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US Dollar:Geithner vs. Payrolls

Last updated 2/5/2009 5:16 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: GEITHNER VS. PAYROLLS
• EUR/USD: ECB STILL STUCK IN THEIR OLD WAYS
• GBP/USD: RALLIES AFTER BOE CUTS INTEREST RATES TO 1%
• USD/CAD: IVEY PMI HITS RECORD LOW
• NZD/USD: OIL STABILIZES ABOVE $40 A BARREL
• AUD/USD: GOLD HITS $914 OZ
• USD/JPY: UPSIDE BREAKOUT

EXPECTATIONS FOR UPCOMING FED MEETINGS

US DOLLAR: GEITHNER VS. PAYROLLS

On Friday, the Bureau of Labor Statistics is expected to tell us that US employers fired another 500k people in the month of January.  Surprisingly enough currencies and equities are trading higher ahead of the non-farm payrolls report which suggests that traders are not afraid of a bad number.  Everyone knows that the US economy is very weak and major job losses will continue.  Since traders are becoming immune to bad data, it may take job losses in the area of 600k to spook them (January Non-Farm Payrolls Preview) .  Instead, traders are looking beyond Friday’s non-farm payrolls report to the Monday, February 9th speech by US Treasury Secretary Timothy Geithner.  According to a Treasury official, Geithner is expected to unveil a bank rescue plan next week .  This is one of the few things that could strike a meaningful recovery in the currency and equity markets.  If traders deem Geithner’s plan as satisfactory, we could see a further recovery in the financial markets despite the fact that the US economy will get worse before it gets better.

Jobless Claims, Factory Orders and Chain Store Sales

This morning’s economic data was mixed with jobless claims skyrocketing but the losses in factory orders and chain store sales moderating.  The number of people claiming unemployment benefits for the very first time broke the psychologically hobbling 626k mark, which is consistent with a very weak labor market.  It should just a matter of time before the total number of people collecting benefits (continuing claims) hits 5 million, up from its current level of 4.788 million.  Non-farm productivity increased while unit labor costs declined.  This suggests that the people who still have jobs are working harder for less pay. Chain store sales fell less than expected, but the improvement was due primary to sales at discounters like WalMart.  As for factory orders the rebound is off of record lows.  Don’t expect any good news from US economic data, the best that we will get are less negative reports.  

How to Trade Non-Farm Payrolls

In this current market environment, a weak non-farm payrolls report may not be entirely dollar negative. The currency market’s reaction to the labor market number should primarily revolve around risk appetite. A truly negative number could trigger another fit of panic, sending investors into the safety of US dollars and out of any currency that does not hold ranks as a safe haven. On the heels of a weak number, the only currency that the dollar could lose value against is the Japanese Yen. If payrolls fall by 524k (the number of jobs lost in the month of December) or less, we may see renewed risk appetite that could benefit the Euro, Yen, Australian, Canadian, and New Zealand Dollars.  Non-farm payrolls is the most market moving number for the greenback which can make trading NFPs very risky.  This is particularly true since revisions can easily exacerbate or offset the headline release.  Usually it is best to stand aside, but if you insist on trading the event risk, USD/JPY may have the cleanest reaction to the economic data.  

EUR/USD: ECB STILL STUCK IN THEIR OLD WAYS

The Euro was one of the few currencies to lose value against the US dollar today.  Following ECB President Trichet’s post monetary policy meeting press conference, the EUR/USD actually traded above 1.2880 before reversing all of its gains to end the day lower.  Initially, the EUR/USD rallied because Trichet was reluctant to turn extremely dovish but the currency pair quickly lost ground as Euro traders realize that the central bank is stuck in their old ways which could mean the destruction of the Eurozone.  The ECB is in their own world and no one can quite understand why Trichet refuses to give up on his obsession with inflation and finally deliver the monetary stimulus that the Eurozone needs.  Thankfully, Trichet did not hide the fact that 2 percent will not be bottom for Eurozone rates .  More rate cuts will be delivered and the 50bp easing that the market is looking for is probably the right bet according to Trichet.  With that in mind however, Trichet also said that the ECB does not pre-commit or exclude anything.  We believe that interest rates could fall as low as 1 percent, because another half point cut is not enough ( Trichet’s Folly ).  The economy remains very weak as illustrated by this morning’s German factory orders report.  The orders dropped 6.9 percent, which is 150 percent more than the market’s forecast.  Ratings agency Moody’s also cut the bank debt guarantee for the Irish government to negative.  Ireland is expected to be one of the next countries to face a credit downgrade by rating agencies.

GBP/USD: RALLIES AFTER BOE CUTS INTEREST RATES TO 1%

The Bank of England cut interest rates by 50bp to 1 percent, the lowest level in 300 years.  Rate cuts are usually negative for a currency but in the case of the BoE and the UK government, they are being rewarded for their aggressive monetary and fiscal policies.  These days, the currency market is less focused on interest rate differentials and more focused on recovery.  We have long argued that Britain should be one of the first countries to recover from the global economic slump thanks to tremendous stimulus and a weak currency.  We are already beginning to see signs of stabilization.  Earlier this week, the PMI reports rebounded off recent lows and this morning, HBOS reported a month to month uptick in house prices for the first time in more 12 months.  The 3 month pace still declined, but the monthly improvement marks a sharp departure from the trend of house prices this past year.  Producer prices and industrial production are due for release on Friday.  We would not be surprised to see some further improvements since the price component of manufacturing PMI increased.  

USD/CAD: IVEY PMI HITS RECORD LOW

The Australian, New Zealand, and Canadian Dollars appreciated against the greenback as a speculation of demand coming back for commodities drove the exchange rates higher. The prices of gold jumped approximately 2%, while prices of oil seem to find a bottom at $40 a barrel even as inventories continue to rise. The Canadian Dollar was reluctant to formulate any discrete direction ahead of unemployment numbers released on Friday, even as negative figures continue to plague the economy. IVEY purchasing managers index has fallen for the 5th consecutive time reaching a record low, while the building permits declined to a level not seen in 3 years. The Canadian unemployment rate is expected to reach 6.8% as global recession continues to impact the world’s 8th largest economy.  Finance Minister Flaherty has already warned that Friday’s job numbers will be very regrettable. Canadian officials stated that the initial stimulus package to support the domestic economy will be less than previously estimated; only one-fifth or C$32 billion ($26 billion) of previously amount will be allocated over the next two year.  The Australian government has also postponed a stimulus package of A$42 billion or $27 billion as concerns mount that it would create the biggest budget deficit in 13 years.  After cutting its rates to 325 basis points, the RBA stated that further cuts will be implemented in order to prevent the economy from slipping into a first recession in 18 years.  New Zealand seems to be the only country that is able to put forward a spending plan that is not delayed. Prime Minister John Key stated that NZ$480 million or $247 million will be spent in the next 4 years for reforms on business taxes in order to stimulate the growth.

USD/JPY: UPSIDE BREAKOUT

On Wednesday, we talked about how USD/JPY was prime for a breakout and that is exactly what we have seen in the currency pair today.  All of the Japanese Yen crosses traded higher thanks to the improvement in risk appetite. Talking about the market’s risk appetite is like talking about the weather – one day it is hot and the next it is cold.  Although a weak non-farm payrolls report on Friday could easily alter the market’s risk appetite, the prospect of a bank rescue plan on Monday should limit losses.  Meanwhile, comments from former Finance Ministry’s top currency official, Toyoo Gyohten, have contributed to some of the gains in the yen crosses on speculation of foreign exchange intervention . Gyohten pointed out that the intervention will be a possibility if the volatility along with strength of direction continues to impact the domestic economy. Furthermore, BoJ board members stated that additional actions will likely to be needed aside from buying equity and corporate debt, if the global recession deepens.  Another “extraordinary” measure in order to counteract the credit squeeze will be the reduction in the interbank lending rates which remained considerably high even as overnight lending rate remains at 0.1%. With a lack of economic figures released throughout the week most of the moves in yen were attributed to statements and actions taken by BoJ. Tomorrow, Japan is expected to release leading index figures which should confirm the contraction in the domestic economy for intermediate timeframe.

USD/CAD: Currency in Play for Next 24 Hours

USD/CAD will be the currency in play for the next 24 hours. One of the most market moving economic figures - employment numbers - will be released for Canada and the United States tomorrow. Canada is set to release Net Change in Employment at 12:00GMT or 7:00AM EST, while U.S. Non-Farm Payroll figures will be released thereafter at 13:30GMT or 8:30AM EST. The pair is currently trading within our Range Trading Zone, established through the Bollinger Bands. It is not surprising that the pair failed to originate a trend in either direction for past couple of days, as it awaited an important economic release toward a conclusion of the week. The pair seems to be stationed perfectly in the middle of the Bollinger Bands. Hence, the support which proved to be efficient prior this week is placed at 1.2520, which is 1st Standard Deviation of the Bollinger Bands. On the other hand our resistance is originating at 1.2145, which is a 61.8% retracement of the highest and the lowest points in 2009, in addition to it being 1st Standard Deviation of the Bollinger Bands. Due to an increase of volatility usually attributed to an important economic release, either support or resistance might be tested.

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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.