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A Dollar Story

Last updated 2/12/2009 5:35 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

• A DOLLAR STORY
• EUR/USD: GROWTH TO SLOW TO RECORD LOWS
• GBP/USD: INTEREST RATES HEADED TO 0.25%?
• NZD/USD: FALLS 1 PERCENT
• AUD/USD: AUSTRALIA STILL REPORTING POSITIVE JOB GROWTH
• USD/CAD: OIL PRICES AT $34.24 A BARREL
• USD/JPY: JAPANESE CGPI FALLS FOR FIRST TIME SINCE 2003

EXPECTATIONS FOR UPCOMING FED MEETINGS

A DOLLAR STORY

It is a dollar story in the foreign exchange market today as the greenback rises against every major currency.  Although earlier risk aversion contributed to the strength of the US dollar, the underperformance of the Japanese Yen suggests that revenge of the low yielders is not the theme in the currency market.  Since we are still waiting on the economic stimulus package, the market has shifted its focus away from politics and back onto economics.   The comments about sovereign debt ratings by ratings agency Moody have spooked currency traders.  

Moody’s Warnings on Country Debt Ratings

According to Moody’s, Ireland and to a lesser extent Spain is “vulnerable” to losing their AAA ratings.  Germany, Canada, France and Scandinavia’s AAA ratings are “largely untested” while the UK and UK’s AAA ratings are “being tested” because of shock to growth.  Credit ratings have been a big focus today after ratings agency Fitch lowered the Ukraine’s debt rating from B+ to B.  For a company or a country, there are two primary consequences to having your credit rating downgraded.  The first is higher borrowing costs and the second is investor outflow.  Many global investment funds are mandated to only invest in AAA assets and therefore when a country like Spain and Greece loses its AAA rating those, funds have to liquidate their Spanish and Greek debt.  Therefore news that the members of other G20 nations are closer to losing their AAA credit rating than the US has triggered a broad based dollar rally.  Even if these nations do not lose their credit rating, there is a greater chance that they could be put on credit watch negative which would still be bearish for those currencies.  

Consumer Spending Not Sustainable

Despite massive job losses, Americans continued to spend. Retail sales rose 1.0 percent in the month of January after falling for 6 months in a row. Although consumers were taking advantage of discounts and going out of business sales, the trend is not expected to persist as the nation loses jobs at an alarming rate. Jobless claims rose to 623k in the week ending Feb 7 while claims for the prior week were revised up to 631k. The total number of Americans claiming unemployment benefits hit 4.81 million. If this pace of job loss continues, it should just be a matter of time before the rolls hit 5 million. Jobless claims are at recessionary levels and therefore retail sales should resume their downtrend.

What to Expect for the G7 Meeting

On Friday, finance ministers and central bankers from the Group of Seven major industrialized nations (G7) will be gathering in Rome to discuss the global financial crisis.  Russia has also been invited to attend part of the meeting along with the IMF, World Bank, WTO and the OECD (China has not been invited).  Over the past 30 years, G7 meetings have triggered major tops and bottoms in the US dollar and given that currencies will be discussed at this meeting, any official changes to the FX portion of the G7 communiqué could lead to a turn in the US dollar. Coordinated interventions are the most effective types of interventions in the currency market, which is why a cohesive message from G7 nations has such a powerful impact on currencies. Although we believe that the G7 will repeat their previous statement on currencies, all traders need to be wary of sharp volatility on Sunday if G7 nations change their language ( see how the EUR/USD and USD/JPY traded after past G7 meetings ).    

EUR/USD: GROWTH TO SLOW TO RECORD LOWS

Even though the Euro ended the day lower against the US dollar, it staged a dramatic intraday recovery as US stocks recuperated nearly all of its earlier losses.  Eurozone growth figures are due for release tomorrow and all signs point to a deeper recession. GDP growth is expected to fall for the third straight quarter by record 1.3 percent.  Growth in Germany is also expected to contract by 1.8 percent.  Consumer spending has been very weak and the trade surplus shrank significantly in the last 3 months of the year.  We learned today that the manufacturing sector is in big trouble and comments from ECB President Trichet indicate that he recognizes the weakness in growth.  According to Trichet the recession will last for a few more quarters.  The central bank head also said that he appreciates Geithner’s comments on the strong dollar.  Clearly, the ECB realizes the weakness of the Euro will help the region recover and therefore even if the currency continues to weaken, he will not be stepping in to halt the decline anytime soon.  

GBP/USD: INTEREST RATES HEADED TO 0.25%?

For the third day in a row, the British pound lost value against the US dollar and Euro.  There was no UK economic data released today but the ramifications of the dovish comments by Bank of England Governor King continued to weigh on the British pound.  Talk of Quantitative Easing has many economists predicting that UK interest rates will hit 0.25 percent.  Some are even calling for zero interest rates.  More aggressive monetary easing by the UK central bank could mean further weakness for the British pound against the dollar and the Euro.  It is even possible for the pound to reach parity with the Euro over the next few months.  However a weak currency is the “bitter pill” that the UK economy needs.  We continue to believe that the aggressive fiscal and monetary stimulus by the UK government will help them recover quickly when the dust settles.

NZD/USD: FALLS 1 PERCENT

The Canadian, Australian and New Zealand dollars experienced a decline against the U.S. Dollar then a drastic reversal as equities in the U.S. markets rallied in last half hour of trading. The prices of oil tumbled roughly 20% since the beginning of the week, while gold continued to appreciate past $950 an ounce as investors are seeking to put their value into precious metals.  New Zealand economic data was disappointing with retail sales and house sales falling more than expected.  Unlike Australia, New Zealand is in recession and will probably remain there for the next few months.  Last night, the Performance of Manufacturing Index which measures sentiment of the manufacturing sector declined for the ninth straight month as a lack of demand for exports impacted businesses nationwide.  Meanwhile even though the Australian unemployment rate rose more than expected to 4.8% reaching 31-month high, Australian employers added 1,200 jobs. The Australian Senate also rejected a proposed A$42 Billion or $27 Billion stimulus package aimed to prevent a looming recession and tightness of credit. The bill is set to be re-voted on as early as tomorrow, as Prime Minister Kevin Rudd reintroduced the legislation only five hours after its defeat in the Senate. No economic data is expected from the commodity producing countries over the next 24 hours.      

USD/JPY: JAPANESE CGPI FALLS FOR FIRST TIME SINCE 2003

After appreciating in the beginning of the day, the Yen reversed its gains as U.S. equities drove risk appetite back to the markets. Deteriorating conditions that have not seen a bottom as of yet within Japanese economy are continuing to plague the nation. Japanese Domestic Corporate Goods Price Index depreciated for the first time since late 2003, indicating that demand for goods coming from businesses is continuing to decline, driving prices lower. What is alarming about the data is a possibility of deflationary spiral, as CGPI predicts supply-side prices of CPI which could decline further. Moreover, the data indicates that the businesses are unwilling to spend as credit squeeze along with lack of demand is affecting operations. Due to shortcoming of credit in the market, BoJ is considering extending a policy of buying commercial paper from corporation for an additional 6 month. The initial policy was set to conclude on March 31, but a decline in earnings has eroded credit worthiness of many companies, as a result concerns started to amount of liquidity tightening further. What is more puzzling for Japan is a probability that the economy has shrank by more than 11% in the last quarter of 2008, for which figures are expected to be released on Monday. With a lack of economic indicators coming this week, all attention will be gripped by the GDP figures and upcoming BoJ Monetary Policy Meeting on Wednesday.

EUR/USD: Currency in Play for Next 24 Hours

The currency in play for the next 24 hours is EUR/USD based on the release of German GDP at 7:00GMT or 2:00AM EST, followed by Euro-zone GDP released at 10:00GMT or 5:00AM EST. After falling well into Sell Zone which we determine using Bollinger Bands, the EUR/USD reversed significantly and is currently trading in the Range Trading Zone. During the course of this year, the pair structured a triangle which is on the verge of being negated if the volatility remains high after the release of GDP figures. Current resistance is placed at 1.3000 which is a psychological level that coincides with the 20-day SMA and the top of triangle formation. Support is placed at the bottom of the triangle formation which is the low for the day at 1.2720.

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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.