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U.S. Dollar: Keep an Eye on Chinese Data

Last updated 3/10/2010 5:23 PM ET (GMT -5) 3 Comments

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Kathy Lien

Director of Currency Research, GFT

THE STORIES IN THE CURRENCY MARKET

• U.S. DOLLAR: KEEP AN EYE ON CHINESE DATA
• EUR/USD: IS IT STILL AN EXPORT-LED RECOVERY?
• GBP/USD: MANUFACTURING SLUMP ADDS TO GROWTH TROUBLES
• NZD/USD PLUNGES ON CAUTIONARY COMMENTS FROM RBNZ
• AUD/USD: EMPLOYMENT NUMBERS ON TAP
• USD/CAD: SUSTAINS STRENGTH AHEAD OF TRADE REPORT
• USD/JPY: SUDA PLEDGES ACCOMODATIVE ENVIRONMENT

EXPECTATIONS FOR UPCOMING FED MEETINGS

U.S. DOLLAR: KEEP AN EYE ON CHINESE DATA

It has been another quiet day in the foreign exchange markets with the U.S. dollar trading higher against some currencies and lower against others.  The fragment price action in greenback continues to reflect the divergence in the risks of investing in different countries.   The dollar weakened against the euro, Australian dollar and Swiss franc, and strengthened against the British pound, Japanese Yen, New Zealand and Canadian dollars.  Sterling continues to be the ultimate underperformer as economic data surprises to the downside.  The only pieces of U.S. economic data released today were wholesale inventories and the monthly budget statement – neither of which was meaningful enough to impact the dollar.  It is worth noting that the U.S. budget deficit climbed to a record high last month as the U.S. government spends its way out of recession.  At this pace, the deficit will easily surpass the $1.4 trillion gap last year.  The growing budget deficit is one of the primary reasons why some economists believe that the upside in the dollar is limited.  We beg to differ since we know that forex traders tend to have short attention spans and the positive economic data from the U.S. coupled with the exit strategies that are being implemented by the Federal Reserve should help to boost the dollar, particularly against the Japanese Yen.  The outlook for the labor market remains promising with only 30 states in the U.S. reporting a rise in unemployment in January (compared to 43 states in December).  Although these reports are relatively dated, there are many reasons to believe payrolls will be very strong in March.  Therefore in our opinion, the dollar’s losses against the Japanese Yen should be limited.  The U.S. trade balance is due for release tomorrow and the rise in manufacturing ISM points to an improvement.  It is becoming increasingly clear that the U.S. economy is turning the corner when other countries are falling deeper into the shadows.  

Chinese Data to Set Market Tone

Meanwhile, all eyes are on China this evening.  Chinese economic data has become almost as important as U.S. economic data in some respects and expect tonight’s laundry list of economic reports could set the market tone for the next 24 hours.  Last night, risk appetite improved after China’s trade balance decreased less than the market had anticipated.  Exports were stronger than expected while the pickup in imports reflects more strength than weakness for the Chinese economy.  This evening, retail sales, industrial production, producer and consumer prices are due for release.  If manufacturing activity continues to be strong and consumer spending grows at a faster pace, risk appetite should improve, sending the dollar lower against higher yielding currencies and higher against lower yielding ones.  However if the data disappoints, it could trigger a wave of risk aversion across the forex market.

EUR/USD: IS IT STILL AN EXPORT-LED RECOVERY?

Although the euro strengthened against the U.S. dollar today, the currency pair is caught within a very tight trading range. For the past 6 trading days, the EUR/USD has fluctuated within a 175 pip range which is impressive considering all of the bad news that has surfaced.  Part of its resilience is tied to the extremeness of short euro positions.  In order for the currency pair to break out of its range, we need either very positive or negative news from the Eurozone or U.S.  Meanwhile, the euro managed to rally despite much weaker than expected trade numbers from Germany.  The country’s trade surplus shrank sharply last month, falling to 8.0B from 13.5B as imports far outpaced the surprising decline in exports. Shipments plunged 6.3 percent, ending a four month streak of gains. This is of real concern to the Eurozone since it is widely believed that it will be international, rather than domestic demand that will fuel their recovery. However, one good sign did arise out of today’s mess, coming in the form of rising imports. Imports rose by 6.0 percent adding some belief that consumer spending may be improving. News from Italy and France that signaled Industrial Production proved to be stronger than expected worked to soften the blow created by Germany’s trade situation. Concerns about the potential for a Greek default have definitely scaled back in the last week, after former European Commission President Romano Prodi said Greece’s “problem is completely over.” Prodi’s comments are definitely a vote of confidence but there are still many unanswered questions about the situation, enough to keep markets jittery even if the country’s troubles have past. After today’s bevy of reports, tomorrow will be a quieter day with only the ECB Monthly Bulletin on tap.

GBP/USD: MANUFACTURING SLUMP ADDS TO GROWTH TROUBLES

The British pound continued to weaken against the U.S. dollar following disappointing economic data.  Manufacturing and Industrial Production confirmed the weakness in trade reported earlier this week. Manufacturing output slipped for the first time in five months, signaling that the country’s already dwindling growth rate may turn out to be even lower in the first quarter of the year. All except for two of the indices’ components displayed worsening conditions. The decline in manufacturing also may be initial signs that troubles in the Eurozone are starting to find their way into the U.K. Industrial Production also showed a sharp drop, falling from 0.5 percent to -0.4 percent for the month of January. In response to today’s red flags and others that have popped up in the last few weeks, Prime Minister Gordon Brown said the economy is still ‘fragile’. In a speech today, Brown set a date for his next budget report for the end of March. The announcement comes on the heels of yesterday’s warnings from Fitch, developing the need to promote confidence in the administration’s fiscal plans. Despite today’s troubles, U.K. stocks stayed on track, reaching a new 21 month high.

NZD/USD PLUNGES ON CAUTIONARY COMMENTS FROM RBNZ

The New Zealand dollar sold off on the heels of the Reserve Bank of New Zealand’s monetary policy announcement.  Even though the RBNZ left interest rates unchanged and confirmed their commitment to raise rates in the middle of next year, kiwi traders were looking for more.  Bollard acknowledged that the growth of New Zealand’s trading partners was faster than expected but he tempered this optimism by saying that the risks around the global outlook have increased.  He believes that economic growth domestically improved in December and March but the pace of this recovery will be subdued compared to previous recoveries.  Due to higher bank funding costs, Bollard believes that less rate hikes are needed compared to previous cycles.  In other words, the “meaty” rate hikes that he signaled in February may look more like a lean patty than a fatty one.  Unfortunately, his subdued tone should weigh on the kiwi for the next few trading days.  Meanwhile Australian employment numbers are due for release this evening and given the sharp rise in job advertisements, we expect another month of positive job growth.  Canada has trade numbers due out tomorrow and following the optimistic comments from the central bank, the trade and housing market data is expected to improve.  

USD/JPY: SUDA PLEDGES ACCOMODATIVE ENVIRONMENT

USD/JPY pushes higher to erase the last two days of losses as the yen remains relatively weak against most counterparts. Miyako Suda, a BoJ policy maker, shared his thoughts on future of monetary policy. Suda holds that while “upside and downside risks are almost balanced” the economy still faces a “highly uncertain” outlook. Suda promises that the BoJ will continue to “maintain an extremely accommodative environment” with “persistent efforts” from the central bank to achieve major policy targets. Suda did not signal anything that would confirm or deny recent reports that the bank was preparing to reveal new expansionary policies. While his pledge to keep accommodative policies intact does signal a dovish bias, it does not represent any deviation from what we have been hearing from the bank as of late. On prices, he contends that the decline will most likely ‘moderate’. However, his predictions are not yet proving true as Japan’s Domestic Corporate Goods Price Index slid for the fourteenth straight month. Meanwhile, Machine Orders dropped 3.7 percent, a sharp departure from last month when the index posted the best results in a decade. Apparently capital spending remains volatile and unlikely to show consistent improvement anytime soon. We have the final report on GDP expected for tomorrow.

AUD/USD: Currency in Play for Next 24 Hours

The AUD/USD will be the currency pair in play for the next 24 hours.  The Australian Employment report is scheduled for 7:30 pm ET or 00:30 GMT while the U.S. Trade Balance will be released at 8:30 am ET or 13:30 GMT.

AUD/USD

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Comments (3)

MoneyManager

March 10, 2010 at 11:36 PM ET

Kathy,

"Meanwhile, all eyes are on China this evening. Chinese economic data has become almost as important as U.S. economic data in some respects"

I agree. And I think this means you need to seriously consider adding key Chinese data to your calendar. I know you don't trade it, but the data trades you. ^_^

alexjbrandt

March 11, 2010 at 07:58 AM ET

For those who would like to keep tabs on the Chinese economy, I recommend this site:

http://www.chinaknowledge.com/Databank/Default.aspx

Biowolf

March 11, 2010 at 01:10 AM ET

With experts like Signore Prodi (or is it Ponzi) at the helm the future of the Euro looks bright
On the other hand chances are that he willbe eating crow for dinner (the bird not the ex Bank of Canada Governer) very soon.

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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.