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FX: What to Expect from Fed Minutes (Wed)

Last updated 10/10/2011 5:05 PM ET (GMT -5) 1 Comments

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Kathy Lien

Director of Currency Research, GFT

THE STORIES IN THE CURRENCY MARKET

• FX: WHAT TO EXPECT FROM FED MINUTES
• EUR: SOARS ON HOPE FOR BAILOUT PLAN BY MONTH END
• GBP: RALLIES BUT UNDERPERFORMS AFTER QE
• AUD: FIFTH STRAIGHT DAY OF GAINS
• CAD: STRONG RISE IN OIL PRICES
• NZD: CREDIT CARD SPENDING DATA ON TAP
• USD/JPY FAILS TO JOIN RISK RALLY

EXPECTATIONS FOR UPCOMING FED MEETINGS

FX: WHAT TO EXPECT FROM FED MINUTES

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**Fed minutes rescheduled to Wed

The lack of U.S. economic data along holidays in the U.S., Canada and Japan did not stop currencies and equities from staging a strong performance. The move today was triggered entirely by the optimism of Europeans who hope that their policymakers would finally get their acts together and deliver on their promises to stabilize the region. Considering how much of the concern of central bankers around the world centers on the uncertainties in Europe, we are not surprised that investors have reacted so positively to the prospect of Germany and France reaching a deal by the end of the month.  Given the large amount of short euro positions in the market, we still attribute much of the move to short covering.  With that in mind however, if Europe truly resolves its problems and the deal sketched out by Germany and France effectively stabilize the market, then a rate cut by the ECB may not be needed, leaving the U.S. dollar a less desired currency because the sluggish pace of U.S. growth could still necessitate more stimulus from the central bank.

Tomorrow’s FOMC minutes will shed light on how close the Federal Reserve is to initiating QE3.  The last time the central bank met, they took the rare step of twisting the yield curve by selling short term Treasuries and purchasing longer term ones.  This was exactly what the market had anticipated at the time but meeting expectations was not enough.  The Fed did the minimum of what investors expected and they were punished for it.   Last week, Bernanke stepped out and admitted that that Operation Twist had only a modest impact on the market.   Traders will be looking at the minutes to see how close the central bank was to implementing QE3.  If they discussed it heartily, then the prospect of more stimulus next month is still realistic.  If there was a lot of debate about the need for any stimulus at all and the only reason why they chose Operation Twist was to give the market something instead of nothing, it would be a major disappointment that could lead to a renewed rally in the greenback.  At the time, there was absolutely no mention of additional asset purchases in the FOMC statement and by not mentioning QE3, it certainly appears that the central bank could be saving their few remaining bullets in case the volatility in the financial markets intensifies or the U.S. economy falls into recession. 

EUR: SOARS ON HOPE FOR BAILOUT PLAN BY MONTH END

@import url(/css/cuteeditor.css); With the heads of the two largest countries in the Eurozone committing to reach an agreement and produce a new package of measures to stabilize the region before the November G20 Summit, there is a general sense of optimism in the market that has boosted the euro and other high yielding currencies. In fact, we have not seen such a strong move in the euro since 2009.  Little details were provided from Merkel and Sarkozy but as the 2 main stumbling blocks to any major bailout package for the Eurozone, their cooperation was warmly received by the market.  The only concrete commitment that they have offered is to recapitalize banks because the greatest risk of a Greek default is the losses that it would impose to banks in the region.  They also promised that any plan would offer a long term solution for Greece, ensure that they remain in the Eurozone and could potentially involve a treaty change.  If Merkel and Sarkozy manage to come up with a decently structured bailout program that would mitigate contagion throughout the region, it would target the root of the Eurozone's problems and offer the nuclear solution that could potentially put a long term bottom in the euro.  This is of course a tall task and based on their track record, we are more skeptical than optimistic because it is still unclear whether they can put their political agendas aside and deliver on their promises.  Nonetheless we have to respect the rally in the euro and acknowledge that the prospect of a deal has triggered more short covering.  France and Belgium also announced that they will nationalize part of Belgium's largest bank Dexia.  Infusing billions of taxpayer money into Dexia eliminates a near term high level risk for the market by preventing a default that could trickle over to other banks in the Europe and the U.S. However Dexia is also an example of why the Eurozone urgently needs to recapitalize its banks because it would help to shore up their finances, stabilize yields and hopefully increase investor confidence with the goal of ultimately preventing a Dexia redux in other countries.  Recapitalizing banks in the Eurozone alone is not enough but with the EU Summit next week now postponed to October 23rd, hopefully the Europeans have more tricks up their sleeve.  @import url(/css/cuteeditor.css);

GBP: RALLIES BUT UNDERPERFORMS AFTER QE

@import url(/css/cuteeditor.css); The British pound also gained strength against the greenback but its rally was the most limited of all the high beta currencies.  This should surprise no one considering that the Bank of England announced a new round of asset purchases last week, making them the most dovish central bank in the market right now.  Everyone else is thinking about increasing stimulus whereas the BoE actually acted on it and earlier than most people had anticipated.  Their pro-activeness shows just how concerned they are about their local economy as well as global uncertainties.  According to Lloyd’s employment confidence survey, the labor market may have deteriorated in the month of September, with U.K. businesses growing less willing to hire. We will see whether this is true on Wednesday when the jobless claims report is released. This evening, we have the BRC retail sales and house price reports.  Unfortunately both sets of data are expected to show further deterioration in consumer demand and the housing market.  This week is a busy week for the U.K. with a tremendous amount of key economic reports scheduled for release.  Given that the BoE jumped the gun and reinitiated its QE program last week, investors will be looking at this week’s data as validation for the central bank’s recent decision.  At this point, no one expects the BoE to “add” to their stimulus.  They have done more than other central banks in similar positions and will probably remain on hold for the rest of the year.   @import url(/css/cuteeditor.css);

AUD: FIFTH STRAIGHT DAY OF GAINS

@import url(/css/cuteeditor.css); The Canadian, Australian and New Zealand dollars performed strongly against the greenback as demand for risk currencies returned.  The Aussie was one the day’s best performers, rising more than 2 percent and extending a recovery that has lasted for the past 5 trading days. The AUD/USD is within a whisker of parity and appears poised to make a run back above that level.  Despite a 2.1 percent decline in job advertisements, the Australian dollar has performed extremely well which is testament to how much investors really want to be done with the European sovereign debt crisis.  Oil prices also rose 3 percent, lending momentum to the Canadian dollar.  Aside from the Australian labor market number, there were no additional economic data from the commodity producing countries and the fact that these currencies still staged such a strong rally indicates that a further extension of today’s moves hinges not upon economic data but rather the market’s continued faith in European policymakers.  With that in mind however, New Zealand credit card spending numbers will be released this evening along with Australian business confidence and Canadian housing starts.  None of these reports will be big market movers for the commodity currencies.  @import url(/css/cuteeditor.css);

USD/JPY FAILS TO JOIN RISK RALLY

@import url(/css/cuteeditor.css); With the Dow Jones Industrial Average trading up 330 points, nearly all of the Japanese Yen crosses are higher.  The only one that is not is USD/JPY, which is unchanged for the day.  The lack of participation of USDJ/PY in the rally is concerning because it implies that the market is bearish dollars in general which may be a reflection of expectations going into the FOMC minutes.  Japanese markets were closed for Physical Fitness Day, but this is a busy week for Japan.  Trade balance numbers are scheduled for release this evening and unfortunately the data is expected to show the further strain imposed by a strong currency.   The country’s trade surplus is expected to have turned into a deficit in August, which would add pressure on the Japanese government to take steps to weaken the Yen.  The Bank of Japan’s monthly economic report will also be released along with consumer confidence and the Eco Watchers survey. Further deterioration in economic data is expected along with increased pessimism from the central bank, but anyone trading the Yen knows that Japanese data has very little impact on the currency. @import url(/css/cuteeditor.css);

GBP/USD: Currency in Play for Next 24 Hours

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Our currency pair in play for the next 24 hours is the GBP/USD. U.K. industrial production numbers are scheduled for release at 4:30 AM ET or 8:30 GMT followed by the U.S. FOMC Minutes at 2:00 PM ET or 14:00 GMT.

After hitting a low of 1.5265 earlier this month, the GBP/USD has finally stabilized and recovered some of its recent losses.   The currency pair is now trading in the range trading zone which we define using Bollinger Bands.  Should the GBP/USD extend its gains, near term resistance will be at 1.5782, the 38.2 percent Fibonacci retracement of the August to October sell-off.  Above that, the 50-day SMA and psychological 1.60 level will serve as more significant resistance.  If the GBP/USD trickles lower and resumes its slide, the first level of support will be at the first standard deviation Bollinger band 1.5460 and below that the October of 1.5265.

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Comments (1)

Dhanjot

October 10, 2011 at 05:17 PM ET

Great work, Kathy.

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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.