All Trade Ideas and trading scenarios found on FX360.com are hypothetical. FX360.com has not placed these Ideas in a live trading environment. Forex Trading involves high risks, with the potential for substantial losses that exceed your initial deposit and is not suitable for all persons. Past performance is not necessarily indicative of futures results.

USD: Concerns About Upcoming Data

Last updated 8/30/2010 4:33 PM ET (GMT -5) 2 Comments

• Share this:

Kathy Lien

Director of Currency Research, GFT

THE STORIES IN THE CURRENCY MARKET

• USD: CONCERNS ABOUT UPCOMING DATA
• EUR: RISK AVERSION OVERSHADOWS IMPROVEMENT IN CONFIDENCE
• GBP: BOE MINUTES ON TAP
• CAD: COMM DOLLARS HIT BY WEAKER DATA
• AUD: STRONGER PROFITS OFFSET BY DROP IN HOME SALES
• NZD: BUSINESS CONFIDENCE AND OUTLOOK DECLINE
• JPY: BOJ INCREASES STIMULUS BY 10 TRILLION

EXPECTATIONS FOR UPCOMING FED MEETINGS

USD: CONCERNS ABOUT UPCOMING DATA

Currencies and equities have been in a corrective mode throughout the North American trading session, erasing part and in some case all of Friday’s gains.  Even though this is the week before the Labor Day holiday in the U.S., which is also the unofficial end of summer, traders should not dismiss the possibility of significant volatility due to the heavy dose of economic data on the calendar.  This is a big week in the financial markets with key events such as the minutes from the most recent Fed meeting out on Tuesday, a monetary policy announcement from the Eurozone on Thursday and the non-farm payrolls report on Friday. Canada, Australia and the Eurozone also have second quarter GDP reports due for release. The sell-off in the financial markets today reflects the realistic concern that Friday’s labor market report will show additional weakness in the labor market and in turn, the U.S. economy.

Fed to Pay Close Attention to This Week’s Data

On Friday, Bernanke said the Fed will “do all that it can” to support the economy which basically means that he stands ready to initiate QEII if the economy continues to worsen. This week’s economic reports will play a big role in that decision process as Chicago PMI, consumer confidence, pending home sales, manufacturing and service sector ISM are the other important releases on the calendar aside from payrolls. The U.S. economy is expected to report another month of net job losses due to culmination of the Census. More importantly however private sector payrolls are expected to increase by a smaller amount which would mean that U.S. corporations have toned down their pace of hiring. Before we get to that report, the minutes from the latest Fed meeting, which is due for release tomorrow, should reinforce the central bank’s concerns about the sluggish pace of growth expected for the rest of this year and the lower than desired inflation level. Bernanke has already outlined the central bank’s options for additional stimulus so no major surprises are expected from the minutes. There is no question that growth is undershooting everyone’s expectations and without additional stimulus, it could continue to do so which is the greatest risk for the U.S. dollar. The stimulus water is one that the Fed will have to navigate carefully as each option reduces the element of surprise. In our opinion, the most effective would probably be something that has a physical rather than psychological impact on the market such as buying government debt and long term securities.

Meanwhile this morning's U.S. economic reports provided a minor boost for the U.S. dollar, but the data surprise was not large enough to offset the corrective mode in the forex markets.  After stagnant growth in June, it was encouraging to see an increase in income and spending during the month of July. Personal income grew 0.2 percent which was slightly less than forecast while personal spending grew 0.4 percent, slightly more than forecast. For the time being incomes and consumption are moving in the right direction.  On a quarterly basis, personal income and spending also continued to rise.  Meanwhile inflationary pressures have increased slightly with the deflator for personal consumption expenditures rising from an annualized pace of 1.4 to 1.5 percent.  Core prices which are more stable grew 0.1 percent in July.  Although this pace of growth is not likely to garner any attention from the Federal Reserve, it is aligned with lighter deflationary pressures.

EUR: RISK AVERSION OVERSHADOWS IMPROVEMENT IN CONFIDENCE

Of all the major currency pairs, the euro sold off the most today against the U.S. dollar, erasing all of Friday’s gains in the process. Economic data was surprisingly neutral with business confidence edging slightly lower while consumer, services and economic confidence edged higher in the month of August. According to the latest report, economic confidence rose to its highest level since March 2008. Despite the cloudy outlook for the European community, things are still going fairly well in the Eurozone, providing reasons for consumers and businesses to remain optimistic. However the price action in the EUR/USD indicates that there is a major disconnect between what is happening and what investors expect to happen going forward. The weakness of the euro suggests this concern about the global economic outlook is overshadowing current activity. Credit Default Swap rates for countries such as Portugal, Greece, Ireland, Italy and Spain have declined which means that today’s concerns stems from the general risks in the market and not from the Eurozone specifically. When there is not much going on, the EUR/USD likes to track U.S. equities and therefore the drop in stocks is the best explanation for the underperformance of the euro and other high beta currencies. German unemployment figures are scheduled for release tomorrow and the market expects unemployment rolls to decline for the 14 ^th month in a row. Although we also believe that this will be the case, the pace of improvement could slow as the latest PMI number shows a pullback in the employment component of the service and manufacturing sector reports.

GBP: BOE MINUTES ON TAP

Like the euro, the British pound was also hit by risk aversion, weakening against all of the major currency pairs. U.K. markets were closed for a bank holiday which means the sell-off in the currency was triggered entirely by external factors.  Last Friday, second quarter GDP beat expectations, printing at 1.7 percent, the highest mark since March 2008. Nevertheless, the reaction in the markets was mostly muted as analysts wrote off the improvement to be temporary as fears of rising inflation and public spending cuts has many, including the BoE, worried that UK economy may be facing further financial instability going into the fourth quarter.  While inflation topples the BoE’s 2 percent target, the UK housing market is facing tremendous challenges of low demand as last night’s Hometrack House Price Survey showed housing prices falling by -0.3 percent compared to an expected -0.1 percent drop. Rightmove also published a survey (conducted between July 5-19 of 22,010 individuals) which indicated that of those expecting to buy a home in the next 12 months, only 22.2 percent will be first time buyers compared to 30.8 percent a year ago. With unemployment expected to rise well into 2011, prospective buyers are getting harder to find and Rightmove labels such findings of low housing turnover as “cause for concern.” In the past few months, while the UK government took quick and decisive actions in hopes of cutting massive budget deficits, they may now suddenly find themselves with few options left to spur the economy. Deputy BoE Governor Charles Bean warns that talking about controlling short-term interest rates is not enough to ward off a possible double-dip recession, saying “keeping interest rates low in the future will boost future inflation… [while] boosting activity today.” He further argues that BoE must be “able to commit to keep policy rates low for a sustained period, as this is the only way of further stimulating the economy.” Needless to say, the BoE still faces a number of difficult tasks ahead, with low consumer demand, high inflation, high unemployment, and now continuing indications of weakness in the housing markets. With all this in mind, investors should be keeping an eye on the GfK Consumer Confidence report due for release later tonight, Manufacturing PMI release on Wednesday, and more housing data on Thursday.

CAD: COMM DOLLARS HIT BY WEAKER DATA

The Canadian, Australian and New Zealand dollars lost value against the greenback due not only to risk aversion but also weaker economic data and softer commodity prices.  Up North, Canada reported a sharp expansion in their current account deficit due to weaker demand from the U.S. In the second quarter, Canada's deficit widened to CAD$11 billion from CAD$8.5 billion.  Despite the recent rate hikes from Canada which imply that the economy is improving, falling orders from the U.S. for lumber and automobiles have sapped demand.  As Canada's #1 trade partner, the country will undoubtedly be impacted by the health of the U.S. economy. This is part of the reason why we expect tomorrow’s GDP report to fall short of forecasts due to weaker retail sales and trade activity at home and abroad. Over in Australia, the increase in corporate sector profits in the second quarter was offset by a decline in inventories and a larger drop in home sales. The housing market continues to see the effects of weaker global growth and the prior increase in interest rates. Retail sales, the current account balance and building approvals are scheduled for release this evening and the market is looking for stronger numbers. Any downside surprises could exacerbate the selling of Aussies. In New Zealand, business confidence and the outlook for activity continued to decline, reducing the prospect of additional near term tightening by the Reserve Bank. Although New Zealand businesses are optimistic on their outlook for exports and livestock activity, residential construction and the labor market remains areas of concern. New Zealand building permits are scheduled for release this evening.

JPY: BOJ INCREASES STIMULUS BY 10 TRILLION

The Japanese Yen strengthened against all of the major currencies despite the central bank’s decision to increase their emergency loan facility. We have long believed that the BoJ's comments on the Yen amounted to nothing more than empty threats.  At an emergency monetary policy meeting earlier today, the Bank of Japan decided by an 8 to 1 vote to add 10 trillion Yen to the emergency loan facility, which allows banks to borrow money at the extremely low interest rate of 0.1%. The BOJ also announced that the terms of the loans for the new funds will be set at six months. In direct response to the central bank’s measures, former monetary policy board member Nobuyuki Nakahara said “the announced measures were meaningless and can’t stop the Yen’s advance,” and that “the action therefore was too little and too late.” Nakahara then mentioned his view on what the central bank should do, stating “unless the BOJ lowers the policy rate to zero, interest rate differentials between Japan and the U.S. will continue to narrow and weigh on the Dollar-Yen rate.” He added “If the BOJ stubbornly keeps saying that it can’t do anything in helping to achieve growth, we don’t need such a central bank any longer, and should just turn over its power and functions to the government or to megabanks.”  Knowing that intervention would have probably been a waste of money because the impact on the forex market will be temporary and limited, the Japanese government has resorted to monetary and fiscal stimulus.  Although this is the more prudent option because it provides direct stimulus to the economy, it is not one that investors are satisfied with.  The Yen is still trading near its 15 year highs with USD/JPY hovering below 85.  BoJ Governor Shirakawa pledged additional action if necessary and there is a good chance that the government will follow up with a fiscal stimulus plan. As for intervention, long Yen positions are at record highs which is what the BoJ likes to see when they intervene, but to intervene after seeing how the market has responded to their monetary stimulus would imply that they are bowing to market pressures.

EUR/USD: Currency in Play for Next 24 Hours

EUR/USD will be the currency pair in play for the upcoming 24 hours. From the Euro-Zone, we expect German Unemployment Change figures at 3:55 ET or 7:55 GMT, followed by the Consumer Price Index Flash Estimate and the Unemployment Rate at 5:00 ET or 9:00 GMT. The United States is expected to release the Chicago Purchasing Managers’ Index at 9:45 ET or 13:45 GMT, followed by the Conference Board’s Consumer Confidence at 10:00 ET or 14:00 GMT and the Federal Open Market Committee’s meeting minutes at 2:00 ET or 18:00 GMT.

After rising for four consecutive days, the EUR/USD fell back into the Sell-Zone today, which we established through the Bollinger Bands. The pair channeled upward after hitting its lowest point in five years but is currently on a downward path after failing to sustain above the 1.3000 level for long. The most significant near-term support level is at 1.2634, which provided adequate support since mid-July and which held up for the most part last week. If this level is broken, the 50% Fibonacci Retracement level of 1.2604, drawn from the June low of 1.1876 to the August high of 1.3333, should provide further support for the pair. The closest level of significant resistance is the 38.2% Fibonacci Retracement level of 1.2776, which coincides with the 50-Day Simple Moving Average. If this point is crossed, the pair should see further resistance at the 20-Day Simple Moving Average of 1.2885, at which previous highs and lows were established.

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.

• Share this:

Comments (2)

FXDragon

August 31, 2010 at 03:36 AM ET

Countdown to crash!
5,4......

hsbc

August 31, 2010 at 09:55 AM ET

wrong again ... sigh

Add Your Comment

Please login to post a comment or sign up for an FX360® account.

Loading...

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.