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: Beige Book Confirms Uneven Recovery

Last updated 9/8/2010 5:26 PM ET (GMT -5) 0 Comments - Add your comment

• Share this:

Kathy Lien

Director of Currency Research, GFT

THE STORIES IN THE CURRENCY MARKET

• USD: BEIGE BOOK CONFIRMS UNEVEN RECOVERY
• EUR: COMFORTED BY DEMAND FOR PORTUGUESE BONDS
• GBP: SIGNS OF STRONGER SPENDING
• CAD: RAISES RATES TO 1 PERCENT
• AUD: EMPLOYMENT NUMBERS ON TAP
• NZD: OIL AND GOLD UNCHANGED
• JPY: REBOUNDS AFTER HITTING NEW HIGHS

EXPECTATIONS FOR UPCOMING FED MEETINGS

USD: BEIGE BOOK CONFIRMS UNEVEN RECOVERY

With no U.S. economic data on the calendar, currencies and equities rebounded after successful European bond auctions helped to alleviate concerns about sovereign debt exposure. The focus this week is not on the U.S., but on the rest of the world and today, the rebound in risk has been fueled primary by developments in Europe. Investors barely reacted to the Federal Reserve’s Beige Book which reported a slower pace of expansion. Part of the reason is because beneath the headlines, the details show a very uneven recovery. Although the dollar fell to a fresh 15 year low against the Japanese Yen overnight, by the end of the NY trading session it had recovered all of its losses and even moved into positive territory. At the same time, the improvement in risk drove the dollar lower against higher yielding currencies such as the euro, British pound and comm. dollars. Although the U.S. is back in the game tomorrow with the trade balance report scheduled for release, the spreads between the bond yields of European countries will probably be a bigger driver of currency movements than the small improvement expected in the U.S. trade balance.

Beige Book Notes Uneven Recovery

The Beige Book report measures economic activity between Federal Reserve monetary policy meetings and is used by central bank officials to decide future monetary policy. The latest report echoes the tone of the past FOMC minutes and comments from policymakers. According to the report, the U.S. recovery is continuing but at a slower pace with widespread discrepancies in growth. Although the takeaway from this month’s report is that the 12 Fed districts saw “continued growth in national economic activity” between mid July and the end of August, “but with widespread signs of a deceleration compared with preceding periods,” not every part of the nation experienced a slowdown. For example, Boston and Cleveland reported improvements while the Fed districts of St. Louis, Minneapolis, Kansas City, Dallas and San Francisco reported that economic growth was continuing at a moderate pace. New York, Philadelphia, Richmond, Atlanta and Chicago on the other hand reported mixed conditions or slower growth.  Yet the reason why the Fed concluded the report saying there are widespread signs of deceleration is because on balance even the regions that reported continued growth saw pockets of weakness. Although consumer spending increased and manufacturing activity is expanding, the expiration of tax credits has taken a toll on the housing market, pushing prices lower while loan growth was either stable or slightly lower. At the end of the day, there were no surprises in the Beige Book because everyone knows that the U.S. recovery is slowing and the Fed is worried.  

Aside from the Beige Book, Fed President Kocherlakota made comments on the economy. He is worried about the labor market and describes it lack of vitality as “disturbing.” Kocherlakota expects the unemployment rate to exceed 8 percent into 2012.  Earlier today, the Fed also announced that they will sell term deposits in October and November and every other month thereafter in preparation for an eventual exit from emergency measures. The sales have been planned for a while and are very small which is why the market has not reacted to the announcement.  If the central bank decided to delays these plans, it would have probably had a more significant impact on the U.S. dollar.  

The acceleration in manufacturing activity suggests that the trade deficit could shrink but an increase in jobless claims could offset an upside surprise. 

EUR: COMFORTED BY DEMAND FOR PORTUGUESE BONDS

The euro rebounded against the U.S. dollar following a strong bond auction in Portugal and Ireland’s decision to split Anglo Irish Bank into a funding bank and an asset recovery bank. The funding bank will be a stand alone regulated bank that is backed by the government and will accept deposits from customers. The asset bank on the other hand will be partially or wholly sold over time. The goal is to separate the risks between the two banks and provide a clear set of expectations for investors. Meanwhile the Committee of European Supervisors also released a statement addressing the discrepancy between the Bank of International Settlements numbers and the data disclosed by banks during the stress tests. Unfortunately the statement provided little information outside of acknowledging that banks were asked to disclose gross exposures and were allowed to deduct offsetting short positions. They argue that the data compiled by the BIS used different reporting dates and methodologies which make a comparison between the 2 numbers “impossible.”  If the statement was aimed at alleviating the market’s concerns, it failed to do the trick as the euro barely reacted to the press release. As for economic data, the German trade surplus decreased less than expected but any positive sentiment was offset by the sharp decline in exports which indicates that the rebound in the euro has hurt German trade activity. This was confirmed by the sluggish growth of industrial production which rose by only 0.1 percent in July. France appears to be suffering from a similar problem with the trade deficit widening. Imports and exports both increased but exports rose at a slower pace.

GBP: SIGNS OF STRONGER SPENDING

The price action in the British pound has been very choppy with the currency pair falling aggressively on Tuesday only to recover strongly on Wednesday. The pound has been driven higher primarily on news that Vodafone plans to sell its stake in China Mobile worth approximately $6.6 billion which should translate into a sterling positive FX flow.  Economic data from the U.K. on the other hand was mixed with industrial production growth falling short of expectations which is in line with the weakness seen in manufacturing activity. However the negative sentiment was offset by a surprise increase in house prices in the month of August. According to Halifax, a rebound in demand helped boost prices. Although the report conflicts with earlier numbers released by Rightmove PLC, the operator of the nation’s biggest property website and Nationwide Building Society, it is it is a piece of good news that investor have quickly latched onto in a month filled with disappointments. The NIESR’s GDP estimate showed a moderate increase in output of 0.7 percent from the 1.3 percent in the three months ending in July. The institute says that though “the pace of economic growth [has] softened in the three months to August, it is still a robust rate for the UK.” Unfortunately, the rate of growth could continue to decelerate over the coming months as the UK economy suffers from the effects of fiscal austerity.  Thursday is a big news day for the UK with a number of key releases including the Trade balance and the BoE rate decision. The central bank isn’t expected to change its target rate, which it has kept at the 0.5 percent level since March of 2009 or the size of its quantitative easing program. With inflation expected to remain above the BoE’s 2 percent target going into 2011, affected particularly by the increase in VAT, earlier rises in oil prices, not to mention the enormous amounts of deficits the UK government continues to take on, the BoE is carefully balancing sticky inflationary pressures with slower growth. Since the central bank does not release new comments when monetary policy remains unchanged, the rate announcement should have a muted impact on the currency. Instead, the trade report will be important because an expansion of the trade deficit would further confirm the troubles in the UK economy.

CAD: RAISES RATES TO 1 PERCENT

The Canadian dollar soared after the Bank of Canada raised interest rates by 25bp to 1 percent.  This was the third consecutive rate hike from the BoC and has made them one of the most aggressive G20 central banks.   The tone of the monetary policy statement was not nearly as dovish as some traders feared and therefore the Canadian dollar is trading sharply higher.  Recent economic data may have taken a turn for the worse and the U.S. recovery may be moderating, but Canadian officials are hopeful that consumption and business investment will continue to rise.  As a result, they remain in tightening mode after lifting rates this year from 0.25 to 1 percent.  The BoC reminded us that "financial conditions in Canada have tightened modestly but remain exceptionally stimulative" which can only be interpreted to mean that they will continue to normalize monetary policy over the next few months.  We expect the central bank to raise rates by another 25bp before the end of the year which should keep the Canadian dollar in demand.   At the same time, it is important to note that "economic activity in Canada was slightly softer in the second quarter than the Bank had expected" and the Bank now expects the economic recovery in Canada to be slightly more gradual than it had projected in its July Monetary Policy Report (MPR), largely reflecting a weaker profile for U.S. activity."  These last words give the central bank the flexibility to take a break from tightening should the recovery in U.S. slow further.   The rally in the CAD was further compounded by the sharp rise in the IVEY PMI report. Thanks to a pickup in business spending, Canadian manufacturing activity expanded by its fastest pace since July 2008. The trade balance is scheduled for release tomorrow and the stronger IVEY suggests that the deficit may have turned into a surplus in July. Meanwhile the Australian and New Zealand dollars are also trading higher ahead of Australia’s employment report. Given the slightly more positive tone of the Reserve Bank’s monetary policy statement, the labor market is expected to improve with the unemployment rate forecasted to fall from 5.3 to 5.2 percent. 

JPY: REBOUNDS AFTER HITTING NEW HIGHS

At the beginning of the Asian trading session last night, USD/JPY fell to a fresh 15 year low. However the rally in European and US equities help the currency recover and end the NY trading session higher. In fact the improvement in risk appetite has lifted all of the Yen crosses. Although Japanese officials continued to threaten intervention, their comments did not contain more punch and remained virtually unchanged despite the continual appreciation of the Yen. Last night, Bank of Japan Governor Shirakawa simply said that the Yen’s rise on Tuesday reflected doubts about Europe bank stress test and he is watching the downside risks from the Yen’s rapid rise. The Bank of Japan is willing to take additional steps if the downside risks become visible. Finance Minister Noda said that the Japanese government is ready to take decisive measures “when needed” but the comments from both officials suggest that so far, intervention is not necessary. Meanwhile economic data out of Japan was mixed. Machine orders rose 8.8 percent in July which was much stronger than the market had anticipated while the current account surplus expanded from JPY1.04T to JPY1.676T.  The trade surplus also rose more than the market had anticipated to Y916.1B. The 26 percent rise in the current account surplus indicates that the strong yen only had a limited impact on trade activity in the month of August. Yet the Eco Watchers survey show that the man on the street is growing more concerned about the outlook for the Japanese economy. The BoJ monthly report is scheduled for release this evening along with the consumer confidence report.

GBP/USD: Currency in Play for Next 24 Hours

The GBP/USD is the currency pair in play tomorrow with the UK trade balance scheduled for release at 4:30am ET / 8:30 GMT and the Bank of England rate announcement at 7:00am ET / 12:00 GMT. The US will follow with its trade balance and jobless claims report at 8:30am ET or 12:30 GMT. 

The GBP/USD has been trading very choppy over the past 2 weeks as it attempts to break out of a tight consolidation. Significant resistance and support levels hover close to current rates and a break of those levels is needed before a new trend can emerge. The 1.56 level is resistance in the GBP/USD because the first standard deviation Bollinger Band and the 23.6 percent Fibonacci from the May to June rally retracement converge at that point. The 1.53 level is support created by the 38.2 percent Fibo of the same move and recent lows. 

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.

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.