• Share this:

THE STORIES IN THE CURRENCY MARKET

• WILL THE DOLLAR CONTINUE TO RISE?
• EUR/USD: BUSINESS CONFIDENCE HITS 17 MONTH HIGH
• GBP/USD: BIG WEEK AHEAD
• USD/CAD: SECOND WEEKLY DECLINE
• AUD/USD: AUSSIE COMPANIES COMPLAIN ABOUT AUD STRENGTH
• NZD/USD: GOLD AND OIL PRICES REBOUND
• USD/JPY: INTOLERABLE DEFLATION

EXPECTATIONS FOR UPCOMING FED MEETINGS

CURRENT US INTEREST RATE: 0.25%
	1/27 Meeting	3/16 Meeting
NO CHANGE	68.0%	62.4%
Cut to 0.00%	32.0%	27.1%
Increase to 0.50%	0.0%	10.5%
Increase to 0.75%	0.0%	0.0%

WILL THE DOLLAR CONTINUE TO RISE?

On the last trading day before Christmas week, when everyone goes into holiday mode, the dollar held onto its recent gains against all of the major currencies except for the comm dollars (AUD, NZD and CAD).  Although many of the major currency pairs ended the day virtually unchanged, on an intraday basis, there was quite a bit of volatility in both currencies and equities. Considering that today is Quadruple Witching, when stock index futures, stock index options, stock options and single stock futures all expire, the volatility is not particularly unusual. Instead, the lack of economic data in U.S. and the flat price action in the EUR/USD has many traders wondering how much further if the dollar will rise.

Will the Dollar Continue to Rise?

In the foreign exchange market, we have long learned that trends can be longer and deeper than most people would normally expect.  The latest downtrend in the U.S. dollar for example lasted for more than 8 months.  Since the turn in the U.S. dollar is supported by a turn in fundamentals, there is a good chance that it could continue.  However dollar bulls may have to wait until the New Year for the dollar to resume its rise since next week’s economic reports may hurt more than help the U.S. dollar.  The key U.S. economic releases on the calendar include the final release of third quarter GDP, durable goods, existing and new home sales.  No major revisions are expected to Q3 GDP but given the drop in builder confidence and the previous jump in existing and new home sales, the housing market numbers may retreat.  Also, the volatility in the week of Christmas tends to be less than two thirds that of the typical volatility that we see in the EUR/USD and USD/JPY throughout the year.   If the dollar gains traction however, pushing the EUR/USD lower, the sell-off could stall at 1.4150 region, where we have the 200-day SMA and the 38.2 percent Fibonacci retracement of this year’s rally coming in as support. 

Is the Dollar’s Downtrend Over?

Despite the obvious rebound in the U.S. dollar, many investors and economists have a hard time believing that the long term trend in the dollar has really changed.  They point to the aggressive spending by the U.S. government and the growing budget deficit as the primary reasons why structural demand favors dollar weakness and not strength. They also indicate that even though the U.S. economy is improving, growth in the first half of 2010 will be modest at best and the fears of the blowup in Greece spilling over to the larger members of the Eurozone are exaggerated.  Although we also believe that the spending by the U.S. government will only increase in the coming year, in the near term, foreign central banks still have to buy dollars.  Trading is also an expectations game.  The dollar could resume its decline which means the rebound that we are seeing now could be temporary, but until the market has a reason to change its bias, it won’t.  The next test of the U.S. economy will come from the December non-farm payrolls report, which is not due for release until January 8th. 

 

Forex Traders Increase Long Dollar Positions, Short Euro Positions

Meanwhile, foreign exchange traders in the futures market increased their short euro, long dollar positions.  Last week’s CFTC Commitment of Traders report revealed that futures traders turned net short EUR/USDs for the first time since March.  On Monday, we talked about how this shift in positioning tends to foreshadow a sharp decline in the currency pair.  As of December 15th, before the break of 1.45 level, EUR/USD net short positions were at 16,448 contracts, up sharply from 511 contracts a week earlier.  From a sentiment and positioning perspective, this suggests that the dollar has more room to rise even though it just recorded its biggest one week rally against the euro since October.  Although future traders are net long dollars against the euro and Japanese Yen, they remain net short dollars against all of the other major currencies which implies that they are not as bearish about the Australian or Canadian economies as they are the Eurozone and U.K. economies. 

EUR/USD: BUSINESS CONFIDENCE HITS 17 MONTH HIGH

The EUR/USD capped out an extremely tough week by falling to a four month low of 1.4262 on an intraday basis.  Yet the currency pair managed to rebound off its lows to end the day unchanged as U.S. equities crawled back from negative territory.  Despite all of the concerns about the sovereign risk of certain countries within the Eurozone, German economic data remains strong.  The German IFO report which measures business confidence rose to a 17 month high in December, supporting this week’s uptick in manufacturing sector PMI.  Exports continue to drive the Eurozone recovery and the recent sell-off in the EUR/USD will only help.  Businesses grew more optimistic about current and future conditions which suggest that they are not worried about the outlook for the global economy or the problems in their sister nations.  The Eurozone current account and trade balance also beat expectations, reflecting the same strength as the German IFO report.  The only disappointment came from German producer prices which grew at a slower pace in November but with the risks of inflation growth accelerating in the future, slower inflation growth in the present is more than welcome.  Looking ahead, the Eurozone economic calendar is devoid of any market moving data in the coming week which means that barring any unpredictable disasters, trading should be quiet. 

 

GBP/USD: BIG WEEK AHEAD

Like the EUR/USD the British pound ended the day unchanged against the greenback.  According to this morning’s economic reports, public sector net borrowing hit a record high in the month of November while private sector borrowing moderated.  Although the public sector borrowed less than the market had anticipated, it does little to ease the concerns of sterling bears that have become increasingly uncomfortable with the U.K.’s fiscal position.  Countries around the world being downgraded because of their burgeoning budget deficits and the degree of borrowing in the U.K. has some traders wondering if they will be next.  Although the risk of a downgrade is currently low, the risk of the governing Labour Party losing support ahead of the June elections is high.  The British pound will be one of the currencies in play next week with the Bank of England minutes and final third quarter GDP report due for release.  The BoE left their Quantitative Easing program unchanged and traders will be looking to the minutes to see if the central bank has left the door open for further easing.  

 

USD/CAD: SECOND WEEKLY DECLINE

All of the commodity currencies rebounded off yesterday’s lows thanks to decent gains in both crude and gold. The Canadian dollar faces its second weekly decline as Wholesale sales are unable to spur a recovery. The sales figures missed estimates, coming in at 0.3% versus the 0.5% that was expected. However, the headline number masks signs of improvement such as the fact that five out of the seven underlying components were stronger on the month. It was sales of food, beverages, and tobacco products that weighed down the index. Canadian data for next week includes Retail Sales for Monday and monthly GDP for Wednesday.  Even though the Australian dollar recorded its worst weekly performance in close ti a year, we received new indications that the rally over the past year is starting to have its affect on Australian companies. Foster Group, the beer and wine maker, reported that earnings could be reduced by as much as A$90 million in the first half of 2010 if the aussie stays at these lofty levels. In addition, they indicated that for every cent rise against the dollar, the company stands to lose A$6.3 million in profit. A second warning from Telstra today indicates that the economy is finally starting to feel the pain, even though the effects have lagged a bit. There has not been many comments made on the part of the RBA, but if the aussie develops new legs, they may be forced to try to talk down the currency. New Zealand has a busy week ahead with the Current Account Balance on Monday and GDP on Tuesday.

USD/JPY: INTOLERABLE DEFLATION

The yen is weaker across the board on signs that monetary policy will remain accommodative for much longer than expected. At today’s rate decision, the Bank of Japan voted unanimously to keep rates cemented at 0.1 percentand proclaimed that they would not tolerate a change in inflation “equal to or below zero percent.” The BoJ is now embattled in a difficult fight against deflation, which means that, until prices return to a more sustainable range, all bets are off for an exit strategy let alone a rate hike. The BoJ will closely monitor a ¥10 trillion lending program that it put into place a couple of weeks ago. It remains very likely that if this deflation fighting technique proves ineffective, the bank will either have to expand the program or institute a new plan of attack. It seems that the BoJ is slowly beating out the Bank of England as one of the most dovish central banks in the G-20. Economic data was at a minimum today with Nationwide Department Sales showing a larger than expected decline to -11.8%. Reports on the way for next week include Merchandise Trade for Sunday night, All Industry Activity for Monday, the BoJ Minutes and BSI index for Wednesday, and the Jobless rate for Thursday.

USD/CAD: Currency in Play for Next 24 Hours

The currency in play for Monday is USD/CAD. Canadian Retail Sales are expected to be released at 13:30GMT or 8:30AM EST. USD/CAD is currently on the verge of a breakout, having consolidated for the past 2 months.  Although the currency pair is trading within the Buy Zone which we determine using Bollinger Bands, the bands are not as effective when ranges are this tight.  Before embarking on a rally the pair must first pierce through the top of rising triangle formation which would require a break of 1.0745, a level that the pair failed to break on three distinct occasions. Meanwhile, if USD/CAD drops out of the Buy Zone and breaks support at 1.0600, expect it to fall to the bottom of the rising triangle formation.  

The information, including Commentary and Trade Ideas, provided on FX360.com should not be relied upon as a substitute for extensive independent research which should be performed before making your investment decisions. Global Forex Trading and FX360 .com is merely providing this information for your general information. The information and opinions presented do not take into account any particular individual’s investment objectives, financial situation, or needs. All investors should obtain advice based on their unique situation before making any investment decision and should tailor the trade size and leverage of their trading to their personal risk appetite. Any projections or views of the market provided by FX360.com may not prove to be accurate.

The views of the authors and analysts are not necessarily those of Global Forex Trading, its owners, officers, agents or other employees. FX360.com and the currency research team will not be responsible for any losses incurred on investments made by readers and clients as a result of any information contained on FX360.com. Global Forex Trading and the currency research team do not render investment, legal, accounting, tax, or other professional advice. If investment, legal, tax, or other expert assistance is required, the services of a competent professional should be sought.

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.