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3 Attempts to Restore Confidence

Last updated 2/9/2009 5:29 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: 3 ATTEMPTS TO RESTORE CONFIDENCE
• EUR/USD: THE CASE FOR A BOTTOM
• GBP/USD: BARCLAYS RESULTS SENDS GBP CLOSER TO 1.50
• USD/CAD: HOLDS STEADY DESPITE WEAK DATA AND LOWER OIL PRICES
• NZD/USD: OIL PRICES BELOW $40
• AUD/USD: GOLD PRICES BELOW $900
• USD/JPY: ECONOMIC CONDITIONS DETERIORATE TO THE WORST IN A HALF CENTURY

EXPECTATIONS FOR UPCOMING FED MEETINGS

US DOLLAR: 3 ATTEMPTS TO RESTORE CONFIDENCE

Over the next 24 hours, the crisis of confidence will be tested.  A number of speeches and announcements are expected from the Obama Administration ranging from the President himself, the Treasury Secretary and the Chairman of the Federal Reserve.  The big test tomorrow will be whether or not investors are satisfied with the government’s efforts.  Is the rescue plan enough to turn around the US economy or will the critics crush any optimism?  The US dollar is trading lower against all of the major currencies suggesting that forex traders are holding out hope that Obama’s plan is well received but this same sentiment is not being shared by equity traders.  

Watching the 3 Acts in Washington

With no US data on the calendar tomorrow, politics will determine where the dollar is headed.  There will be 3 important speeches in Washington aimed at headliner accompanied by two follow up acts.   

Act 1: Obama Press Conference at 8pm ET

On Friday, the Treasury announced that Tim Geithner would unveil a Financial Rescue plan on Monday, but the announcement was delayed to Tuesday to give President Obama the floor to push for the swift approval of his massive economic stimulus plan.  Treasury Secretary Geithner wanted to focus on the stimulus bill that is debated in Senate, but we think he did not want to distract from the President’s very first press conference.  Reporters will be asking the President a variety of questions and any new revelations could trigger volatility in the currency market.  The President will be advocating for his Economic Stimulus Plan, so most likely no surprises are expected.  

Act 2: Geithner Announces Financial Rescue Plan at 11am E T

Obama’s press conference will be followed by the Treasury’s Financial Rescue plan, which will be the meat of the show.  Expect a cocktail of initiatives that could include a bad bank that buys up the toxic debt or some sort of asset guarantee, more oversight, a plan on how to use the remainder of the TARP funds, expansion of the Term Asset Backed Securities Loan Facility to help private investors and direct assistance for homeowners facing foreclosure.  One of the big questions will be how the toxic assets will be priced.  If they are sold at market values, banks may have to report significant losses, which would erode their balance sheets even further.  

Act 3: Bernanke Testifies on Fed Programs and Financial Crisis at 1pm E T

Finally Bernanke will be testifying on the Fed Programs and the Financial Crisis to the House.  He will be asked questions related to the central bank’s lending programs and he may discuss the Fed’s openness to buying long term Treasuries. The central bank is split on how to alleviate the credit crisis and not every member is in support of buying Treasuries.  Speculation that the central bank could scrap that plan has contributed to the sell-off in bond prices.  The Federal Reserve will also play a big role in the Treasury’s Financial Rescue and the specifics may be critiqued and questioned by the House as well. The Obama Administration will be out in force trying to restore confidence in the American people and in the financial markets.  The fate of currencies will depend upon whether the people’s confidence in Obama can be translated into their confidence in his Financial Rescue plan. We are optimistic, but worried nonetheless after Martin Feldstein, a member of Obama’s Economic Advisory Board warned that the stimulus package is not good enough for the money spent and that neither the House nor Senate version of the plan has enough bang for the economy.

EUR/USD: THE CASE FOR A BOTTOM

The Euro extended its gains above the 1.30 level against the US dollar as currency traders remain cautiously optimistic ahead of Washington’s big announcements.  Economic data was mixed with the German trade balance narrowing but the current account balance widening.  This discrepancy is probably due to capital flows which make up the difference between the trade and current account balances.  Imports and exports both declined, reflecting the deterioration in the German and global economy.  Many firms are cutting jobs which is cramping demand. French industrial production is due for release on Tuesday and unfortunately the country will not be immune to the global slowdown in manufacturing.  Despite the dismal outlook for the Eurozone economy, the Euro continued to rise because of the market’s improved risk appetite.  Should investors respond favorably to Obama’s Financial Rescue Plan, we could actually see the EUR/USD extend its gains.  Also, from a technical perspective, there is a case for a long term bottom in the currency pair.  The price action in the EUR/USD is very similar to the price action that marked previous tops and bottoms.  In the case of a bottom, the currency pair first attempts to base, but fails to hold onto those gains.  We then see a deep pullback that retraces more than 70 percent of the rally and only afterward is a long term bottom in place. This behavior can be seen in 2006, late 2001 and in 2005 on the topside.  After hitting a low of 1.2329 in October, the EUR/USD surged to 1.4719 before giving back 84 percent of its gains.  The currency pair is once again attempting to base and if the EUR/USD behaves just like it has in previous tops and bottoms, technicals argue that this could be the beginning of a long term bottom ( take a look at the EUR/USD charts ).

GBP/USD: BARCLAYS RESULTS SENDS GBP CLOSER TO 1.50

The British pound has seen an impressive five day rally against the US dollar that has taken the currency pair from 1.4155 to a high of 1.4986. The gains are also replicated against the Euro and Japanese Yen which suggest that this the market’s sentiment towards the UK economy and its currency has changed dramatically.  The latest dose of strength has been triggered by the positive earnings report from Barclays PLC, the UK’s third largest bank by assets. This report rejuvenates some confidence in the British financial sector as well as the indication that their absorption of several Lehman Brothers units was going well. This should serve as a boost to morale for all market participants. We have to remember that Barclays was one of the few British banks that denied the acceptance of government funds to induce lending. Once more, since they are one of Britain’s largest mortgage companies, their health can provide some solace for struggling businesses and consumers who are desperate for funds. Once lending becomes available again, the prospects for the British economy will change markedly. While many important UK data is expected for this week, tomorrow will produce the RICS House Price Balance and Trade Balance.

USD/CAD: HOLDS STEADY DESPITE WEAK DATA AND LOWER OIL PRICES

The commodity currencies are predominantly mixed in today’s trading. There has been an offsetting factor between the declines in commodity prices and the prospects for the passage of the US stimulus bill. Oil prices fell by 1.15% while gold retreats by the most in a month. The Canadians reported today that Housing Starts fell to the lowest level since 2001. The figure came in 11% below prior numbers. The worst area of the housing market appears to be in the construction of new single family homes, which declined by 20% last month. Nonetheless, the Canadian dollar has shrugged off the weak report and lower oil prices.  Price action in Australian and New Zealand dollars have been less pronounced against the dollar and yen as the onslaught of terrible economic news has taken a much-needed break. Tomorrow, Australians will release two reports on confidence including the NAB report on Business Sentiment and Westpac report on Consumer Sentiment.

USD/JPY: ECONOMIC CONDITIONS DETERIORATE TO THE WORST IN A HALF CENTURY

USD/JPY faces pressure today after breaking out on Thursday. It is a bit strange to see the yen rallying in a market that is showing a small pocket of risk tolerance and in spite of all of the terrible Japanese economic data. It is the norm to see traders ignore the principles of Japan’s economic state, which the BoJ’s Chief Economist says is the worst in a half century, but the principles of risk appetite are usually more applicable. The Japanese economy has had a particularly hard month in January. One of the most concerning factors is the sharp widening in Japan’s Trade Balance. For a country that usually runs a trade surplus, the ¥197.9B deficit surely makes things clear for the markets. The strong yen and weakened international demand has almost single-handedly torn the country apart. Most recently, Nissan reported that they will lay off 20,000 workers partially due to the fact US sales have declined by 31%. Business Bankruptcies were not as bad as last month but marks the eighth consecutive increase in business closings. Furthermore, a steep decline in Machine Tool Orders indicates the relative inability for companies to invest in projects and maintain usual operating conditions. Things seem pretty dire for the world’s second largest economy. Fortunately, we did receive notice that the Outlook in the Eco Watchers Survey came in above prior figures, as optimistic intentions have not been completely decimated.

GBP/USD: Currency in Play for Next 24 Hours

GBP/USD is our currency in play for the next 24 hours. Reports coming from the UK include RICS House Price Balance, scheduled for 7:01 pm ET or 00:01 GMT, and the Trade Balance at 4:30 am ET or 9:30 GMT.

GBP/USD has staged a long string of some impressive rallies that easily pushed prices into the Bollinger band buy zone. There are plenty of events this week that will act as catalysts, but resistance to further moves is unfortunately very strong. The pair has two major resistance levels lying right above. The first is 1.4972, the 78.6% retracement from early-January highs to late-January lows. This level is also the high experienced on January 16th. Prices managed to surpass 1.4972 today, only to fail a relevant break. Another resistance lies above at the high of January 8th. Support is accounted for as the 50% retracement of the aforementioned retracement which also happens to be the late-December low. Even though the momentum is on the side of the pound, the resistance that lies above will present a strong test for whether or not further gains are warranted.

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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.