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Stronger U.S. Data Boosts Risk but not the USD

Last updated 9/9/2010 9:08 AM ET (GMT -5) 4 Comments

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Kathy Lien

Director of Currency Research, GFT

A sharp improvement in the U.S. trade deficit and decline in jobless claims helped to lift risk appetite across the forex market. With Federal Reserve officials warning about the risks in the U.S. economy and the prospect of slower growth in the fourth quarter, today's stronger economic reports helped to reduce pessimism. However the dollar failed to receive a lift from the numbers which suggests that some investors are skeptical that the improvements will be temporary but it is hard to argue against today's reports.  The trade deficit shrank from -$49.76B to -$42.77B as increased shipments of civilian aircraft and telecom equipment pushed exports boosted exports by 1.8 percent.  Imports on the other hand fell 2.1 percent with broad based declines for most goods. Recent trade reports have been extremely volatile and sensitive to exchange rates.  With the dollar declining in value in the month of July, we have seen a significant improvement in trade activity.  

At the same time, weekly jobless claims fell from 478k to 451k with continuing claims dropping 4.48M to 4.478M.  The problem with the better than expected non-farm payrolls report last week was its sustainability and today's jobless claims report suggests that the labor market has continued to improve. At the end of the day, both reports are very positive for the U.S. economy.

However the mixed performance in the currency market this morning reflects the growing gap between the performance of countries around the world.

The U.S. trade report may have surprised to the upside but the Canadian and U.K. trade number were major disappointments. Both trade gaps hit a record high in the month of July, signs that those countries are feeling the pinch of a slower recovery.  The Canadian trade deficit hit -CAD2.7B up from -CAD1.8B in June.  Exports to all countries dropped 0.7 percent while imports rose 2 percent. The U.K. trade deficit climbed to 8.7 billion pounds in July as the combination of rising imports and falling exports widened the trade gap to its largest level ever. The increase was due to higher oil prices and purchases of chemicals. The latest trade numbers confirms that the U.K. economy is in trouble because import demand is not likely to be sustainable with the VAT tax hike and fiscal austerity measures.  Exports are also falling which explains why manufacturing activity has slowed significantly.  These recent disappointments in UK economic data has and will continue to keep the Bank of England on hold.

Meanwhile anyone who wants to find a job should go to Australia.  The country continues to report solid employment numbers with another 30.9k Australians finding new work in the month of August.  As a result, the unemployment rate in Australia fell to an 18 month low of 5.1 percent (matching the rate in June). To put this into perspective, the U.S. unemployment rate is currently 9.6 percent.  Eighteen months ago it was 7.7 percent and yesterday Fed President Kocherlakota basically said there is no chance that the unemployment rate will dip below 8 percent before 2013.  Countries that supply to China continue to perform extremely well despite their slowdown in growth thanks to a heavy backlog.  The strength of the Australian economy has driven the Aussie to a record high against the euro.  

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Comments (4)

Semaj

September 09, 2010 at 09:58 AM ET

Here is a possible trade for a base hit, not home run !

Nzd/Usd has overbought indicators on the 15, 1 hr, & 4 hr charts. Indicator divergence from price on a 3 & 15 min on the new high. We are @ a 78.6 fib on the Aug drop, weekly R1 & daily R2 pivot overlap. Short entry on a 3 min setup risking to just above .7300. Profit target at 25 pips for 1/2 the position, move stop to just above the 3 min swing high for the remainder & exit that 1/2 where you want to, perhaps a fib of the last rally. If you dont like this setup, dont trade it, it's not for everyone !

NeoFX

September 09, 2010 at 12:49 PM ET

I see what you mean, not a bad set up at all, thou I think there's been a bit of choppiness in this one lately.

Currently, on top of the AUD/USD upcoming short, I like the GBP/USD shorted @ 1.5640 with initial profit @ 1.5540.

Keep an eye on this one as a secondary target may be the support @ 1.5320 again. Could be a nice trade.

Neo

Semaj

September 09, 2010 at 04:45 PM ET

The Nzd/Usd trade has the potential to finish out as a H&S pattern on a 15 min which could drop down to the 7210 area, daily central pivot, 100% retracement of the last rally, etc... Watch for 7262 to hold up as the right shoulder or else abort the H&S setup.

Semaj

September 10, 2010 at 08:30 AM ET

Oh well the Nzd H&S failed by about 15 pips but there were some pips to be taken out of the market. Thats why counter trend trading so hard but if you understand this and trade defensively you dont wreck your account.

Today there is another chance for a Nzd/Usd short. Price is still pressed against the 78.6 fib, weekly R1 pivot, and a phycological "00" @ 7300 with no data to push it higher. Risk flows could be the reason if the market rallies today? On a 1 HR there are 3 symetrical impulse waves that have each retraced 50-61.8%. If it does turn south from here there will be indicator divergence from price on the 1 HR and could give a 100% retracement of the last rally. Again, this might not be for everyone.

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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.