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US Dollar: Turn, Turn, Turn

Last updated 2/10/2009 5:49 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: TURN, TURN, TURN
• EUR/USD: TALK OF DEEPER RATE CUT
• GBP/USD: FURTHER WEAKNESS LIKELY
• AUD/USD: TRIPLE BLOW
• NZD/USD: GOLD PRICES SETTLE AT $915
• USD/CAD: OIL PRICES AT $38 A BARREL
• USD/JPY: JAPANESE YEN SOARS DESPITE PROSPECT OF 11% GDP CONTRACTION

EXPECTATIONS FOR UPCOMING FED MEETINGS

US DOLLAR: TURN, TURN, TURN

The much anticipated announcements from Washington have triggered a dramatic turn in the currency and equity markets.  With investors flocking back into the safety of US dollars and the Dow Jones Industrial Average falling 381 points, it is clear that investors are not satisfied with the Obama Administration’s new programs to unlock the credit the market and rescue the financial sector.  If today’s announcements were to be measured by their ability to restore confidence in the financial markets, then the new President has failed miserably.  Fortunately we are more optimistic and believe that economic stability will be restored under Obama’s leadership, but patience may be needed.  

Treasury’s Plan: Heavy on Variety, Light on Details

The biggest criticism of Treasury Secretary Tim Geithner’s financial stability plan is that it is heavy on variety and light on details.  Geithner has introduced a cocktail of initiatives that include, a stress test to determine which banks are healthy, more capital for the healthy banks, a public private fund that buys up toxic assets and up to $1 trillion of new financing for consumers and businesses ( More details on Geithner’s Super TARP Plan ).  Investors are also not happy about being a part of any new experiments.  Geithner said that the government will have to do things that “we haven’t tried before” and warned that there will be “mistakes.”  This lack of confidence in his programs has translated into lack of confidence in the financial markets.  Uncertainty has heightened risk aversion which has driven all of the major currencies lower against the US dollar.  

Senate Approves $838B Economic Stimulus Bill

Even the US Senate’s approval of the $838B Economic Stimulus bill has failed to stop the liquidation in the financial markets.  The massive stimulus package was passed by a 61 to 37 margin and now heads to a House-Senate conference at which both will attempt to resolve their differences and hopefully combine their ideas to create a new version of bill that would be ready for President Obama to sign next week, if not earlier.  Any optimism about the passage of the bill has been overshadowed by the market’s disappointment with the details of the Treasury’s Financial Stability plan.  As for Fed Chairman Ben Bernanke, there were no fireworks from his testimony to Congress.  He did not really touch on Treasury purchases of long term bonds and instead focused on outlining the various credit facilities that the Fed has put into place and their rationales.  There is no doubt that politics stole the show today and the consequences of Geithner’s performance could impact how currencies trade for the remainder of the week.

Dollar Could Extend Gains on Trade Numbers

Although the US dollar could extend its gains simply on the fact that a highly anticipated event proved to be a big disappointment, the latest trade numbers from the US could add fuel to the rally.  In the month of December, the US trade deficit is expected to narrow further after hitting a 5 year in November.  Weaker domestic growth and a sell-off in the US dollar towards the end of the year could have crimped imports.  Exports on the other hand may have recovered since a similar improvement was seen in the export component of manufacturing ISM.  In a strong economy, a narrower trader deficit would be something to cheer about but in this current environment, the shrinking deficit is a reflection of weakness rather than strength. If the US government advocates a “Buy American” mentality, we could see a further reduction in the deficit.  

EUR/USD: TALK OF DEEPER RATE CUT

Risk aversion has driven the EUR/USD back below 1.30 and comments from Eurozone officials certainly didn’t help.  ECB member Axel Weber said that “We should not at this point avoid to lower rates aggressively, because we understand at the current juncture all indicators look like the economy is in free-fall." This is a stronger view than we have ever heard from Trichet, the head of the central bank but is a view that is shared by most market participants.  Trichet may never openly acknowledge the need for aggressive rate cuts, but continued weakness in the Eurozone economy will force the central bank to take interest rates to 1.50 percent if not lower  French industrial production continued to drop for the fifth consecutive month, driving the annualized pace of production down 11.1 percent.  The same weakness was seen in Italian production which suggests manufacturing sector weakness for the Eurozone as a whole.  There are significant economic releases from the Eurozone on Wednesday – the only piece of data on the calendar is the final numbers for German consumer prices.  

GBP/USD: FURTHER WEAKNESS LIKELY

After a failure to break 1.5000 against the US dollar, the British pound dropped considerably today.  Most of the weakness can be tied to the market’s risk appetite, but the currency’s losses against the Euro suggest that investors are still concerned about the vulnerability of the UK economy.  Nonetheless, the UK trade deficit narrowed to an 18 month low on lower imports and softer commodity prices.  The weakness in the British pound has helped to drive exports modestly higher. Most countries have reported a decline in exports over the past few months, so a 0.3 percent increase in UK exports is a win.  House prices continued to fall, but consumer spending according to the British Retail Consortium rose 3.2 percent in the month of January.  The UK consumer has been surprisingly resilient which may be due in large part to the aggressive efforts by the UK government.  Wednesday’s employment data and the Bank of England’s Quarterly Inflation Report will shed more light on the state of the economy.  Unfortunately, further weakness in the British pound may be likely since the contraction in the employment component of service, manufacturing and construction sector PMI point to more job losses.  Prices are falling globally and the central bank is expected to acknowledge that.  

AUD/USD: TRIPLE BLOW

The US dollar appreciated significantly against the commodity currencies as risk aversion drove investors into the safety of the lower yielding currency. Oil prices fell to $38 a barrel on the increase of reserves and bleak economic sentiment in the US. The Australian dollar dropped 3.5 percent today on the weight of lower gold prices, weaker economic data and risk aversion. Business confidence in Australia contracted further in the month of January as companies are projecting that the global slowdown will continue to affect their balance sheets. RBA’s Governor Glenn Stevens urged the rest of the world that a retreat from risk could eventually damage the world’s economy by a bigger margin. Mr. Stevens is expecting that cross-border investment will decline in the future, which in his mind, would contribute to bigger problems that are on hand at the present time. On Wednesday, Australia will release its Westpac Consumer Confidence figures which are likely to contract amid concerns of global economy outlook. After losing 125,000 jobs in the month of January, Bank of Canada Governor Mark Carney seemed optimistic about the future, stating that the economy will rebound at the fastest pace in two decades, reaching 3.8% in 2010. Carney further indicated that there is high probability of interest rates being reduced in the upcoming meeting on March 3rd, which will bring the rates to a record level of 75 basis points. What is bleak about the data is a rise of Personal Bankruptcies which rose by 50.6% from the same period last year. Tomorrow, Canada is expecting to release its International Merchandise Trade which will elaborate on exports that the economy is heavily dependent upon. While later in the day, New Zealand is set to release its figures for Card Spending for the month of January.

USD/JPY: JAPANESE YEN SOARS DESPITE PROSPECT OF 11% GDP CONTRACTION

The Yen rose against other major counterparts as a stipulation that Treasury Secretary Timothy Geithner’s recovery plan will fail, drove a move back towards risk aversion. Nevertheless, the situation within the Japanese economy seems bleaker by day as manufacturers continue to cut production driving unemployment higher, while credit squeeze remains an overwhelming problem. It is predicted that the Japanese economy will decrease by an astonishing 11.70% in 2008. The GDP figures which are expected to be released on Monday will likely be a catalyst for further actions by the government. Lately, the Japanese government has been reluctant in initiating any fiscal support for the economy as opposition party in the Parliament blocked needed steps from taking place. Yet, with the economy on track for the worst pace in more than half a century, more action will be needed by the government in order to stimulate growth.  Consumer confidence rebounded modestly from record low levels, yet the level indicates that the household may continue to cut spending as the recession deepens. Housing loans fell 3.3 percent from the prior month as the credit freeze is continuing to affect big item purchases.  With a lack of economic data coming this week, the markets will continue to lean towards risk aversion.

USD/JPY: Currency in Play for Next 24 Hours

The currency in play for the upcoming 24 hours is USD/JPY based on the U.S. Trade Balance released at 13:30GMT or 8:30AM, followed by Japanese Domestic Goods Price Index released at 23:50GMT or 6:50PM EST. The pair is currently lingering within the Range Trading Zone established through the Bollinger Bands. After hitting a decade low USD/JPY has been reluctant to find a trend, resulting in a formation of uprising triangle. Resistance is originating at the top of the formation around 91.75, coincides with 2nd Standard Deviation of the Bollinger Bands along with 38.2% retracement of 2009 high and low. Support is on the other hand is placed at 90.00, which is 61.8% retracement of 2009 high and low as well as 20-day SMA. The next level of support is placed at the 1st Standard Deviation of the Bollinger Bands at 88.90 which is also the bottom of the triangle formation.

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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.