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Forex: U.S. Confidence Improves but Not Enough to Restore Risk Appetite

Last updated 1/26/2010 10:10 AM ET (GMT -5) 9 Comments

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Kathy Lien

Director of Currency Research, GFT

After a brief rally on Monday, risk aversion has swept through the foreign exchange once again. Safe haven flows drove the dollar higher against every major currency except for the Japanese Yen because the currencies that perform best during periods of risk aversion are the lowest yielders. The stronger U.S. consumer confidence numbers failed to offset the barrage of negative reports overnight including Standard & Poor's warning that it could downgrade Japan's sovereign debt rating, the U.K.'s much weaker than expected GDP numbers and reports that China is moving forward with plans to tighten their economy. 

Dollar Shrugs off Consumer Confidence

Like the University of Michigan, the Conference Board reported a sharp improvement in consumer sentiment in the month of December. For the third month in a row, the Consumer Confidence index rose from an upwardly revised 53.6 to 55.9, the strongest level since August 2008. Since the Conference Board report follows the UMich survey, it tends to elicit only a limited reaction in the U.S. dollar. According to the details of the report, consumers grew more optimistic about the current and future conditions and less pessimistic about their ability to find jobs. The Richmond Fed index also rose from -4 to -2, reflecting a slower contraction in manufacturing activity.

FOMC Begins 2 Day Meeting

Today, the Federal Reserve begins their 2 day monetary policy meeting and so the FOMC announcement and President Obama's State of the Union address will be the primary focus of the foreign exchange market over the next 36 hours. The U.S. central bank is not expected to alter interest rates or adjust their view that rates will remain at exceptionally low levels for an extended period of time. The only area where they could make adjustments are their assessment of current and future growth. Recent labor market and consumer spending reports have been below expectations and household net worth shrunk by $500 billion. Based upon these factors, the Federal Reserve should grow less optimistic but given the potential impact that a change in tone could have on the financial markets, the risk of triggering further volatility in currencies and equities is far greater than the risk of leaving the FOMC statement virtually unchanged. 

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Comments (9)

Silenus

January 26, 2010 at 10:28 AM ET

According to my astrologer :

1. USD will have some sort of rally in the first quarter 2010, but it isn't going to be as huge as people think.
The reaction : 'out-of-stocks-into-dollars' can't hold forever.

2. EUR will bounce back big time
Europe is still in better shape fundamentally than the US

3. JPY buying is the big contrarian play this year
Everyone including the Japanese are short yen. How far can you cut 0.10% interest rates?

4. AUD and NZD are making/have made tops
Payback time, mates.

5. CHF valuation is a joke.
Just how big is the market for chocolate, cheese and cockoo clocks?

Since astrologers have been known to make mistakes, I thought I'd ask you pros at FX360 for some 'big picture' analysis.

alexjbrandt

January 26, 2010 at 10:53 AM ET

lol. My russian roulette forex simulation will beat your astrologer :P lol

1. I think we've seen/are witnessing the dollar rally for first quarter of 2010
PS. US GDP expectations for Q4 are too high - the report will disappoint.
2. I hope so! I'm more bullish on the euro than the dollar.
3. I don't trade usd/jpy so I don't care about this pair much less Japan.
4.AUD, NZD topping out O.O Not until AUD reaches parity :D because of interest rate difference.
5.And lets not forget, chocolate is apparently worth $19B ( I know different country :P) And I thought the french were renown for their cheeses, not the swiss O.o

schultzz.at

January 26, 2010 at 11:39 AM ET

There is this proverb 'perforated like a swiss cheese'. I think southern Germany, the 'Black Forest' south of Stuttgart, will also be hit hard by the reduced demand for cockoo clocks.
However, this is only the tip of the iceberg crushing the euro. Under the waterline I see Spanish banks with a lot of real estate on their books.
Germany is trying to set up a 'bad bank' for the former Hypo Real Estate worth 210 billion euro. The 'bad bank' for WestLB contains 'assets' worth only 90 billion euro.
Tom Schultz.

Roger Olofsson

January 26, 2010 at 10:30 AM ET

Hi Kathy,

Great analysis.

I have question regarding the upcoming G7/8 in Feb.

The Japanese business climate seems to find USDJPY above 90 as "acceptable". When USDJPY hit 85 in Nov '09, the JP former finance minster hinted at possible currency intervention. Japan now seems to be in serious trouble with an enormous growing deficit plus plans to increase quantitative easing and the strong JPY is not helping at all.

If we continue to see risk aversion throughout next week and USDJPY below 90, do you believe that we could see indications of currency intervention by the central banks at the next G7/8?

Cheers,
Roger

klien

January 26, 2010 at 10:32 AM ET

Love your comments about chocolate and clocks Silenus!

Roger > I don't think that we will see the G7/G8 ban together and threaten currency intervention. I do however except the Japanese to scream about too much Yen strength below 88

FXBulldog

January 26, 2010 at 05:05 PM ET

I agree, AUD and NZD have topped and I see sheep running for cover. AUD parity is a "pipe dream" for the next few years. Now that Obama has realised that his wallet has run empty (and China is not much different), a re-adjustment of world affairs is inevitable.

Silenus

January 26, 2010 at 06:35 PM ET

Alexjbrandt
I just see a triple top on the daily AUDUSD along with a recent break of both kumo and kijun sen
Hard to argue with that - I'm betting on a retrace to the 200 MA circa 0.8550

Silenus

January 26, 2010 at 06:53 PM ET

Schultzz you may be right on the 'rotten in the state of Denmark thing' but looking at a daily chart of the EURCHF
Oversold (RSI 30)
Harami 'spike' bottom
Good risk/reward (1.4650 / 1.4850)
Can someone explain to me how Switzerland can be doing well if Europe is doing badly ? They are surrounded aren't they? Who would they export to?

schultzz.at

January 26, 2010 at 11:06 PM ET

Trade has rebounded remarkably fast in this great recession. I would have expected more protectionism.
Medical/pharmaceutical products are non-cyclical and there still is some demand for heavy machinery despite an enormous drop in private investment (down 12% y/y in Q3/09 for the EU27).
The high standard of living and low taxes is also attracting financial firms nervous about the future of the U.K. and London as a financial center.
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.