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Who Wants To Buy Dollars?

Last updated 9/3/2010 5:47 PM ET (GMT -5) 15 Comments

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Kathy Lien

Director of Currency Research, GFT

THE STORIES IN THE CURRENCY MARKET

• WHO WANTS TO BUY DOLLARS?
• EUR: RALLY GAINS MOMENTUM, NEXT STOP 1.30
• GBP: PRIMED FOR A BREAKOUT
• AUD: SERVICE SECTOR ACTIVITY IMPROVES
• CAD: BIG WEEK AHEAD
• NZD: GOLD AND OIL PRICES DOWN
• JPY: COULD THERE BE A MAJOR CHANGE IN BOJ POLICY?

EXPECTATIONS FOR UPCOMING FED MEETINGS

WHO WANTS TO BUY DOLLARS?

Who wants to buy dollars? Based upon today’s price action, no one does.  The non-farm payrolls report was not as weak as the market had feared and in fact was pretty good when taking into consideration prior revisions. A net of 54k jobs were lost in the month of August, approximately 50 percent less than economists had anticipated. Unsurprisingly, the dollar soared on the heels of the release but quickly lost ground after the non-manufacturing sector report showed a slowdown in service sector activity.  The reversal was not surprising because ISM conflicted with NFP but what was interesting was the only asset class that pulled back was currencies after the ISM report. The dollar gave up all of its gains against the Japanese Yen and weakened further against the euro, British pound and commodity currencies. Stocks and bonds on the other hand shrugged off the number with equities holding onto their gains for most of the day while bond yields rose across the board. Given the rise in stocks the rally in risk currencies such as the EUR/USD and GBP/USD are understandable but the sell-off in USD/JPY suggests that some investors are not convinced that the good labor market number is enough of a reason to buy dollars.

Discrepancy between NFP and ISM

Although the non-farm payrolls report was bullish for the U.S. dollar and the U.S. economy, the discrepancy between that report and the employment component of non-manufacturing ISM is a red flag. The latter usually has strong predictability for the former and therefore suggests that the labor market has not improved but deteriorated. The non-manufacturing activity index fell from 54.3 to 51.5 with the employment component falling to 48.2, the lowest reading since January. The number implies that on balance, jobs are being lost in the service sector, which of course conflicts with today’s payrolls report. However we won’t know until next month whether the improvements are sustained. Therefore the only information that we and the Federal Reserve have to work reflects improvements in the labor market. Non-farm payrolls fell by only 54k in August, compared to the forecast for 105k job losses.  The July figure was revised higher from -131k to -54k.  Private sector payrolls rose 67k against a 40k forecast with the July number revised up from 71k to 107k. Excluding Census workers, August payrolls increased by 60k.  Cutbacks forced government workers to slash 121k jobs last month but U.S. corporations picked up the slack.  The only black mark in the report was the unemployment rate which rose from 9.5 to 9.6 percent.    Not only did the headline number surprise to the upside, but private sector job growth beat expectations with the July figures also revised sharply higher.  This positive non-farm payrolls number will bring relief to both currency and equity traders and suggests that September may actually be a good month for the financial markets. Although this was the third consecutive month that more jobs were lost than acquired, this is the best outcome that investors could have hoped for.  The stronger non-farm payrolls report will reduce the pressure on the Federal Reserve to implement additional Quantitative Easing and practically guarantees that the central bank will make no new announcements on Sept 21st.  Central bank officials will be able to enjoy the Labor Day holiday with a lighter heart knowing that the labor market is moving in the right direction.

Monday is a holiday in the U.S. and Canada. The currency market will still be open for trading but the equity and bond markets will be closed for Labor Day. With no major economic data scheduled for release from any country, it should be a relatively quiet trading session. The only piece of U.S. data worth watching next week is the trade balance. Otherwise, currency traders will be focusing their attention on the four central bank rate decisions and the 3 employment reports on the calendar.

EUR: RALLY GAINS MOMENTUM, NEXT STOP 1.30

The euro continued to charge higher against the U.S. dollar following another round of relatively positive economic data. Although the pace of Eurozone retail sales growth fell short of expectations by rising only 0.1 percent in July, an upward revision to the prior month’s report (from 0 to 0.2 percent) offset this month’s softer release. A pickup in service sector activity in France and Italy also led to an upward revision to the Eurozone PMI services report. However when combined with the slowdown in manufacturing activity, there was on balance slightly slower activity in the month of August. Yet the euro continues to charge ahead and ends the week just a hair below the 1.29 level.  The strength of the currency can be partially attributed to the positive comments from ECB officials. Central bank member Draghi said this morning that the European recovery is becoming more broad based and cites a pickup in consumption and investment in Europe. ECB member Gonzalez-Paramo warned against banks becoming addicted to liquidity and said it is crucial that the measures are temporary and phased out gradually. Like Trichet, he believes that there are upside risks to prices due to energy costs which may be considered a bit of an upgrade from prior comments. Meanwhile, the Eurozone economic calendar is also relatively light next week which means that barring any unexpected circumstances, 1.30 should be resistance for the EUR/USD. Swiss consumer prices were flat last month which reflects the impact of a strong currency on inflation. Switzerland has an employment report scheduled for release next week and with the unemployment rate expected to remain unchanged. Yet there is a reasonable chance for improvement.

GBP: PRIMED FOR A BREAKOUT

The British pound shrugged off weaker economic data to rally sharply against the U.S. dollar. The latest numbers show that like the manufacturing and construction sectors, service sector activity slowed in the month of August.  The PMI index fell from 53.1 to 51.3 to the lowest level since April 2009. As our colleague Boris Schlossberg said this morning, “this was the third PMI gauge to miss this week” which suggests that the recovery in the U.K. is slowing. “Services, which comprise more than 70% of the UK business activity is the key barometer of the country's economic health and today’s third consecutive monthly decline in the PMI reading indicates that the probability of a double dip recession have increased. While the gauge still remains slightly above the 50 boom/bust line the general trend suggests it could slip into contraction by Q4 of this year.” Although there is a monetary policy announcement next week, the Bank of England is not expected to change interest rates or the size of their Quantitative Easing policy. Instead traders will be focusing on the industrial production, trade balance and producer price reports. Given the decline in manufacturing activity, which grew at its slowest pace in 9 months, there is a good chance that industrial production and trade activity has slowed. Continued weakness in incoming data would stifle the gains in the GBP and perhaps trigger a move back towards 1.50. Based upon the recent action of the GBP/USD, a breakout appears to be imminent and next week’s economic releases could provide the trigger.

AUD: SERVICE SECTOR ACTIVITY IMPROVES

The Canadian, Australian and New Zealand dollars rose sharply against the greenback ahead of what will be an exceptionally busy week for Canada and Australia. Both countries have monetary policy announcements and employment reports scheduled for release which will almost ensure an active trading week. Although the Reserve Bank of Australia is not expected to change interest rates, the RBA will release a monetary policy statement which traders will analyze closely. By all counts the RBA should leave interest rates on hold for the rest of the year, but recent economic data has shown signs of a stronger recovery which may have led to a more optimistic assessment by the central bank. Service sector PMI rose from 46.6 to 47.5 in August which indicates that even though service sector activity is still contracting, it is doing so at a slower pace. The details of the report show a strong pullback in employment which does not bode well for next week’s labor market report. Meanwhile the Bank of Canada is the only central bank expected to raise interest rates. The current forecast calls for a quarter point hike which would be their third dose of tightening in 3 meetings. Recent data out of Canada has been mixed with the trade deficit expanding and growth slowing. Consumer prices may have edged higher but only modestly and retail sales excluding auto purchases declined. Therefore a rate hike from Canada is not a done deal and even if they raise rates, the monetary policy statement will most likely downplay the significance of the move. On top of that, Canada also has their IVEY PMI and employment reports scheduled for release. According to the latest CFTC report, Canadian dollar traders turned short CAD for the first time since May of 2009. Although it will be quiet data wise in New Zealand, the kiwi will most likely follow the tracks of the Aussie.

JPY: COULD THERE BE A MAJOR CHANGE IN BOJ POLICY?

The improvement in risk appetite drove the Japanese Yen lower against all of the major currencies except for the Swiss Franc. Capital spending numbers were better than expected for the second quarter but the impact on the Yen was modest. The focus continues to be on the upcoming elections which should remain a key priority for Yen traders next week. However there is talk of a potentially radical change in Japanese policy that could strip the Bank of Japan of its independence and force them to adopt a positive inflation target. We all know that the independence of the BoJ is very limited as the government’s hand can be seen in most major decisions. According to Barclays, the argument behind the rumor is that “ amending BoJ Law is something the ‘Yours’ party has as a top priority whereas other parties don’t have strong cares either way/view this as a priority – and therefore if support from ‘Yours’ was needed this would be an easy point for another party/faction to compromise on. If it happened, expect market discounting higher likelihood of major turn around in the BOJ's policy, including unsterilized intervention.” Meanwhile given Ozawa’s harsh criticism of Yen strength, if he replaces Kan, it would probably be positive for USD/JPY.  Next week will also be a busy one for Yen traders with trade figures, consumer confidence and the Eco Watchers survey on the docket. The Bank of Japan has a rate announcement as well but we expect nothing significant until after the elections.

AUD/USD: Currency in Play for Next 24 Hours

The AUD/USD will be the currency pair in play for Monday. From Australia, we expect the AIG Construction Index at 7:30 ET or 23:30 GMT, followed by the Melbourne Institute’s August Inflation Gauge at 8:30 ET or 0:30 GMT and the Australia and New Zealand Banking Group’s Job Advertisements figure at 9:30 ET or 1:30 GMT. The U.S. markets are closed on Monday for Labor Day holiday.

Rising for the fourth straight day, AUD/USD is currently trading within the Buy-Zone, which we determined using Bollinger Bands. The pair has just broken above the 78.6% Fibonacci Retracement level, drawn from the April high of 0.9387 to the May low of 0.8065 and appears to have be on path to a correction to its decline from the mid-April. The nearest level of support for the pair is at the 200-Day Simple Moving Average of 0.8937, which is close to the psychologically important 0.9000 level. If this level is broken, the 61.8% Fibonacci Retracement of 0.8882 should provide further support as it coincides with the 50-Day Simple Moving Average. The closest level of significant resistance is at the 0.9178 level, which the pair tested but failed to break above in the beginning of August and which corresponds to the Upper Two Standard Deviation Bollinger Band. If this level is crossed, the pair should face further resistance at the 0.9292 level, at which previous highs and lows were established.

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Comments (15)

FXDragon

September 04, 2010 at 01:02 AM ET

Ok folks, that pretty much nears the last fake rally. Market will start to crash in 2 weeks. Sorry its taking so long. Patince and slyness of a snake is a virtue in fx.

Semaj

September 04, 2010 at 10:35 AM ET

Is this based on techs or fundis. Will it be USD strength or weakness? For either give your reasons Why ! On this side of the screen it's like me saying it will rain in 2 weeks. Oooh, thats helpful for planning a weekend at the beach !

Judging on your random calls of the past that seem to have a 50/50 outcome as in choosing red/black & odd/even on a Roulette table, your credibility is weak at best on this side of the screen. Do you recall eur/usd to 1.35 before 1.25 when it was @ 1.30 & I also belive you were buying at the top before the collapse @ 1.50 in Dec 09'. In addition usd/jpy to 88 when it was at 85 & then you changed your mind & became a seller the next week. All random calls without considering geo politics & disregarding the writers here @ 360, B&K.

Here's a thought. Why don't you pony up on your calls by posting your entries & exits so all here can see how good/bad a trader/investor you really are since you put yourself out there as a predictor of markets !

One more thing. Money Manager when faced with oposition @ 360 had the guts to turn his back & walk away never to be heard from again whether for the right reasons or not he earned my respect. I happened to enjoy his comments and am sorry he left, he at least had intelligence & reasons in his posts. Maybe there's something for you to learn from there !

schultzz.at

September 04, 2010 at 01:55 PM ET

Stock markets and Commodity Dollars are basically back at the level where they were at the end of July. I think we just have observed a typical period of summer dullness. Trading will get much more serious in the coming weeks.

Based on declining stock market volume and stock market volatility as measured by the CBOEs VIX indicator, I support FxDragon's thesis that a sell-off in risk assets is very likely later that month. From a timing perspective I am focusing on the triple witching day (Sept 17). I do not consider the transformation of the sell-off into a full blown panic as the base line scenario. However, the fragility of the European banking system is always on my mind and I am preparing for the worst.

A story that has not received its justified attention is the Anglo Irish drama. Ireland seems to hit a limit, politically as well as economically, in supporting its zombie banks. Anglo Irish revealed that it needs €25 bill., equivalent to two-thirds of Ireland's tax revenue. Standard&Poor's estimates that the bank will need €35 bill.

There are discussions to involve bond holders, but this would be messy. Bond investors will most likely turn to the courts to force the liquidation of the bank. Ultimately, other creditors could also be forced to take some pain. This would of course cause losses for the ECB.

I think that the violent short squeeze in the EUR/USD in June and July has lulled euro bulls into a false security. Like fxconcepts Taylor said: `The euro can be compared to a chicken that is still running over the yard with its head cut off.'
Tom Schultz.

FXDragon

September 05, 2010 at 03:58 AM ET

You want an essay full of reason for everything dont you. Ok. Here’s another reason: I was looking at the oil contracts during the last rally, the open interest is very low. In commodities, you can think of open interest as ‘new money.’ There’s no new money coming in, so how do they push the prices? By short selling their already existing positions! Thats whats been raising the price last week. If you’re short selling yourself, that signals big trouble. Also those rallies we been having in stocks, if you look at the volume, its weak. You cant have real rally without real volume behind oil and stocks(which are 90% correlated lately). Conclusion: all those rallies are fake, empty, show off. They do that with little money(compared to real volume). And when real volume starts to come back, ‘senior traders welcome back party’ begins. And its no joke! You always have to follow the new money(if you can); cause if its not there, theres trouble ahead.
Im not saying parity very soon. Im saying 1.17 till December and oil to 60. Here’s my position: buying usd except for usdjpy(selling), expecting a turn in eurusd between 2940-3030, not caring about stop for now(we can discuss my reasons later). And stay this way long term until further notice. Thats my big money shot this quarter. My short term trades with a lot smaller money i can post also as we go along.
Im sure someone like money manager is reading everything on the site and will return one day. I criticize myself 100 times than people here so i dont question my dignity.
If you need technical confidence, i suggest Brad’s long term eurusd. Fundamental confidence, you can be sure Boris and Kathy will be singing the ‘fears of global slowdown and weak fundamentals’ blues after this rally show turns around. Remember, they will all be right:)
If the market dont crash, i will apologize to everyone here, declare myself ‘foolest dummy of all time in fx’ and disappear from here with 10,000$ of money lost, throwing all my past experience in the market to the garbage. So my whole dignity and finances at stake how you like that! If i get right, i make 40,000 and predict the next crash with my new found Throne of Brinkmanship.
Thanks to everyone challenging me to fuel my ambition and greed.
Note: all that head wreck upstairs is valid on one condition, Fed not pumping more QE until well after 2011. Thats my first and last essay!

hsbc

September 05, 2010 at 03:38 AM ET

dragon, want to bet? i say that eur will rally to 1.31 and this time u are dead wrong.

FXDragon

September 05, 2010 at 06:43 AM ET

hsbc, i have to say you had a good pull from 1.29 down to 27. However i dont think its worth to bet in glamour for a few pips. As i’ve asked before, are you up or down at this point till December? Im talking about at least 1000 pips. It could go to 3150 if it pushes hard enough, 33... it wouldnt change my stance 1 bit until i post i stopped. The more it pushes up, the more delicious my mudslide would become smothered with pip shots.
Up or down or neutral? In or out? Call it wiseguy. Here’s another chance i serve you to put me in shame! Think how goood it will feel:) You’ll be the new rock star here!
What is your bet? Im selling new highs till 3060.

hsbc

September 05, 2010 at 10:24 AM ET

done. as i said, u are wrong this time. it will reach 1.31, possibly 1.32. if that isnt clear cut to u it means its going up. come on. everyone knows that you have called it wrong at 1.50 and 1.20. u keep talking abt big move but u never ever justify urself and all of a sudden u tell us that u have changed. ok lets do it lets see how wrong u are this time.

jouniharjula@hotmail.com

September 05, 2010 at 04:51 PM ET

EUR will test 1.18 very soon, as stock markets will tank. why ? stock market rallies weak volume= short covering, recent EUR rally pure short covering, crude short cvering..ljuts look CFTC like dragon suggested...ast shoe to drop is Copper and Silver prices which hava had significant rally. once these market soften..at the moment we will have some sideways action in stocks and EUR (maybe stop hunt until 1.31 the most)...but it is about the go on your face. btw, i am hapy to see EUR positive comments here, this means more positive consesus to clean these suckers out for good. Dragon, i see EUR to paritiy with dollar so hold on to your position and buy new raneg rover with that....HSBC you are dead wrong. i can bet on that.

jouniharjula@hotmail.com

September 05, 2010 at 05:00 PM ET

dont forget the VIX, it is way to low for this season, as if EUR worries, fiscal issues have been resolved ??? also, dont forget the message 10 YR market is sending, economy will tank sooner rather than later. lalso atest CFTC indicates major reloading for
US treasuries...i see S&P500 to make its final jump to 1120-30 if that and we have one of the best short opportunities in a while.

its short short short....any rallies on EUR, AUD, GBP S&P, metals...US has not decoupled from China, thats another fallacy to write about...for those argumenting BRICS will save the day, they wont.

i am new to this forum but please feel send me emails, or comments, negative or positive.

FXDragon

September 07, 2010 at 01:35 AM ET

Ok so we got:
Bull Board: hsbc, NeoFX, MHW
Bear Board: FXDragon, Mr.Schultz, jjula
Anybody in? Last call!
Million dollar question as we head into an interesting fall:
"Could 1.26 may have been the bottom?" Or may it have been not?
Cmon ladys and gents! Books are closing!

syd

September 07, 2010 at 01:44 AM ET

Interesting. My call is Bear - heading back to 1.26. Sovereign debt will raise it's head within the next 60 days, and put more pressure on the EUR.

schultzz.at

September 07, 2010 at 04:32 AM ET

The euro took a hit in early Far East trading in an otherwise risk neutral environment. The 'explanation' was that the WSJ published an article that certain banks understated their sovereign risk for the stress test.
This explanation is of course nonsense, because everybody was already aware that the stress tests were conducted under absurd assumptions.

The drop in EUR/USD was most likely caused by real money and signals that Asians have not that much confidence in the euro. It also signals 'all lights green'. The EUR/USD will most likely trend lower, even in an environment that could remain risk neutral for another two weeks or so.

Right now, currency markets are mainly driven by weak European stock markets and U.S. index futures. I am now counting on a stabilization of the pair after stops at 1.2750 have been run. The ideal scenario would be a bounce back above 1.2800 in the context of recovering stock markets and strong German factory orders.

I am considering to take some profits around 1.2600, but the mark will not hold for very long. The cocktail of Irish zombie banks, French strikes, talk of Belgium breaking up, etc. will prove too toxic for the pair.
Tom Schultz.

syd

September 07, 2010 at 05:24 AM ET

Tom,
Indeed, I agree with your final paragraph.

NostradamusFX

September 07, 2010 at 06:15 AM ET

I’ve been bearish since 1.29. Moved my stop up to 1.3040. My last resistance is 1.3135 then I’m out!

jouniharjula@hotmail.com

September 07, 2010 at 04:13 PM ET

cover shorts for EUR, S&P, AUD; GBP, some weak bounce coming up....then it's SELL SELL SELL again.

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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.