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USD: Recession Ended in June 2009?!

Last updated 9/20/2010 4:40 PM ET (GMT -5) 3 Comments

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Kathy Lien

Director of Currency Research, GFT

THE STORIES IN THE CURRENCY MARKET

• USD: RECESSION ENDED IN JUNE 2009?!
• EUR: MASSIVE IRISH BOND AUCTIONS TO BE THE REAL TEST
• GBP: GETTING WORSE
• AUD: POTENTIAL FOR MORE GAINS ON RBA MINUTES
• NZD: LIFTED BY CONSUMER SENTIMENT
• CAD: SHRUGS OFF WEAKER DATA
• JPY: TENSIONS WITH CHINA ESCALATE

EXPECTATIONS FOR UPCOMING FED MEETINGS

USD: RECESSION ENDED IN JUNE 2009?!

The U.S. dollar traded lower against all of the major currencies with the exception of the British pound ahead of Tuesday’s FOMC announcement. A number of economists expect the U.S. central bank to gear up for additional Quantitative Easing which is why the dollar has been sold pre-FOMC. Currency trends are usually determined by the direction of interest rates or monetary policy and the prospect of further stimulus has put the dollar under pressure.  The only reason why sterling underperformed the dollar is because economic data from the U.K. suggests that the U.K. economy has taken a turn for the worse. 

The U.S. economy on the other hand is not doing much better despite the National Bureau of Economic Research’s announcement that the recession officially ended in June 2009. Ask anyone on the streets of America and they will be shocked because for the past year, the U.S. economy has and continues to feel like it remains in recession. Does it really matter when the U.S. economy came out of recession when 14.9 million Americans are still unemployed and 43.6 million Americans are living in poverty?  According to the National Association of Home Builders / Wells Fargo index, builder confidence held steady at an 18 month low.  The expiration of the tax credit has put the housing market at a standstill. Aside from the Fed announcement, a number of housing market reports is also scheduled for release this week. We expect the data to show a similar lack of improvement as the NAHB survey. Before the 2:15pm NY time announcement tomorrow, housing starts and building permits will be released and an extremely modest increase is expected. The housing numbers should only be a minor distraction from the main event of the week, which is the FOMC announcement. This morning we published a thorough preview of the event risk including key language changes to watch for . 

How Could Changes to the FOMC Statement Impact the U.S. dollar?  

The Fed’s choice of words could have a significant impact on the U.S. dollar. The key words to look for in the FOMC statement are balance sheet and expansion. The balance sheet remained unchanged with the reinvestment of principal payments last month but if the Fed were to engage in large scale asset purchases (to the tone of $550B - $1T), it would increase the balance sheet and officially mark the beginning of QEII. With 3 monetary policy meetings before the end of the year, the odds that the Fed will authorize asset purchases tomorrow is extremely low but if they plan to do so in November, they will need to start telegraphing their intentions now to avoid greater volatility later.  The dollar should sell off aggressively if the Fed says they stand ready to expand or increase the size of their balance sheet but if very little changes in tomorrow’s FOMC statement, it would suggest that the speculation about QE has gotten ahead of itself, which would be positive for the U.S. dollar.   Alternatively, a middle ground could be for the Fed to announce a small amount of asset purchases ($200B - $300B) on Tuesday that is accompanied with some noncommittal comments about the possibility of additional purchases should the economy deteriorate further which would be bearish for the dollar.  In addition, if the Fed plays around with the “extended period” language in the FOMC statement, it could also hurt the dollar. However there are not many adjustments the Fed could make that would sound more dovish than saying that economic and inflation conditions warrant “ exceptionally low levels of the federal funds rate for an extended period.”  In terms of the economic outlook, the Fed is likely to acknowledge the improvements but warn that the risk is still heavily skewed to the downside. 

EUR: MASSIVE IRISH BOND AUCTIONS TO BE THE REAL TEST

The euro ended the NY trading session unchanged against the U.S. dollar. Like an annoying fungus that keeps on growing back, sovereign debt troubles have come back to haunt the euro. The latest developments center on Ireland. Over the weekend, there were reports from the Financial Times that the ECB stepped into the market to support Irish bonds on Friday after a leading UK bank released a report that triggered fears that the country might turn to the international community for a multibillion-euro bail-out.   Speculation of Ireland needing emergency support from the IMF and EU was so strong that the Finance Minister of Ireland had to deny it publicly. In an interview with the U.K. Telegraph, Brian Lenihan said "Ireland is funded well into next year as a sovereign and that is not contested by anyone." These comments were in reaction to a Barclays Capital report that said the government “perilously close" to calling in the IMF.” The real test of investor confidence in Ireland will occur tomorrow with the government’s plans to float EUR1 billion worth of bonds on Tuesday. According to a staff economist for the Irish Times, “if there were to be any serious problems with take-up, or if the rate of return offered were much above already high rates in the secondary market, real consideration would have to be given to seeking help. Although it is by no means inevitable that a bailout will be necessary, the chances of that outcome eventually coming to pass have risen this week, and not only because yields have increased to levels that create an uncontainable debt dynamic…..Thankfully, the Government is sitting on a very large cash cushion, so it won’t be forced into any decisions even if in the unlikely event that its usual bond customers don’t buy on Tuesday and in the months to come. Things may be bad and getting worse, but there is still time and space to consider options.” So far, bond auctions in the Eurozone have been well received and Ireland could get lucky. At any rate Ireland and the Eurozone as a whole will remain in focus this week with a billion euros worth of Irish debt being auctioned tomorrow and up to a billion euros worth of Portuguese debt being auctioned off on Wednesday. Don’t expect Europe’s sovereign debt troubles to go away anytime soon. Meanwhile the Swiss Franc traded higher against the euro and U.S. dollar after the KoF raised their growth forecasts for Switzerland. Despite the dovish comments from the Swiss National Bank last week about the damaging impact of a strong currency, the country’s leading economic research institute boosted its GDP forecast to 2.7 percent in 2010 from 1.8 percent and to1.8 percent in 2011 from 1.6 percent. Swiss trade numbers are due for release tomorrow and the strong franc may have curtailed exports.

GBP: GETTING WORSE

The British pound was the only major currency that underperformed the U.S. dollar. In fact, sterling fell against every single major currency following another round of weaker economic reports. Mortgage approvals fell slightly short of expectations, a sign of a potential slowdown in home purchases in the month of August. Beneath the surface, the business side of the data showed a trend in lending in which “credit conditions were easing for larger businesses though remaining tight for smaller firms.” Major UK lenders also reported that “demand for credit remained subdued” for the month of August, with many in the UK still uneasy about taking on a loan and their ability to pay it back.  More housing data from the Rightmove House Price Index, which covers over 90% the market’s house price data, showed a drop in average asking price for UK property of 1.1% compared to last month’s drop of 1.7% in prices. This represents the third consecutive monthly deterioration in prices, prompting Rightmove to call buyers in the current market “an endangered species” and suggesting the housing market ‘recovery’ could be easing in the months to come. Amidst the treat of a faltering in UK economic stabilization, the sterling fell against all the majors. On the political front, the annual party conference led by the minority Liberal Democrats renewed concerns over the new Conservative-led Major Party and what it could mean for more potential cuts to public services. In an economy that is vulnerable to a further slowdown, via an increase in VAT and public budget cuts upward of 40%, the key question remains: How will the UK economy sustain a recovery if the government continues to limit the growth potential for British citizens?  While the persistence of tight credit conditions fail to keep inflation in check, the BoE says it stands “ready to respond in either direction.” Bank of England Chief Economist Spencer Dale stated in a report that while the UK economy continues in its recovery efforts, “the adjustment process has been slow and painful … [while] doubts remain about the durability and speed of the global economic recovery going forward.”Looking ahead, the UK is set to release data on Public Sector Net Borrowing, which will show a clearer picture of UK national finances tomorrow.

AUD: POTENTIAL FOR MORE GAINS ON RBA MINUTES

The Australian and New Zealand dollars strengthened against the greenback following hawkish comments from the RBA and better than expected economic data from New Zealand. Last night, RBA Governor Stevens confirmed that the central bank is actively considering another rate hike, possibly even before the end of the year. In a speech before the Foodbowl Unlimited Forum, Stevens said “If downside possibilities do not materialize, the task ahead is likely to be one of managing a fairly robust upswing. Part of that task will, clearly, fall to monetary policy." He added," We expect, and indications from businesses are that they do as well, that resource sector investment will rise further -- as we experience the largest minerals and energy boom since the late 19th century." These comments drove the AUD/USD to a fresh 2 year high. Tonight the minutes from the last RBA meeting will be released and not only do we expect the tone of the report to reflect Stevens’ hawkishness but also to drive the AUD/USD even higher.  Australia’s central bank continues to be the most hawkish of the bunch and this very sentiment should sustain the rally in the Aussie. Meanwhile the New Zealand dollar also benefitted from reports of stronger service sector activity and consumer confidence. Although the Canadian dollar also joined in on the action, their economic reports actually fell short. Foreign purchases of CAD denominated securities increased marginally in July from CAD5.389B to CAD5.48B.  This was much weaker than economists had expected and suggests that Canada may not be benefitting from as much diversification flows as previously though.  Wholesale sales also fell for the fourth month in a row by 0.1 percent, indicating that spending remains weak. Canadian consumer prices are scheduled for release tomorrow. 

JPY: TENSIONS WITH CHINA ESCALATE

With Japanese markets closed for Respect the Aged day today, there was no major action in the Japanese Yen.  USD/JPY continues to hold above 85 and the consolidation suggests that a breakout could be imminent. Tomorrow’s FOMC meeting will provide the perfect trigger.  It will be a quiet week overall in Japan with markets also closed on Thursday for the Autumn Equinox. The Coincident index, Leading indicators and machine tool orders are due for release tomorrow but these are final figures which means the impact on the Yen will be nominal. In the meantime the Japanese government is probably very pleased with the foreign exchange market’s reaction to last week’s intervention efforts. As long as USD/JPY holds above 85, further intervention is unlikely. However should the currency pair fall back below 84, the Bank of Japan could be in the market again. At the same time, tensions between China and Japan are brewing. The two countries have suspended all high-level diplomatic talks following Japan’s announcement that it will hold a Chinese fishing boat captain for another 10 days whose ship collided with two Japanese Coast Guard vessels on September 10 ^th . The spat between the two Asian countries have extended well beyond what happened at sea with the “Chinese government now officially no longer speaking to the Japanese” according to the Washington Post. Large numbers of Chinese tourists have already canceled trips to Japan and China has threatened a strong response. Although we believe that these tensions will eventually subside, for the time being, they are weighing on the Yen. 

USD/CAD: Currency in Play for Next 24 Hours

USD/CAD will be the currency pair in play tomorrow with Canadian consumer prices scheduled for release at 7:00AM ET / 11:00 GMT. The U.S. will follow with Housing Starts and Building Permits at 8:30AM NY Time / 12:30 GMT. The FOMC monetary announcement is scheduled for 2:15PM NY Time or 18:15 GMT.

Over the past 5 months, USD/CAD has been trading in a very wide range that spanned from a low of 1.0110 to a high of 1.0675. Presently, USD/CAD is at risk of testing the lower portion of this range, having just entered the sell zone, which we determine using Bollinger Bands. Support is at last week’s lows of 1.0215, a break of which would expose the currency pair for a move down towards 1.0110. Should USD/CAD recover today’s sell-off and rise back above today’s high of 1.0350, it still needs to break above the key resistance level of 1.04, created by the 50-day and 100-day SMA. 

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Comments (3)

Semaj

September 20, 2010 at 09:33 PM ET

Is the National Bureau of Economic Research the same agency that was denying we were in a recession for the 8-12 months following 2 consecutive quarters of negative GDP which is the official flag for a recession I believe, or was that the Nobel Prize winners in economics at the Fed that delayed interest rate policy action?

One in Seven in the U.S. is living below the poverty level as Kathy states & One in Ten will be bankrupt within a years time. Don't worry though, the U.S. gov't will take care of things in it's usual manor :(

FXDragon

September 21, 2010 at 03:21 AM ET

Dont just blame it on the gov though Semaj. Not only this crisis, i wrote a 800 page paper about this century’s financial crisis around the globe. You’d be surprised that all of them has the same cause: If you borrow the money you’ll be spending in 10 years and then spend all of it in one year = you guarantee a good old recession! Then ofcourse you have to recoup for the next decade:(
Btw, anyone wanna bet against me on oil hitting 50 in six months?

schultzz.at

September 21, 2010 at 04:13 AM ET

Ludwig v. Mises says:
'There is no means of avoiding the final collapse of a boom expansion brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.'

Tom Schultz.

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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.