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U.S. Dollar: Where Is The Action?

Last updated 12/1/2009 5:26 PM ET (GMT -5) 3 Comments

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Kathy Lien

Director of Currency Research, GFT

THE STORIES IN THE CURRENCY MARKET

• U.S. DOLLAR: WHERE IS THE ACTION?
• EUR/USD: GERMAN DATA COMES THROUGH
• GBP/USD: HOUSING VS. MANUFACTURING
• AUD/USD: RBA HIKES RATES TO 3.75 PERCENT
• NZD/USD: BIGGEST MARKET MOVER AGAINST JPY AND USD
• USD/CAD: GOLD PRICES HIT RECORD HIGH
• USD/JPY: JAPANESE GOVT FALLS SHORT

EXPECTATIONS FOR UPCOMING FED MEETINGS

U.S. DOLLAR: WHERE IS THE ACTION?

The weakness of the U.S. dollar had a profound impact on the financial markets over the past 24 hours.  It resurrected the uptrend in most of the major currency pairs, drove gold prices to a new record high and the Dow Jones Industrial Average to a yearly high.  Dubai’s problems are quickly fading from the minds of traders and a round of solid economic data from across the globe has given them the confidence to pile back into risk trades.  Mixed economic data from the U.S. in the face of universally strong data from the Eurozone provides a fundamental reason for traders to move out of dollars and into other currencies.  The demand to sell dollars was so strong that traders completely disregarded Federal Reserve President Plosser’s comments on when the central bank could raise interest rates.  

Are the U.S. Markets Losing Importance?

What we found most interesting about today’s price action is the fact that the major moves happened in Europe which means that the EUR/USD and USD/JPY range traded for most of the U.S. trading session.  In fact, USD/JPY remained primarily within the 86.55 to 86.75 trading range from 10:30am NY Time onwards.  The same lack of volatility can be seen in the EUR/USD, albeit with a wider 45 pip trading range.  This leads us to wonder if the U.S. markets are becoming less important and if the movements in Europe and Asia are actually dictating the moves during the U.S. session. Taking a look at the last 5 trading days, we have found that at least in the short term this appears to be true. The action is primary in Europe. The following chart illustrates how the U.S. session tends to either retain the move made in Europe or add to them.  We already know that traders are placer greater importance on Chinese economic data because many parts of world have become less reliant on U.S. growth.

Source: Dealbook 360

All Eyes on Central Banks  

Another reason why traders have shunned dollars is because of the passiveness of the Federal Reserve compared to the rest of the world.  Last night, the Reserve Bank of Australia raised interest rates by 25bp, widening the spread between U.S. and European yields.  On Thursday, the European Central Bank is expected to make a hawkish adjustment to their 12 month tender.  Even though Plosser said the Fed should change its policy when the cycle turns and raise interest rates in the future in line with market rates, the market knows not to expect any real action from the Fed anytime soon.  This degree of passiveness by the Federal Reserve will remain an important driver of forex flows ahead of Wednesday’s Beige Book report.  In addition to the survey on the economy, the Challenger layoff report and the ADP Employment report are also due for release which will set expectations for Friday’s non-farm payrolls report.

Manufacturing ISM Fails to Deliver

In terms of this morning’s economic releases the extension of the housing tax credit helped to boost pending home sales by 3.7 percent, the strongest increase on record. Given that the housing and manufacturing sectors were the hardest hit by the recession, as long as both sectors continue to recover, risk appetite can be sustained. Manufacturing ISM fell short of expectations but remained in expansionary territory for the fourth consecutive month.  The index fell from 55.7 to 53.6. Aside from new orders, exports and imports, the rest of the underlying components of ISM all declined. However it is important to realize that new orders and exports are direct beneficiaries of a weaker dollar which suggests that the depreciation in the greenback is holding up the U.S. economy. This is the single biggest reason why the market has downplayed the Federal Reserve and Treasury's calls for a stronger dollar, because traders know that at this point in the recovery, a weak dollar helps more than it hurts the economy.

EUR/USD: GERMAN DATA COMES THROUGH

The EUR/USD is on its way to testing its yearly high thanks to the combination of solid economic data and a weaker dollar.  German unemployment fell by 7k last month, driving the unemployment rate down to 8.2 from 8.1 percent.  The improvement in the labor market helped to bolster consumer spending which rose 0.5 percent in October.  Even the final manufacturing PMI figures were revised upwards which suggests that the economy is still performing well.  However as the euro rises, speculation about when the ECB would panic will intensify.  According to Market News International, ECB officials are aware of the impact that withdrawing their accommodative measures could have on the euro.  One source says that “If the ECB moves before the Fed, you would have a negative exchange rate issue to contend with.”  Although 1.50 is clearly not a disaster for the Eurozone since the economy has performed well despite the stronger currency, the Europeans are certainly not relaxed about the euro level.  Looking ahead, Eurozone PPI numbers are due for release and we believe that inflationary pressures intensified in the month of October.  However the PPI numbers may not have the oomph to drive the EUR/USD to a new yearly high – instead that will be left to the market’s expectations for U.S. non-farm payrolls.  Meanwhile Switzerland reported positive GDP growth in the third quarter.  After four quarters of contraction, the country has finally come out of recession.  The latest manufacturing PMI numbers suggest that the recovery remains underway and is in line with other stronger reports from Switzerland.  

GBP/USD: HOUSING VS. MANUFACTURING

After underperforming for the past few trading days, the British pound has finally managed to recover against the U.S. dollar, euro and Japanese Yen.  However economic data remains mixed and there are still many lingering concerns about the outlook for the U.K. economy.  Manufacturing sector PMI fell from 53.4 to 51.8 in the month of November but house prices rose for the seventh consecutive month.  There is a growing divergence from two very important parts of the U.K. economy which is actually quite worrisome because it can’t be beneficial for the long term outlook of the economy if growth is slowing and house prices are rising.  The commercial real estate and financial sectors in the U.K. are still very vulnerable particularly after the Dubai debacle - don’t forget that U.K. banks are the most heavily exposed.  Bank of England member Adam Posen was speaking in London today and he basically said that raising interest rates will not stop asset (house) prices from rising.  Inflationary pressures remained contained for the time being and since inflation targeting is the central bank’s main focus, now is not the right time to raise interest rates. Instead he supported the use of new tools to curb asset bubbles such as higher real estate taxes and regulation measures.  Construction sector PMI is the only piece of U.K. economic data due for release tomorrow.  

AUD/USD: RBA HIKES RATES TO 3.75 PERCENT

The Australian, New Zealand and Canadian dollars performed strongly against the greenback.  Last night, the Reserve Bank of Australia raised interest rates for the third month in a row to 3.75 percent, which is a clear vote of confidence on the economy.  With no monetary policy meeting in January, the central bank felt that they could not wait until February to raise interest rates.  China and the Asia region as a whole are recovering while demand for homes has increased dramatically this year. With the labor market also improving, the RBA wants to reduce the risk of an asset bubble.  So far, their rate hikes have been effective in cutting building activity - on a month to month basis, building approvals fell 0.6 percent.  However rate hikes also have implications on other parts of the economy.  The expansion in the manufacturing sector for example has slowed.  Looking ahead, the big question is whether the RBA will raise interest rates again in February. There is a lot of time before the next meeting and if the Australian economy continues to outperform, there is a good chance that the RBA will raise rates four times in a row. They have already raised it 3 times which is a new record. In the meantime, the higher interest rate differential between Australia and other countries should keep the currency bid.  There are no Australian, New Zealand and Canadian economic data over the next 24 hours.  Therefore traders should keep an eye on commodity prices. Gold has already hit a record high and further gains could lift the Aussie.  

USD/JPY: JAPANESE GOVT FALLS SHORT

The Japanese Yen lost value against all of the major currencies.  Last night, the Japanese Government had a big opportunity to prove to the world that they have the guts to take measures into their hands but unfortunately they fell short.  The new Democratic Party held a special meeting on the economy last night and unfortunately they did not decide to intervene in the foreign exchange market and sell the Japanese Yen but instead simply increased their Quantitative Easing Program by 10 trillion. This has halted the rise in the Yen but we believe that this will only be temporary. By not intervening last night, the Japanese government has signaled to the market that at 85, USD/JPY is a threat to the economy but does not create an emergency situation that would warrant the first intervention by the Ministry of Finance in 5 years and the first by the DPJ. Yet the bottom line is that the government increased stimulus which should help to spur the recovery.  

USD/JPY: Currency in Play for Next 24 Hours

USD/JPY will be the currency in play for the next 24 hours. The price action of USD/JPY will be highly influenced by the U.S. data as the economic calendar for Japan is light for tomorrow. The highlight of the day in term of economic releases will be Challenger Job Cuts released at 12:30GMT or 7:30AM EST and ADP Employment Change released at 13:15GMT or 8:15AM EST. After falling to a 14-year low, USD/JPY rebounded slightly but remains well within the Sell Zone established through Bollinger Bands. The current level of support is placed at 85.75 which is the 2nd Standard Deviation of the Bollinger Bands. If this level is breached, we can expect USD/JPY to make a run for the14-year low at 85.00.  Until USD/JPY breaks the 1st Standard Deviation at 87.50, the odds are skewed towards further weakness in the currency pair.  

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Comments (3)

shailudg

December 02, 2009 at 09:18 AM ET

Hi Kathy,
I am an ardent follower of the articles written by you. I really like the data in comparison that you put forth. My memory is not big enough to remember the economic data for more than 1 week. Usually economic data makes proper sense in relative to past data. So, Is it possible to put the economic data statistics on the website collectively at a place, so that it can be referred at any time? My suggestion is to put a new tab "Economic Data" at the top of the home page. In that, list out the country names of interest. On selecting the country, different economic data w.r.t that country can be displayed.

Regards,
shailesh

Eddie09

December 02, 2009 at 10:28 PM ET

Hi Cathy, We know that Japanese government believes the Yen has been too strong against the US dollar and wants the exchange rate moves back to the other direction. But does the US central bank wish the US dollar get stronger at this stage?
Thanks!

Eddie09

December 02, 2009 at 10:47 PM ET

Your text above already provides the answer to my question. I should have read a bit more carefully. Sorry Kathy.

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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.