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Dollar: Will Consumers Please Stand Up

Last updated 6/10/2010 5:42 PM ET (GMT -5) 0 Comments - Add your comment

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Kathy Lien

Director of Currency Research, GFT

THE STORIES IN THE CURRENCY MARKET

• DOLLAR: WILL CONSUMERS PLEASE STAND UP
• EUR: TRICHET COMMENTS BOOST EURO
• GBP: STRONGER DATA EXPECTED
• AUD: STRONG GAINS IN EMPLOYMENT
• CAD: TRADE BALANCE TURNS SURPLUS
• NZD: FEELS LINGERING IMPACT OF RATE HIKE
• JPY: NODA TALKS NO INTERVENTION

EXPECTATIONS FOR UPCOMING FED MEETINGS

DOLLAR: WILL CONSUMERS PLEASE STAND UP

Better than expected global economic data and relatively upbeat comments from central bankers over the past 24 hours helped to boost risk appetite across the financial markets.  With equities around the world climbing higher after the strong Chinese trade figures, investors moved out of the safety of U.S. dollars and Japanese Yen into higher yielding currencies such as the Aussie, kiwi and British pound. The euro rose for the third straight trading day against the U.S. dollar while the yen ended the NY trading session slightly higher against the greenback.  U.S. economic data has been relatively light this week but a big market mover is scheduled for release tomorrow. The consumer spending report for the month of May will shed new light on the strength and sustainability of the U.S. recovery.

Will the Consumers Please Stand Up

Based upon the recent non-farm payrolls report, the recovery in the labor market could be hitting a roadblock. We won’t know until next month whether private sector payrolls turned negative, leaving government hiring as the sole source of job growth. However what we will find out before the next NFP report is how consumers are holding up. If retail sales are strong, then the fears of a slower recovery will dissipate but if it is weak, they will exacerbate. The current forecasts for May retail sales call for slower growth in consumer spending but we believe that regardless of whether Americans are finding part of full time work, the fact that they are finding work period means that they have money to spend, even if it is on the essentials. Therefore in our opinion, the risk is for a stronger and not weaker retail sales report on Friday. In fact, the International Council of Shopping Centers reported a 2.6 percent increase in revenue at stores open for at least year in May compared to a 0.8 percent gain in April. The Johnson Redbook retail sales report showed sales rising 0.3 percent versus a 0.1 percent decline the previous month. These numbers were not as impressive as the market had anticipated but they still represent a pickup in consumer spending. The main drag should have come from gas prices which declined steeply last month. Although we believe that retail sales could surprise to the upside, the consumption numbers will still be soft compared to the economy’s heyday but it should be enough to sustain risk appetite.

Jobs and Trade

The U.S. trade deficit widened slightly in the month of April, but not as much as the market had anticipated. The deficit rose to -$40.3B from -$40.0B, the highest level in a year. Even though exports and imports declined, overseas shipments remained at the second highest level since October 2008. Trade remains a big area of contention in Washington. Congress remains concerned about the China’s artificial depreciation of the Yuan, leading Treasury Secretary Geithner to say that the country’s exchange rate policy is an impediment to global rebalancing. On the day of the U.S. trade report, the U.S. government is trying to pressure China to strengthen its currency but as we have seen in the past, the bully approach with China usually backfires. Meanwhile the bigger surprise today was in the weekly jobless claims report.  Although weekly claims fell marginally from 459K to 456K, continuing claims fell steeply to the lowest level since 2008. The decline is partially due to the improvement in the labor market and partially to the expiration of regular unemployment benefits. Continuing claims do not include Americans receiving extended or emergency benefits.

EUR: TRICHET COMMENTS BOOST EURO

The euro received a boost from the comments made by Trichet following the European Central Bank’s monetary policy meeting. As expected the ECB kept interest rates unchanged. Going into this morning's European Central Bank meeting, we openly wondered if Trichet could say anything that would save the euro and based upon the market's initial reaction, investors were satisfied. Although the ECB President acknowledged the great deal of uncertainty in the economic environment, the tone of his comments were more positive than investors had anticipated. Yet more importantly, the ECB raised their growth and inflation forecasts for 2010 which suggests that they will be reluctant to provide further stimulus to the Eurozone economy unless it is absolutely necessary. Many people believe that fiscal consolidation will restrict growth in the Eurozone this year but Trichet expects the economy to continue to expand at a moderate pace with the possibility of faster growth if exports rise more than expected. This optimism was reinforced by their decision to raise their 2010 GDP growth forecasts from 0.4-1.2 percent to 0.7-1.3 percent. It won't be an easy ride of course and quarterly growth is expected to be uneven but the ECB believes recent economic data reflects an economic rebound in the spring. Inflation is not a problem for the time being, but it is something that the ECB is watching very closely. Inflation expectations are firmly anchored but Trichet does not rule out "more rises in inflation." In fact, the ECB also raised their staff forecast for inflation to 1.4 - 1.6 percent from 0.8 - 1.6 percent for 2010. This is a dramatic upward revision that suggests the central bank could aggressively normalize monetary policy once the European Sovereign Crisis recedes. One of the other main reasons why the euro appreciated following Trichet's press conference is because the central bank did not increase their bond purchase program. They may be looking at other tools such as debt certificates, but nothing has been decided for the time being. The ECB will continue their unlimited 3 month tenders, but they did not introduce a weekly, monthly or yearly tender. The lack of new measures has been received positively by the market because it suggests that the ECB does not believe market conditions have deteriorated enough to warrant fresh emergency action. However, as Trichet said, their inflexibility is also attached to their mandate of price stability. Finally, the ECB is not worried about the level of the euro. Trichet did not characterize the currency's move as brutal and simply said it is a very credible currency that has the capacity to preserve its value. ECB President Trichet has brought relief for the euro on a day when risk was already being bought on strong Chinese economic data.

GBP: STRONGER DATA EXPECTED

Like the euro, the British pound traded sharply higher against the greenback thanks to the recovery in risk appetite. The Bank of England left interest rates unchanged at 0.5 percent and their asset program in place. As we expected, the BoE did not provide any details in their monetary policy statement and as usual, traders will have wait for the release of the minutes from the meeting to get a better sense of the central bank’s thinking. Interestingly enough, the British pound jumped 30 pips following the BoE announcement but like ice cubes melting in your hand, the gains were lost quickly because at the end of the day, the central bank said nothing new. With the new government led by David Cameron still in the midst of preparing the new budget, there was very little chance that the BoE would make any dramatic announcements especially if it required committing additional capital. U.K. producer prices are scheduled for release tomorrow we believe that inflationary pressures increased significantly last month. Not only has the pound fallen aggressively but the PMI reports showed a sharp increase in prices. Industrial production is also expected to be firm with new orders rising for the eleventh consecutive month and export orders nearing record levels. Stronger economic data should fuel further gains in the GBP/USD.

AUD: STRONG GAINS IN EMPLOYMENT

The Australian, New Zealand and Canadian dollars rose strongly against the greenback on the heels of a rate hike from New Zealand and better than expected employment numbers from Australia. Not only did the RBNZ raised rates by 25bp but they hinted that monetary policy will continue to be normalized gradually. The larger increase in Australian employment also restored the market’s expectations for tightening by the Reserve Bank of Australia. A total of 26.9k Australians found new work last month driving the unemployment rate down to 5.2 from 5.4 percent. All the job gains were full time which is extremely encouraging. There is no question that the Australian labor market is one of the healthiest in the world at this time.   Meanwhile the Canadian trade deficit returned to surplus in the month of April. Even though the Canadian dollar rallied on the heels of the report, this is more likely due to risk appetite than data because the trade surplus fell short of expectations and only turned a deficit because the surplus in March was revised to negative.

JPY: NODA TALKS NO INTERVENTION

The broad based decline in the Japanese Yen reflects the improvement in risk appetite. Tokyo stocks rose Thursday in reaction to strong Chinese export data which revealed the highest growth since 2007 for an increase of 48.5%, causing the Chinese Trade Balance to rise to 19.5B from the eyed 8.2B—a six month high, and a monstrous increase from last month’s 1.7B. Because of Japan’s largely export-based economy and its close dealings with China, such large Chinese export numbers could signal a positive future for not just Japan but the larger Asia Pacific region; which until now was thought to have reached its pinnacle of expansion and was expected to be contracting. Such bright news coupled with a sharp 12.4% rise in Chinese property prices led the Nikkei 225 to advance 103.52 points from Wednesday, as Japanese Consumer Confidence saw a gain of 0.6 from last month’s 42.1 and Household Confidence also rose 0.8 points from previous month to reach 42.8—the fifth straight monthly gain and the highest reading since its similar October 2007 mark. With no more upcoming economic data for the week for Japan, investors are taking note of the newly appointed Finance Minister Yoshihiko Noda and his possible reactions to such better-than-expected economic news. Perhaps foreseeing a brighter future for Japan, Finance Minister Noda vowed to not intervene in currency markets, while also relieving any pressure set forth by his predecessor on the BoJ by stating, “The bank will decide specific measures for itself.”

GBP/USD: Currency in Play for Next 24 Hours

The GBP/USD will be the currency pair in play for the next 24 hours. In the United Kingdom, we expect a wide array of economic data, including April Manufacturing Production, Industrial Production and May Producer Price Index figures at 4:30 ET or 8:30 GMT. In the U.S., we await the Advance Retail Sales figure for May at 8:30 ET or 12:30 GMT and University of Michigan’s Consumer Sentiment Index for June at 9:55 ET or 13:55 GMT.

The GBP/USD is currently trading in the Bollinger Band Buy-Zone, rallying for the second straight day. Potential Support for the pair lies at today’s low of 1.4508, a level which coincides with its 10-Day Simple Moving Average. A key level of near-term resistance for the pair is at 1.4800, the pair’s March low.

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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.