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U.S. Dollar: Taking Cues from Gold

Last updated 12/2/2009 4:37 PM ET (GMT -5) 1 Comments

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Kathy Lien

Director of Currency Research, GFT

THE STORIES IN THE CURRENCY MARKET

• U.S. DOLLAR: TAKING CUES FROM GOLD
• EUR/USD: WHAT TO EXPECT FROM ECB
• GBP/USD: DALE SEES RENEWED EXPANSION APPROACHING
• AUD/USD: LENDERS MAGNIFY RBA’s HIKE
• NZD/USD: ENDS TWO DAY WINNING STREAK
• USD/CAD: LOONIE WEAKER ON OIL
• USD/JPY: BOUNCES ON INTERVENTION FEARS

EXPECTATIONS FOR UPCOMING FED MEETINGS

U.S. DOLLAR: TAKING CUES FROM GOLD

It has been a relatively quiet day in the forex markets with the U.S. dollar strengthening against most of the major currencies.  Economic data was positive but apparently not positive enough for traders to tack on more risk. According to Challenger Grey & Christmas, job cuts fell a whopping 72 percent.  ADP reported a 169k drop in private sector payrolls which was less than the previous month but not as good as the market’s forecast. Stocks hit a new year to date high in the first hour of trading but the reversal during the rest of the day ate into the rally of the EUR/USD, AUD/USD and NZD/USD.  

Fed Districts Report Modest Improvements, Lacker Comments on Exit Strategy

In addition to the labor market reports, the Federal Reserve also released the Beige Book survey which reports on the latest conditions in the 12 Fed districts.  Although the tone of the report was slightly more upbeat than the previous month, currency and equity traders barely reacted to the news.  Overall, “economic conditions have generally improved modestly since the last report” thanks to a moderate pickup in consumer spending, steady to moderate improvement in manufacturing, rise in home sales and continued demand for automobiles.  They also reported that retailers were more optimistic before the holidays and held leaner inventories.  However credit remains tight and loan demand has been steady to weaker.  The reason why traders failed to react was because the slightly more upbeat tone puts the Fed marginally closer but still extremely far away from implementing an exit strategy.  Federal Reserve President Lacker confirmed this fact when he said shortly after the Beige Book report was released that he is looking for “well established” expectations for growth as a condition for tightening and unfortunately “we are not there yet.”  He also shed some light on how the Fed may progress in coming months when he said an exit strategy should start with asset sales.  Federal Reserve Chairman Ben Bernanke will be testifying before the Senate Banking Committee tomorrow in a confirmation hearing for his second term which begins in February of next year.  Speculation on how Friday’s jobs report could fare will be the market’s central focus tomorrow when the service sector ISM and jobless claims reports are released.  So far, all signs point to an improvement in non-farm payrolls but service sector ISM has the strongest correlation with NFPs, which makes that piece of data particularly important to watch.  

Taking Cues from Gold

It is extremely important for currency traders to be aware of the persistent rally in gold which closed above $1,200 an ounce for the first time ever.  Currency, equity and Treasury yields are mixed but gold prices continue to rise.  Growing interest in commodities, U.S. dollar weakness, political tensions and demand from central banks are the primary reasons why gold has been in such a strong uptrend. However the key take away from the rise in gold is that investors of all sizes, from central banks to individuals are buying gold as a hedge for inflation and a hedge for the dollar.  Therefore even though currency traders are hesitant about taking the dollar lower, other investors are already positioning for further dollar weakness.

EUR/USD: WHAT TO EXPECT FROM ECB

The Euro weakened against the U.S. dollar ahead of the European Central Bank’s monetary policy decision on Thursday.  The central bank is fully expected to leave interest rates unchanged at 1 percent but changes to their 12 month tender or comments from ECB President Trichet could still trigger volatility in the EUR/USD.  The only data released today was the Euro-zone Producer Prices which showed that deflation was slightly less of a threat than it was last month. Prices rose by 0.2% on a monthly basis, after falling 0.4% last month. However, a decline of 6.7% on an annualized basis marked the tenth straight month of falling producer prices. Overall inflationary pressures (including CPI) are moving upwards which could prompt the ECB to start paving the way for an exit strategy.  At this meeting, the ECB is expected to decide what they want to do with the 12 month tender.  If they raise the rate of the tender or get it rid of it completely, it would be perceived as a hawkish move.  Also, if the central bank upgrades its GDP outlook, it should be perceived as bullish for the currency.  However critical comments about the dollar or euro could negatively affect the currency.  Before the monetary policy decision, Eurozone GDP and retail sales figures are due for release.  Given strength in the French and German data, we anticipate numbers.  

GBP/USD: DALE SEES RENEWED EXPANSION APPROACHING

The pound is holding on to very small gains against the dollar after finishing a volatile trading session that saw both gains and losses. However, it is likely that EUR/GBP will earn the spotlight over the next 24-hours upon the ECB’s interest rate decision. Even though pound strength persisted for the second straight day, tomorrow may indicate that the course of monetary policy between these countries has abruptly gone in different directions, a condition that may result in some pound weakness. The data schedule today was relatively light, with only Construction PMI to fill in some of the unanswered questions about where the British economy is headed. Construction remained below the 50 expansion/contraction threshold, but ended a streak of declines stretching back to August. The Bank of England’s Chief Economist Spencer Dale provided markets with some insightful commentary. Dale optimistically points out that “the economy has begun to stabilize and that they are likely moving into a period of renewed expansion” thanks to the effects of easy monetary policy. While Dale’s comments are encouraging, they do not mean much in terms of altering the course of BoE expectations. Furthermore, he is among a very small minority that opposed a quantitative easing expansion in November. Service PMI should complete the Purchasing Manager’s releases for tomorrow. So far, PMI data has been mixed with improving construction but disappointing manufacturing.

AUD/USD: LENDERS MAGNIFY RBA’s HIKE

All commodity currencies are under pressure, ending what was a two day winning streak for the aussie and kiwi. However, the slight influx of risk aversion is probably the result of traders making safe bets ahead of Friday’s Non-Farm Payroll report in the U.S. Commodities were mixed with gold reaching a second consecutive record, officially breaking through $1,200. However, crude oil was sent lower by 2.0%, taking a bite out of the loonie. There was no data on the board for any of the commodity currencies. In Australia, the government is grappling with an interesting development in which some lenders, namely Westpac Banking Corp., have boosted mortgage rates by a larger amount than the RBA’s recent 25bp hike. If this becomes a continued problem, it may curtail RBA efforts as additional tightening is inadvertently flowing through the system due to lenders hiking rates. The calendar for Australia tomorrow presents AiG Performance of Services and Retail Sales. Retail Sales will be a number of critical importance due to its unexpected fall in last month’s release. Hesitancy on the part of the consumer to spend is a factor that will surely be on the top of the RBA’s list of concerns during their next meeting. New Zealand will be reporting its ANZ Commodity Prices tomorrow as well.

USD/JPY: BOUNCES ON INTERVENTION FEARS

Fears of intervention drove all of the Japanese Yen crosses higher.  Not only did the Prime Minister say that the Yen’s rise cannot be left “as is,” but it was revealed today that Japan’s top currency official, Rintaro Tamaki met with Lael Brainard, the Obama administration's nominee for Treasury undersecretary for international affairs on Monday.  This suggests that Japan is getting serious about intervention.  This is a new government with no intervention experience and the meeting between Tamaki and Brainard indicates that they are trying to do as much homework as possible before making the decision.  Since no details on the meeting were released, the Japanese could also be rounding up support from their international counterparts because they know intervention is only effective if it is coordinated with other countries.  Additionally, Japan probably wants to make sure that it is the right thing to do from a global perspective because ultimately Japan cannot stage a recovery unless the U.S. recovers.  A strong yen is a big problem for Japan because 70 percent of revenue from 3 of Japan’s largest companies – Toyota, Sony and Canon are generated outside of Japan. Canon’s Mitarai told reporters today Japan needs “urgent steps to counter this critical situation.” Canon would lose 4.4 billion yen in sales and 2.5 billion yen in operating profit in the three months ending Dec. 31 for every 1 yen gain against the dollar, according to the company.  Toyota recently cautioned that for every one yen appreciation against the dollar, their operating profit falls off by ¥30B. Also, the new government has recently acknowledged that the country is in deflation and therefore steps may need to be taken to fix it.  One of those steps is to increase QE, which they did earlier this week.  The other step is to weaken the Yen.  

AUD/USD: Currency in Play for Next 24 Hours

AUD/USD will be the currency pair in play for tomorrow. Australia’s main release for tomorrow will be Retail Sales, expected at 6:30 am ET or 1:30 GMT. In the U.S., we have Unit Labor Costs, Jobless Claims, and Non-Farm Productivity on tap for 8:30 am ET or 13:30 GMT, followed by the ISM Non-Manufacturing Index at 10:00 am ET.

AUD/USD seems to have lost track after three straight gains, but is still trading within the Bollinger band range trading zone. In case momentum shifts to the downside, closest support stands at 0.9060, the low from November 20th. It may be a little early to tell, but the formation of a head and shoulders pattern is starting to define itself. The neckline stands at about 0.8943 and will need to be broken to confirm the pattern. Resistance stands at the November 25th high of 0.9321. The aussie rally seems to be losing steam, but it is an ailment that tomorrow’s data may be able to correct.

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Comments (1)

DJFX

December 03, 2009 at 06:27 PM ET

Regarding the US Dollar, BANKS -

Kathy , I have a very deep question regarding TARP, BANKS and the US Dollar?

1. If the US TRSY Didn t buy the toxic assets back in 08', then who is holding them on their balance sheet?

2. If banks are not lending money at the degree of pre-recession, then how are they so profitable? I understand it is cheap for them to borrow it, but who are they lending it to for a profit margin?

3. Do you think the USD will rally in tandam with the stock market, when we finally get some job growth? I dont see any other reason it would?

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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.