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THE STORIES IN THE CURRENCY MARKET

• KEEPING TABS ON THE DOLLAR
• CHF: KOF HITS 12M HIGH BUT CONCERNS REMAIN
• GBP: FINALLY REBOUNDS
• NZD/USD: LENDING GAINS AT ACCELERATED PACE
• AUD/USD: GOLD PRICES DOWN
• USD/CAD: WEAKENS SIGNIFICANTLY AGAINST USD
• USD/JPY: JAPAN AIRLINES WEIGHS ON THE YEN

EXPECTATIONS FOR UPCOMING FED MEETINGS

CURRENT US INTEREST RATE: 0.25%
	01/27 Meeting	03/16 Meeting
NO CHANGE	66.0%	58.6%
CUT TO 0BP	34.0%	26.1%
INCREASE TO 50BP	0.0%	15.3%
INCREASE TO 75BP	0.0%	0.0%

KEEPING TABS ON THE DOLLAR

In low liquidity trading environments it is very common to see a mixed performance in the currency market.  With one more day to go before the end of the year, the dollar traded higher against the Japanese Yen and Canadian Dollar, was unchanged against the Euro and weakened against the British pound, Franc, Australian Dollar, and New Zealand Dollar.  Chicago PMI was the only piece of U.S. economic data released this morning and the strong report helped the dollar spur early gains. However, midday saw a sharp selloff in the greenback when it was reported that the Nasdaq offices in Times Square had to be evacuated because a suspicious vehicle was parked out front. The dollar has since been unable to regain its earlier strength.

Solid Chicago PMI Report

Manufacturing activity in the Chicago region expanded for the third month in a row with the index rising from 56.1 to 60.0, the highest level since January 2006.  The details of the Chicago PMI report reveal overall strength; aside from a small contraction in supplier deliveries, every single one of the other underlying components increased in the month of December.  We were particularly encouraged by the rise in production, new orders and employment.  For the first time since November 2007, manufacturers in the Chicago region added jobs which fit into the overall improvement that we have seen in U.S. data over the past few weeks.  The combination of the strong Chicago PMI and Philly Fed reports suggest that manufacturing activity accelerated nationally.  The ISM manufacturing index is due for release next week and based upon the latest numbers, we expect a dollar positive report on the first trading day of 2010.  The expansion in the employment component of Chicago PMI also points to smaller job losses in the manufacturing sector which bodes well for next Friday's non-farm payrolls report.  

Keeping Tabs on the Dollar

This past year has not been kind to the U.S. dollar.  Since January, the dollar has lost value against every major currency except for the Japanese Yen. For the average American, this means that the cost of traveling to Canada for example has increased 15 percent but for an American exporter, their goods have become 27 percent cheaper for Australians and close to 9 percent cheaper for Britons from an exchange rate basis.  However the weakness of the U.S. dollar is not unique to this past year.  Taking a look at the 10 year performance of the dollar, we can also see that the greenback weakened against every currency except for the British pound.  According to the first chart provided below, over 70 percent of the dollar’s depreciation in the past 10 years occurred in 2009.  More than half of the New Zealand dollar’s gains against the greenback also took place in 2009.  Interestingly enough, the value of the Euro and Swiss Franc has been essentially flat over the past decade.  The second chart compares the current valuation of the major currencies against the dollar with their valuation at the beginning of the year.  On a purchasing power parity basis (using CPI), the dollar is undervalued against every major currency.  However this was not necessarily the case in the beginning of the year.  In January, the Canadian dollar and the British pound were actually undervalued against the greenback while the Australian and New Zealand dollars were fairly valued.  The sharp sell-off in the U.S. dollar has significantly altered the valuation of many currencies.  Although currencies rarely trade at fair value and can remain over and undervalued for years, this information provides important context.  

 

Source: FX360.com, Data from Bloomberg (based on CPI)

CHF: KOF HITS 12M HIGH BUT CONCERNS REMAIN

The euro remained unchanged against the U.S. dollar even as the rally in stocks seems to be losing momentum.  The only piece of Eurozone economic data released this morning was money supply which grew at a slower pace in month of November.  The lack of interesting news for the euro turns our attention to the Franc which is closing in on its 9 month high against the euro.  The currency’s strength is partially tied to the strong KoF leading indicators report which rose from 1.62 to 1.68 in December.  Although the index fell short of market expectations, it was the highest reading since January 2008.  Based upon the UBS Consumption index released earlier this week and KoF leading indicators report, the Swiss economy is on the road to recovery.  However the KoF Economic Institute does not share this sentiment.  According to the institute, the Swiss economy could lose momentum significantly over the next few months.  Although they did not elaborate on this statement, we suspect that their concerns and ominous forecast are directly tied to the recent strength of the Swiss Franc.  As an export dependent economy who counts the European Union as their largest trading partner, the weakness of the euro in relation to the Franc could certainly take a toll on trade.  The prior stability of the Swiss economy was directly tied to the SNB’s successful efforts at keeping EUR/CHF above 1.50.  If the SNB allows the Franc to appreciate further, they stand to risk their own recovery.  

GBP: FINALLY REBOUNDS

We have finally seen a rebound in the British pound that is worth writing about. Over the past few weeks, the pound has come under severe selling pressure against the euro and U.S. dollar.  Although there was no news to trigger today’s move, a relief rally in the pound was long overdue.  Yet it is important for traders to not get too carried away with the rebound in sterling since a tremendous amount of resistance lies above current levels.  At the 1.6050 region, we have the 200-day SMA, this week’s high and the 23.6 percent Fibonacci retracement of the August to October sell-off.  The only piece of U.K. economic data still scheduled for release this week is Nationwide House Prices tomorrow night.  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/USD: LENDING GAINS AT ACCELERATED PACE

Today’s trading saw the aussie and kiwi rally for the fifth straight day, while the Canadian dollar was sent lower for the second straight day. Commodity prices have been unable to extend much support to the commodity currencies, as oil stages slight rallies while gold slides 0.5%. The only data to be reported today came from New Zealand. The country showed that an indicator of household lending rose by 2.8 percent, the fastest annual pace in about a year. While the figure may signal that credit markets are starting to operate more efficiently, the pickup in lending does not necessarily signal reprieve for consumers because that component actually dropped by 5 percent. It was mainly housing loans that drove the figure higher. The country also reported that M3 Money Supply slid to -2.0 percent from 0.8 percent. Even though this figure is often difficult to interpret, it could signal that deflationary pressures are starting to reappear.  This makes sense considering the fact that a higher currency tends to drive down prices. The only data event for the rest of the week from the three commodity producing countries will be tomorrow’s of Australian Private Sector Credit report.

USD/JPY: JAPAN AIRLINES WEIGHS ON THE YEN

USD/JPY rallied for third consecutive day over concerns that a possible bankruptcy by Japan’s largest airlines will send shockwaves through the nation’s economy. Japan Airlines is currently looking into filing for bankruptcy protection after previous government assistance failed to prevent a long string of severe losses. The main question is whether or not the government will be forced to amend the ¥100 billion credit line it has already offered the company. With no data expected for the rest of the week, it is likely that the Japanese Airline’s situation will be the only impetus for further losses. The country did report one piece of data today in the form of Manufacturing sector PMI which rose to 53.8 from 52.3. During a cabinet meeting today, Japanese Prime Minister Yukio Hatoyama put forward his administration’s growth targets for the next decade, which appear to be overly optimistic to some. The cabinet agreed that the government should target growth of more than 2 percent, a figure that currently quadruples the BoJ’s estimates. To add on to what seems to be an unachievable goal is the fact that Japanese growth has not achieved these types of levels in more than two decades. Meanwhile, Finance Minister Fujii confirms that fact that current government support will prevent a double-dip recession because it will spur “consumer spending and housing investment.” Unfortunately, the government’s optimism has failed to give the yen any support as the JAL crisis has negated any positive sentiments.

EUR/USD: Currency in Play for Next 24 Hours

EUR/USD will be the currency pair in play for tomorrow. Data will be limited to Jobless Claims at 8:30 am ET or 13:30 GMT and NAPM-Milwaukee at 10:00 am ET or 15:00 GMT from the United States.

EUR/USD remains in the Bollinger band range trading zone as today’s trading proved unsuccessful in moving the pair very far. The main level of support continues to be 1.4216, which is the low from December 22nd. The strength of the support is aided by the fact that the psychological 1.42 is only slightly below. For resistance, keep an eye on 1.4435, which is the 23.6% retracement from November highs to December lows. This level did a good job at keeping prices depressed after yesterday’s rally attempt failed. With light trading ahead, it is doubtful the pair will be able to definitively break either level.

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.