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FX: Losing Confidence in Central Banks Means Capitulation

Last updated 9/22/2011 9:22 AM ET (GMT -5) 0 Comments - Add your comment

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Kathy Lien

Director of Currency Research, GFT

It is no surprise to see currencies and equities trading sharply lower this morning. Traders around the world shared the disappointment of U.S. investors who realize that they cannot count on the Fed to kick start the U.S. economy. In fact, we would even venture to say that investors have lost complete confidence in the major central banks and are throwing their hands up in defeat. The sharp capitulation over the past 24 hours reflects the severe anxiety in the market and explains why investors are buying dollars even after the Federal Reserve announced a new form of stimulus. The desire for safety has made the U.S. dollar and Japanese Yen the day's biggest winners. The aggressive intervention by the Swiss National Bank stripped the Franc of its safe haven status, which means that long as investors remain nervous, the dollar and Yen will outperform.

It is difficult to reverse market sentiment when it turns this negative and no major policymaking body has anything positive to say. Instead, the IMF and central banks around the world are adding pressure on the markets by lowering their growth forecasts and painting a grim outlook for the global economy. China's weaker manufacturing PMI report also didn't help. If equity prices continue to decline and confidence retreats further, the U.S. could fall back into recession. So what can policymakers do to help? At this point, the only hope lies in decisive and swift action by the G20. Unfortunately it is not clear if global monetary support is even on the agenda. The European sovereign debt crisis is the top priority in Washington this weekend when the G20 needs to think bigger by making the global growth their number one agenda item. Thankfully initial comments from the G20 this morning suggests that they acknowledge that a growth plan is needed. G20 leaders released a statement that called for decisive action to support growth, confidence and credibility. Unfortunately six of the G20 leaders urged individual action on collective needs which suggests that coordinated action could meet resistance.

This morning's U.S. economic reports showed jobless claims improving slightly in the week ending September 17th. Weekly claims fell from 432k to 423k while continuing claims dropped to 3.727 million from 3.755 million. Although it is nice to see claims moving lower, as long as they remain above 400k, there is no reason to get excited. Hiring and not firing is the main problem in the U.S. economy and unfortunately unemployment claims have been a poor indicator of job growth in the U.S. for the past few months. Meanwhile Canada report a sharp decline in retail sales in the month of July. Consumer spending fell 0.6 percent after rising 0.8 percent the previous month. Economic data around the world is weakening, forcing many central banks to abandon policy normalization and move back into easing mode. 

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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.