U.S. Dollar: Will The Fed Rain On NFP Party?

Last updated 1/5/2010 4:36 PM ET (GMT -5) 1 Comments

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Kathy Lien

Director of Currency Research, GFT

THE STORIES IN THE CURRENCY MARKET

• U.S. DOLLAR: WILL THE FED RAIN ON NFP PARTY?
• EUR/USD: GIVES UP EARLIER GAINS
• GBP/USD: CRUSHED BY PIMCO AND DARLING COMMENTS
• USD/CAD: CANADA TO ISSUE EURO DENOMINATED DEBT
• AUD/USD: HOME SALES CONTINUE TO RISE
• NZD/USD: OIL AND GOLD PRICES FLAT
• USD/JPY: FINANCE MINISTER FUJII RESIGNS

EXPECTATIONS FOR UPCOMING FED MEETINGS

U.S. DOLLAR: WILL THE FED RAIN ON NFP PARTY?

It has been a topsy-turvy day in the currency market as the dollar came back with a vengeance. The EUR/USD and AUD/USD turned negative in the second half of the U.S. trading session while currency pairs such as USD/JPY and USD/CAD recovered earlier losses. Although the S&P 500 hit fresh 15 month highs at the onset of trading, the gains faded after U.S. economic reports were released. Given the sell-off in stocks and the decline in Treasury yields, the rally in the dollar certainly smells like a pullback in risk appetite. In yesterday’s daily report we talked about how the pullback in the dollar should be temporary and as we head into Friday’s NFP release, there is a good chance that the dollar could sustain its gains as long as the Fed does not rain on the Payrolls party.

Tomorrow, the market will turn its eyes to the leading indicators for non-farm payrolls, which include the Challenger Layoff report, the ADP Employment report and service sector ISM. If these 3 pieces of data confirm the improvement that we have seen in jobless claims, the dollar could extend its gains on the expectation of payrolls turning positive on Friday. However traders have to be particularly careful tomorrow with the FOMC minutes which are due for release in the afternoon. The tone of the last FOMC statement was relatively upbeat and included a brand new paragraph detailing their plans to shut down a large portion of the alphabet soup of liquidity facilities in early 2010. At that time, the Fed appeared to be inching closer to tightening monetary policy. Yet recent comments from Federal Reserve Presidents suggest that central bank officials remain cautious. Therefore the tone of the FOMC minutes will could or break it for the U.S. dollar. If minutes contain a more upbeat tone like the FOMC statement, it could propel the dollar higher but if the central bank puts greater emphasis on headwinds and plans to keep interest rates low for a long time, dollar bulls could lose control.

Sharp Drop in Pending Home Sales, Factory and Vehicle Sales Rise

Meanwhile the latest reports on the U.S. economy were mixed. Pending home sales dropped 16 percent in November, the sharpest decline since the National Association of Realtors starting tracking the data in 2001. This report breaks the consistent rise in pending home sales seen between Feb and October. Given the stronger existing home sales report and weaker new home sales report, the state of the housing market is unclear. The drop in pending home sales suggests that the housing market may not be as resilient as everyone expects even if part of the falloff in demand can be attributed to the acceleration of sales ahead of the expected expiration of the tax credit. Although factory orders rose 1.1 percent, traders discounted the upside surprise after Monday's stronger than expected ISM manufacturing report. Vehicle sales were mixed with Ford and Subaru reporting a 33 percent rise in sales last month and GM reporting a 6.1 percent decline in sales. Japanese automakers did particularly well with Honda, Nissan and Toyota reporting an increase in U.S. sales. Overall the beleaguered auto industry is continuing recover, which should support the manufacturing sector.

EUR/USD: GIVES UP EARLIER GAINS

The strength of the U.S. dollar in the second half of the NY trading session pushed the EUR/USD into negative territory. On an intraday basis, the EUR/USD managed to hit a 2 year high of 1.4484 but failed to hold onto to its gains. Although the market had expected the German labor market to deteriorate, in our daily report yesterday we talked about how the PMI numbers pointed to stronger and not weaker job growth. According to this morning’s German unemployment figures, the number of people claiming jobless benefits decreased for the sixth month in a row, leaving the unemployment rate unchanged at 8.1 percent. The improvement in the export sector has helped to prevent a prolonged deterioration in the labor market. Meanwhile Eurozone consumer price growth is expected to have accelerated in December with the CPI estimate rising from 0.5 to 0.9 percent. The final figures for service sector PMI are due for release tomorrow along with producer prices and industrial new orders. Stronger inflationary pressures and steady growth should encourage the European Central Bank to continue to gradually unwind emergency measures in the coming months.

GBP/USD: CRUSHED BY PIMCO AND DARLING COMMENTS

The British pound was hit from all sides today with the currency pair initially selling off after the Telegraph quoted the large US fixed income investment house PIMCO as saying that they will not be buyers of UK gilts because of the massive issuance coming out in 2010. Paul McCulley, a managing director at Pimco, said: "We are currently cutting back in the US and UK because... supply and demand dynamics are likely to be negatively affected as borrowing rises and central bank buying declines." As the world’s biggest bond fund, their demand or lack thereof certainly affects the markets particularly since they put the likelihood of a U.K. sovereign downgrade at 80 percent if their debt reduction programs are not changed. Later in the day, UK Finance Minister Darling added additional pressure on the pound when he said the U.K. is not yet out of recession. Considering that nearly all of the other major economies have already come out of recession, the possibility that the U.K. is still in the woods is the main reason why the British pound has been struggling. Although Darling couldn’t say that the U.K. is out of recession because the fourth quarter figures have not been released, he also added that he believes they will come out of recession “at the turn of the year,” which most likely means the first quarter of 2010. Unlike the manufacturing sector which expanded at a faster clip in December, activity in the construction sector was basically unchanged. Construction sector PMI rose from 47.0 to 47.1, leaving it in contractionary territory. Service sector PMI is due for release tomorrow and the market expects the expansion to accelerate but given the drop in retail sales and the GfK consumer confidence index, we believe that the odds favor slower growth. If the data disappoints, the GBP/USD could test its 2 month low of 1.5835.

USD/CAD: CANADA TO ISSUE EURO DENOMINATED DEBT

The Australian and New Zealand dollars ended the day virtually unchanged against the greenback while the Canadian dollar extended its gains for the fourth trading day in a row. The lack of big moves in the commodity currencies reflects the lack of volatility in oil and gold prices which were also flat on the day. The Canadian dollar hit a 2 month high against the U.S. dollar intraday ahead of the inflation numbers. Industrial product and raw material price growth accelerated significantly in the month of November, reflecting the stronger price pressures in Canada. The Bank of Canada also announced plans to sell as much as €1 Billion or C$1.5 Billion worth of euro denominated 10-year bonds. The peculiar decision suggests that the central bank plans to diversify its funding sources by issuing debt in European currency for the first time ever. More than 10 years ago, Canada issued bonds in deutsche marks and French Francs. Meanwhile Australia released its HIA home sales report last night and sales of new dwellings rose 0.3 percent in the month of November. Despite recent rate hikes and the government’s reduction in the home grants for first time buyers, demand for new home has held steady. Australian building approvals will be released this evening along with the New Zealand trade balance tomorrow afternoon.

USD/JPY: FINANCE MINISTER FUJII RESIGNS

One of the biggest stories in the forex market today was the strength of the Japanese Yen, which appreciated against every major currency. The move can be partially attributed to the comments from a senior Chinese official who said the Yuan is facing a new round of appreciation pressures and expectations for stronger Yuan could attract speculative flows. As a proxy for Asia, some traders like to express their Yuan views through the Yen. Demand for the currency was so strong that traders even shrugged off the news of Finance Minister Fujii's plans to resign due to health problems. During the holidays, Fujii who is 77 was admitted to the hospital due to fatigue after compiling the national budget for the next fiscal year. Interestingly enough, the Yen has strengthened and not weakened. If U.S. Treasury Secretary Geithner resigned, the dollar would probably weaken significantly due to uncertainty surrounding his potential replacements. The lack of concern by Yen traders could reflect Fujii's popularity and effectiveness. However no official announcement has been made as Prime Minister Hatoyama is still waiting for a judgment from Fujii’s doctor. If he does resign, the immediate question is Hatoyama’s choice of a replacement and the replacement’s stance on currency intervention. In terms of economic data, Japanese vehicle sales increased, reflecting the stronger demand both domestically and internationally for Japanese brand automobiles.

GBP/USD: Currency in Play for Next 24 Hours

The currency in play for the next 24 hours is the GBP/USD. The economic releases will begin today with U.K.’s Nationwide Consumer Confidence released at 00:01GMT or 7:01PM EST followed by Service PMI at 9:30GMT or 4:30AM EST. From the U.S., we have the ADP report at 13:15 GMT or 8:15 EST, ISM non-manufacturing at 15:00GMT or 10:00AM EST and the Fed Minutes released at 19:00GMT or 2:00PM EST. Technically, the GBP/USD is on a verge of entering the Sell Zone which we determine using Bollinger Bands. The break of yesterday’s low and the 200-day SMA at 1.6070 and the subsequent close below 1.60 opens the door for a move towards the 2 month lows of 1.5835. However, if the pair manages to stay clear of the Bollinger Band Sell Zone we expect the 200-day SMA to act as resistance.

Comments (1)

deanbo

January 05, 2010 at 08:29 PM ET

Thanks for the numbers! Support and resistance that is.

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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.