All Trade Ideas and trading scenarios found on FX360.com are hypothetical. FX360.com has not placed these Ideas in a live trading environment. Forex Trading involves high risks, with the potential for substantial losses that exceed your initial deposit and is not suitable for all persons. Past performance is not necessarily indicative of futures results.

FX: What To Expect For G20 And NFP

Last updated 11/3/2011 4:00 PM ET (GMT -5) 1 Comments

• Share this:

Kathy Lien

Director of Currency Research, GFT

THE STORIES IN THE CURRENCY MARKET

• FX: WHAT TO EXPECT FOR G20 AND NFP
• EUR: WHY EURO REMAINS STRONG DESPITE RATE CUT
• GBP: SLOWER SERVICE SECTOR ACTIVITY
• CAD: EMPLOYMENT NUMBERS ON TAP
• AUD: WEAKER SERVICE SECTOR ACTIVITY
• NZD: UNEMPLOYMENT RATE RISES
• JPY: YEN CROSSES LIFTED BY RISK

EXPECTATIONS FOR UPCOMING FED MEETINGS

FX: WHAT TO EXPECT FOR G20 AND NFP

News that Greece scrapped its plans for a referendum sent currencies and equities soaring. As a result, the U.S. dollar lost value as investors moved their money out of safe lower yielding currencies into higher yielding ones.  The rally in the financial markets comes ahead of the monthly U.S. labor market report and the G20 statement, both of which could lend additional support to risk appetite. Much of the volatility this week has been triggered by headlines out of Europe and developments out of Greece will remain the primary driver of market movements. The fate of the U.S. dollar hinges upon whether the improvement in risk appetite can be sustained. In the meantime the G20 meeting is underway and Europe was the main topic of discussion.  According to the draft of the communiqué, which will be officially released on Friday afternoon, the leaders of the 20 most powerful economies commit to coordinated actions and policies that would bring down deficits for countries with large fiscal imbalances and boost internal demand in those with large trade surpluses. This is the same commitment made back in October and is not new. What is new however is talk of an IMF credit line created through a special allocation of Special Drawing Rights which are artificial “basket” currencies created by the IMF for internal accounting purposes. This new 6 month credit line capped at 5 times a country’s contribution to the IMF could stabilize the market psychologically but practically, few countries will be able to tap the line. First, the IMF wants to offer it only to countries with “strong policies and fundamentals,” which means Greece need not apply and second, since it is limited to 5 times contribution, large countries such as Italy would not qualify. This type of credit line would only work for smaller countries like South Korea, Poland and Mexico. Nonetheless, an offer of liquidity from the IMF could be enough to extend the gains in currencies and equities. Investors also need to keep an eye out for the G20’s stance on currencies. The changes have been intentionally left out of the draft as the G20 leaders debate language directed at China and its exchange rate policies. However even if the U.S. manages to push through a stronger call for a more flexible Yuan, China will still appreciate their currency on their own terms.

Before the G20 statement is released, currency traders will have to contend with the monthly non-farm payrolls report. Thankfully most of our leading indicators for non-farm payrolls points to stronger job growth. In September, 103k jobs were created and a similar pace of growth is expected for October and as long as payrolls are more than 85k, investors should be pleased. According to the non-manufacturing ISM report, which is our most reliable leading indicator for non-farm payrolls, the service sector enjoyed its strongest job growth since June. This is in line with the rise in private sector employment reported by ADP and the smaller amount of layoffs reported by Challenger Grey & Christmas. Jobless claims have also eased with the four week moving average dropping to 404.5k from 415k. Although the consumer confidence numbers have been mixed, the rest of the labor market reports do not contain any red flags that would point to a month of exceptionally weak job growth.  The optimism from the Federal Reserve about current conditions in the U.S. economy also suggests that the labor market has stabilized and as long as job growth is not terrible, the impact on currencies should be minimal.  The uncertainty still rests with Europe and for that reason the outcome of the G20 meeting and the Greek Prime Minister Papandreou’s no confidence vote on Friday night will be far more important to the outlook for the U.S. dollar.

EUR: WHY EURO REMAINS STRONG DESPITE RATE CUT

Despite a surprise rate cut by the European Central Bank, the euro ended the day higher against the U.S. dollar. The reason for the currency’s strength has nothing to do with the central bank’s outlook for monetary policy. In fact, ECB President Draghi was extremely pessimistic, spending much of his press conference talking about the downside risks to the economy and the possibility of a mild recession. The euro still managed to strength against the U.S. dollar because Greece abandoned its plan for a referendum on the EU debt deal which could put the country back on track to receiving its aid payment. A no confidence vote is scheduled for tomorrow evening and Greek opposition leaders are calling for Prime Minister Papandreou’s resignation. A resignation would not be the end of the world if it is followed by a government that implements the terms agreed on October 27 ^th quickly. The IMF has said that they will wait for “all uncertainty” to be removed before releasing the next tranche of aid to Greece. However that remains a big “if” because the opposition could turn out to be as unorganized and inefficient as Papandreou. For the time being, keep an eye on the headlines because they will continue to dictate the movements of the euro.  Good news will fuel further gains in the currency but additional setups could put a big dent in the rally. For the first time in more than 18 months, the European Central Bank cut interest rates by 25bp to 1.25 percent. This was the first time that Mario Draghi is in the hot seat and his decision to lower rates shows that he wants to prove to the world he has what it takes to be the second most powerful central banker in the world. In his first ever press conference, Draghi explained that the downside risks have intensified and significant cuts to growth forecasts are likely. Although price stability should be their number one priority, inflation is expected to fall further in coming months and for that reason, Draghi feels that fighting recession is more important than fighting inflation at this time. Draghi had nothing positive to say about the outlook for the Eurozone economy and his unambiguously pessimistic comments sent the euro tumbling against the U.S. dollar minutes after the release. Cutting interest rates was the right thing for Draghi to do particularly since there was no question that the ECB's staff forecasts would be revised lower next month - so why wait. Draghi's pessimistic tone and his emphasis on the downside risks to inflation is not only a departure from Trichet but imply that another quarter point rate cut is on the table. Draghi sees Europe headed for a mild recession which could lead to another rate cut December.

GBP: SLOWER SERVICE SECTOR ACTIVITY

The British pound traded higher against the U.S. dollar despite a slowdown in service sector activity. According to Markit Economics the service sector continued to enjoy positive growth but concerns about the economic outlook and a decline in new orders drove the index to its lowest level in 10 months. Combined with the sharp deterioration in manufacturing activity and we can appreciate why the Bank of England eased monetary policy last month despite a recent report that showed the economy expanding at a faster pace in the third quarter. With that in mind however, the business confidence component of the service sector report rose to its highest level since May, reflecting some improvement in expectations. Although the manufacturing and service sectors experienced slower growth, construction sector activity accelerated. The BoE was one of the first central banks to pull the trigger on additional stimulus and unlike the ECB or Fed, they will probably remain on hold for the rest of the year as they monitor how the economy reacts. The uncertainty in the Eurozone drove the pound sharply higher against the euro this week but EUR/GBP is finally showing signs of stability and if the concerns recede, the pair could enjoy a stronger recovery. In the meantime, there are no additional economic releases from the U.K. this week, leaving the currency at the whim of the market’s risk appetite.

CAD: EMPLOYMENT NUMBERS ON TAP

The Australian, Canadian and New Zealand dollar have all strengthened against the U.S. dollar thanks to the improvement in risk appetite. In Australia, the AIG Service Index contracted to 48.8 in October after expanding for two consecutive months. Although both manufacturing and service indexes have fallen under 50, the boom/bust line, the activity in the services sector has stabilized according to the survey. The respondents noted that uncertainty and low levels of consumer confidence continue to be key factors hindering economic activity throughout the service sector. On a more optimistic note, retail sales advanced 0.4 percent in September on a month-over-month basis. This data marked the third monthly increase since July. While the European financial fallout casted deep concern over the global recovery, Australian consumers withstood the slowdown. The most encouraging signs came from the discretionary parts of the retail sales report with restaurant spending and household good up by 0.6 and 0.5 percent, respectively. Although the Reserve Bank of Australia has just lowered interest rates this week, the market has priced in another 25 basis point cut in December. Nonetheless, the central bank could be more hesitant to act if it sees more optimistic signs in the Australian economy. In New Zealand, the unemployment rate crept back up to 6.6 percent for the quarter ending in September. Meanwhile, the Bank of Canada is particularly “vigilant” in monitoring effects of currency moves on inflation in times of great volatility, Governor Mark Carney said. While Canadian retail-goods prices are higher than in the U.S., the differential has narrowed from 18 percent in April to 11 percent in September. The central bank cited several reasons why prices are slow to change, including higher labor costs in Canada, transportation costs, more competition and economies of scale in the U.S. market and a weaker U.S. economy which could prompt retailers to provide more discounts. Looking ahead, we expect the employment and PMI data from Canada.  Job growth is expected to slow after a particularly robust October.

JPY: YEN CROSSES LIFTED BY RISK

The Japanese yen weakened against all of the major currencies with the exception of the U.S. dollar. Despite the latest intervention effort by the Bank of Japan, USD/JPY remains vulnerable to the negative news flow from the European crisis. While the yen traded in a tighter range versus many of the majors today, the volatility could increase as intervention effort fades. A BOJ board member warned that the yen might strengthen further, two days after the government intervened to protect exporters by weakening the currency from a postwar record against the US dollar. “We could see the yen, regarded as a relatively safe currency, rise even further” should investors’ risk aversion intensify over a deepening European crisis, the official, Sayuri Shirai, said in a speech yesterday in Kofu, central Japan. Meanwhile, the Prime Minister Yoshihiko Noda is facing his toughest challenge since taking the office. In addition to heading an internally divided Democratic Party of Japan (DPJ), Noda chose to tackle a highly sensitive political issue – the participation in the Trans-Pacific Partnership (TPP). TPP’s aim is to further liberalize the economies of the Asia-Pacific region. With the Japanese manufacturers suffering from declining demands from developed countries, the partnership could potentially expand Japan’s exporting market. Nonetheless, representing the interests of the farmers, the Minister of Agriculture, Forestry and Fisheries (MAFF) Michihiko Kano has strongly and publically expressed his opposition to Noda’s interest in the TPP. The split reflects the underlying concern for Noda’s government. While Noda attempted to unify the DPJ, the political divergence could further inhabit the economic recovery in Japan. With no economic releases on the docket, the market could continue to trade on the news flow out of Europe and the G20 meeting.

USD/CAD: Currency in Play for Next 24 Hours

USD/CAD will be our currency pair in play for the next 24 hours. The economic releases from Canada are the employment data at 7:00AM ET/ 11:00 GMT and PMI at 10:00AM ET/ 14:00 GMT. From the U.S., we expect payrolls and employment data at 8:30AM ET/ 12:30 GMT.

Despite USD/CAD ’s collapse today, the pair is currently trading range-bound which we determined using the Bollinger Bands. The nearest support lies at 1.0031, the 50% Fibonacci level. We drew our Fibonacci retracement from the swing low in July to the year-to-date high in October. If the USD/CAD ’s fallout continued, the pair could see further support at 0.9892 (100-day SMA). On the upside, yesterday’s high of 1.0217 could serve as the first level of resistance. Further up, pair’s rally could be contained at the 23.6% Fibonacci level – 1.0361.

The information, including Commentary and Trade Ideas, provided on FX360.com should not be relied upon as a substitute for extensive independent research which should be performed before making your investment decisions. Global Forex Trading and FX360 .com is merely providing this information for your general information. The information and opinions presented do not take into account any particular individual’s investment objectives, financial situation, or needs. All investors should obtain advice based on their unique situation before making any investment decision and should tailor the trade size and leverage of their trading to their personal risk appetite. Any projections or views of the market provided by FX360.com may not prove to be accurate.

The views of the authors and analysts are not necessarily those of Global Forex Trading, its owners, officers, agents or other employees. FX360.com and the currency research team will not be responsible for any losses incurred on investments made by readers and clients as a result of any information contained on FX360.com. Global Forex Trading and the currency research team do not render investment, legal, accounting, tax, or other professional advice. If investment, legal, tax, or other expert assistance is required, the services of a competent professional should be sought.

• Share this:

Comments (1)

Darkdoji

November 04, 2011 at 03:33 AM ET

"However that remains a big “if” because the opposition could turn out to be as unorganized and inefficient as Papandreou." Not fair. First this assessment is based on his last action (a point estimate equivalent such as that does not reflect his overall performance so far). Second none of us has the near experience of office and situation to judge the man directly. What he did was to my mind absolutely needed in the situation. Now he has flushed opposition into open support of austerity - which is a plus for those who mistakenly think there is a solution in the bailout program and yet supporters of this highly defective stance still slam him and seek his head? Second (and this reflects in nearly all the reports across the web) analysts think Mario Draghi "acted to prove himself" - this notion is at once silly and unhelpful to assessing future bank policy insofar as Draghi's predispositions are concerned. Why is it so hard to see the man as simply doing his job based on the facts before him around which he forged a consensus within his committee? Therefore, if over the next two or so meetings this is maintained we can then conclude that he is inclined to and expect him to work by building consensus around the facts - and therefore predictable.

Add Your Comment

Please login to post a comment or sign up for an FX360® account.

Loading...

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.