US Dollar: Watch Out for GDP

Last updated 1/29/2009 5:45 PM ET (GMT -5) 0 Comments - Add your comment

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Kathy Lien

Director of Currency Research, GFT

THE STORIES IN THE CURRENCY MARKET

• US DOLLAR: WATCH OUT FOR GDP
• EUR/USD: TALKING DOWN THE EUR/USD
• GBP/USD: ANOTHER ANNOUNCEMENT FROM THE UK
• NZD/USD: HITS 6 YEAR LOW
• AUD: GOLD PRICES AT $909.65
• CAD: INFLATION PRESSURES CONTINUE TO FALL
• USD/JPY: EQUITY WEAKNESS DRIVES YEN PAIRS LOWER

EXPECTATIONS FOR UPCOMING FED MEETINGS

US DOLLAR: WATCH OUT FOR GDP

The US dollar is stronger across the board today as risk aversion returns to the market.  Like Florida weather, where it can be hot one day and cold the next but warm most of the time, we can occasionally see an improvement in the market’s risk appetite but the bias is still towards risk aversion. Traders have quickly realized that nothing new came out of the Fed’s monetary policy meeting yesterday and until we have another major announcement from the US government, currencies will be vulnerable to negative US economic data, earnings report and developments abroad.

Talk is Not Always Cheap

US economic data took a back seat to the barrage of comments made by government officials and market players. In the Eurozone, the EUR/USD slipped after Trichet said he is open to taking interest rates below 2 percent and after Soros warned about the Euro’s survival (more in EUR/USD section of commentary).  The GBP/USD also came under selling pressure after the UK government announced a plan to buy up to GBP50 billion of investment grade assets.  The Swiss Franc (CHF) sold off when SNB President Roth downplayed the risk of currency intervention.  In the US , Vice President Biden reiterated Treasury Secretary Geithner’s recent comments on China.  It is now becoming increasingly clear that the Obama Administration will be taking a tougher stance on China .  Biden said that China will have to play by the rules and unlike his predecessors he will be blunter with the Asian giant.  Pressuring China to revalue their currency is bearish for the US dollar and a strategy that has received a significant amount of criticism.  Obama’s $900B stimulus plan has already been passed by the House and is now up for vote at the Senate.  If it does get approved, someone will need to buy up all of the debt that the US government will need sell to fund its spending.  China has long been one of the largest purchasers of US debt and to ask them to appreciate their currency now means to ask a major buyer to exit the market.  Furthermore, China has never been one to succumb to political pressure in fact pressure on China usually leads to backlash and possibly even retaliation.  

US GDP Expected to be the Weakest in 26 Years

We may not see any improvement in risk aversion over the next 24 hours with the fourth quarter GDP report due for release.  The market is currently looking for GDP to fall by 5.5 percent, which would be the largest contraction in 26 years.  From a consumer spending standpoint, growth should be very weak because retail sales collapsed in the last 3 months of 2008.  In fact consumer spending in October dropped by the most on record. However, there are two primary components to GDP – retail sales and the trade balance.  The trade deficit recently narrowed to a 5 year low which suggests that fourth quarter growth may drop less than the market expects.  However with that in mind, growth could still be the weakest in two decades.  In addition to the GDP report, Chicago PMI and final numbers for the January University of Michigan consumer confidence report are also due for release.  Overall, tomorrow’s data should be bearish just like this morning durable goods, jobless claims and new home sales reports.  The sharp rise in jobless claims suggests that the number of jobs lost in the month of January could actually be worse than the job losses in December (read our intraday commentary for more on the jobless claims and durable goods report ).  The bad data keeps on coming and new home sales were no exception.  Even plummeting prices failed to prevent sales of new homes from falling to the lowest level on record.  

EUR/USD: TALKING DOWN THE EUR/USD

The EUR/USD was hit by the double blow of weaker economic data and Euro negative comments.  Unemployment in Germany skyrocketed as job losses rose 56k, driving the unemployment rate up to 7.8 percent.  Despite the improvement in business and consumer confidence, the German economy and the labor market has not been immune to the global slowdown.  This should just be the beginning of a broader trend of job losses in the Eurozone.  German retail PMI also deteriorated even though PMI for the overall region improved.  This was due largely to the resilience of consumers in France, who actually increased their spending in the month of January.  Unfortunately France may not be able to carry the Eurozone for long.  Meanwhile, the Euro also came under selling pressure after ECB President Trichet said that he would not rule out taking interest rates below zero. Judging from recent comments by Trichet, it is clear that he still plans on cutting interest rates but not in February.  The Euro extended its losses after legendary investor George Soros added his two cents.  He warned that the Euro may not be able to survive the crisis without a global plan.  He is pushing for the European Union to come up with a way to deal with all of the toxic debt sitting on the balance sheets of European banks. Eurozone consumer prices and unemployment rate are due for release tomorrow and given the recent trend of inflation and employment data, they are expected to be Euro bearish.  

GBP/USD: ANOTHER ANNOUNCEMENT FROM THE UK

Even though the British pound appreciated against the US dollar today, it is well off its high. The UK government has announced another plan to unfreeze the credit markets and stimulate the economy.  This time, the government has authorized the Bank of England to purchase up to GBP 50 billion in investment grade assets ranging from corporate bonds, commercial paper and syndicated loans. Although details will not be released until last week, this announcement was not well received by the currency market because traders have become increasingly skeptical about the effectiveness of the new programs from the UK government.  The Chancellor also talked about Quantitative Easing and how the BoE needs his written approval to use the money for Quantitative Easing which entails purchasing UK gilts. Although more stimuli should be ultimately good for the country, many investors fear that the UK could become the next Iceland. The only economic data released from the UK was Nationwide House prices which dropped 1.3 percent in the month of January.  This is the 14th consecutive month that house prices have declined.  Consumer confidence, consumer credit and mortgage approvals are due for release on Friday – more weakness is expected.  

NZD/USD: HITS 6 YEAR LOW

After announcing an unexpected 150 basis point cut in the interest rates, the New Zealand Dollar (NZD/USD) has dropped to the lowest level against the US Dollar in 6 years. The Australian and Canadian Dollars experienced the same negative effect as the prices of oil tumbled below $42 a barrel while risk aversion returned to the markets. There seems to be less willingness to take on risk, with gold prices confirming the speculation by appreciating over the psychologically important $900 level. Canadian Industrial Product Prices have rebounded slightly, yet depreciating for the fourth consecutive time, as the downward pressure of the currency has prevented some prices from deteriorating further. Raw material prices on the other hand fell 15.4 percent.  Canada is expected to release its GDP report tomorrow which is projected to contract by half of a percent as trouble in U.S. weighs on the economy.  The Australian Leading Index is set to be released later in the day, which should provide more clues on how poorly the country is doing. The Leading Index has been negative for most of last year and the trend is expected to continue.  It is widely assumed that the Reserve bank of Australia is going to cut its interest rates by 50 basis points at next week’s meeting.

USD/JPY: EQUITY WEAKNESS DRIVES YEN PAIRS LOWER

The yen crosses tumbled against other major currencies as fresh worries about U.S. economic outlook drove investors into the safety of the low-yielding currency. The economic picture within Japan is continuing to deteriorate and showing little signs of bottoming as retail sales drop by the largest almost four years. It is a busy night for Japan with a lot of economic data due for release this evening.  This includes the consumer price index, industrial production, manufacture PMI, the jobless rate and household spending. Bank of Japan Deputy Governor Kiyohiko Nishimura indicated in his speech earlier in the day that deflation is not a concern as medium to long term indicators are stable for the time being. The ever growing situation between U.S. and China over possible manipulation of the Yuan could provide some relief for the Yen. So far the Bank of Japan has been reluctant to intervene in the foreign exchange markets. This decision was originally implemented in 2004 to give China the flexibility to gradually appreciate their currency. A stronger Chinese Yuan would reduce the pressure on Japan to intervene in the Yen.  

USD/CAD: Currency in Play for Next 24 Hours

The currency in play for the upcoming 24 hours will be USD/CAD due to the release of GDP from both Canada and U.S. at 13:30GMT or 8:30AM EST. U.S. is also expected to release Personal Consumption figures at 13:30GMT or 8:30AM EST, followed by Preliminary U. of Michigan Confidence at 15:00GMT or 10:00AM EST. Massive trend moves seem to be the thing of the past for the pair, as USD/CAD continues to fluctuate with no clear direction, currently lingering within Range Trading Zone established using Bollinger Bands.  Current support has proved to be effective at 1.2027, which is a 78.6% retracement of 2008 high and 2009 low. Resistance on the other hand is placed at the 50-day SMA average which is structured around 1.2310.  If GBP/USD breaks 1.2310, we could see a move towards the first standard deviation Bollinger band at 1.25.

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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.