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Forex Markets Hit by Risk Aversion after More Disappointing U.S. Data

Last updated 1/15/2010 10:24 AM ET (GMT -5) 8 Comments

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Kathy Lien

Director of Currency Research, GFT

Risk aversion has finally hit the forex markets following another round of weaker U.S. economic data.  The dollar sold off against the Yen but rallied against higher yielding currencies as there are only so many disappointments the market can take before the optimism fades.  We are getting more and more evidence that the U.S. recovery is not as strong as previously thought, especially compared to other countries around the world. If the weakness that we have seen over the past 2 weeks persist, then the U.S. could be an underdog in the first quarter.

Although consumer confidence rose in January, the increase in optimism was extremely modest. The University of Michigan sentiment survey rose from 72.5 to 72.8.  This is a bit of concern considering that spending was weak last month.  If consumers only grew only a tad more optimistic, then perhaps their spending habits have not. Meanwhile industrial production grew by 0.6 percent in Dec, which was the same pace as the previous month after the downward revision to the November report.  However capacity utilization increased which means that manufacturers have become more productive.  The one piece of overwhelmingly positive data was the Empire State manufacturing survey which jumped from 4.50 to 15.92.

Consumer prices also grew at a slower pace and the details of the report confirm that discounts led to weak consumer spending last month.  Prices for personal computers for example fell 0.2 percent, leaving CPI growth at 0.1 percent for December.  On an annualized basis, consumer prices rose from 1.8 to 2.7 percent but the bulk of that increase was due to energy prices. 

The combination of weak inflationary pressures and less than impressive U.S. economic data will undoubtedly leave the Federal Reserve on hold later this month.  In fact, we may even see a tinge of dovishness, which would be bearish for the dollar. 

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Comments (8)

hsbc

January 15, 2010 at 10:30 AM ET

last mth we saw strong US employment figures and USD rallied. Now we see disappointing US figures and USD rallies again ... am i missing something?

NeoFX

January 15, 2010 at 11:25 AM ET

no you're not, hsbc...... the only difference this time was the bad European news...which is why EUR/USD fell. so the Euro got weak this time, and the greenback rose against it naturally, but overall the Dollas has taken a BEATING (look at USD/CAD, USD/JPY, AUD/USD, even the GBP/USD.

R

hsbc

January 15, 2010 at 05:54 PM ET

seems more like panic rather than fundamentals. there is a theory on the street esp after the 10y(?) auction in ust which had a big mystery bidder. street suspect that he sold eur big size before the fall. rumor that this bidder is from the east who was seen buying eur aggressively last yr to diversify their usd holdings

FXDragon

January 15, 2010 at 11:33 AM ET

Still support on eurusd. i want my rally next week.

aloen

January 15, 2010 at 11:39 AM ET

hi Kathy, you said that usd/jpy have strong correlation with 10 years trasury yields.
where i can find a free 10 years treasury graph? Thanks

CecilFX

January 16, 2010 at 01:04 AM ET

USDCHF tracks the 10 year yeild well. WSJ.com has 10yr charts, fxstreet.com has bond charts.

aloen

January 16, 2010 at 09:23 PM ET

Yes, I found it. Thanks :)

FXBulldog

January 15, 2010 at 11:45 AM ET

When the Dollar strengthens on weak fundamentals it is a sign of growing market nervousness. Expect a big Dollar rally if the nervousness gains momentum...

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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.