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The Good News and Bad News on Christmas Eve

Last updated 12/24/2008 12:17 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

• US DOLLAR: THE GOOD NEWS AND BAD NEWS ON CHRISTMAS EVE
• EUR/USD: HOW JANUARY SEASONALITY IMPACTS THE EUR/USD
• EUR/GBP: HEADED BACK TOWARDS RECORD HIGH
• USD/CAD: GDP CONTRACTS 0.1%
• AUD/USD: GOLD PRICES STABILIZE, OIL PRICES CONTINUE TO FALL
• NZD/USD: RISES 1.37% AGAINST THE DOLLAR
• USD/JPY: STRONG YEN CONTINUES TO HURT THE ECONOMY

EXPECTATIONS FOR UPCOMING FED MEETINGS

US DOLLAR: THE GOOD NEWS AND BAD NEWS ON CHRISTMAS EVE

Thin market conditions continue to dominate in the currency market on the eve before Christmas.  Trading ranges for all of the major currency pairs have been relatively narrow, especially when compared to the large swings that have been characteristic of the third and fourth quarters of 2008. There were both upside and downside surprises in this morning’s economic data but even the upside surprises were numbers that reflected a contraction in US economic activity.  This has fueled the mild sell-off in the greenback that began at the European open.  

The Good News

Since it is the holidays, we will start with the good news.  Durable goods orders fell less than the market expected in the month of November.  The third decline in four months was primarily driven by a drop in Boeing orders.  A strike that ended in the first week of the month could have also contributed to the lower output.  Stripping out the transportation component of the report, durable goods orders actually increased 1.3 percent, the first rise in 5 months.  The rebound in durable goods ex transportation suggests that corporate investments may be recovering.  Another upside surprise was in personal spending which fell less than the market expected, but this was still the fifth month in a row that consumers have reduced their spending.  The 30-year mortgage rate also fell to a record low today and that will hopefully help to stabilize the housing market.  Low mortgage rates really do matter as applications increased 48 percent last week.  Although applications can fluctuate a lot, this is the second largest rise since March and is the fourth increase in five months. Meanwhile we are also continuing to watch the move in oil prices which remains near 4 year lows.

The Bad News

As for bad news, personal income dropped 0.2 percent while jobless claims soared to 586k, the highest level in 26 years. Claims have been above 500k since the beginning of November and the US labor market is on track to lose 2 million jobs this year.  Given that 1.91 million jobs have already been lost in 2008, 2 million will be easily surpassed in the month of December.  US unemployment is expected to rise from 6.7 percent to 7 percent in December.  There are no economic releases due for the remainder of the week. The next day that we expect US data is Tuesday December 30th.   All the financial markets are closed on Christmas Day.  Foreign exchange trading with GFT will reopen on December 6 at 6:00am ET.  

EUR/USD: HOW JANUARY SEASONALITY IMPACTS THE EUR/USD

Technical analysis is based on the idea that past price patterns repeat themselves and Seasonality is rooted in this very same concept.  Stock market traders may be familiar with the concept of Seasonality if they have ever heard of the term Sell in May and go away. Interestingly enough, Seasonality also happens in the currency market.  According to the following chart, over the past 10 years the EUR/USD depreciated in the month of January 70 percent of the time.  If we expand the chart to include 1997, the EUR/USD actually dropped in the month of January 8 out of the past 11 years.  Of course, like all technical analysis, the pattern does not always repeat itself which is why we saw the EUR/USD rose in the month of January during 2003, 2006 and 2008.  There are a lot of factors working against the US dollar in the beginning of 2009 but seasonality is one factor that may help.  

EUR/GBP: HEADED BACK TOWARDS RECORD HIGH

Despite quiet GBP/USD trading today, EUR/GBP is charging higher once again. Even though we have not yet experienced another successive record high, the overwhelming strength is still worth mentioning in such an illiquid holiday market. The rest of this week will present no new information, so we expect GBP/USD to remain within an extremely tight range. For next week, there are a few reports worth mentioning, including Nationwide House Prices on Monday, HBOS House Prices on Thursday, and BoE Credit Conditions, Net Consumer Credit, and M4 Money Supply next Friday. Further indication of the decline in House Prices may be a strong market mover, in that a disastrous number would boost the probabilities of another large BoE rate cut. The report on credit conditions will be of particular importance as well. The BoE has been pulling out all of the stops in an effort to influence credit institutions to relax their interest rates. If they do not comply, the vast majority of BoE rate cuts can be considered largely useless as credit markets remain locked-up.

USD/CAD: GDP CONTRACTS 0.1%

The Canadian dollar strengthened against the greenback as GDP contracted less than the market expected.  Economists forecasted a 0.3 percent decline in growth but GDP fell by only 0.1 percent in the month October.  However with that in mind, the Canadian government admitted this month that the country has fallen into recession.  Unlike the rest of the world, lower oil prices have been more negative than positive for the Canadian economy.  In addition, automotive sales dropped significantly in October as US demand for cars evaporate.  In addition to an economic crisis, Canada has also faces a political crisis.  Prime Minister Harper is expected to unveil a C$25 billion stimulus plan next week but lack of support in Parliament could mean roadblocks for his plan.  If the US economy continues to slow and oil prices continue to fall, we may see a further contraction in Canadian growth which could lead to more job losses.  The US absorbs 80 percent of Canadian exports every year which is why the country is so sensitive to the developments of its southern neighbor.  More rate cuts are also expected.  This morning, Canada injected C$625 million into the market in an effort to push the overnight lending rate lower, bringing it closer to the central bank’s target rate.  Meanwhile the Australian and New Zealand dollars also strengthened against the greenback - the kiwi was actually the day’s best performing currency.  There was no New Zealand economic data but we have long believed that the New Zealand will be one of the first countries to recover as a weak currency and aggressive interest rate cuts hit the economy.

USD/JPY: STRONG YEN CONTINUES TO HURT THE ECONOMY

As stated in yesterday’s Daily Currency Market Focus, our concerns about the impact of a strong Japanese Yen have been realized in Japanese manufacturing confidence which fell by the largest amount on record. Formally called the BSI Manufacturing report, the index dropped an astounding 45.5 in Q4, from -10.0 in Q3. This dismal outlook suggests more trouble ahead for the Japanese economy.  The All Industry Activity index also fell from -10.2 to -35.7. From this result, we can predict that business spending on new equipment and plants will be cutback dramatically in the first quarter, industrial production will suffer, and indirectly, the trade deficit will continue to widen. Yes, Japan is now running a trade deficit and not a trade surplus.  Not only is Japan counting on a rebound in international demand, but will now have trouble refueling capacity once the international economy stabilizes. Unfortunately, even as we are bombarded by these terrible news reports, the yen is appreciating against the dollar.  As more evidence of a weaker economy surfaces, speculation about physical intervention will grow. However, it appears that Japanese manufacturing is in such a recessionary state that it will take more than a sharp reversal in USD/JPY to counteract their woes. As a side-note, it is important to mention that volatility has fallen to a two month low. Meanwhile Japan is the only country that will be releasing economic data over the next few days.  We expect the BoJ Monetary Policy Minutes tonight, while Vehicle Production, Manufacturing PMI, Consumer Price Index, Retail Trade, and Industrial Production are all scheduled for Christmas day.

USD/JPY: Currency in Play for Next 24 Hours

Despite the holidays, we are still declaring USD/JPY as our currency pair in play. In fact while all other currencies will practically shut-down for the remainder of the week, the Japanese will be pumping out a vast array of important economic indicators. They will be releasing Manufacturing PMI at 6:15 pm ET or 23:15 GMT, as well as CPI, Household Spending, and the Jobless Rate at 6:30 pm ET or 23:30 GMT, and Retail Trade and Industrial Production at 6:50 pm ET or 23:50 GMT.

USD/JPY is still maintaining itself within the range trading zone. However, the potential for rapid USD/JPY appreciation may be an all too distant fantasy for the BoJ. Price action is quickly approaching the 20-day exponential-moving average, an important resisting force for the pair. The level is so significant because price action has only closed above the EMA two times since September, only to be thwarted lower in the span of a day. Arguably the failure of the moving average could hold within it a significant retracement, perhaps to the 96.11 area, or the 38.2% retracement from August highs to December lows. Currently, prices are struggling to break the resistance posed by the low placed on October 24th at 90.90. Support on an extension downward would first face the one-standard deviation Bollinger band and ultimately the major low of 87.13.

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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.