• Share this:

THE STORIES IN THE CURRENCY MARKET

• U.S. DOLLAR: RATE DECISIONS FIRST, THEN NFP
• EUR/USD: MANUFACTURING UNABLE TO OFFSET GREECE CONCERNS
• GBP/USD: BOE MEETING NEXT WEEK
• AUD/USD: RBA EXPECTED TO RAISE INTEREST RATES
• USD/CAD: BOC COULD BE A TAD MORE OPTIMISTIC
• NZD/USD: OIL FALLS BACK BELOW $80
• USD/JPY: GOVERNMENT V. BoJ FIGHT HEATS UP

EXPECTATIONS FOR UPCOMING FED MEETINGS

CURRENT US INTEREST RATE: 0.25%
	03/16 Meeting	04/28 Meeting
NO CHANGE	62.0%	61.0%
CUT TO 0BP	38.0%	36.5%
INCREASE TO 50BP	0.0%	2.5%
INCREASE TO 75BP	0.0%	0.0%

U.S. DOLLAR: RATE DECISIONS FIRST, THEN NFP

Although risk on appears to be the theme in financial markets today with equities up strongly, the price action in the majors indicates that the divergence trade is in full swing.  The dollar traded higher against the euro, British pound and Swiss franc, lower against the commodity currencies and unchanged against the Japanese Yen.  The U.S. non-farm payrolls may be due for release this week but with 4 central bank rate decisions on the calendar, forex traders can put off thinking about the labor market report until the end of the week particularly since there is no market moving U.S. data on the calendar tomorrow. The aggressiveness and passiveness of central banks will be the driving force of the forex markets this week.  Tonight, the Reserve Bank of Australia is expected to raise interest rates for the fourth time in this monetary policy cycle and tomorrow a bit more optimism is expected from the Bank of Canada.  So over the next 24 hours, the market will focus less on U.S. developments and more on monetary policy developments in the rest of the world.  

Softer Economic Data Fails to Dent Risk Appetite

This morning's U.S. economic data was slightly softer than expected. Personal income rose by 0.1 percent in January while personal spending rose by 0.5 percent. Although the pickup in spending is encouraging, it is never a good thing to see Americans spend more than they make. With Friday's non-farm payrolls number expected to reflect accelerated job losses in February, the outlook for spending and incomes remain bleak. Price pressures are muted with the PCE deflator flat in January. Core prices remained unchanged. The national ISM manufacturing index fell from 58.4 to 56.5 which was a bit surprising considering that the regional indices all improved. The drop was largely tied to the sharp decline in new orders and production. However with a good number of the underlying components rising in Feb, the negative impact on the dollar should be limited. The employment component rose materially which indicates that manufacturers are continuing to hire and the backlog of new orders has increased.

Fed’s Losing Kohn – Usually Considered a Dove

Federal Reserve President Kohn announced this morning that he will be leaving the U.S. central bank once his term ends in June.  After 4 decades of service, Kohn who was once considered the preferred successor to Bernanke decided to resign.  Given that he is oftentimes considered one of the more dovish members of the FOMC, his departure could lead to faster exit from ultra easy monetary policies.  It also leaves three empty seats out of the seven that represent the Federal Reserve Bank’s board. While the potential nominees for these seats are uncertain, it appears that the Fed’s Daniel Tarullo stands to be a likely successor for Kohn’s position as Vice Chairman.  Tarullo, who was appointed to the board by President Obama early last year, has been the leading man on issues such as financial reform and new bank regulations. Tarullo is greatly respected for the eight years of experience in the antitrust division of the Justice Department, so much so that he was considered as Bernanke’s replacement should congressional hearings not result in his reappointment. As far as policy goes, Tarullo has demonstrated a dovish slant but has kept his focus on his latest task of defining the Fed’s new role in financial regulation. Upon the filling of the three vacant Fed seats and Kohn’s replacement, President Obama would have officially appointed five members to the board, giving him substantial clout over the course of monetary policy. However, it is questionable how quickly the president will be able to dole out new appointments, considering factors that it is an election year and the sheer scarcity of nominees willing to weather weeks of Congressional vetting. Whatever the case, it is safe to say that the face of the Fed could change dramatically in the next year.

EUR/USD: MANUFACTURING UNABLE TO OFFSET GREECE CONCERNS

The euro ended the day well off earlier lows that would have taken the pair dangerously close to the lowest levels in 9 months. The ongoing skittishness in trading is undoubtedly related to the pending bail-out of Greece, which has left many questions unanswered. The European Union’s Monetary Chief Olli Rehn added to the fire today by saying that he would like to see more in terms of the fiscal austerity plans that the Greek government is proposing. Rehn says that “we are ready to put in place a framework for coordinating fiscal action” but that he would like to see “additional measures over financial consolidation.” The strings attached to Greek assistance have stalled the process and has subsequently weighed on currency market psyche. Today’s optimistic data was the main factor behind the euro’s recovery. Manufacturing Purchasing Managers’ showed that the sector expanded at the fastest rate in more than two years, rising to 54.2. The relatively consistent improvement in the manufacturing sector has been the driving point for the European recovery and will is depended upon to pick up the slack left by consumer spending and domestic demand. Looking forward, it is likely that the fall in the euro will keep the industry on track as European exports become more favorable on the global marketplace. In addition to PMI, the EZ Unemployment Rate declined to 9.9% from 10%. Tomorrow’s schedule will be dominated by the CPI Estimate and Producer Prices. Swiss GDP numbers are also due for release

GBP/USD: BOE MEETING NEXT WEEK

With mixed to slightly better than expected U.K. economic data, traders may be scratching their heads about why the British pound has fallen so steeply today. Manufacturing PMI held steady at 56.6, consumer credit increased while mortgage approvals declined.  The weakness in the pound can be attributed to a few different factors. First, Britain's Prudential announced plans to buy AIG's Asia operations for $35.5 billion in cash and stock - since this is partially a cash deal, it will involve selling British pounds.  According to the FT, the gap between the U.K. and German interest rate has risen to the highest level since 2005.  Even though the official U.K. interest rate is less than the Eurozone's interest rate, the cost of servicing government borrowing in the U.K. over Germany has increased significantly.  Based upon the dovish comments from Bank of England officials at the beginning of last week, there is also a tiny risk of the BoE raising the size of their QE program on Thursday.  Even if they do not, the tone of their statement will be dovish which is also bearish for the GBP.  Finally there were a ton of stop orders sitting at the previous 9 month low of 1.5117.  When the GBP/USD broke that level, the currency pair dropped very quickly.  The selling exacerbated when stop orders at the 1.50 level were tripped, but the big move came when the GBP/USD broke below 1.4935 - it fell 158 pips in 3 minutes.  With so many straws sitting on the camel’s back, it was bound to fall under the pressure.  A bounce is not out of the question after such a big move particularly since the GBP/USD has not able to rally for the past 9 trading days. However unless the BoE stops talking about QE and we don't expect them too, the GBP will continue to be the worst performing currency.

AUD/USD: RBA EXPECTED TO RAISE INTEREST RATES

The Australian, New Zealand and Canadian dollars have performed exceptionally well today ahead of the Reserve Bank of Australia and the Bank of Canada monetary policy announcements.  Following the hawkish comments from RBA Deputy Governor Battelino last week, there are only 2 potential outcomes for the meeting tonight. The RBA will either raise interest rates by 25bp to 4.00 percent and downplay the rate hike by saying that they are going to slow down from here on forward or leave rates unchanged at 3.75 percent and increase their hawkishness, paving the way for a rate hike at the following meeting.  Either way, the outcome should be bullish for the Australian dollar in the long run.  Although the AUD/USD would probably first sell off and then recover if the RBA leaves rates unchanged.   Before the rate decision is announced, Australia will also release its latest figures on retail sales and building approvals. As for Canada, the BoC is widely expected to leave interest rates unchanged.  Canadian GDP numbers were stronger than expected which means that the BoC will crawl towards exit.  However broad based improvements in the Canadian economy including a pickup in consumer spending, growth, inflation, employment and manufacturing activity means that if anything, the BoC could grow slightly more optimistic.  The risk is to the upside following the improvements in the Canadian economy which may be the reason why the loonie has been rallying.  If the Bank of Canada is a tad more positive, the Canadian dollar could extend its gains.  The Canadian economy is very sensitive to the performance of the U.S. economy which means that if the Fed is talking exit strategies, the Bank of Canada could start doing so as well. 

USD/JPY: GOVERNMENT V. BoJ FIGHT HEATS UP

USD/JPY failed to hold onto all of its earlier gains despite the rally in equities. Overall, the yen remains relatively weak except against the pound which saw a significant decline. The Japanese government’s assault on the BoJ for more direct control of monetary policy continues today as both Finance Minister Kan and Financial Services Minister Kamei prod for more action. Kamei warns that “Japan cannot overcome the economic crisis unless the Bank of Japan shows its commitment.” He recommends that the bank initiate a new program that entails underwriting new debt to capture funds for the government to use in the form of stimulus spending. Likewise, Finance Minister Kan says that he would rather the bank made “further efforts” and to some extent scolds the bank for policies which have been unsuccessful in controlling prices. This saga has gone on for months now but it appears as though the pressure is becoming more intense. On a side note, Japanese Vehicle Sales rose for the seventh month despite ongoing woes at Toyota. The country still has car scrappage programs in place that may be artificially boosting demand. Tomorrow sees a lot more action in the form of the Jobless Rate and Household Spending.

AUD/USD: Currency in Play for Next 24 Hours

The AUD/USD will be the currency pair in play for tomorrow. The key Australian release will be the RBA’s interest rate decision, which is scheduled for 10:30 pm ET or 3:30 GMT. In addition, we will also receive retail sales and Building Approvals at 7:30 pm ET or 00:30 GMT. In the US, expect Vehicle Sales at 5:00 pm ET or 22:00 GMT.

AUD/USD has returned to the Bollinger band buy zone but has yet to break from the consolidation zone that has developed over the last couple of weeks. Resistance can be found at the 61.8% retracement from January lows to February highs at 0.9042, which seems to have formed the upper bound for the recent trading range. Using the same retracement levels, support can be found at both the 50% retracement at 0.8953, which is strengthened by the 10-day moving average, and the 38.2% retracement at 0.8864, which is also the location of the 20- day moving average. With prices consolidating ahead of the rate decision, it is possible that tomorrow’s event could preclude a big break-out in the pair.

The information, including Commentary and Trade Ideas, provided on FX360.com should not be relied upon as a substitute for extensive independent research which should be performed before making your investment decisions. Global Forex Trading and FX360 .com is merely providing this information for your general information. The information and opinions presented do not take into account any particular individual’s investment objectives, financial situation, or needs. All investors should obtain advice based on their unique situation before making any investment decision and should tailor the trade size and leverage of their trading to their personal risk appetite. Any projections or views of the market provided by FX360.com may not prove to be accurate.

The views of the authors and analysts are not necessarily those of Global Forex Trading, its owners, officers, agents or other employees. FX360.com and the currency research team will not be responsible for any losses incurred on investments made by readers and clients as a result of any information contained on FX360.com. Global Forex Trading and the currency research team do not render investment, legal, accounting, tax, or other professional advice. If investment, legal, tax, or other expert assistance is required, the services of a competent professional should be sought.

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.