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U.S. Dollar: Bye Bye 2009

Last updated 12/31/2009 6:14 PM ET (GMT -5) 4 Comments

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Kathy Lien

Director of Currency Research, GFT

THE STORIES IN THE CURRENCY MARKET

• U.S. DOLLAR: BYE BYE 2009
• EUR/USD: ENDS 2009 UNCHANGED
• GBP RECOVERS AS BOE EXPECTED TO STAND PAT NEXT WEEK
• AUD: ENDING THE YEAR ON A FIRM NOTE
• NZD: FADING STRENGTH
• CAD: ENDS 2009 ABOVE 1.05
• USD/JPY SHRUGS OFF SELLOFF IN STOCKS

EXPECTATIONS FOR UPCOMING FED MEETINGS

U.S. DOLLAR: BYE BYE 2009

Within a few hours, we will be ringing in a New Year and a New Decade.   Although stocks ended the last trading day of 2009 in negative territory, the dollar was mixed, extending its gains against the Japanese Yen and the euro but losing ground against the British pound. 2010 should be an exciting year for the foreign exchange market with central banks around the world unwinding their emergency measures and starting to raise interest rates.   Trading should start off with a bang next week with an exceptionally heavy economic calendar.   Only a limited amount of economic data has been released over the past 2 weeks and forex traders will be looking to make up for lost time.   The beginning of the year is typically a very busy time in the financial markets as mutual funds, hedge funds, institutional and individual investors initiate new positions.   In our special report this morning, we talked about how the dollar has a tendency to rise in the month of January.  

Before we talk about all of the economic data that are scheduled for release in the coming week, we think that it is important to first get a sense of where different countries stand going into the New Year.   In the following table, we have listed the current interest rate, unemployment, growth and inflation rates along with the deficit or surplus of that country as a percentage of GDP.   We also highlighted the countries with the weakest and strongest rates by category for comparison.   In terms of interest rates, China and Australia have the highest rates while Japan has the lowest.   The U.S. has the highest unemployment rate while the level of unemployment in Switzerland and China are the lowest.   Growth is the weakest in the U.K. and Japan, which helps to explain why the British pound has been underperforming as of late and why the Japanese Yen has underperformed over the course of the year.   The Australian dollar on the other hand was the best performing currency in 2009 because Australia was the only G20 nation with positive GDP growth last year.   However even though growth has been weak in both the U.K. and Japan, inflationary pressures in each of these countries are very different.   On annualized basis, the U.K. is facing strong inflationary pressures while Japan is still mired in deflation.   Finally, one of the primary reasons why economy watchers have been calling for long-term dollar weakness is the huge U.S. deficit as a percentage of GDP.   New Zealand on the other hand is running a strong surplus, which may help to explain why the New Zealand dollar was the second best performing currency in 2009.   How these numbers change will determine where the major currency pairs are headed in 2010.

Big Week Ahead

In the meantime, the first week of January will be an exceptionally busy.   The U.S. will be releasing its manufacturing ISM report, factory orders, pending home sales, service sector ISM and non-farm payrolls.   The NFP report is always a very a big market mover for the U.S. dollar but the market’s reaction to the December labor market report could be particularly volatile.   Last month’s net job loss of 11k put the U.S. economy at the cusp of returning to positive job growth.   If job losses come to an end in December, the recovery trade would be in full swing, which should help the dollar extend its gains.   This morning’s healthy jobless claims report puts the odds in favor of stronger employment numbers.   However if job losses accelerate, the pace of the U.S. recovery could come into question, threatening the recent rally in the U.S. dollar.    

EUR/USD: ENDS 2009 UNCHANGED

Despite all the volatility that we have seen in the EUR/USD this past year, it has ended 2009 virtually unchanged. There was no European economic data on the calendar this morning but everyone should consider this the calm before the storm. Like the U.S., there are a number of market moving Eurozone economic reports to be released next week.   January tends to be a difficult month for the EUR/USD but whether that will be true this year will be partially contingent upon the upcoming releases.   The most important reports that we are expecting from the Eurozone include German unemployment, Eurozone producer prices, retail sales, confidence, German factory orders, industrial production, trade and current account figures. Based upon the most recent PMI reports from Germany, the service sector saw increased employment while job losses in the manufacturing sector moderated.   Although the fiscal troubles of various European nations have crippled the euro, the economic outlook remains healthy.   As indicated by the chart above, inflationary pressures are modest.   The European Central Bank has already begun to unwind their emergency measures and we believe that they will continue to do so in the month of January.  

GBP RECOVERS AS BOE EXPECTED TO STAND PAT NEXT WEEK

For the second day in a row, the British pound extended its gains against the U.S. dollar.   Although the U.K. is the only country with a monetary policy decision next week, nothing material is expected to come from the rate announcement.   Bank of England officials have already hinted that the next major decision will occur in February.   According to the minutes from the most recent monetary policy decision, MPC officials voted unanimously to leave interest rates unchanged because nothing changed from the prior meeting.   Given that there was virtually no economic data released from the U.K. in the last 2 weeks of December, we doubt that much has changed since the most recent meeting either.   Any big surprises in next week’s economic reports could affect the tone of the BoE meeting - manufacturing sector PMI, mortgage approvals, service sector PMI, and producer prices are due for release. However we don’t really expect any major deterioration or improvement in the U.K. economy, which has underperformed significantly over the past year.   Despite the recovery in the financial sector, the U.K. was hit hard by the credit crisis and is still struggling to recover.   Unlike other countries, the U.K. has not benefitted from a recovery in export demand or a weak currency.   The Bank of England will most likely wait another month before deciding whether to increase monetary stimulus.  

AUD: ENDING THE YEAR ON A FIRM NOTE

The year 2009 will definitely be one for the record books for the commodity currencies. The Australian and New Zealand dollar each completed their best years since 2003, rising 27 percent and 23 percent against the dollar, respectively. They gained even more against the yen, with the Aussie rising almost 30 percent. The Canadian dollar also made waves with a 13 percent advance against the greenback. One of the main factors that have driven the commodity currencies higher was the combination of gold reaching unprecedented heights and oil pushing for the largest annual rally in about a decade. So far, this week the long term trend for the aussie and kiwi has continued with gains seen against the dollar and yen.   However, the loonie saw its earlier rally dissipate due to a strong decline on Wednesday. Several data events for next week should warrant heightened attention. The week’s first events include New Zealand Trade Balance and Australian Building Approvals for Wednesday. This will be followed by the release of Australian Retail Sales, Trade Balance and Canadian Ivey PMI on Thursday. The big event for Canada will be Friday’s employment report – the market currently expects continued job growth.  

USD/JPY SHRUGS OFF SELLOFF IN STOCKS

For the fourth trading day in a row, the U.S. dollar extended its gains against the Japanese Yen.   Given the lack of liquidity today, traders should not make much of the strength in USD/JPY in the face of sharp equity market weakness. Despite the consistent flow of headlines about the unprecedented strength in the yen this past year USD/JPY actually ended the year in positive territory.   Granted, the pair fell to a multi-decade low in November, prompting fears of intervention by the Japanese government, the advance was largely mitigated by a strong dollar rebound in December.   Unlike other countries, there are no major economic releases from Japan next week.   This means that USD/JPY will primarily trade off U.S fundamentals.   However the ongoing developments for Japan Airlines could also affect how the JPY trades.   In the meantime, Japanese traders will have to wait another week before major economic data will be released from Japan.

GBP/USD: Currency in Play for Next 24 Hours

The currency pair in play on Monday will be the GBP/USD.   U.K. manufacturing sector PMI, mortgage approvals and net consumer credit are due for release at 4:30am NY time or 9:30 GMT.   U.S. manufacturing sector ISM and construction spending will be released at 10:00am NY Time or 15:00 GMT.

The recent rally in the GBP/USD has taken the currency out of the sell zone and into the range trading zone, which we determine using Bollinger Bands.   The closest level of resistance is 1.6288 which is a Fibonacci retracement of the 1.57 to 1.6870 rally.   If the currency pair manages to break that level, there is a good chance that it could make a run above 1.65.   On the other hand, if GBP/USD breaks 1.60, it could reenter the sell zone, which could pave the way for further losses

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Comments (4)

m.hollingshaw

December 31, 2009 at 06:34 PM ET

Do you think the GBPs rebound was in part due to Iceland agreeing to pay back its loan to England and the Netherlands? I of course only read about it long after the rally but I was curious if any other reasons had come to light since it rallied for nor apparent reason.

Thai Vu

January 01, 2010 at 12:16 AM ET

Last year, my important even is reading your book, and discovering your website. I appreciate your jobs Kathy. Happy New Year!!!!!!!

vipulkhajuria

January 01, 2010 at 01:21 AM ET

thnx kathy forall good work in 2009
great new year for market and all

Oded

January 03, 2010 at 03:00 PM ET

GBP/USD
Was very clear wave 4 up. It has enough room to go upper and after that to fall down again.
EUR/USD must either stop here or a bit more down before correction
Look over the EURUAD- it ,ight provide long signal tonight- daily
WWW.elbariasignals.com

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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.