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.

EUR: Decouples from stocks but not for long

Last updated 11/21/2011 5:40 PM ET (GMT -5) 0 Comments - Add your comment

• Share this:

Kathy Lien

Director of Currency Research, GFT

THE STORIES IN THE CURRENCY MARKET

• EUR: DECOUPLES FROM STOCKS BUT NOT FOR LONG
• USD: FOMC MINUTES, SUPERCOMMITTEE DEFEAT
• GBP: HIT BY WEAKER DATA AND RISK AVERSION
• CAD: RETAIL SALES ON TAP
• AUD: GOLD AND OIL DOWN
• NZD: FALLS TO 7 MONTH LOW
• JPY: REPORTS TRADE DEFICIT, TRADE WITH EU AT RECORD LOW

EXPECTATIONS FOR UPCOMING FED MEETINGS

EUR: DECOUPLES FROM STOCKS BUT NOT FOR LONG

@import url(/css/cuteeditor.css);

U.S. equities fell sharply today along with many high yielding currencies.  Even though the euro ended the day lower against the U.S. dollar, its relatively modest decline has baffled some investors especially considering that much of the market’s concerns still stem out of Europe.  More speculation continues to weigh on the markets with the latest being the possibility of Moody’s downgrading France.  The rating agency warned today that a sustained rise in borrowing costs could threaten the country’s AAA rating.  It wasn’t too long ago that the mistaken downgrade warning by Standard & Poor’s wrecked havoc on the markets.  This may only be a warning but it is an example of how rising bond yields are affecting the rating decisions of S&P, Moody’s and Fitch.  Realistically, Italy, Spain, Belgium or Austria would probably be downgraded before France but the risk of a French downgrade remains real.  A downgrade of France would cause far more carnage on the market than a downgrade of Spain or Italy even though it would all be extremely bad on the market. The resilience of the euro probably has more to do with short covering and position squaring ahead of an important holiday in the U.S.  Unfortunately we do not believe that the EUR/USD and U.S. equities will decouple for long because the nervousness of equity investors is caused by the uncertainty in Europe.  Some euro traders could be holding out hope that the ECB will be more active and if this proves true, it would be positive for risk appetite, which would lift the euro and equities.  If European officials allow conditions to worsen before they step in, both the euro and equities will suffer. If things continue to progress at its current pace with no stopgap measures from European officials, Italian and Spanish bond yields could take another aim at 7 percent. ECB member Stark's observation that the risks have increased over the past 2 weeks is spot on and everyone is in waiting to see what type of dramatic measure European officials can come up with to stabilize the region.  One of the few solutions is a greater role by the ECB but they may wait for a more a desperate time before stepping.  With no major Eurozone economic reports scheduled for release tomorrow, headline risk remains the greatest risk for the euro.   For the time being, we continue to believe that unless European officials suddenly agree to magnify the firepower of the European Financial Stability Facility three fold, the path of least resistance is lower for the euro.  

USD: FOMC MINUTES, SUPERCOMMITTEE DEFEAT

@import url(/css/cuteeditor.css);

The sell-off in U.S. stocks drove investors back into the arms of the U.S. dollar, which traded higher against all of the major currencies.  The strength of the greenback against other safe havens such as the Japanese Yen and Swiss Franc shows that despite the fiscal troubles in the U.S. and the supercommittee’s inability to reach an agreement on spending cuts, the dollar is still the world’s favorite currency.  Existing home sales was the only piece of U.S. data released this morning and according to the report, sales rose 1.4 percent in October thanks to price cuts by homeowners.  The second release of Q3 GDP is expected tomorrow but no major revisions are anticipated. Instead the more significant event risk will be the FOMC minutes. When the central bank last met, they left investors more confused than ever. The tone of the FOMC statement was slightly more upbeat but the comments from Bernanke and the central bank’s latest GDP forecast reflect continued concerns about the outlook for the U.S. economy. The Fed downgraded their growth and inflation forecasts significantly but passed on the opportunity to take additional steps to stimulate the economy. Although very few people expected the Fed to increase asset purchases going into the FOMC rate announcement, there was a general belief that they would at least lay the groundwork for easier monetary policy by signaling a change in their communications strategy. Yet not only did they fail to do so but their statement contained a slightly more optimistic outlook which is why the FOMC minutes are so important in shedding more light on where the central bank stands on future policy actions Meanwhile the U.S. Supercommittee officially announced that they failed to come up with a way to cut $1.2 trillion over the next decade. The Supercommittee’s defeat has driven investors back into the safety of the U.S. dollar and U.S. Treasuries. Although this may be counterintuitive to investors, because it reflects greater fiscal troubles in the U.S. and the possibility of a downgrade by more rating agencies, in times of uncertainty, cash is king and when it comes to cash, the U.S. dollar is the world's most liquid currency. The EUR/USD has fallen significantly but the AUD/USD, GBP/USD and NZD/USD have suffered the most because these tend be higher beta currencies. Unless there is a postponement, the lack of urgency and finger pointing means there could be automatic $1.2 trillion across-the-board spending cuts to domestic and defense programs starting January 2013. A year is a long time in the markets which could explain why the reaction to a possible supercommitee impasse is still muted. However there are immediate consequences that can pose significant risks to the U.S. economy. A failure to reach an agreement on spending cuts means that the payroll tax cut and unemployment benefits for millions of people still out of work could expire at the end of this year. If jobless benefits are cut after the holidays, it could have a devastating impact on the economy that causes spending in the U.S. to grind to a complete halt. The payroll tax cut and the expanded unemployment benefits are expected to add 1 to 2 percentage points to GDP next year which means if these programs are not extended, the U.S. could fall back into recession, particularly if Europe's troubles worsen.

GBP: HIT BY WEAKER DATA AND RISK AVERSION

@import url(/css/cuteeditor.css);

The British pound fell sharply against the U.S. dollar and euro in anticipation of some major disappointments this week.  Last night, Rightmove reported a 3.1 percent decline in house prices for the month of November.  According to the U.K.’s largest property website, home prices were slashed by the largest amount since November 2010 as growing uncertainty deters home buyers from purchasing property, forcing sellers to reduce asking prices.  The number of properties being listed also declined and even in London, where the housing market has been the most resilient, prices fell by 1.2 percent. To support the property market, U.K. Chancellor Cameron announced new plans that would allow first time borrowers to borrow up to 95 percent of the value of a new home. This is good news for the market but bad news for U.K. finances because it will require greater outlay by the government.  Public sector finances and borrowing numbers are scheduled for release tomorrow and the amount of borrowing last month is expected to be much smaller than in September. The fall in borrowing reflects the implementation of the government’s austerity measures that will gradually help to reduce the deficit.  Although the U.K. government is doing a much better of job of moving forward with their budget deficit reduction programs than other European countries, recent government forecasts suggest that they could be behind schedule. The official forecasts will be released on November 29 along with the Chancellor’s autumn statement.

CAD: RETAIL SALES ON TAP

@import url(/css/cuteeditor.css);

Risk aversion drove all three commodity currencies sharply lower against the U.S. dollar.  Based on the price action in the markets today, it is clear that investors are nervous and in times of uncertainty, high yielding commodity currencies tend to suffer the most.  This explains why the Australian dollar is the day’s biggest loser despite the lack of Australian economic data.  Commodity prices also declined, adding pressure on the comm. dollars – gold prices fell nearly 3 percent while oil prices decline approximately 1.5 percent.  Export dependent countries with small economies such as Australia, New Zealand and Canada are particularly sensitive to the ebbs and tides of the market.  Economic data from New Zealand and Canada failed to help the NZD and CAD.  Credit card spending in New Zealand doubled in October which is encouraging but probably not enough to stop the Reserve Bank from toning down its calls to tighten monetary policy next month. Canada also reported a smaller increase in wholesale sales which rose 0.3 percent in August and September.  Retail sales are scheduled for release tomorrow and based upon the wholesale sales report, spending on the consumer level is expected to have held steady and possibly weakened in September.  The sell-off in all of the commodity currencies has taken the pairs to technically significant levels.  Further losses would be contingent upon further liquidation of equities and risky assets in general.  

JPY: REPORTS TRADE DEFICIT, TRADE WITH EU AT RECORD LOW

@import url(/css/cuteeditor.css);

With stocks falling sharply during the North American trading session, it is no surprise to see the Japanese Yen strengthening against all of the major currencies.  What was interesting however is that the yen held steady against the U.S. dollar and Swiss Franc which indicates that investors are buying any and all safe haven currencies equally.  Last night’s Japanese economic reports were mostly disappointing as was the tone of the BoJ minutes.  Although economists had expected Japan’s trade surplus to shrink, they did not think that it would turn into a deficit but with global growth slowing and imports and exports from Thailand affected by the floods, the odds certainly favored weaker over stronger trade activity.   Last month, Japan posted a deficit of Y273.8B on weaker exports to the U.S., Europe and China.  Trade with the European Union actually fell to its lowest level ever.  Unfortunately with Thailand still struggling to recover from floods that hit Japanese owned factories hard, the balance of trade could remain in deficit for a few more months.  At the same time, higher commodity prices do not help the outlook for imports, which surged 17.9 percent last month.  Convenience store sales on the other hand rebounded strongly which is encouraging but the BoJ’s pessimism suggests that more stimulus is likely.  The central bank increased stimulus by 5 trillion yen last month, but one member of the central bank called for a larger Y10 trillion increase.  Many members of the central bank felt that the improvement in business sentiment was waning given the slowdown in global growth and the strength of the Yen. The Cabinet’s monthly economic report will be released later this week and we expect their outlook to be downgraded in a similar manner as the Bank of Japan who cut their monthly economic assessment for the first time last week since April.   

USD/CAD: Currency in Play for Next 24 Hours

@import url(/css/cuteeditor.css);

Our currency pair in play for the next 24 hours is USD/CAD.   Canadian retail sales are scheduled for release at 8:30 AM ET / 13:30 and this will be followed by the second release of Q3 GDP from the U.S. at the same time.   Later in the afternoon, the FOMC minutes will be released at 2:00 PM ET / 19:00 GT.

The recent rally in USD/CAD has renewed the currency pair’s uptrend. The latest push higher has the pair testing 1.04, which is a former support turned resistance level.  As long as the curency pair holds above 1.0285, the first standard deviation Bollinger Band, the outlook favors a move back towards 1.05.   Should USD/CAD fail to hold that level however, there is support at 1.0150, where we have the 20 and 50-day SMA.

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.