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THE STORIES IN THE CURRENCY MARKET

• U.S. DOLLAR: BUCKLING UNDER FUNDAMENTAL AND TECHNICAL PRESSURE
• EUR/USD: STRONGEST RALLY IN DECEMBER
• GBP: NO MAJOR DECISIONS UNTIL FEB
• USD/CAD: SHRUGS OFF GDP
• NZD/USD: FINANCE MINISTER ENGLISH CALLS RECOVERY FRAGILE
• AUD/USD: COMMODITY PRICES REBOUND
• USD/JPY: STIMULUS ABOUND

EXPECTATIONS FOR UPCOMING FED MEETINGS

CURRENT US INTEREST RATE: 0.25%
	01/27 Meeting	03/16 Meeting
NO CHANGE	64.0%	59.7%
CUT TO 0BP	36.0%	30.4%
INCREASE TO 50BP	0.0%	9.9%
INCREASE TO 75BP	0.0%	0.0%

U.S. DOLLAR: BUCKLING UNDER FUNDAMENTAL AND TECHNICAL PRESSURE

It is clearly a quiet day in the currency market when we get can excited about a 0.5 percent sell-off in the U.S. dollar.  However this is the most significant correction that we have seen in the currency in 7 days against the euro and Japanese Yen and 5 days against the British pound.  There is no question that the dollar has become extremely overbought and was due for a correction.  The combination of disappointing economic data and technical resistance has finally caused the Teflon currency to buckle.  The dollar weakened against every single currency except for the British pound with the sharpest losses seen against the Canadian dollar, the only currency to outperform the greenback this month.  

Disappointing U.S. Economic Data

The latest series of U.S. economic reports offset some of the optimism induced by data released earlier this month. In November, personal income, personal spending and the PCE deflator all fell short of expectations. Incomes rose 0.4 percent last month while spending rose 0.5 percent. The faster growth in spending over income suggests that consumers are becoming more liberal about opening their pocketbooks. However we remain skeptical on whether this pick up spending will last after the holidays since consumers have primarily been looking to take advantage of discounts by retailers. The lofty University of Michigan consumer confidence numbers were also revised lower for the month of December, but it does not draw away from the fact that confidence improved dramatically this month. The big negative surprise was in new home sales which fell by a staggering 11.3 percent in November. This is the sharpest decline that we have seen since January and the lowest number of units sold since April. Not only does the large decline offset the strong demand for existing home sales but it provides a taste of what may be to come for the housing market when the tax break ends next year. With such weak demand for new home sales, we are surprised to see an increase in the median new home price last month. Although prices fell 1.9 percent when compared to the year prior, they rose 3.8 percent between October and November.

 

Dollar’s Uptrend Remains Intact

Looking ahead, durable goods orders and jobless claims are due for release on Thursday.  Trading will probably grind to a halt after those numbers are released since the U.S. equity markets closes early at 1pm NY Time.  Forex trading will end at 3pm NY Time (20:00 GMT) for the Christmas Holidays.  GFT will be open for trading again on Sunday December 27 at 5pm NY Time (22:00 GMT).  In the meantime, the sell-off in the dollar today is merely a hiccup in the currency’s overall uptrend.  We would need to see a much more significant correction in the dollar to erase the positive sentiment.  The only possible trigger for this in the near future would be the U.S. non-farm payrolls report which is scheduled for release on January 8th.  So far, jobless claims have increased in December and if claims rise tomorrow as well, there is a good chance that job losses accelerated this month which would hurt the recovery trade.  Meanwhile the launch of Boeing’s 787 Dreamliner may have boosted demand for nondefense aircraft orders.

EUR/USD: STRONGEST RALLY IN DECEMBER

On both a pip and percentage basis, the rally in the EUR/USD today was the strongest since the beginning of the month.  Considering that the currency pair only appreciated 0.6 percent or 85 pips, the performance reflects its overall weakness.  The combination of stronger U.S. economic data and concern about the fiscal situation of Eurozone nations has weighed on the euro for most of the month.  The fact that the EUR/USD rebounded today despite weaker economic data suggests that the recovery is driven primarily by dollar weakness and not euro strength.  French consumer spending turned negative last month while German import prices grew at a slower pace and Italian retail sales were also flat which indicates that if Eurozone GDP growth is to be supported by consumption, it would need to come from Germany.  Unfortunately if the Germans also cut back spending, then GDP growth could slow in the third quarter.  The only Eurozone economic report on the calendar tomorrow is t labor market data from France and the number of jobseekers is expected to decline.  Meanwhile the price action in the Swiss Franc suggests that Swissie traders like enjoy flirting with danger. After a brief pause on Tuesday, the franc has extended its gains, pushing deeper into intervention territory.  Someone is clearly interested in testing the resolve of the Swiss National Bank.  Even though the SNB has not made a peep about the latest strength in the Franc, the consequences of SNB intervention are severe.  

GBP: NO MAJOR DECISIONS UNTIL FEB

The British pound was the only currency that weakened against the U.S. dollar today and its underperformance is partially tied to the market's disappointment in the Bank of England, who failed to give any signal to the market. The minutes from the December monetary policy meeting revealed that Bank of England members voted unanimously to keep the size of their Quantitative Easing program unchanged. Although the pound managed to maintain its gains following the report, it has failed to strengthen against the U.S. dollar or any other major currency for that matter as traders realize that the U.K. economy is amongst the weakest. The Bank of England is the only central bank that is seriously considering additional quantitative easing and the U.K. is the only major country still in recession. The Monetary Policy Committee voted to keep their QE program unchanged because the economic and inflation outlook has not deteriorated or improved since November – in other words, nothing has changed. The minutes revealed that the central bank is concerned about money growth, the outlook for the labor market and the shock that a sovereign downgrade would have on the economy. Central bank officials were also surprised by the weakness of export growth considering that the sterling has weakened and world trade is recovering. According to the index of services, the service sector contracted for the 16th month in a row.  On a positive note, the monetary policy committee felt that consumption and business investment was stronger than expected which may help to boost GDP in Q4; loans for house purchases also increased.  Ultimately, we expect the Bank of England to stand pat again in January as they wait for more data before deciding what changes to make, if any in February when their Quarterly Inflation Report is released.  

USD/CAD: SHRUGS OFF GDP

All commodity currencies are benefiting from the combined effects of a weak dollar and stronger commodities. However, economic data has not lent much to support any rallies. The loonie largely shrugged off an earlier report that suggested growth would be more stubborn than expected.  GDP expanded by 0.2 percent in October, falling short of the market’s 0.3% forecast. Nevertheless, traders are still rejoicing in the fact that this marks the second consecutive month of expansion, a trend that has not been seen in approximately two years. It was mainly the mining and financial services sectors that dragged down the index, while retail and construction saw improvement. The real driving force behind the loonie was the fact that Canadian Finance Minister Jim Flaherty noted that China and Russia might take “greater positions” in the currency. This makes sense as it coincides with the theme of diversifying away from dollars, but it is hard to believe that the government will be too receptive of the fact the CAD might strengthen as a result. In New Zealand, Gross Domestic Product displayed a rather sluggish recovery, which is being hurt by construction and business investment. Nevertheless, on a bright note, Household Spending showed a gain of 0.8% while exports remained resilient even in the face of a stronger kiwi. In response to the report, New Zealand Finance Minister Bill English said that the recovery “remains fragile.” This makes the previously mentioned June 2010 target for a rate hike slightly more doubtful.

USD/JPY: STIMULUS ABOUND

USD/JPY officially breaks a six-day winning streak, its longest since the end of September. In the last 24 hours, Japanese Finance Minister Fujii proposed a plan to set aside ¥1 trillion for additional economic stimulus, with emphasis on job creation and small business assistance. The new administration is clearly responding to political unrest, driven by unfulfilled promises to revive the economy. However, the question remains as to where exactly the funds will come from. While the answer is still unclear, Fujii promised that the government will not be selling any more bonds to finance the new projects. Perhaps more interestingly, the finance minister proposed that another plan, of similar propositions be organized for next year. Apparently, officials believe that Japan will make no quick recovery as the fight against deflation and economic stagnation will be waged for many months to come. A Japanese holiday has caused a glut in data today, but the calendar will pick-up for tomorrow. We are expecting the release of the Bank of Japan’s Minutes from their last rate decision. The BoJ’s recent confirmation to fight deflation at all costs left many wondering what they plan to do if the threat continues unabated. Therefore, traders will be looking at the minutes for any signs of clarifications to the central bank’s plans. In addition, the quarterly BSI Large All Industry index will also be released.

USD/JPY: Currency in Play for Next 24 Hours

USD/JPY will be the currency pair in play for tomorrow. In overnight trading, we are expecting the release of the Bank of Japan’s Monetary Minutes and the BSI Large All Industry Index at 6:50 pm ET or 23:50 GMT. The U.S. will be releasing Durable Goods Orders and Jobless Claims at 8:30 am ET or 13:30 GMT.

Despite a small pullback, USD/JPY is still clearly holding within the Bollinger band buy zone. However, in case today’s decline marks a short-term pullback, we are looking at the December 4th high at 90.76 as support. If a new rally develops, there is a very strong level of resistance in place at 92.32, which is the high from October 27th. Overall, the momentum is still on the dollar’s side. However, if the bad data continues to come streaming in, it is unlikely that it will last for long.

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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.