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U.S. Dollar: Low Liquidity Swings

Last updated 12/29/2009 5:21 PM ET (GMT -5) 2 Comments

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Kathy Lien

Director of Currency Research, GFT

THE STORIES IN THE CURRENCY MARKET

• U.S. DOLLAR: LOW LIQUIDITY SWINGS
• EUR: HIT BY FIXING FLOWS
• GBP: HITS 2 MONTH LOW
• NZD: BREAKS OUT ON LOW VOLUME
• AUD: GOLD AND OIL PRICES LOWER
• CAD: HITS 2 MONTH HIGH INTRADAY
• JPY: NIKKEI HITS 4 MONTH HIGH

EXPECTATIONS FOR UPCOMING FED MEETINGS

U.S. DOLLAR: LOW LIQUIDITY SWINGS

The lack of liquidity in the financial markets this week finally triggered low volume breakouts in the foreign exchange market. The Australian and New Zealand dollars for example strengthened dramatically against the greenback despite the lack of any Australian or New Zealand economic data. The euro ended the day only marginally weaker against the dollar, but the 0.2 percent decline masks significant intraday volatility. The same is true for the British pound which fell as much as 200 pips from high to low on an intraday basis.  The dollar primarily gained momentum during the U.S. session because prior to the NY open, the dollar was actually down against all of the major currencies except for the Japanese Yen. By the end of the day however, it managed to overtake everything except for the Aussie and kiwi. 

Global Equity Indices Hit Year to Date Highs

We also found it interesting that many equity indices hit a year to date high today on an intraday basis. Aside from the Dow, Nasdaq and S&P 500, European indices such as the FTSE, CAC and DAX all climbed to fresh highs while Singapore’s Straits Times Index rose to a 15 month high. On a year to date basis, all of the major stock market indices are up more than 20 percent while some emerging market indices such as Brazil are up 80 percent. Although part of the strength can be attributed to low liquidity, the rallies year to date is a clear reflection of the global recovery.  Emerging markets also tend to be particularly sensitive to the global outlook and their out performance confirms the broad belief that better times lie ahead in the coming year. Whether this is true remains to be seen but we also believe that the worst is behind us. 

Chicago PMI on Tap

Meanwhile according to the latest U.S. economic reports, house prices rose for the fifth month in a row in October. The S&P/CaseShiller home-price index increased 0.4 percent from the previous month on a seasonally adjusted basis, bringing the annualized drop in house prices to 7.3 percent, the smallest year over year decline in 12 months. The data indicates that low mortgage rates and the tax credit continued to support the housing market. Meanwhile consumer confidence rose from an upwardly revised 50.6 to 52.9 in the month of December. Although consumers were less optimistic about the present situation, they grew more optimistic about the outlook for economy for the second month in a row. This increased optimism is in line with the improvements that we have seen in the labor market and the increase in holiday spending. Chicago PMI is the only U.S. report due for release tomorrow and this month the number is particularly important because the other regional releases have been mixed. Manufacturing activity slowed in the NY region but accelerated in Philadelphia and Dallas. The sector’s performance in Chicago will help the market forecast next week’s manufacturing ISM report. 

EUR: HIT BY FIXING FLOWS

Fixing flows drove the euro sharply lower against the U.S. dollar. Up until the release of U.S. consumer confidence numbers, the EUR/USD held onto its recent gains. However around 11am NY Time, the EUR/USD began to fall aggressively and within half an hour, the currency pair dropped close to 80 pips. There was no news or economic data released around that time and the move cannot be attributed to the confidence numbers since the EUR/USD stalled for approximately an hour after the release.  Once or twice a day, banks will provide a fixing rate for market participants. This rate may be used to mark option trades, future or forward contracts and other things such as tourist rates. The fix rate is then considered the benchmark for the currency pair that banks and other vendors will use for their customers that day. Importers and exporters may also settle contracts based upon the fixing rates. Therefore typically ahead of fixings or option expirations (which usually occur around 12pm NY Time or 5pm London Time), there can be a lot of volatility in the dollar which is exactly what we witnessed today.  German consumer prices were released this morning and based upon the latest report, inflationary pressures increased significantly in the month of December. Meanwhile the Swiss Franc ended the day virtually unchanged against the euro and marginally weaker against the dollar despite a sharp rise in the UBS Consumption Indicator. According to the report, consumer spending rose to the highest level since September 2008 confirming that the recovery in Switzerland is underway. Perhaps this may be part of the reason why the Swiss National Bank has been missing in action over the past 2 weeks. The KoF leading indicator report is due for release tomorrow and we expect similar strength as the UBS report.

GBP: HITS 2 MONTH LOW

The British pound fell to a 2 month low against the U.S. dollar as the London markets prepared to close. Given the recent price action in sterling, it is not entirely surprising to see the pound sell off significantly against the dollar. The break of the prior 2 month low at 1.5922 has opened the door for a move down to 1.58. The Bank of England’s housing equity withdrawal was the only piece of U.K. data released this morning. According to report, Britons paid back their housing debt for the sixth consecutive quarter. The recession has encouraged the British to reduce their debt and increase their savings in case economic conditions worsen in the coming months. However the pace of savings has slowed as the housing market continues to show signs of resilience. Looking ahead, Nationwide House Prices are due for release this evening and there is no reason why the Building Society should offer any different information from Hometrack, the Property Valuation firm who reported increases in house prices last month. 

NZD: BREAKS OUT ON LOW VOLUME

The New Zealand and Australian dollars were the day’s best performing currencies. Despite the lack of economic data or comments from central bank officials, the kiwi and aussie appreciated for most of the Asian and late European trading sessions. In yesterday’s daily report, we talked about how the divergence between the recent comments from the two Reserve Banks has helped the New Zealand dollar outperform the Aussie. Today’s price action indicates that this dynamic remains a primary driver of AUD/NZD. Nothing outside of model buying and fixing demand can explain the breakout in these currencies. The rally in the AUD/USD and NZD/USD are a reflection of the type of volatility that low volume and thin trading conditions can create. Meanwhile the Canadian dollar gave up its earlier gains after oil prices turned negative. On an intraday basis, USD/CAD had fallen to 2 month low shortly after the NY open. Aside from New Zealand’s M3 money supply release which is inconsequential, there are no additional economic releases due from the 3 commodity producing countries over the next 24 hours. 

JPY: NIKKEI HITS 4 MONTH HIGH

Although the Nikkei climbed to a 4 month high overnight, the Japanese Yen weakened across the board.  No economic data was released but investors were concerned that the government is now considering bankruptcy as one of the components of its restructuring plan for Japan Airlines. Twenty years ago to this day the Nikkei hit a record high of 38,957. Since then, the index has fallen more than 70 percent, representing the underperformance of the economy over the past 2 decades. Twenty years ago, the Japanese economy was at its height and growth appeared unstoppable. However the burst of the housing market triggered a massive turn in the economy, thrusting Japan into a long period of stagnation. Not much has changed other than the fact that China is closing the gap on Japan with the country now at risk of losing its title as the world’s second largest economy. Manufacturing sector PMI is due for release this evening and after that, there will be no additional economic reports from Japan until the New Year. Manufacturing sector activity has been expanding since July and this trend is expected to continue. Meanwhile Finance Minister Fujii was admitted to the hospital earlier this week for high blood pressure and exhaustion. This may be part of the reason why the Yen weakened against the dollar over the past two trading days. Just imagine what would happen to the greenback if Treasury Secretary Geithner was suddenly hospitalized. 

USD/JPY: Currency in Play for Next 24 Hours

USD/JPY will be the currency pair in play tomorrow with Chicago PMI due for release at 9:45am NY Time or 14:45 GMT. Despite today’s quiet trading conditions, USD/JPY rose to a 2 month high, putting the currency pair deeper into the Buy Zone, which we determine using Bollinger Bands. The October high of 92.33 is the closest level of resistance but the most significant level is 93.15, which is the 50% Fibonacci retracement of the April to November sell-off. As long as USD/JPY holds above 91.00, which is fairly significant support (served by the 38.2% Fibo retracement of the same levels, the 20 and 100-day SMA and 1 ^st Standard Deviation Bollinger Band) there is scope for further gains. 

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Comments (2)

Thai Vu

December 29, 2009 at 11:36 PM ET

No economic data for JPY today. There are 2 important indicator KOF Economic Barometer of CHF and Chicago PMI of USD. So the USD/CHF should be the pair play for the next 24 hours

Thai Vu

December 29, 2009 at 11:40 PM ET

By the way, I bet a bad indicator for CHF and good Chicago PMI. Then the
EURUSD go down to 1.4250
USDCHF go up to 1.0450

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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.