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THE STORIES IN THE CURRENCY MARKET

• IS THE DOLLAR DRIVING STOCKS OR THE REVERSE?
• EUR/USD: ANOTHER STAB AT 1.50?
• GBP/USD: GAINING SOME GROUND
• USD/CAD: SHARP RISE IN RETAIL SALES
• AUD/USD: GOLD PRICES HIT RECORD LEVELS
• NZD/USD: VISITOR ARRIVALS PLUMMET
• USD/JPY: DOWN ACROSS THE BOARD

EXPECTATIONS FOR UPCOMING FED MEETINGS

CURRENT US INTEREST RATE: 0.25%
	12/16 Meeting	01/27 Meeting
NO CHANGE	51.1%	49.2%
CUT TO 0BP	48.9%	45.4%
INCREASE TO 50BP	0.0%	5.4%
INCREASE TO 75BP	0.0%	0.0%

IS THE DOLLAR DRIVING STOCKS OR THE REVERSE?

Equities are up, the dollar is down and no one can agree on whether currencies are driving equities or vice versa.  If you ask a currency trader, they will most likely say that the reason why the dollar sold off today is because equities are higher.  However if you ask an equity trader why stocks are up chances are that they will say that it is because the dollar is down.  In reality, there is no easy answer, just like the question about what came first, the chicken or the egg.  Currency markets operate 24 hours a day and to some degree, equities do so as well on Globex.  This means that even before the U.S. equity markets officially open, traders are already expressing their views through futures.  In general, the relationship between equities and currencies is much more symbiotic which means that sometimes it is stocks that are driving currencies and vice versa.  In the case of the past 24 hours, an intraday chart of the EUR/USD and S&P 500 reveals that currencies are leading equities and not the reverse. 

Correlation between Currencies and Equities  

In the following 5 minute chart of the EUR/USD and the S&P 500, we have circled two big intraday moves.  In the first, the S&P 500 started to turn before the EUR/USD but the move in stocks only gained traction after the big breakout in the EUR/USD. In the second area that is circled, the rally in the EUR/USD (blue line) peaked before the rally in stocks (green line).  However a closer look at the chart should also indicate that there are occasions where the S&P 500 makes a move before the EUR/USD.  Taking a step back, the correlation between has been strong throughout the year.  On a 12 month basis, the EUR/USD has had an 86 percent positive correlation with the S&P 500.  Over the past 6 months, this correlation has increased to 94 percent.  Yet the correlation has not always been this strong.  For example, in 2007 the EUR/USD appreciated gradually throughout the year from 1.30 to 1.47. During that same time, there was a significant amount of volatility in the S&P 500 even though the index ended the year virtually unchanged. The correlation between the dollar and equities will break when the dollar finally moves on U.S. fundamentals, meaning that good data becomes positive for the greenback.  This will most likely occur when the U.S. stages a full blown recovery that eclipses that of its peers. 

 

Source: Dealbook

All Eyes on Housing

The housing market is a big focus this week.  This morning's existing home sales report was exceptionally strong with the number of units sold rising by the most since Feb 2007. The demand was partially driven by tax incentives which were originally set to expire on November 30th and has now been extended to April 30th. The 10.1 percent rise is glaring evidence that despite a drop in builder confidence, permits and housing starts, the market for previously owned homes remains hot. The only wrinkle is that units are still being sold at lower prices but that is expected given the current state of the economy and tightness of credit. The average price of a home sold dropped from $221.9k to $218.1k in October. A variety of house price reports are due for release tomorrow along with the second release of third quarter GDP, consumer confidence and the minutes from the most recent FOMC meeting.  Q3 GDP is expected to be revised downward given the downward revision to retail sales and trade numbers.  As for the Fed, their recent tone has been cautious and pessimistic.  Unfortunately we expect this sentiment to be echoed in the minutes.  Last week, Bullard suggested that the Fed may not raise interest rates until 2012 and overnight, he called on the Fed to extend its authority to buy Mortgage Backed Securities and Agency bonds beyond March. Although this represents a departure from his typically more hawkish stance, it is important to remember that Bullard is a non-voting member of the FOMC. Yet, there is no question that most FOMC members are still very cautious. Evans for example warned that the unemployment rate may not peak until 10.5 percent and not decline until the summer. The more cautious the Fed is, the less likely they are to implement an exit strategy and the more likely the dollar carry trade will remain intact.

EUR/USD: ANOTHER STAB AT 1.50?

The EUR/USD took another stab at 1.50 today and unfortunately failed to break above the key level.  We have been asked repeatedly why the 1.50 is so important and the reason is because traders are humans and humans like to think in round numbers.  There are a ton of option barriers and stop orders sitting above 1.50 and there is clearly a strong desire to defend against a break of that level.  However economic data is on the side of euro bulls.  Eurozone PMI reports were surprisingly strong with both the service and manufacturing sector PMI numbers edging higher.  The German IFO report is due for release tomorrow and even though there have been improvements in manufacturing sector activity, factory orders grew at a slower pace last month while the ZEW survey declined.  This suggests that we may only see a limited pickup in business confidence.  In addition to the IFO, the final Q3 GDP numbers are also scheduled for release from Germany.  Meanwhile the market barely reacted to ECB President Trichet’s comment that a strong dollar is good for the international community because there was nothing new in his comments.  At this point, he would need to use far more critical words to turn the euro around.  We continue to believe that the 1.50 level will only be a temporary barrier in the EUR/USD and that the U.S. dollar could fall another 5 to 7 percent before it stages a full blow recovery.

GBP/USD: GAINING SOME GROUND

The pound is gaining some ground in today’s trading as rallies managed to eat away most of last Friday’s sharp decline. EUR/GBP, on the other hand, is still edging higher, advancing for the fourth straight trading day. Corresponding with the rally in GBP/USD has been the first rise in the FTSE index in five days, posting its biggest rally in more than a month. There has been no data in the pipelines today, so the pound has been floating mostly on the promising U.S. data. However, we do expect more for tomorrow’s session. Expected for Tuesday will be the quarterly Total Business Investment report. This index will be important for one reason, and one reason only, it sets-up Wednesday’s critical release of preliminary Gross Domestic Product. Since Business Investments have implications for hiring and spending, it is often viewed as a leading economic indicator for the growth report. Obviously, the main event of the week will be the GDP report on Wednesday, which will be accompanied by Private Consumption, the Index of Services, as well as Exports and Imports.

USD/CAD: SHARP RISE IN RETAIL SALES

The Canadian, Australian and New Zealand dollars strengthened materially against the U.S. dollar today.  Gold prices hit a new record high while oil prices edged higher.  Australian new motor vehicles continued to rise in October which may have helped the lift the Aussie.  However the kiwi strengthened despite the drop in visitor arrivals.  Meanwhile the Canadian dollar rose dramatically following the much better than expected retail sales figures. USD/CAD dropped more than 150 pips and appears poised to test 1.05. The loonie is staging such a strong rally because not only did consumer spending jump 1.0 percent in September but the August data was also revised up from 0.8 to 1.0 percent. This is a testament to the resilience of the Canadian economy that retail sales increased 4 out of the last 5 months and 7 out of the last 9 months. Spending outside of automobiles was also very strong. Retail sales ex autos rose 1.1 percent thanks to a sharp increase in demand for furniture, electronics, food and beverages. Over the past few weeks, we have seen more evidence that the Canadian economy is becoming less sensitive to the U.S. economy, first through the trade numbers and now through retail sales. This means that GDP growth may have turned positive in September which could fuel further gains in the Canadian dollar. The U.S. economy could only hope for the same strength in headline and core retail sales as Canada.  No data is expected from the 3 commodity producing countries over the next 24 hours.  

USD/JPY: DOWN ACROSS THE BOARD

The yen was weaker across the board with USD/JPY posting slight gains. However, the big moves were reserved for the yen crosses and pairs like NZD/JPY and AUD/JPY which surged about 1.5% and 1.25%, respectively in today’s trading alone. Nevertheless, when looking at the big picture, the yen has yet to surrender any substantial portion of its move against the dollar, even as the VIX plummets more than 5.0%. Obviously, the once significant relationship between the movement in the yen and volatility index have broken down substantially, with the correlation over the last 12-months sinking to only 20.6%. Today’s trading has been riding on a sheer lack of economic data due to Japan’s Labor Thanksgiving Day. Things will pick up a little bit tomorrow with the Bank of Japan Monthly report. Since the BoJ has officially admitted that deflation is taking hold, it remains to be seen how exactly the bank plans to respond. The BoJ is definitely in a bad position as its considerations to start exiting unconventional policies may have to be delayed as to keep deflation at a manageable level. Scheduled for tomorrow night with be the Merchandise Trade Balance which is always important because of the implications it has on how the yen is affecting trade.

EUR/USD: Currency in Play for Next 24 Hours

EUR/USD will be the currency pair in play for tomorrow.  The Euro-zone will release the German Gross Domestic Product at 2:00 am ET or 7:00 GMT followed by the IFO survey at 4:00 am ET or 9:00 GMT. US trading will be even busier with the Gross Domestic Product and Personal Consumption reports due at 8:30 am ET or 13:30 GMT, Consumer Confidence at 10:00 am ET or 15:00 GMT, followed by the FOMC Minutes at 2:00 pm ET or 19:00 GMT.

Even though EUR/USD managed to rise back into the Bollinger band buy zone, the pair continues to struggle within a very tight contractionary zone. In the past few weeks, the pair has rarely exceeded a 200 pip zone capped by the important 1.4800 and 1.5000 levels. However, if today’s gains manage to spur a new rally, resistance is strongest at the 1.5060 level which was the October 23rd high. If the pair should falter once again, the 1.4800 level should stand in as support as it has been tested several times in providing the lower bound for the trading range and was the low for November 20th. Nevertheless, momentum has not been convincing in either direction which may result in a continuation of directionless trading.

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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.