for the pound as traders may have anticipated.  Going into the monetary policy meeting, many people believed that the central bank could opt for a bigger move and even though they didn’t they still expected some members to vote in favor of it.  The tone of the Bank of England minutes also contained a tinge of hawkishness. According to the report, "A number of Committee members noted that one consequence of additional asset purchases would be to bring forward the point at which the extraordinary degree of stimulus could begin to be withdrawn, if the projected impact was realised." This can be interpreted two ways - the first being that the BoE is afraid that by stimulating too much, they would be forced to implement an exit strategy prematurely or second, that the 25B QE extension made earlier this month has already forced them to start working on an exit. Either way, additional stimulus from the BoE is becoming increasingly unlikely.  Aside from the BoE minutes, the CBI monthly manufacturing survey was also released and according to the report, activity in the sector contracted at a slower pace.  Retail sales are due for release on Thursday and given the rise in the BRC retail sales monitor, there is a good chance that consumer spending picked up last month which could help to lift the pound.

USD/CAD: CPI FINALLY TURNS POSITIVE

Commodity currencies are facing subdued pressure, while the kiwi managed to shed its losses for modest gains. Canadian Consumer Prices were the main report today and showed that inflation has picked up slightly. On an annualized basis, prices increased for the first time in five months, officially ending one of the worst streaks of declines in about a half-century. Nevertheless, even though this is good sign of economic recovery, it does not signal any change in the Bank of Canada’s rather dovish monetary bias. A much more sustained increase must be seen approaching their 2% target before the bank has reason to take any notice. We will receive more from Canada tomorrow in the form of International Securities Transactions, Wholesale Sales, and the Leading Indicators. The shock from yesterday’s Reserve Bank of Australia minutes is still weighing on the Aussies, as it takes a second straight fall. The “open question” for December’s meeting has become even more ambiguous with the release of today’s data. First, the Westpac Leading Index saw a disappointing decline to 0.9% from 1.1%. Secondly, quarterly Wage Growth dipped to 0.7% in the third quarter. Although neither report by itself is enough to sway an RBA decision, they are definitely providing more breathing room for the bank to keep steady next month. The Assistant Governor Guy Debelle made a speech today that indicated his intentions to start paring back some of certain institutions established to support lenders through the credit crisis. However, Debelle made no comments in clarification to yesterday’s minutes. We can expect Average Weekly Wages for tomorrow.

USD/JPY: JAPAN IS BECOMING A “CAUSE FOR CONCERN”

USD/JPY makes a very modest advance in today’s trading, its second rise in a row. The fourth straight decline in the VIX has finally started to eat away at some yen strength. The Organization for Economic Cooperation and Development commented on Japan’s economic health noting that it was “a cause for concern” thanks to intensifying deflation and a worsening fiscal situation. The OECD expects that public debt will reach 200% of GDP and become an insurmountable burden for the country to face. Such projections may make it difficult for the new Democratic Party of Japan to get its promised spending programs off the ground. The organization even advised that it abandon certain initiatives in effort to curtail the rising debt load. The only piece of data to be released today was Machine Tool Orders, which came in slightly better at -42.5%. Tomorrow will be a much more eventful day as far as indicators goes, with the release of the All Industry Activity Index, Leading and Coincident Index, along with Department Store Sales. In addition, the BoJ’s monetary meeting is set to go under way, though it is unlikely that they will make any significant decisions.

GBP/USD: Currency in Play for Next 24 Hours

GBP/USD is the currency pair in play for tomorrow. For the U.K. Retail Sales, Public Finances, and the M4 Money Supply will all be released at 4:30 am ET or 5:30 GMT. Thereafter, the U.S. has Jobless claims in store for 8:30 am ET or 13:30 GMT, followed by Leading Indicators and the Philly Fed Manufacturing Survey at 10:00 am ET or 15:00 GMT.

GBP/USD

Comments (2)

FXDragon

November 19, 2009 at 07:52 AM ET

Why do fx people meet in Vegas? Public's gonna think we're gamblin'! Its baad publicity:)
Hold my reservations,

Yaakub

November 20, 2009 at 03:42 AM ET

Thu Nov 19, 2009 10:31am EST WASHINGTON (Reuters) - The U.S. dollar will remain the world's primary reserve currency for many years or decades, an International Monetary Fund official said on Thursday.
Spokeswoman Caroline Atkinson's comments came two days after IMF Managing Director Dominique Strauss-Kahn said the world can no longer rely on a currency issued by a single country, and a new global currency may evolve out of the IMF's in-house unit of account, known as Special Drawing Rights.

"The managing director has said ... he expects the dollar to be the leading reserve currency for many years or decades," Atkinson said at an IMF media briefing.

She said the IMF routinely looks at what is happening in the international monetary system, but was not launching any sort of formal study into how SDRs might one day replace the dollar as a global reserve currency.

"During this last financial crisis, people actually found the dollar a safe haven and preferred to move into dollar assets when risk aversion was very high," she said. "That suggests there's very solid demand, based on the U.S. economy's strength and size and liquidity of its financial markets."

The dollar's role in the world economy has been a topic of debate in recent months as its value fell against a basket of currencies. China, the largest foreign buyer of U.S. government debt, has expressed growing concern that the weakening dollar would hurt its finances.

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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.