U.S. Dollar: New Week, New Focus?

Last updated 1/25/2010 5:09 PM ET (GMT -5) 5 Comments

Forex Trading involves high risks, with the potential for substantial losses and is not suitable for all persons. Past performance is not necessarily indicative of future results.

Kathy Lien

Director of Currency Research, GFT

THE STORIES IN THE CURRENCY MARKET

• U.S. DOLLAR: NEW WEEK, NEW FOCUS?
• EUR/USD: SUCCESSFUL GREEK BOND AUCTION
• GBP/USD RISES AHEAD OF GDP REPORT
• AUD/USD: RBA TO FACE STAGNANT PRICES
• USD/CAD: CARNEY TALKS EXIT STRATEGIES AND EXCHANGE RATES
• NZD/USD: GOLD AND OIL PRICES UP SLIGHTLY
• USD/JPY: BOJ UP AGAINST ALL ODDS

EXPECTATIONS FOR UPCOMING FED MEETINGS

U.S. DOLLAR: NEW WEEK, NEW FOCUS?

Today’s rally in U.S. equities helped to alleviate part of the risk aversion that dominated the forex markets last week.  Higher yielding currencies recovered against the U.S. dollar but the gains remain modest when compared to recent losses.  The dollar retreated against every major currency except for the Japanese Yen which has a lower yield.  With the Federal Reserve’s monetary policy announcement and fourth quarter GDP report due for release later this week, forex traders will undoubtedly turn their focus back to the outlook for the U.S. economy.  However politics could still affect how the dollar trades with Bernanke’s confirmation hanging by a thread and President Obama scheduled to deliver his State of the Union Address on Wednesday.  It is also a big week for earnings with Apple scheduled to report this afternoon and a number of S&P 500 companies to report later this week. If equities continue to rally, we could see a further rebound in the currency market, but sentiment is very shaky at this time and therefore it won’t take much to derail the rally.  

The Action is Back in the Forex Market

Forex trading volume has finally recovered after the wave of deleveraging caused the market to contract back in April 2009.  This morning, central banks from around the world released their semi-annual foreign exchange surveys and according to the reports, the average daily trading volume between April and October of 2009 increased significantly.  In London, total daily foreign exchange volume rose 14 percent to $1,549 billion and in NY the average volume increased 28 percent to $675 billion.  These are still below 2008 levels but indicate that demand for foreign exchange trading and hedging is beginning to recover. There is no doubt that the breakdown in the dollar between April and October contributed to returning interest in currencies.  London remains the most active forex trading center with daily volume more than double that of NY.  This explains why the absence of London traders is always felt in the forex markets and why much of the big moves oftentimes begin in Europe.   The EUR/USD is the most actively traded currency pair by far followed by the GBP/USD and USD/JPY.  This information is illustrated in the following table which breaks down London foreign exchange and over the counter forex derivatives trading by currency pair:

Existing Home Sales Disappoint

The only piece of meaningful U.S. economic data released today was existing home sales and despite the record decline, the initial impact on the dollar was nominal. In December, 5.45 million units of previously owned homes were sold, down 16.7 percent from the previous month. On a percentage basis, this decline was the largest ever reported by the National Association of Retailers. A deeper look into the report reveals weakness across the nation as demand plunged ahead of the original Nov 30 expiration of government tax credits - the credits have now been extended to contracts signed by the end of April. The number of months that the homes have remained on market also increased, raising fear that the housing market has turned. However we believe that it is premature to turn overly pessimistic on the real estate sector simply because of one month worth of data. The deadline and scope of the housing tax credits have been extended, providing continued support for the sector. The existing home sales report also indicated that the medium price of a home sold increased 1.5 percent, the first rise since Aug 2007 and the biggest increase since May. This suggests that homeowners may have grown a bit more optimistic about the outlook for the U.S. economy. Consumer confidence is due for release tomorrow and given the rise in the IBD and University of Michigan survey, we expect the Conference Board to report an uptick in sentiment. 

EUR/USD: SUCCESSFUL GREEK BOND AUCTION

One of the biggest risks for the EUR/USD this week was an unsuccessful Greek bond auction.  However concerns have been alleviated following solid demand for Greece’s 5 year bond auction. Approximately EUR 25 billion worth of demand came in for the 3 to 5 billion auction originally planned, encouraging the government to expand the offering to EUR 8 billion.  The auction was an important test of investor appetite and for the time being, Greece has passed the test without too many cuts and bruises.  The strong interest in Greek debt will pacify concerns about the country’s ability to finance their public debt and will reduce pressure on the euro.   The Greek government will need to raise EUR 53 billion this year and based upon today’s demand, they should not have any problems with funding.  Also, Eurostat revised up the strong industrial new orders reported last week.  Originally, they said that industrial new orders rose 1.6 percent in November, but after Germany reported a 2.8 percent increased in new orders later that day, Eurostat went back and revised their numbers and reported today that the orders actually rose 2.7 percent. The upward revision to an already strong report reflects the health of the manufacturing sector and is part of the reason why the German IFO report for January could rise.  German consumer confidence was also released this morning but unfortunately confidence fell for the fourth month in a row as job fears curbed spending.  However ECB Member Weber said the latest economic reports do not change the ECB’s stance that interest rates are appropriate.  

GBP/USD RISES AHEAD OF GDP REPORT

Of all the major currencies, the British pound staged the strongest rally against the U.S. dollar today.  In fact of the most actively traded currency pairs, the GBP/USD and EUR/GBP were the day’s biggest movers with sterling appreciating significantly against both currencies.  There was no U.K. economic data released this morning and no comments from monetary policy officials which suggest that the outperformance of the pound could be related to speculation about tomorrow’s U.K. GDP report.  The U.K. economy is expected to grow for the first time since the second quarter of 2008.  Returning to growth after 6 consecutive quarters of contraction would be extremely significant.  However retail sales were slightly weaker in the fourth quarter and the trade balance expanded marginally which makes us skeptical about whether GDP really managed to turn positive in Q4.  Either way, the GDP report should trigger a sharp reaction in the British pound.  Positive growth will help the currency extend its gains while negative growth could send the GBP/USD back towards 1.60.  The magnitude of the move will be tied to the degree of growth or lack thereof.  

AUD/USD: RBA TO FACE STAGNANT PRICES

The story is the same for all of the commodity-dollars. The CAD, AUD, and NZD all broke a 4-day losing streak, but today’s small gains were far from convincing. The Australian dollar lost track of much of its earlier rallies as a dismal Producer Prices report curtailed the chances of another rate hike at next week’s RBA meeting. Prices fell by 0.4% in the fourth quarter, significantly worse than the 0.1% gain that was expected. The main factor underlying the decline was that prices of imported goods fell drastically by 5.2%. This suggests that the country’s still high currency is starting to act as a deflationary force. Today’s Producer Price index serves as the precursor to Wednesday’s highly anticipated report on Consumer Prices. If we receive another sign of soft prices, the RBA could extend their hiatus from rate hikes. Bank of Canada Governor Mark Carney held an interview today, in which he said that “one can foresee exit strategies.” In addition, he mentioned that he hopes that other nations will “have flexibility in their exchange rates.” Carney did not specifically mention the strength in the loonie, but his request does indicate he is uncomfortable with its current levels. New Zealand is set to release Credit Card Spending for tomorrow and the RBNZ has a monetary policy decision on Wednesday evening.  

USD/JPY: BOJ UP AGAINST ALL ODDS

USD/JPY has barely moved after a series of sharp declines took hold last week. The focus for tonight is sure to be the Bank of Japan’s rate statement. It is safe to say that the bank will stand at the dovish end and confirm that they will continue to fight deflation at all costs. It is also possible that the bank will add to the lending program that it established last month in order to alleviate deflationary pressures or even outline new steps should current programs be deemed unsuccessful. In addition, the bank has been under pressure from the government who has said lately that they would prefer them to enact more stimulus steps. The bank will also be influenced by the fact that the yen has started to strengthen again this month, adding to concerns that prices will spiral out of control. To complicate matters for Japan’s government, the Finance Ministry confirms that the world’s largest debt burden just got larger, rising to ¥973 trillion. Aside for the BoJ’s statement, the Corporate Service Price Index and Small Business Confidence are also due for release.

EUR/GBP: Currency in Play for Next 24 Hours

EUR/GBP will be the currency pair in play for tomorrow.  The German IFO survey and the Eurozone current account figures are due for release at 4:00 am ET or 9:00 GMT.  This will be followed by the U.K.’s fourth quarter GDP report at 4:30 am ET or 9:30 GMT.

EUR/GBP

EUR/GBP

Comments (5)

Radu

January 25, 2010 at 10:13 PM ET

Thank you for your analysis. I am reading every day, I would not trade without it.

hsbc

January 25, 2010 at 11:07 PM ET

eur and aud tumbled upon a old reuters report whcih was already out last wed. story was on chinese banks asked to set aside more reserves. this caused panic selling in stocks and fx and sl to be triggered. given that this is an old news and already factored in, i am taking the chance to buy eur or aud.

hsbc

January 26, 2010 at 12:40 AM ET

mkt is v jittery and rerun news managed to spook it. be prepared for some more swings

schultzz.at

January 26, 2010 at 04:45 AM ET

U.K. GDP just came in at +0.1% for the 4th quarter, down more than 5% y/y. They are in deep trouble.
Tom Schultz.

schultzz.at

January 26, 2010 at 05:14 AM ET

Sorry, I had a stale graphic in my browser's cache. Y/Y growth was down just over 3%. Nevertheless, with the economy barely growing, it will be very hard for the BoE to go for a fast exit.
Tom Schultz.

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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.