G7 Meeting Outcome and Senate Vote

Last updated 2/13/2009 4:33 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

• US DOLLAR: G7 MEETING OUTCOME AND SENATE VOTE
• GBP/USD: ECONOMIC DATA VS. INTEREST RATES
• EUR/USD: GDP FALLS AT RECORD RATE
• AUD/USD: PASSES STIMULUS PACKAGE
• NZD/USD: RISES DESPITE WEAKER RETAIL SALES
• AUD/USD: PASSES STIMULUS PACKAGE
• USD/JPY: WATCH OUT FOR GDP

EXPECTATIONS FOR UPCOMING FED MEETINGS

US DOLLAR: G7 MEETING OUTCOME AND SENATE VOTE

Currency traders reduced their long positions in the US dollar and Japanese Yen ahead of the Senate vote on the Economic Stimulus Package and the G7 meeting.  Holding forex positions over the weekend always exposes traders to gap risk and with the outcomes to 2 major events expected before the market reopens on Sunday the risk is even greater.  Although the US equity and bond markets are closed on Monday for Presidents Day, we could still see an active trading session depending on how the market reacts to the G7 statement and the passage of the Economic Stimulus bill.  

Outcome of G7 Meeting

The odds for the Congress Vote and G7 meeting are skewed towards a resumption of risk appetite, which is why traders have taken the dollar and yen lower.  The House has already passed Obama’s Economic Stimulus Plan and the Senate is expected to do so as well this afternoon.  The bill should be ready for President Obama to sign by Presidents Day.  Once the official announcement is made, we could see a jump in all of the major currency pairs including the EUR/USD and USD/JPY.  As for the G7 meeting, the Group of Seven released the draft of their communiqué. The Finance Ministers and Central Bankers warned that they are monitoring currencies closely and excess volatility and disorderly movements in currencies must be avoided.  They did not single out the Japanese Yen but did say that China’s stimulus should lead to further Yuan gains. The G7 also pledged to restore confidence in the financial system and to avoid protectionism.  Although the draft has been released and there is nothing new, Treasury Secretary Geithner and the other attendees of the G7 meeting in Rome will be conducting press conferences.  Any additional comments on currencies could impact trading.  

Economic Data for the Coming Week

The outcome of the Congress Vote and the G7 meeting could set the tone for trading in the coming week, but there are also a number of Tier 2 event risks worth watching.  This includes the release of the minutes from the most recent FOMC meeting, the Empire State and Philadelphia Fed manufacturing surveys, the Treasury International Capital flow report, producer and consumer prices, leading indicators and industrial production.  The reason why we call these Tier 2 economic releases is because they are not game changers.  In the past, the minutes for some FOMC meetings have been worth watching, but with the central bank leaving interest rates unchanged at 0.25 percent at the last meeting, the lively debate about deflation and credit easing may not lead to lively price action in the US dollar.  As for the other pieces of data, the foreign exchange market has already discounted weakness in the US economy.  We will be watching Federal Reserve Chairman Ben Bernanke’s speech on Wednesday to see if he touches on the possibility of purchasing long term Treasuries.  

Weaker Consumer Confidence Suggests Softer Spending

This morning, currency traders completely shrugged off the weaker consumer confidence report.  The University of Michigan Consumer Confidence report fell from 61.2 to 56.2, the sharpest decline since the September Lehman Brothers bankruptcy. Massive job losses have turned Americans more pessimistic in the month of February. The economic outlook component of the report also fell to the lowest level in more than 10 years.  This is yet another reason why we believe that yesterday's rebound in retail sales is nothing more than a temporary blip within an overall downtrend.  Americans will be more frugal going forward as job security remains a big concern.  Until consumer confidence recovers, consumer spending will remain weak.

GBP/USD: ECONOMIC DATA VS. INTEREST RATES

Although the British pound ended the US trading session slightly higher against the US dollar, it was not before a significant amount of intraday volatility.  At the open of the European trading session, there was a lot of speculation surrounding the possibility of UK Chancellor Darling receiving a lot of heat about the weakness of the British pound at the G7 meeting.  Next to the US dollar and the Japanese Yen, over the past few months the British pound has seen one of the sharpest moves.  However the rally ended after Chancellor Darling and Prime Minister Gordon Brown threw cold water on the rumors.  Darling said that the sterling will not be discussed specifically at the G7 meeting while Brown warned that the UK government will not change its policy on exchange rates because speculators want them to.  He credits the weakness of the currency for making the country more competitive.  The turn in the British pound was further fueled by news that HBOS lost GBP8.5 billion.  HBOS is owned by Lloyds TSB, which the UK government has a 43 percent stake in.  Therefore losses for HBOS indirectly mean losses for taxpayers.  The dovish comments from the Bank of England this week should be echoed in the minutes from the latest monetary policy meeting, due out on Wednesday.  Consumer prices and retail sales are also on the calendar and even though we believe both figures could surprise to the upside, the prospect of lower interest rates in UK should limit any recovery in the British pound.

EUR/USD: GDP FALLS AT RECORD RATE

The desperation of European fundamentals is hitting an impasse today. Things are undeniably worsening at an accelerated rate that will most likely have to be addressed by brute force. Gross Domestic Product for the Euro-zone as a whole tumbled in the fourth quarter to a nearly 15 year low of -1.5%. The number, which was shockingly worse than the third quarter’s -0.2% and was followed by similar disappointments in Germany and France. Unsurprisingly, the declines in growth were widespread across the region, with Spain and Italy facing a similar fate. Only to compound on the series of worsening events is that France reported Non-Farm Payrolls at -0.6%, also a fifteen year low. The question now is whether or not the ECB will surrender to the stranglehold of depressed growth. At this point it seems inevitable that the bank will submit, even though Trichet has expressed no concerns over the inherent instability of inflation. It is most likely that the ECB will attack the problem by regenerating a series of small rate cuts. The most significant reports for the Eurozone next week are the PMI reports and the German ZEW survey.

AUD/USD: PASSES STIMULUS PACKAGE

The Canadian, Australian and New Zealand dollars appreciated across the board against the U.S. Dollar as risk appetite improves and the price of oil rises 10 percent.  The New Zealand Dollar shrugged off a weaker than expected Retail Sales figure which fell for 4h consecutive quarter, while home sales declined to the lowest levels since 1989. The sales figures indicated that the reduction of interest rates combined with tax cuts have not proved to be effective as the consumer continues to cut back in the midst of struggling economy. Reserve Bank Governor Allan Bollard has reduced interest rates by 475 basis points since last summer, but with the recession deepening it is expected that the rates will be reduced by additional 75 basis points on March 12 to 2.75%. Meanwhile, Australian officials have passed an additional A$42 billion or $28 billion stimulus package to stimulate the economy after the same bill was defeated in the upper Senate yesterday. The intention of the stimulus would be to support the economy from entering into first recession in 18 years by allocating resources toward low-income families and infrastructure. The stimulus package comes with a cost, which is a first budget deficit in over 7 years, nevertheless, government officials state that it is key to preventing the economy from contracting in the upcoming year.  New auto sales in Canada continued to decline indicating that demand for big item sales still remains weak. Early next week, Canada is set to release its figures for International Securities Transactions which should elaborate on the exports that the Canadian economy heavily depends upon. On Monday, New Zealand is set to release Producer Prices which are expected to contract as demand curbs. RBA will release its minutes on Tuesday which should elaborate on the future of interest rates in Australia.      

USD/JPY: WATCH OUT FOR GDP

The Japanese Yen fell against all of the major currencies. Today’s moves are mostly on the back of the return of risk tolerance and economic weakness in Japan.  On Sunday, fourth quarter GDP is due for release and the annualized pace of growth is expected to fall by a mind boggling 11.6 percent.  Such severe weakness in growth will most certainly warrant attention from the Bank of Japan who has a monetary policy announcement on Wednesday.  This could be just the opportunity to discuss the potential policies that would assist in weakening their currency. We would not be surprised to hear some quantitative easing related announcements from the central bank. Even though USD/JPY is still all off its lows, it has not appreciated enough to relieve the worries of the Japanese economy. Of course, as far as rate cuts are concerned, nothing is expected as bringing them down to zero would just be a ceremonious move without any truly material effect.

USD/JPY: Currency in Play for Next 24 Hours

The currency in play on Monday is USD/JPY based on the release of Japanese GDP on Sunday at 23:50GMT or 6:50PM EST.

After hitting a 13 year low last month, the pair is now trading within the Buy Zone, which we determine using the Bollinger Bands. Throughout the past couple of months a down sloping line proved to be an effective as resistance, forming a triangle formation. The pair is on the verge of negating the triangle formation and a break to the upside would open up the door to further gains. The next level that might pose as resistance is 92.85 which is a 23.6% Fibonacci retracement of this year’s high and low. If the triangle formation proves to a heavy resistance once again, the pair might experience depreciation to the next psychological support level. Current support is placed at 90.00 which is a 61.8% retracement of this year’s low and high along with it being 20-day SMA.  

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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.