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.

USD: Time to Shift Focus to US Data

Last updated 11/14/2011 5:01 PM ET (GMT -5) 0 Comments - Add your comment

• Share this:

Kathy Lien

Director of Currency Research, GFT

THE STORIES IN THE CURRENCY MARKET

• USD: TIME TO SHIFT FOCUS TO US DATA
• EUR: HEIGHTENED UNCERTAINTY REMAINS
• GBP: INFLATIONARY PRESSURES EXPECTED TO EASE
• AUD: WILL THE RBA MINUTES POINT TO MORE EASING?
• CAD: MANUFACUTRING SALES DUE FOR RELEASE
• NZD: SERVICE SECTOR ACTIVITY SLOWS
• JPY: STRONGER GDP GROWTH OVERSHADOWED BY RECENT WEAKNESS

EXPECTATIONS FOR UPCOMING FED MEETINGS

USD: TIME TO SHIFT FOCUS TO US DATA

For the past few weeks the market has been obsessed with Europe and today it appears that little has changed. With no U.S. economic data on the calendar, the dollar appreciated against every major currency outside of the Japanese Yen. The strength of the greenback and the yen indicate that risk aversion and the desire for safety remains the market’s number one priority. As we mentioned last week, safe haven currencies are back in vogue because in this volatile market environment, cash is king and when it comes to cash, nothing is as liquid as the U.S. dollar. Although there hasn’t been much improvement or deterioration in the U.S. economy, the market’s relentless attack on European bonds poses a major risk to the U.S. Even though American banks do not hold significant amounts of Italian debt, they have written insurance against credit losses to holders of Greek and Italian bonds which puts them at risk of a major payment if either country defaults. This may be a long drawn out drama will no quick resolution in sight but there are immediate consequences from Europe’s troubles that are far more evident. The recent volatility in the U.S. stock market has been caused entirely by Europe’s troubles and if the problems escalate, investor and corporate wealth could evaporate. At the same time, the dollar has been driven higher on safe haven demand and if the greenback continues to rise, commodity prices and export demand could be affected.  For the Federal Reserve and many other central banks, Europe’s troubles are one of the main reasons why easier monetary policy is being considered. Fed officials are actively talking about changing monetary policy but increasing asset purchases is too aggressive. Instead, they would prefer to increase transparency and reset market expectations by tying interest rates to the inflation and/or unemployment rate. How quickly they choose to do so will depend largely on this week’s economic reports.

On Tuesday, producer prices, retail sales and the Empire State manufacturing survey are scheduled for release. In September, inflation and consumer spending increased significantly but this month, the strength is not expected to be repeated. The 0.6 percent decline in import prices last month caused by lower food and fuel costs points to weaker producer prices while a similar drop in consumer spending according to the Johnson Redbook Survey signals weaker retail sales growth in October. The International Council of Shopping Centers found sales increasing marginally for some retailers but the change was nominal as unseasonably warm weather in the beginning of month curbed demand for cold-weather apparel while a snowstorm in the Northeast and Mid-Atlantic states at the end of the month negatively impacted travel. MasterCard Advisors Spending Pulse also found that sales grew at a slower pace in October compared to the previous month.  If retail sales and producer prices surprise to the downside, the chance of a policy change in early December increases significantly.

EUR: HEIGHTENED UNCERTAINTY REMAINS

When the markets opened for trading Sunday afternoon, news of Berlusconi's resignation sent the euro above 1.38. Unfortunately the rally did not last with the EUR/USD ending the day near its lows. The leadership change in Italy was the best news that we have heard from the boot-shaped nation in weeks because it brings in a technocratic government that will hopefully implement real changes to the debt stricken nation. Yet the good news failed to have a lasting impact on the euro because as of this second, there is still more risk than relief for the Eurozone economy. The primary job of the technocratic governments in Italy and Greece are to implement austerity packages that will reduce debt at the expense of growth. The prospect of tougher times in the coming months means that we could be entering a phase of even slower growth in the Eurozone economy that is bordering on recession. There are 4 reasons why the euro has given up its early gains and each one of them relate back to concerns about Eurozone or Italian growth.  Tomorrow’s German ZEW survey and third quarter GDP numbers will show just how concerned investors are about the outlook for the EZ economy and unfortunately investor sentiment is expected to deteriorate significantly. 

1) Weak Italian Bond Auction

This morning's Italian bond auction was the first test of investor confidence since the appointment of Mario Monti as Italy's new Prime Minister. Although Italy managed to sell all their bonds, the 1.5 bid to cover ratio was extremely weak. The bonds were also sold at a yield of 6.29 percent, nearly a full percentage point higher than the rate paid at a similar auction last month and also the highest in 14 years. Ten year Italian bond yields are crawling back towards 7 percent and as we mentioned last week, the correlation between the EUR/USD and 10 year Italian bond yields have been exceptionally high. With Spanish, Greek and Portuguese bills being auctioned throughout the week, the market's appetite for European bonds will remain in focus.

2) European Road Show in Asia Fails to Attract Much Demand

Representatives of the European Financial Stability Facility (EFSF) have been touring across Asia in an attempt to attract China and Japan's sovereign wealth funds to buy its bonds. Unfortunately it appears that Europe has done a poor job of alleviating the concerns of Asian investors who refused to snatch up all of the EFSF bonds sold last week. According to The Sunday Telegraph, the EFSF was only able to find about EUR2.7 billion of outside demand for their debt and had to spend more than EUR100 billion to buy its own bonds. Investor confidence has been a major issue in the Eurozone and even with the backing of Germany, the AAA rated EFSF has faced major challenges in attracting foreign demand which has caused Moody's to raise concerns about the EFSF's ability to fund itself in the market and to stabilize debt prices.

3) Weidmann Says Don't Expect Support from the ECB

Comments from ECB member Weidmann also discouraged investors from buying euros. In a speech earlier this morning, Weidmann said using monetary policy for fiscal needs must stop and he rejected the idea of the ECB becoming the lender of last resort for governments. This view is shared by many other members of the monetary policy committee including former ECB President Trichet but if the debt crisis continues to escalate, the central bank may have no choice but to overstep their mandate.

4) A Future of Weaker Growth

The final reason why the euro gave up its gains so easily is probably the most important. We are moving into a period of aggressive austerity in many parts of the world including the Eurozone, U.S., U.K. and Japan. The deadline for implementing budget cuts in the U.S. is rapidly approaching and unfortunately it comes at a time when global growth is extremely fragile. In Europe, the sovereign debt crisis and budget cuts are expected to slash growth next year to 0.5 percent according to the European Commission. This means that for most of Europe, next year will be a period of stagnation bordering on recession. To prop up growth, central banks could ease monetary policy further and for the ECB this means more rate cuts. The central bank's decision to lower interest rates earlier this month could be followed by another rate reduction in December as incoming economic reports show further weakness.

GBP: INFLATIONARY PRESSURES EXPECTED TO EASE

Over the next few days, a tremendous amount of U.K. economic data will be released and in anticipation of that, the British pound is trading near its 3 week low against the U.S. dollar. This week’s economic reports are expected to show more weakness than strength in the U.K. economy. Last month, the Bank of England surprised the market by increasing its asset purchase program prematurely. The central bank’s decision was made all that more difficult by inflation which has been running at or above 4 percent since the beginning of the year. In fact, in the month of September, consumer price growth matched its record high of 5.2 percent. For the past 2 years, the Bank of England has failed to stick to their mandate of keeping inflation near 2 percent and prices have been pushed even higher by the central bank’s ultra easy monetary policy. The only explanation and justification that the Monetary Policy Committee has had for charging forward with further easing is that they firmly believe inflation will come crashing down in 2012 and 2013 as temporary factors such as a higher VAT tax start to fade and the slack in the labor market puts downward pressure on wage growth. This is the argument that they have stuck with for the past year and throughout this period, inflation has only moved in one direction and that is up. However with commodity prices falling in September into October, price pressures are finally expected to ease. The credibility of the BoE would go out the window if CPI continued to rise and they increased stimulus. There are many reasons to believe that inflationary pressures have declined and this includes the drop in producer prices as well as shop prices according to the British Retail Consortium. If CPI declines like we expect, the British pound could extend its losses. A surprise to the upside would be unexpected and could lead to a strong wave of short covering in sterling.

AUD: WILL THE RBA MINUTES POINT TO MORE EASING?

The global sell-off in risk drove the Canadian, Australian and New Zealand dollars lower against the greenback. New Zealand was the only country that released economic data overnight and the latest reports showed a pickup in consumer spending in the third quarter but a slowdown in service sector activity in October. Like many other countries around the world that were lucky enough to experience a recovery in the third quarter, they were not immune to tensions in the financial markets and the contraction in global demand. As a result, service sector activity barely expanded in October with the services PMI index dipping to 50.6 from 52.9. This pullback overshadowed the 2.2 percent growth in retail sales in the third quarter, which is not likely to have been repeated in more recent months. The big event risk this evening is the release of the minutes from the November RBA meeting. The Reserve Bank of Australia cut interest rates for the first time this year and investors will be combing through the minutes for clues on whether the rate cut is a one off move or the beginning of a series of easing measures. Economic data has not been horrid but the RBA felt that recent information was “consistent with a moderation in the pace of global growth” and with consumer price growth slowing in the third quarter, the RBA felt that there was room for an insurance cut. If the RBA minutes contain a more cautious tone that would lead investors to believe more easing is on the way, the Australian dollar could revisit its one month lows below 1.01. Manufacturing sales are also scheduled for release from Canada but no major changes are expected which means the CAD and NZD’s fate will continue to be tied to the market’s overall risk appetite. 

JPY: STRONGER GDP GROWTH OVERSHADOWED BY RECENT WEAKNESS

For the fifth time in the past six trading days, the U.S. dollar lost value against the Japanese Yen with the currency pair now trading back at its pre-intervention levels. According to last night’s economic reports, Japan’s economy grew 1.5 percent in the third quarter, which was a sharp rebound from the 0.3 percent contraction in Q2. The improvement in the third quarter is a direct reflection of the country’s recovery from the March earthquake and tsunami. On an annualized basis, GDP surged to 6.0 percent from -1.3 percent the previous quarter. The largest increases were in personal consumption, residential investment and exports. Although the rally in the Yen can be partially attributed to the stronger GDP report, more recent economic indicators show growth slowing significantly towards end of the third quarter, beginning of the fourth quarter. Industrial production is a good example – after the latest revisions, industrial production contracted 3.3 percent in the month of September after expanding for 5 consecutive months. The floods in Thailand have also hit the economy hard because Japanese companies are the country’s biggest investors. Pioneer Corp, Honda Motor Co. and Toyota Motor Corporation are among the companies who have slashed their profit forecasts after the floods forced their factory closures.  Decreased activity comes at the worse time possible for Japan who suffering from a strong currency, weaker global growth and unpredictable environment shocks. With the recent appreciation in the Yen, the pressure on the Bank of Japan to intervene again has increased significantly and if the Yen continues to rise, the central bank may have no choice but to step in to curb the strength in the currency. 76 is the level to watch in USD/JPY – the closer the currency pair gets to that level, the higher the risk of intervention.

GBP/USD: Currency in Play for Next 24 Hours

The GBP/USD will be our currency pair in play for the next 24 hours. U.K. CPI numbers will be released at 4:30 AM ET / 9:30 GMT followed by U.S. Producer prices, retail sales and Empire Manufacturing survey at 8:30 AM ET / 13:30 GMT.

The GBP/USD is currently in the range trading zone according to our Double Bollinger Bands but the fact that it is trading at its 3 week low indicates that investors are more interested in selling than buying the currency. Support is at 1.5785, which is the 38.2% Fibonacci retracement of the August to October sell-off as well as the 50-day SMA. If this level is broken, the next area of support would not be until 1.56. Should the GBP/USD resume its rise, 1.5950 will be resistance because this is where the 10 and 20-day SMA converge with the 50% Fibonacci retracement of the same move.

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.

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.