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USD: FOMC Minutes and China Currency Bill

Last updated 10/12/2011 5:28 PM ET (GMT -5) 2 Comments

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Kathy Lien

Director of Currency Research, GFT

THE STORIES IN THE CURRENCY MARKET

• USD: FOMC MINUTES AND CHINA CURRENCY BILL
• EUR: INVESTORS REMAIN OPTIMISTIC
• GBP: MIXED EMPLOYMENT NUMBERS
• CAD: EXTENDS RALLY, INCHING TOWARDS PARITY
• NZD: SHARP RISE IN HOUSE PRICES
• JPY: ECONOMIC DATA IMPROVES
• JPY: ECONOMIC DATA IMPROVES

EXPECTATIONS FOR UPCOMING FED MEETINGS

USD: FOMC MINUTES AND CHINA CURRENCY BILL

The mood in the financial markets continues to improve with currencies, equities and bond yields performing extremely well over the past 24 hours. Although the bursts were concentrated in the first two hours of European and U.S. trading, the fact that nearly all of the major currency pairs held onto their gains throughout the U.S. session is a testament to the risk appetite in the market. The minutes from the September FOMC meeting was the only piece of U.S. event risk on today’s calendar but a number of Fed officials also shared their views of monetary policy. According to the FOMC minutes, the central bank initiated Operation Twist and held back on asset purchases because they wanted to retain QE3 as an option in case the outlook for the U.S. economy worsened. Many policymakers felt that there was “considerably uncertainty” in the U.S. economy which implies that most of them probably would have voted for QE3 if Operation Twist was not an choice of if things were slightly worse. They believed that QE3 is a more powerful tool but they wanted to see whether Operation Twist would be sufficient. The minutes also showed that the Federal Reserve is ready to do a lot more to stimulate the U.S. economy. Aside from boosting asset purchases, most Fed officials also “saw advantages” in tying interest rates to more specific economic developments which suggests that they could be open to tying it to the unemployment rate. QE3 and unemployment rate targeting are only two of the potentially game changing measures that the Federal Reserve could take but based upon the recent recovery in equities and improvement in risk appetite, the central bank will probably save these extreme measures for a time when the economy and the markets need it the most. The Fed’s willingness to go further in stimulating the economy caught no one by surprise and explains why the U.S. dollar barely reacted the release of the minutes. Comments from Fed officials also reflect the continued division within the central bank and the potential opposition to implementing QE3 unless it was absolutely. Plosser who is traditionally one of the most hawkish members of the central bank feels that there was no major impact from Operation Twist. He doesn’t believe that the U.S. economy is at the verge of another recession and he adamantly opposed the Fed’s August and September decisions, saying that it will make exiting easier monetary policy all that more difficult. Fed President Fisher and fellow FOMC voter concurs – he believes that the Fed may have overfilled the tank with too much liquidity and that there are limits to what a central bank can do. Unless the market collapses, giving FOMC voters like Fisher and Plosser reasons to reconsider their skepticism towards more stimulus, the U.S. central bank will remain on hold, leaving the dollar to trade on risk appetite. 

Meanwhile our readers have asked us to add our two cents on the Chinese Currency Bill. As you may know, the Senate passed a bill on Tuesday to slap new duties on imports from nations whose currencies are undervalued. This bill is aimed squarely at China who has artificially kept the Chinese Yuan weak for the past decade. China has responded with some strong words with the Ministry of Foreign Affairs slamming the bill as protectionist which severely violates the WTO rules. If passed, this would undoubtedly launch a trade war that would hurt both the U.S. and China. Theoretically duties on Chinese imports would be positive for the U.S. economy because it keeps demand domestic but in reality, China would retaliate in a number of ways that could include dumping their massive holdings of U.S. Treasuries which could send the dollar sharply lower and bond yields spiraling higher. Thankfully the chances of the bill passing the Republican controlled House is extremely slim which is why we haven’t given the Chinese Currency Bill much airtime because this political exercise has been repeated time and again with the same result. The U.S. trade balance is scheduled for release tomorrow along with jobless claims.  These reports will probably be not as market moving as tonight’s Chinese trade numbers.

EUR: INVESTORS REMAIN OPTIMISTIC

The euro charged higher for the third consecutive trading day, extending a rally that has taken the currency pair from a low of 1.3145 to a high of 1.3830.  Last night, Slovakia rejected the expansion of the European Financial Stability Facility which should have been bearish for the euro but ended up having very little impact. The reason why investors shrugged off the delay caused by Slovakia is because they realize this represents political jockeying and not outright opposition to EFSF expansion.  Three out of the four coalition parties and the opposition party support the expansion and only rejected it as a way to push the Prime Minister out of office.  The next vote should be held before the end of next week, at which time the EFSF bill will most likely be approved by the Slovakian government. The prospect of Greece finally receiving its sixth bailout tranche in early November has staved off a default for the time being and led to a sharp short squeeze in the euro. It has also lifted the currencies of other countries whose central banks may no longer need to ease monetary policy if the European markets stabilize. There was very little in the form of economic data from Eurozone countries outside of some minor inflation reports. Wholesale prices in Germany edged higher in September while consumer prices in France declined.  Inflationary pressures and inflation expectations have fallen in general, making higher prices less of a risk.  Central banks may be flooding the markets with liquidity but weak demand is capping price growth. Eurozone industrial production also rose by 1.2 percent which was stronger than the market had anticipated. Final CPI numbers from Germany will be released tomorrow followed by the ECB’s monthly report.   Switzerland on the other hand will be releasing its monthly producer price report and the strong Franc is expected to push prices lower for the fifth month in a row.

GBP: MIXED EMPLOYMENT NUMBERS

The British pound strengthened against the U.S. dollar but weakened against the euro on news that European officials may reach a plan to recapitalize the region’s banks. Unemployment in the U.K. rose to its highest level in 15 years with the unemployment rate hitting 8.1 percent. In the three months through August, the unemployment rate rose, adding pressure on the government to loosen its fiscal squeeze as the economy struggles to avoid recession. The jobless rate increased to 8.1 percent from 7.9 percent. The number of unemployed persons reached 2.57 million - the most since 1994. Nonetheless the increase in jobless claims was only 17.5k, which was less than the market’s 24.0k forecast. Average weekly earnings fell from 2.9 to 2.8 percent.  Bank of England policy maker said the central bank’s new round of stimulus is the “right place” to start and officials are ready to do more if needed. The central bank is going to review their measures on an ongoing basis and make adjustments as necessary. The conference board leading economic index for the U.K. decreased 0.5 percent in August, following an increase of 0.3 percent in July. The U.K. currently faces weak domestic demand. If exports or the more accommodative monetary policy fail to support growth, current economic conditions may deteriorate further and lead to a new downturn. The trade balance and nationwide consumer confidence report is expected tomorrow. The trade balance will give us key information about foreign demand for the U.K.’s goods and help determine whether or not domestic demand will stay depressed.

CAD: EXTENDS RALLY, INCHING TOWARDS PARITY

The Canadian, Australian, and New Zealand dollars all strengthened against the U.S. dollar as demand for riskier assets picked up. Canada’s new housing price index increased 0.1 percent in August in line with expectations. The index also increased 0.1 percent in July, but remains depressed as global growth concerns weighed on first time home buyers. The Canadian dollar gained the most in two months on optimism that European officials will agree on a plan to recapitalize the region’s banks. Canadian airlines may face trouble as flight attendants are ready to strike. The Canadian Union of Public Employees said they are preparing to walk off the job at 12:01 AM tomorrow. On the docket for Canada is manufacturing sales and the market anticipates some slowing due to depressed overseas demand. The Australian and New Zealand dollars, the other commodity-linked currencies, received a boost from risk appetite as well.  Gold and copper rose to two-week highs on good news from Europe. Also, corn extended its largest advance since June 2010, on signs last month’s 23 percent slump may have attracted buyers seeking to build stockpiles.  Oil dropped for the first day in six on concern fuel demand will slow as the U.S. and Europe struggle to get their economies back on track. Australia will pressure China to embrace a free exchange rate during this week’s Group of 20 meeting in France, joining with U.S. lawmakers’ rhetoric. RBA Treasurer Wayne Swan told Parliament on Wednesday he will raise directly with China’s leaders concerns over the valuation of their currency. As the free-floating Australian dollar remains around historic highs it is hammering the local manufacturing industry causing many companies to move production offshore. Australian consumer confidence edged up further in October, with optimism about the economic outlook balanced by caution on making major purchases. The Westpac index rose 0.4 percent in October, following an increase of 8.1 percent in September. Australian home loans also increased, gaining 1.2 percent in August following an increase of 1.0 percent in July. Employment numbers are due for release from Australia this evening. New Zealand’s REINZ house price index advanced 1.7 percent in September, following a 0.5 percent gain in August. There is increasing buyer interest, but on a very rational basis – there is no appetite on the part of buyers to overpay or to rush purchases. On the docket for New Zealand is the business NZ manufacturing index and the food price index. 

JPY: ECONOMIC DATA IMPROVES

The Japanese yen weakened against all the major currencies today as risk appetite returned to the market. Japan’s core machinery orders rose 11.0 percent in August from the month prior, as rebuilding from the March natural disasters supported corporate capital spending. The increase was greater than the expected 4.7 percent increase, and followed an 8.2 percent fall in July. Preliminary machine tool orders for September rose as well, posting 20.3 percent, following a 15.3 percent increase in July. These reports are a relief as we thought investment may have begun falling with uncertainties about Europe and the U.S. growing. However, today’s gain doesn’t guarantee sustained capital spending. Japan’s bank loans increased in September for the first time in almost two years as the country’s biggest earthquake and tsunami spurred lending for reconstruction. Lending by 119 local banks rose 0.1 percent to 420 trillion yen. ($5.5 trillion) To make this loan recovery sustainable, Japan needs to implement stronger lending requirements along with reconstruction efforts, and real growth in corporate capital spending. The earthquake that crippled Japan in March may cost Toyota Motor Corp. less than the rising yen. Operating profit for the world’s top carmaker will be cut by 250 billion yen ($3.3 billion) in the year ending March 31 because of the currency’s advance. The natural disaster may cost Toyota 160 billion yen. There is pent-up demand and with production back to normal, Toyota can quickly make up for the reduction in output. It’s more of a reality of the strong yen that Toyota needs to address; Toyota produces two out of five vehicles in Japan, making it more vulnerable to the yen than Nissan and Honda. Minutes from October 6 ^th ’s monetary policy meeting will be released later tonight. Also on the docket is tertiary industry activity which is expected to decline at 0.3 percent. A negative reading would underscore the difficulty of an economic recovery taking hold. 

AUD/USD: Currency in Play for Next 24 Hours

Our currency pair in play for the next 24 hours is AUD/USD. From Australia we expect the release of September employment numbers at 8:30 PM ET / 0:30 GMT. From the U.S., we have the trade balance for the month of August, and labor numbers at 8:30 AM ET / 12:30 GMT. 

AUD/USD has been on the rise over the past few days and is currently trading in an up trend, which we determined using Bollinger bands. The nearest level of support is at today’s low of 0.9864. Should the pair fall past that price, significant support will be at 0.9645, where the lower first standard deviation Bollinger band lies. To the upside, nearest support is at 1.0232, where the 50-day SMA and 50% Fib retracement converge. We drew our Fibonacci from July 27 ^th to October 4 ^th . Past that, heavy resistnace will be encountered at 1.0375, where the 200-day simple moving average lies. 

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Comments (2)

traderwillie

October 12, 2011 at 10:58 PM ET

I really rather like an entry in the A$ (short) from around 1.0200. The big figure resistance, and the confluence of two trendlines seems a pretty decent low risk entry.

traderwillie

October 13, 2011 at 09:35 AM ET

Banked 50 pips! Looking to short again. :)

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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.