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U.S. Dollar And Relative Growth

Last updated 2/12/2010 5:35 PM ET (GMT -5) 2 Comments

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Kathy Lien

Director of Currency Research, GFT

THE STORIES IN THE CURRENCY MARKET

• U.S. DOLLAR AND RELATIVE GROWTH
• EUR/USD: IS GREECE AFFECTING REGIONAL GROWTH
• GBP/USD: BIG WEEK AHEAD
• NZD/USD: MID-YEAR HIKES LOOK UNLIKELY
• USD/CAD: NEW MOTOR VEHICLE SALES REBOUND
• AUD/USD: OIL AND GOLD PRICES DOWN
• USD/JPY: CONFIDENCE GAINS SPEED

EXPECTATIONS FOR UPCOMING FED MEETINGS

U.S. DOLLAR AND RELATIVE GROWTH

Based upon the price action in the currency market this past week, traders may be wondering whether currencies are once again trading on relative growth.  The unresolved problems in Greece and weaker growth in the Eurozone continue to weigh on the euro, causing the currency to slip for the third consecutive day to a 3 month low against the U.S. dollar.  The Japanese Yen and Swiss Franc also lost value against the greenback but it was most likely tied to the stabilization of equities this week.  The Australian and New Zealand dollars appreciated as stronger employment numbers in the land down under make it glaringly obvious that the U.S. economy is having a tough time keeping up with its Anglo-Saxon counterparts in Asia.  However the U.S. is not doing all that poorly - even though consumers are less confident, they are at least spending.  

Retail Sales Bounce Back in January

The latest retail sales report indicates that spending picked up in the beginning of the year. Retail sales rose 0.5 percent in January with sales excluding autos rising 0.6 percent. After a surprisingly weak holiday shopping season, the January numbers tell us that consumers cashed in on gift cards and took advantage of beginning of the year discounting. Demand was particularly strong for electronics, food, beverages, sporting goods, general merchandise and online shopping. Also spending in December was not nearly as bad as initially reported with the decline in retail sales revised up from 0.3 to 0.1 percent. The price action suggests that dollar bulls were particularly happy about this report because the smaller decline in December should lead to an upward revision to Q4 GDP. Overall the numbers indicate that U.S. consumers were not as frugal at the end of 2009 as initially reported and are already beginning to return to the stores.  Consumer confidence decreased marginally with the University of Michigan consumer confidence survey falling from 74.4 to 73.7 in January.  This decline was not entirely surprising considering that equities fell during the sample period.

It is Inflation Week but Will the Market Care?

Next week is all about inflation in the forex markets with the U.S., U.K., Germany, Canada and New Zealand releasing consumer and/or producer price figures.  Unlike past years, inflation is muted across the globe and any therefore changes in price pressures will not be significant enough to convince central banks to rethink their monetary policy stance.  In addition to the CPI and PPI numbers, the U.S. will be releasing the Empire State and Philly fed manufacturing surveys along with the Treasury International Capital flow report, industrial production and housing market numbers.  The minutes from the most recent Federal Reserve meeting will also be published and traders will be looking at the report closely for any clues to confirm that the central bank could start tightening credit in the near future, as Fed Chairman Ben Bernanke suggested earlier this week.  

China – Still the Big Market Mover

Despite the importance of the U.S. retail sales report, the big story in the financial markets today was China who once again single handedly triggered sharp volatility across the financial markets.  This morning, China announced a 50bp hike to their reserve requirement ratio. They are slamming the brakes on their economy by forcing banks to extract money from the financial system and resurrecting concerns about how their tightening measures will affect the rest of the world in the process. Yet before turning too bearish, it is important to mention that China usually increases liquidity before the Chinese New Year on Sunday and begins withdrawing it after the holiday. It is already the end of the week in China which means that the tightening will really go into effect after their week long holiday.  U.S. markets will be closed on Monday for President’s Day but the foreign exchange market will be open as usual.  

EUR/USD: IS GREECE AFFECTING REGIONAL GROWTH

The euro fell for a third straight day and for a fifth straight week as weaker GDP numbers raise concerns about whether Greece’s problems are affecting growth throughout the Eurozone.  The flash estimate for Q4 GDP growth was 0.1 percent, compared to 0.4 percent the prior quarter.  Greece did not grow at all which was a sharp contrast to France who grew by 0.6 percent, 3 times faster than the previous quarter.  Indeed, Eurozone growth was dragged down by the PIGS (Portugal, Italy, Greece and Spain) as well as Eastern European nations such as Latvia and Romania.  This raises the question of whether the Eurozone will fall back into recession if countries with large fiscal deficits are forced to take hard measures to rein in spending.  Germany, who was primarily responsible for leading the euro area out of recession in the first place, saw GDP come dangerously close to retrenching into contractionary territory. Today’s paltry performance was emphasized further by the report on Industrial Production which fell by the most in ten months. Meanwhile talks of a Greek bail-out have failed to soothe investor fears. Although EU members may have pledged “determined and coordinated action,” this frankly put more questions on the table than it took off.  In addition, with today’s report showing that Greece’s growth contracted further, many worry that the country will not be able to satisfy European calls for strict budget controls. Fiscal responsibility could continue to dominate the headlines next week with the most important Eurozone economic data on the calendar being Eurozone PMI numbers and the German ZEW survey.  

GBP/USD: BIG WEEK AHEAD

Although the British pound ended the day virtually unchanged against the U.S. dollar, the currency pair is well off its intraday lows.  Over the past 6 trading days, the 1.5550 level has held as support for the currency pair while 1.5750 has been resistance.  Despite wild swings intraday, the currency pair has held within this range, nearing both levels on a day to day basis.  No U.K. economic data was released overnight but that will change dramatically in the coming week with the U.K. dominating the economic calendar.  U.S. markets may be closed on Monday for Presidents Day but that does not equate to nap time for London traders.  With an exceptionally busy economic calendar, this should be a very active week in the U.K.  Some of the big, potentially market moving releases include consumer prices, employment numbers, retail sales and the minutes from the most recent Bank of England meeting.  Last week, the central bank released their Quarterly Inflation Report and to the dismay of U.K. traders, the BoE reduced their growth forecasts and warned that inflation could undershoot its target over the next 2 years.  This week’s economic reports will go a long way in determining whether their caution is warranted.  The BoE left the door open for additional asset purchases but if the employment, inflation and consumer spending reports are strong, t traders will wonder whether the central bank is being overly cautious.  Good numbers should help the British pound shake off some its recent weakness.  

NZD/USD: MID-YEAR HIKES LOOK UNLIKELY

Although the Australian, New Zealand and Canadian dollars ended the NY trading session weaker against the greenback, they are well off their lows which reflect more strength than weakness.  Today’s spurt of risk aversion has been driven by numerous factors including concerns over China tightening credit and a sharp falloff in crude oil. Nevertheless, what really concerned kiwi traders was the abysmal retail sales report. The country showed that sales ex car dealerships fell by the most on record. Such conditions obviously make it more difficult for Alan Bollard and the RBNZ to keep current timelines that show a rate hike imminent by mid-year. With employment still worsening and inflation yet to show a significant surge, it is becoming hard to find evidence supporting a move. On a quarterly basis, Retail Sales rose only 1.0%, less than the 1.4% consensus. New Zealand has Producer Prices prepared for Monday. Aussie traders similarly shuddered as news broke that China’s central bank made their second push for higher reserve requirements. The plan to tighten credit may influence spending on resource-rich Australian exports, a factor that has been a big contributor to the country’s overwhelming success. However, even though China has become Australia’s biggest trading partner, risk is limited since the country’s ports can barely keep up with demand as it is.  Canada’s schedule reported only that New Motor Vehicle Sales rose a healthy 2.6%. The big event risk for loonie traders next weel will be Consumer Prices on Thursday and Retail Sales on Friday.  

USD/JPY: CONFIDENCE GAINS SPEED

The Japanese yen ended the day virtually unchanged across most currencies including the U.S. dollar. Nevertheless, trading has taken place within very narrow ranges for the past three days. The country continues to dole out surprising economic data that may indicate they have reached a turning point. Household Consumer Confidence was today’s sign of improvement, increasing for the first time in the last four months. As a result, we could expect domestic demand to pick up slightly in coming months as consumers become more comfortable with spending. However, any increase in spending will be limited due to the fact that employment markets are still weak and wages remain very low. Next week is a busy one and the first report we receive could sum up the effects of Japan’s better data stream. Gross Domestic Product will be released Monday morning and, if current estimates hold, could reach its highest levels in two years. This will be followed by the Tertiary Industry index on Tuesday. The week reaches another peak with the BoJ decision on Wednesday. The bank definitely stands to be on the dovish side as it will try to save face in their fight against deflation. However, if growth hits expectations, it is unlikely that the bank will propose anything new this time around.

CHF/JPY: Currency in Play for Next 24 Hours

The currency in play for Monday is CHF/JPY. Starting on Sunday evening, Japan will release its GDP numbers at 23:50GMT or 6:50PM EST followed by Industrial Production and Capacity Utilization at 4:30GMT or 11:30PM EST. Swiss Producer and Import Prices will be announced at 8:15GMT or 3:15AM EST. CHF/JPY has been entrenched within the Sell Zone which we determine using Bollinger Bands since mid-January. The persistent downtrend may come to an abrupt end if the pair manages to exit the Sell Zone by breaking above 1st Standard Deviation at 84.00.  This would represent a significant change in trend because it would put CHF/JPY back above its breakdown zone.  However if CHF/JPY fails to break that level and trickles lower, a retest of 82.30 is possible.

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Comments (2)

FXDragon

February 13, 2010 at 04:14 AM ET

We'll be going long on covered calls while shorting married puts, if the dow rallies around 10400.

FXDragon

February 13, 2010 at 04:19 AM ET

Thats mainly for financial stocks.

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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.