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THE STORIES IN THE CURRENCY MARKET

• DOLLAR HITS 15 MONTH LOW, IS 1.55 EUR NEXT?
• EUR/USD: ANATOMY OF A BREAKOUT, SNB RISK
• GBP/USD: GDP REVISION FALLS SHORT
• USD/CAD: RUSSIA LOOKING TO BUY CAD
• AUD/USD: COUNTRY ENTERS NEW UPSWING
• NZD/USD: BUSINESS CONFIDENCE ON TAP
• USD/JPY: TRADE SENDS YEN ON A TEAR

EXPECTATIONS FOR UPCOMING FED MEETINGS

CURRENT US INTEREST RATE: 0.25%
	12/16 Meeting	01/27 Meeting
NO CHANGE	51.9%	51.5%
CUT TO 0BP	48.1%	43.2%
INCREASE TO 50BP	0.0%	5.3%
INCREASE TO 75BP	0.0%	0.0%

DOLLAR HITS 15 MONTH LOW, IS 1.55 EUR NEXT?

Over the past few weeks we have been looking for the EUR/USD to break 1.50 and now that it has finally happened, traders are already wondering how much further the euro can rise.  Before attempting to answer this question, it is important for everyone realize that this is really a U.S. dollar story.  The greenback depreciated against every major currency today, breaking key levels in the process.  The EUR/USD hit a high of 1.5145 intraday while USD/CHF broke parity to hit a 19 month low.  Although the breakout may be a consequence of thin holiday trading conditions, it is worth noting that the dollar moved in the path of least resistance.  On a percentage basis, the dollar dropped the most against the Aussie and the least against the kiwi.  The primary reason why the dollar broke down is because of reserve diversification fears.  Russia said they are preparing to invest some of their foreign exchange reserves into Canadian dollars while China said they will increase the flexibility of the Yuan at a controllable level in the future.  Reserve diversification reduces demand for dollars and is a long term threat for the greenback especially if the U.S. government wants China to strengthen their currency.

Thanksgiving Week Delivers, Time to Look to Seasonality

Contrary to popular belief, volatility in the currency market tends to increase during Thanksgiving week .  In our daily report last Friday, we talked about how the third week in November is typically more volatile than the weekly average throughout the year. Over the last five years, the average weekly volatility in the EUR/USD has been 270 pips but the average during Thanksgiving week is 340 pips. So far this week, the trading range in the EUR/USD has been in excess of 300 pips.  History does repeat itself and therefore another pattern that we have previously identified is worth reviewing.  Earlier this month, we published a Forex Seasonality report in which we found that the EUR/USD and AUD/USD appreciated in the month of December 7 out of the last 11 years.  Given the techincal breakout in the EUR/USD and the 5 fundamental reasons for why the dollar could continue to fall , we believe that there is a good chance the sell-off in the U.S. dollar will drive the Euro to 1.55.  When the EUR/USD was trading at 1.49, we made a case for why the dollar could fall another 5 to 7 percent .  Now that the EUR/USD is trading above 1.51, we are looking for another 4 to 6 percent fall in the dollar which would take the EUR/USD to 1.60 and the AUD/USD just shy of parity.  The tolerance levels of central banks will be tested as we get close to those levels and at some point, they will throw in the towel and say that they will no longer sit idle and watch the dollar fall.  Coordinated verbal intervention is one of the few things that can bring the dollar’s downtrend to a halt.

A Round of Good Economic Data

Meanwhile, risk appetite in the financial markets has been supported by a round of positive economic data.  This is a breath of fresh air in a week where there was a lot of concern about the unevenness of the U.S. recovery. The big surprise this morning was the sharp decline in jobless claims. For the week of Nov 21st, 466k Americans filed for unemployment benefits, the lowest level since Sept 2008. Continuing claims also dropped to the lowest since February which signals that job losses continue to moderate. Personal income, personal spending and core PCE beat expectations which are line with the stronger retail sales figures earlier this month. Durable goods dropped 0.6 percent and if you exclude orders for transportation products, they dropped by a larger 1.3 percent. Orders for defense, computer and electronic products took the biggest hit but even though the data was very weak, the negative sentiment was offset by the 1 percent upward revision to the September data. New home sales rose 6.2 percent, the strongest amount since 2008 indicating that tax credits are helping to support the housing market.  The University of Michigan consumer sentiment index was also revised marginally higher from 66 to 67.4 in November.  There are no economic releases from the U.S. for the rest of the week and there will be no Daily Report on Thursday.

EUR/USD: ANATOMY OF A BREAKOUT, SNB RISK

After consolidating for the past month, the breakout in the EUR/USD has been nothing short of impressive.  The lack of supportive economic data and market moving comments from ECB officials suggest that the breakout of the EUR/USD has been driven by sentiment and flow. The only piece of economic data released from the Eurozone this morning was December German consumer confidence which declined.  Up until today, the year to date high in the EUR/USD was 1.5050.  The currency pair had tested and broken above the 1.50 level on numerous occasions but the rally fizzled each time.  A closer look at the intraday price action of the EUR/USD indicates that the level that traders were defending was really 1.5050.  When the currency pair hit that level at 6:30am ET, it jumped 45 pips in 12 minutes.  This type of price action is a classic example of what happens when there are a number of stop orders hovering at a key price level and they finally are taken out.  This same type of move happened when the EUR/USD reached the 1.5100 level. In less than 3 minutes, the EUR/USD jumped 45 pips.  What this tells us is that the primary reason why the EUR/USD did not breakout before is because option and spot traders were doing all that they can to prevent such a move. The lack of liquidity and participants today allowed dollar bears to finally gain control of the market.  European markets are open for trading tomorrow but there is no meaningful economic data due for release.  However on Friday, a number of Eurozone sentiment indicators will be released and strong numbers could fuel further gains in the euro. Meanwhile it is worth noting that one Swiss Franc is now worth more than one U.S. dollar.  The only time this has ever happened was in March 2008 and that lasted for less than 2 weeks.  Although the Swiss National Bank typically monitors EUR/CHF, the break in USD/CHF may encourage intervention, particularly since EUR/CHF is closing in on 4 month lows.

GBP/USD: GDP REVISION FALLS SHORT

The British pound strengthened due to broad dollar weakness and a mild upward revision to third quarter GDP.  In the first release of Q3 GDP, the U.K. government reported that the economy contracted by 0.4 percent.  At the time, the drop in growth was a big surprise because every other major economy reported positive GDP growth.  Based upon recent comments from Bank of England officials who also expressed surprise with the weakness of growth, the market anticipated a big upward revision – the whisper number was -0.1 percent and unfortunately the -0.3 percent print missed the mark.  Private consumption was healthier than the previous estimate, but the improvement was offset by slower growth in government spending.  As a result, the British pound actually weakened on the heels of the release.  The GDP numbers reflect the relative weakness of the pound and help to explain why the central bank is still open to increasing monetary stimulus.  There are no major U.K. economic releases on the calendar for the rest of the week and therefore we expect the GBP/USD to track the moves in the EUR/USD.

USD/CAD: RUSSIA LOOKING TO BUY CAD

All commodity currencies are stronger on the day, spurred by the combination of a new infusion of risk appetite and gold& #8217;s ninth straight rally. The primary catalyst for the Aussie’s gains was an overnight speech given by the Reserve Bank of Australia’s Deputy Governor Ric Battellino, who painted an optimistic outlook. Mr. Battellino said that the Australian economy has entered a “new upswing” thanks to its unparalleled resilience in the last few months. The deputy governor proudly brings to our attention that it has been nearly two decades since the country has seen even one decline in annual gross domestic product. Furthermore, Battellino finds that, considering the latest developments, it is reasonable to assume growth will continue for the next few years. These highly optimistic comments certainly raise the probabilities behind a December rate hike. Even though the RBA has never raised rates in more than two consecutive decisions, given the fact that the country will experience growth for years to come, the RBA might not have a tough decision to make after all. Data looked good today as well, with DEWR Skilled Vacancies rising to 2.4% and Construction Work Done improving to 2.2% from -0.1%. Private Capital Expenditures are expected for tomorrow. Even though the commodity rallies certainly helped, what really sent the loonie ablaze were comments coming from the Russian central bank indicating their intentions to increase reserves of the Canadian dollar. The move by the Russians is obviously in-line with their attempts to diversify away from dollar reserves, and may give the loonie another leg to rally on. On tap for New Zealand is tomorrow morning’s NBNZ report on Business Confidence followed by the trade balance on Thursday evening.  

USD/JPY: TRADE SENDS YEN ON A TEAR

The breakdown in the U.S. dollar has driven USD/JPY very close to its year to date low.  In addition to broad dollar weakness, the strength of the yen was also triggered by the latest trade balance numbers which showed that Japan’s surplus has risen to the highest level since early-2008. Perhaps more importantly, exports declined at the slowest rate in about twelve months as the volume of shipments in Asia helped counteract the stubborn strength in the yen. Imports improved, but missed expectations, coming in at -35.6%. It is hard to believe that the 6% gain in the yen over the last three months has not been a larger impediment to their export industries. However, with the latest leg of declines, it might not be long until policy-makers reiterate their distaste for a rapidly appreciating currency. The Japanese Finance Minister Fujii noted today that he finds that the Yuan might be undervalued considering the unexpected strength of the Chinese economy. Such comments might be coming on concerns that China will eat out Japan’s export competitiveness, as the yen surges higher. Over the next twenty-four hours, the Bank of Japan is set to produce its Minutes from the last monetary meeting, which could hint on how the bank plans to deal with inflation.

EUR/CAD: Currency in Play for Next 24 Hours

EUR/CAD will be the currency in play over the next 48 hours. On the way for the Euro-zone will be German Consumer Prices and the M3 Money Supply at 4:00 am ET or 9:00 GMT Thursday. On Friday, we can expect Euro-zone Consumer and Economic Confidence at 5:00 am ET or 10:00 GMT. From Canada, Friday will bring the Current Account balance at 8:30 am ET or 13:30 GMT.

EUR/CAD is still trading in the Bollinger band range trading zone as the last few weeks have clearly lacked direction. In terms of support, the strongest level seems to be lying right at 1.5800. This level has been instrumental in keeping prices elevated over the past three days and quickly reversed more substantial declines from earlier today. In addition to its psychological importance, the 20-day moving average is also adding to the level’s significance. Resistance stands firm at 1.5933, or the November 20th high. However, the strong support might keep prices elevated for the next few days.

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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.