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THE STORIES IN THE CURRENCY MARKET

• HOW DOES THE SANTA RALLY AFFECT THE DOLLAR?
• EUR/USD: UNDER PRESSURE FOR FIFTH TRADING DAY
• GBP/USD: CLOSING IN ON SUPPORT
• USD/CAD: RETAIL SALES LIFT THE LOONIE
• AUD/USD: GOLD PRICES PLUNGE
• NZD/USD: CURRENT ACCOUNT TURNS TO DEFICIT
• USD/JPY: SHIRAKAWA KEEPS UP THE FIGHT

EXPECTATIONS FOR UPCOMING FED MEETINGS

CURRENT US INTEREST RATE: 0.25%
	01/27 Meeting	03/16 Meeting
NO CHANGE	68.0%	62.4%
CUT TO 0BP	32.0%	27.1%
INCREASE TO 50BP	0.0%	10.5%
INCREASE TO 75BP	0.0%	0.0%

HOW DOES THE SANTA RALLY AFFECT THE DOLLAR?

Dollar bulls remain in control despite thin trading conditions and the lack of U.S. economic data. The greenback extended its gains against every major currency with the Australian dollar and Japanese Yen losing the most ground.  The rally in U.S. equities has evoked speculation about whether the Santa Claus rally has come early this year.  According to the Stock Traders Almanac, “it is pretty much clockwork” for stocks to post gains at the end of the year.  Stocks ended higher 12 out of the last 15 end of the year periods as holiday cheer translated into holiday gains.  This morning, the Nasdaq hit a fresh year to date high intraday fueling speculation that equities in general may end the year at new highs.

Is the Santa Rally Positive or Negative for the Dollar?

The seven trading days from Christmas Eve to the first two days of January is typically the period that is recognized for the Santa Claus rally.  This pattern was identified by Jeff Hirsch, the founder of the Stock Trader’s Almanac.  We decided to take this same idea and apply it to the currency market to see how the Santa Claus rally affects the U.S. dollar. Based upon our calculations and as indicated by the chart below, the dollar weakened against the euro 8 out of the last 10 years between Christmas Eve and the first two trading days in January.  Against the Japanese Yen, it weakened 7 out of the last 10 years.  Statistically these numbers are significant and suggest that the dollar could give back its gains over the next 2 weeks as the stronger performance in equities fuel risk appetite.  However we all know that this year is unlike any other and so there is a good chance that this pattern may not be repeated.  For the first time since the Lehman Brother’s bankruptcy, the strength in the dollar and the strength in stocks could be a sign that the dollar is finally trading on fundamentals and not risk appetite.  We have previously said the divergence between the performance of currencies, commodities, stocks and bonds was worrisome, but today every single asset class is telling us that investors are banking on an accelerating recovery.  

 

Economic Data Preview

Although it is unclear whether or not there will be a correction in the U.S. dollar over the next two weeks, there is a very good chance that a breakout will not occur.  Instead, we expect continued range trading as the lack of buyers and sellers lead to thin and quiet trading conditions.  In our special report “Forex: The Reality of Thin Holiday Trading” we talked about how the average trading range this week tends to be 25 to 50 percent less than the average weekly trading range in the EUR/USD.  The following is one of two charts that we included in the article to support our point.  However currency traders will have some data to key off of tomorrow with the third release of Q3 GDP and existing home sales on tap.  No revisions are expected to the GDP report, but if growth was to be revised in one direction, it would most likely be lower since prior releases for retail sales were revised downwards. Existing home sales could also disappoint having increased significantly in October.  

EUR/USD: UNDER PRESSURE FOR FIFTH TRADING DAY

For the fifth trading day in a row, the euro has failed to rally against the U.S. dollar.  Although there was no economic data released from the Eurozone there was no shortage of comments from European officials.  ECB member Orphanides talked about how the problems in Greece and Ireland will not lead to a default or a breakout of the euro region.  He also said the central bank will keep rates on hold for as long as needed but will be phasing out some emergency measures as needed.  ECB member Stark was not as conservative.  Instead he pointed out that keeping rates too low for too long was one reason for the crisis and there will be negative side effects to the liquidity measures if they are kept in place for too long.  French producer prices and German consumer confidence are the only marginally important economic releases that will be released from the Eurozone on Tuesday.  Therefore all eyes will be on the Swiss Franc which is still trading in intervention territory.  EUR/CHF hit an 8 month low of 1.4850 intraday but ended up 100 pips higher.  Money supply numbers were released this morning with no major surprises.  The trade balance is due for release tomorrow and we believe that the Swiss National Bank’s attempts to prevent the Swissie from strengthening have probably helped to boost exports.  

GBP/USD: CLOSING IN ON SUPPORT

There was no economic data released from the U.K. this morning, leaving the British pound vulnerable to broad dollar weakness.  The GBP/USD is closing in on its 1.60 support level and there is really nothing standing in the way of this level being tested.  However if 1.60 is broken, there is no meaningful support until 1.58.  U.K. GDP numbers are due for release tomorrow and the market currently expects an upward revision to the Q3 numbers.  However given the downward revision to retail sales and the flat industrial production figures, we are skeptical about the growth report.  Current account figures will also be released and based upon the small improvement in trade, we anticipate a small improvement in the current account deficit.  The real action in the British pound should come on the heels of Wednesday’s Bank of England minutes.  We do not anticipate any blowout reaction to Tuesday’s data.  

USD/CAD: RETAIL SALES LIFT THE LOONIE

The aussie and kiwi are being hit hard as a slump in commodity prices and renewed dollar strength manage to erode the currency’s appeal. However, the loonie remains an outlier, posting strong gains in early trading. However, the currency’s strength has dwindled as dollar bulls come back with force. The main factor keeping the Canadian dollar in positive territory was Retail Sales, which showed its eighth gain in the last ten months. The report advanced to 0.8% on gains in auto and clothing sales. However, this was not exactly the overwhelming strength we were hoping for. Barely half of the underlying components managed to gain and last month’s retail sales were stronger. It’s hard to be too critical of Canadian improvement, as it seems that spending will lag the sharp recovery in employment. Australian Motor Vehicle sales were also strong in November, coming in at 15.8% versus the 3.3% annualized gaine reported last month. However, since this month will mark the end of a tax break that was offered to buyers, it is largely expected that next month’s sales will return to reality. The Conference Board’s Leading Index is expected tomorrow.  Meanwhile New Zealand’s current account surplus turned into a deficit in the third quarter with the balance flipping from NZD 0.124 billion to -1.413 billion.  The 3.1 percent contraction was less than the market had anticipated.

USD/JPY: SHIRAKAWA KEEPS UP THE FIGHT

USD/JPY breaks a six week high on signs that rates will stay at the zero-bound indefinitely. Bank of Japan Governor Shirakawa verbalized his attack against deflation on a Japanese television program today. He said he is prepared to keep rates at “virtually zero” until he wins the fight against deflation. Shirakawa maintains that the bank is “always prepared to act swiftly and decisively.” Rarely is central bank rhetoric made so direct, which says something about how unlikely it will be for us to see any hawkish tendency coming out of the bank in a long time. However, on the policy front, it is questionable as to what more the BoJ would be able to do. This month, they already initiated a new lending program on top of the outstanding programs they already have in place. The BoJ definitely faces some tough decisions if deflationary threat becomes more severe.  Meanwhile economic data from today was very promising. The Japanese Trade Balance showed that exports declined at the slowest rate in more than a year, while imports fell at the slowest pace in twelve months. The improvement was driven primarily by shipments to Asian countries thanks to renewed demand from China. It is surprising that the strong yen did not have more of an effect on trade. Other releases showed that the All Industry Activity Index rose 1.2%.  

GBP/USD: Currency in Play for Next 24 Hours

The GBP/USD will be the currency pair in play for tomorrow. For the U.K., we are expecting Gross Domestic Product as well as the Current Account at 4:30 am ET or 9:30 GMT. Meanwhile, the U.S. is set to release Gross Domestic Product and Personal Consumption at 8:30 am ET or 13:30 GMT and Existing Home Sales at 10:00 am ET or 15:00 GMT.

Another sharp decline keeps sterling firmly positioned within the Bollinger band sell zone. Drawing Fibonacci levels from the October 13th low to the November 16th high, puts the next level of support at the 78.6% retracement of 1.5957. However 1.60 level will undoubtedly provide psychological support especially with the 200-day SMA at that level. Resistance lies at the 61.8% retracement of 1.6164, a level that managed to cap rallies earlier this morning. If the currency pair manages to break above 1.6225, there is scope for a broader rally towards 1.64.

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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.