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Thanksgiving Volatility May Offer Opportunity

Last updated 11/20/2009 4:42 PM ET (GMT -5) 0 Comments - Add your comment

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Kathy Lien

Director of Currency Research, GFT

THE STORIES IN THE CURRENCY MARKET

• THANKSGIVING VOLATILITY MAY OFFER OPPORTUNITY
• EUR/USD: ECB SETS THE STAGE FOR GLOBAL UNWINDING
• GBP/USD: HAS THE UK REACHED A TURNING POINT?
• USD/CAD: RECOVERY BEFORE BUDGET BALANCING
• NZD/USD: CREDIT CARD SPENDING IMPROVES
• AUD/USD: OIL DROPS BUT GOLD RISES
• USD/JPY: DEFLATION HAS TAKEN HOLD

EXPECTATIONS FOR UPCOMING FED MEETINGS

THANKSGIVING VOLATILITY MAY OFFER OPPORTUNITY

The dollar is stronger across the board, but the effects of a late day stock market managed to erode some of the greenback’s standing. Of the major pairs, the pound was hit hardest by today’s selling pressure, and lost 0.95%. USD/JPY, on the other hand, was not as welcome to accepting dollar strength, and kept gains minimal at 0.07%. Global stock markets took another hit today on signs that the ECB is taking their first steps towards an exit. Even though we are heading into Thanksgivings week, it does not necessarily mean that markets will come to a grinding halt. A lot is on the way in terms of trading opportunity and a long list of critical data.

Will Traders have something to be Thankful For?

Going into the Thanksgiving week, many would feel tempted to abandon trading completely on expectations volatility will completely dry up, rationalizing that all the traders are sitting at home enjoying their families and filling up on some good food. However, do not be so quick to judge the Thanksgiving week trading potential. In fact, the third week in November is usually even more volatile than the average throughout the year. Over the last five years, the average weekly volatility in currencies (measured by the difference between the weeks high and low) has been about 270 pips in EUR/USD. This figure jumps to 372 pips when examining the pound. However, the average volatility over the last five years on Thanksgiving week is more volatile at 340 pips in EUR/USD and 433 pips in GBP/USD. In fact, on only one occasion, in 2005, did holiday volatility fall below that of the overall average. At first glance, these figures are pretty shocking, but it makes sense considering that Thanksgiving is only an American holiday. The loss in traders adds to the illiquidity of the market place, magnifying the severity of the moves. In addition, most funds are still trying to satisfy better than expected year end results, and might prefer to relax during Christmas rather than Thanksgiving. Looking at the week itself, volatility does dry up on Thanksgiving day, but is actually rather high on the day after. In any event, keep in mind that like seasonality studies these patterns do not hold 100% of the time. Just keep in mind that opportunities do not cease to exist just because it is a holiday week.

Minutes Take Spotlight Next Week

It seems that neither volatility nor economic data takes a break for Thanksgiving. Next week’s calendar starts off with Existing Home Sales followed by an action packed Tuesday which includes Gross Domestic Product, Consumer Confidence, the House Purchase Price Index and the FOMC Minutes. On Wednesday we can look forward to Durable Goods Orders, Personal Income and Spending, along with New Homes Sales. However, among all the data expected for next week, the most widely anticipated might be the Fed’s minutes, and for good reason. Over the last week we have been bombarded with very telling Fed comments. On Monday we were met with Ben Bernanke telling markets that he will use Fed policy to “ensure that the dollar is strong”. He also added that he feels unemployment has gotten out of control while demand continues to drop off. Despite the initial dollar comment, which may have suggested a hawkish tone, his concerns about the economy reinforced the Fed’s pledge to keep rates exceptionally low for an extended period. On Wednesday, the Fed’s Bullard made the suggestion that interest rates would be stationary until 2012, assuming the Fed behaves in the same way it has after past recessions. All combined, it is hard to believe that the minutes would introduce a hawkish tone.

EUR/USD: ECB SETS THE STAGE FOR GLOBAL UNWINDING

The euro is under added pressure today and continues to lose sight of 1.50, even as the European Central Bank has initiated its first steps to unwind some of its unconventional monetary techniques. The newest plan is a small step in the right direction, and involves tightening standards on which banks could use asset backed securities as collateral for ECB loans. Financial institution will be required to have their securities rated by at least two credit agencies before they will be accepted so that the bank in question can take out a loan. Trichet mentioned that “not all our liquidity measures will be needed to the same extent as in the past.” This provides a good sign in that the central banked has deemed the region secure enough to start removing stimulus. However, stocks were not too happy as tighter monetary policy tends to crimp profits, sending European indices down for the fourth straight day. In any event, as far as rate hikes go, do not hold your breath. Today’s announcements represent only a series of baby steps to come that are sure to be very gradual. Perhaps the next course of action that the bank will consider is to put an end to the unlimited cash provisions, a decision that they have hinted too as of late. In Germany, the Deputy Finance Minister noted that growth “will be less dynamic in the closing quarters as private consumption pales”. Furthermore, the country will face further complications if the euro assumes its ascent and further reduces export competitiveness. Producer Prices in Germany came in unchanged off of last month’s 0.50% decline. On tap for next week will be the PMI for Monday, German GDP and IFO for Tuesday, along with German CPI for Thursday.

GBP/USD: HAS THE UK REACHED A TURNING POINT?

GBP/USD is accelerating its downward trajectory, completing its fourth straight day of declines. Weighing on the currency has been the significant strength in EUR/GBP, which has been magnified thanks to the ECB’s steps to curb some stimulus. Former Bank of England Deputy Governor John Gieve provided comments today that were probably the most optimistic than we have seen in a while. Gieve points out that, thanks to the consistent weakness in the pound, the economy may have finally reached a turning point. This is not the first time we have been subject to such discussion about the preference for pound weakness and suggests that the BoE is counting on its benefits to offset some of the negative domestic economic slack. However, despite the optimistic speech, stocks took a dive for the fourth straight day on Nationwide Building Society’s comments that indicate home prices will resume their fall on what appears to be continued job losses. There will be a bit of a void in pound data until next Tuesday’s Total Business Investment, to be followed by Wednesday’s Gross Domestic Product report. Since much of the BoE’s decision to expand quantitative easing was based on the disappointing first-round GDP report, the latest release obviously registers high on the economic data scale.

USD/CAD: RECOVERY BEFORE BUDGET BALANCING

The commodity pairs continued to lose ground to the U.S. Dollar for the fourth consecutive day as traders curtailed their positions in higher beta currencies. Judging by Australia’s fantastic performance over the last few months, the OECD is urging the Reserve Bank of Australia to increase interest rates as the economy continues to accelerate. Traders are betting that the RBA will increase the overnight cash rate for the record third time to 3.75% in December. Australia anticipates the release of Private Capital Expenditures and CB Leading Index in the following week. New Zealand’s Credit Card Spending rose in October pointing to increasing demand from consumers as the economy recovers from the worst recession in three decades. It will be a relatively light economic release week for New Zealand with merely Visitor arrivals and Trade Balance on tap. Meanwhile in Canada, Financial Minister Jim Flaherty stated that officials will not take away any additional measures, an action that could potentially hamper the recovery in order to restructure the government balance. The budget deficit is expected to widen to C$55.9 billion or $55.2 billion but will be balanced by 2015, according to Flaherty. The release of Canadian Current Account Balance and Retail Sales are anticipated for the following week. 

USD/JPY: DEFLATION HAS TAKEN HOLD

The yen gained ground on all other major counterparts in exception for US Dollar amid an announcement from the Japanese officials that the country is officially experiencing deflation. The world’s second largest economy plunged into deflation for the first time since 2006. A gauge of prices excluding imports fell the most in 51 years, while Consumer Prices excluding fresh food dropped for seventh month in a row. Nonetheless, the Bank of Japan opted to lift the assessments on the economy as it kept the interest rates unchanged at 10 basis points. During the 1990’s, Japanese economy sunk into a deflationary spiral which eroded the growth of the country for nearly a decade, consequently named the “Lost Decade.” Now with the stimulus measures winding down, the economy faces potential problems down the road with a deteriorating labor market and limited monetary policy actions.   A “sense of crisis” according to Financial Minister Hirohisa Fujji is emerging; sentiments echoed by Deputy Prime Minister Kan along with other officials. In turn, the government urged the BOJ to combat deflation with additional tools, possibly expanding the debt acquiring program further. Meanwhile, the Convenient Store sales dropped in the month of October confirming weaker demand from consumers which may push prices even lower. In the following week some crucial economic releases are due out including Jobless Rate, Merchandise Trade Balance, and Bank of Japan Minutes from the latest meeting.

EUR/USD: Currency in Play for Next 24 Hours

EUR/USD will be the currency in play for the upcoming Monday. German Manufacturing and Service PMI are due at 8:30GMT or 3:30AM EST. Thereafter, Euro-zone will release Composite PMI at 9:00GMT or 4:00AM EST. U.S. Existing Home Sales will be released at 15:00GMT or 10:00AM EST.

Over the course of this week EUR/USD was not able to define a trend, trading within the Range Trading Zone. However, the following week presents appropriate amount of economic data to let the pair develop a new intermediate trend. The rising channel which the pair has been trading since August may be put to the test as it represents current support. The bottom of the channel also coincides with 1 ^st Standard Deviation and 50-day SMA which is structured at 1.4800. Nonetheless, if the upper Standard Deviation located at 1.4950 gets breached expect the pair to test this year’s highs.

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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.