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FX: Better U.S. Data Takes Backseat to European Headline Risk

Last updated 11/10/2011 9:04 AM ET (GMT -5) 0 Comments - Add your comment

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Kathy Lien

Director of Currency Research, GFT

Better than expected U.S. economic data prevented the dollar from weakening further against the Japanese Yen.   Jobless claims rose 390k while the trade balance narrowed to trade balance -$43.1 billlion.   As long as jobless claims are less than 400k, the labor market is moving in the right direction and returning to its pre-crisis levels.   Unfortunately claims have had a weak correlation with payrolls and for this reason, the Federal Reserve will take the improvement in jobless claims with a grain of salt because fewer firings has not equated to more hiring.   The smaller deficit on the other hand was a breath of fresh air because the rise from -$46.0 billion to -$43.1 billion was caused by a surge in exports, which reached record levels.   Based upon these economic reports, the pressure on the Fed to ease has declined but the crisis in Europe poses a far greater risk on the U.S. economy and for this reason, the central bank is still ready to ease and not tighten monetary policy.   Import prices also fell 0.6 percent, giving the central bank a bit more flexibility to increase stimulus, if needed.  

With USDJPY breaking its 5 day low, traders should be on watch for BoJ intervention. The Japanese government has committed to doing all that it will take to stop the Yen from strengthening and for the past week, they have been successful.  However, the jitteriness in the market has driven investors back into the arms of the low yielding Yen, which has traded higher against all of the major currencies.  Fighting Yen strength has always been an uphill battle for the Japanese government but this time their firepower is a lot higher with their intervention war chest is at its largest level ever. 

Meanwhile in Europe the main question is how quickly will we see additional action from European policymakers.   Even though the EUR/USD has rallied, doing nothing is not an option right now.   The mild rebound in the euro is fueled partially by the premise that European officials are working frantically on a more aggressive response to the crisis.   Aside from that, investors were also encouraged by the Italian bond action where Italy succeeded in attracting enough demand to cover its entire EUR5 billion auction, although at a yield nearly double last month's amount.   The auction sold for an average yield of 6.087 percent, compared to a yield of 3.57 percent on the same maturity in October.   There are a few options that being floated in the market this morning including more money for the IMF, an inter-meeting rate cut from the ECB and printing money.   Firing up the printing presses however is forbidden by the European Treaty, limiting the central bank’s options.   With talk of noontime announcement from the ECB, we will be keeping an eye on the headlines.

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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.