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US Dollar: Big Announcements From Washington

Last updated 2/6/2009 5:13 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: BIG ANNOUNCEMENTS FROM WASHINGTON
• EUR/USD: WILL DEEPENING RECESSION FORCE ECB’S HAND?
• GBP/USD: HEADED BACK TOWARDS 1.50?
• USD/CAD: CANADIAN ECONOMY LOSES A RECORD 129K JOBS
• NZD/USD: COMMODITY PRICES SLIP
• AUD/USD: AUSTRALIA COULD AVOID RECESSION
• USD/JPY: YEN CROSSES EXTEND GAINS ON DOW RALLY

EXPECTATIONS FOR UPCOMING FED MEETINGS

US DOLLAR: BIG ANNOUNCEMENTS FROM WASHINGTON

This morning, the Bureau of Labor Statistics reported that January was another month of massive job losses.  For the third time in a row, more than 500k Americans lost their jobs.  The market was looking for payrolls to drop by 540k, but instead they fell by a whopping 598k ( Instant Insight on January Non-Farm Payrolls ). Yet, currencies and equities traded like non-farm payrolls increased rather than decreased but this baffling response to a very negative number can be easily explained by the prospect of help from Washington.  

Politics Overshadowing Economics

Politics will come head to head with economics next week and if today’s price action is any guide, then politics could overshadow economics.  The Obama Administration is expected to make a big announce at noon (Eastern Time) on Monday. Treasury Secretary Timothy Geithner will be unveiling a much awaited bank rescue plan that will “be critical in supporting an effective and lasting economic recovery,” according to Treasury department.  Geithner will talk about how the Obama Administration plans on getting credit flowing again to family and businesses while imposing new measures and conditions to strengthen the accountability, oversight and transparency in how taxpayer dollars are spent.”  The focus will be on how banks will be able to offload toxic debt from their balance sheets.  The Treasury could announce a bad bank to absorb the assets or provide a guarantee against losses on the illiquid assets or both.  They are also expected to announce some direct support for mortgage foreclosures. If investors are satisfied with Obama’s financial rescue program, the optimism may last.  We have long said that fiscal stimulus is one of the few things that can trigger a meaningful recovery in risk appetite.  In addition to Geithner’s speech, Fed Chairman Ben Bernanke will be testifying on Tuesday while the market still awaits the Senate to vote on the economic stimulus package, which could happen next week.   

Retail Sales and G7

The US economic calendar is very light next week, but there is one release very important release that can remind traders about the major problems plaguing the US economy.  Retail sales are expected to drop for the seventh consecutive month but interestingly enough the decline in the month of January is forecasted to be mild.  Given the sharp drop in non-farm payrolls and the possibility of Americans cutting back significantly after the holiday shopping season, retail sales could drop far more significantly than the market’s -0.7% expectation.   In the month of December, when Americans were still spending on holiday gifts, retail sales fell 2.7 percent.  Weak retail sales could weigh on risk appetite, but that would only be true if traders shifted their focus away from politics.  At the end day, it will take some time before any of the stimulus and credit relief reaches the average American.  G7 finance ministers and central bankers will also be meeting in Rome on February 13th. Nothing significant is expected since most nations have chosen to adopt fragmented rather than coordinated responses to the global economic crisis.  The main focus will be on transparency and the push to preserve free trade. Concerns about protectionism have erupted on talk that many want to attach the “Buy American” slogan to Obama’s latest stimulus plan. This will be at the top of priorities for Canada, Japan, and Europe as they are very dependent on trade with the US. The economies of such export dependent countries have been dragged into recessions almost on weakened international demand alone. In addition, the United States could push the effort to persuade China to appreciate their currency, which would promote the attractiveness of US made goods to national buyers. However, as with most recent G7 meetings, there should not be many market moving developments as joint cooperation will be hard to come by.

EUR/USD: WILL DEEPENING RECESSION FORCE ECB’S HAND?

The improvement in risk appetite helped to drive the EUR/USD within a whisker of the 1.30 price level.  Economic data was mixed with the French trade deficit narrowing but German industrial production plummeting.  Even though Germany is the world’s third largest economy and France is the world’s sixth, the Germany economy is only 20 percent larger than France, making them both major contributors to the Eurozone.  For the time being France is faring much better than German economically. This upcoming week, we will learn how the region as a whole is doing through their fourth quarter GDP report.  The recession is expected to deepen significantly which may renew speculation that the ECB could take interest rates towards 1 percent.  A 50bp rate cut is widely expected and to some degree validated by Trichet’s comments earlier this week, but weaker growth could force a heavier hand from the central bank.  Meanwhile, the Swiss franc sold off against the Euro following comments from Swiss National Bank member Jordan who warned that the central bank is watching the exchange rate closely.  The SNB has been very unhappy with the appreciation of the low yielding Swiss Franc but based upon their contradicting comments with the Swiss government, we believe that more verbal intervention is more likely than physical intervention.  

GBP/USD: HEADED BACK TOWARDS 1.50?

Since hitting a 23 year of low of 1.3505 2 weeks ago, the British pound has staged a dramatic recovery.  Having traded as high as 1.4844 this morning, the currency pair could be headed back towards 1.50.  UK economic data was mixed with industrial production falling more than expected and producer prices rising strongly.  This suggests that the aggressive fiscal and monetary policy stimulus from the UK government has boosted inflation pressures far more than growth.  This could be troubling for the Bank of England and drive them to consider smaller interest rate cuts going forward.  Either way, the currency market is rewarding the nations that could recover the fastest.  The Bank of England’s Quarterly Inflation report is due next week and it will be interesting to see if they address the recent uptick in inflationary pressures.  In addition to the report, the trade balance and employment numbers are due for release.  A weaker currency could have boosted exports but the labor market should remain very weak.  

USD/CAD: CANADIAN ECONOMY LOSES A RECORD 129K JOBS

The spotlight is on the US economy this morning but Canada also released their labor market numbers and unfortunately, job losses have been staggering. In the month of January, Canadian corporations cut 126k jobs, which is the equivalent of a million jobs in the US.  The third consecutive month of job losses drove the unemployment rate to 7.2 percent, the highest since November 2004.  Most of the job losses were in manufacturing sector which is not all that surprising since vehicle sales and exports have plummeted.  The employment component of IVEY PMI has a very strong correlation with the net change in employment, foreshadowing today's big decline.The Canadian auto sector has been hit by the slowdown in the US while weak oil prices is keeping the energy sector depressed.  With the economy in its first recession since 1982, the Bank of Canada is expected to respond with more fiscal and monetary stimulus.  The enthusiasm following the RBA’s rate cut earlier this week has continued to push for some impressive rallies in the currency. AUD/USD climbed more than 240 pips even as commodity prices faced broad weakness. This somewhat contradicts the fact that the RBA was forced to reduce their economic forecasts for growth and inflation. However, markets are being driven by their bold prediction that rate cuts will cushion the economy enough to keep them out of a recession. Ultimately, this translates into a slower rate cutting regime for future meetings. Australia’s most potent economic release will be in Thursday’s employment change. NZD/USD pushes higher in step with the Aussie. New Zealand will release Retail Sales on Thursday.

USD/JPY: YEN CROSSES EXTEND GAINS ON DOW RALLY

Due to worse than expected Non-Farm Payrolls figures coming from the United States, a presumption that a fiscal stimulus will be passed in near future contributed to a decline in the yen, reducing its haven appeal. A decline in the yen is coming later than it would be needed as bigger portion of corporations within the country are continuing to struggle.  Toyota, world’s largest carmaker, and Mitsubishi UFJ, Japan’s largest bank, have both cut their estimates on income during this fiscal year as the economy is continuing to plunge into deeper recession. Leading Indicators and Coincident Index are not showing any signs of recovery in the near future as they continued to contract during the month of December.  Early next week, Bank Lending figures will elaborate on the state of credit within the economy. Further, Trade Balance along with Current Account will be released which is projected to be weak as global demand is continuing to slump, eroding the manufacturing sector within Japan. The figures will confirm the need for the “extraordinary” actions that the BoJ is planning to take in order to counteract for the deepening recession.

EUR/USD: Currency in Play for Next 24 Hours

The currency in play for Monday of the upcoming week will be EUR/USD based on German Current Account and Trade Balance being released at 7:00GMT or 2:00AM EST. After a massive downtrend which has been in place since late last year, the pair seems oversold and entering the Range Trading Zone which we determine using Bollinger Bands. Since the beginning of the year, the pair formulated a downward slopping triangle, which proved to be effective numerous amount of times. The pair is on the verge of breaking the triangle upon moving past its first resistance which is at a psychological level of 1.3000. If the resistance of the upper line of the triangle is negated the next level of resistance will be 1.3180, which is a 78.6% retracement of December high and this year’s low. Nevertheless, the pair may establish another leg of downtrend if support is broken at 1.2705 which is a 2009 low for the pair.

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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.