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FX: Early Gains Fading Quickly

Last updated 11/22/2011 9:14 AM ET (GMT -5) 0 Comments - Add your comment

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Kathy Lien

Director of Currency Research, GFT

The rebound in the European trading session faded quickly with the euro and other currencies giving up most if not all of their earlier gains.  Dow futures turned negative on the heels of a sharp downward revision to third quarter GDP, which reinforced concerns about the strength of the global recovery. After Monday's sharp sell-off, a rebound in risk is not unusual but throughout the European session, the recovery looked vulnerable at best. Any enthusiasm from reports that Greece could possibly receive its next aid payment by the end of the month was overshadowed by the hard evidence that investors are demanding more return for bearing the risk of owning European bonds. This morning's Spanish bond auction was met with decent demand but the average yield of 5.11 percent was more than double the yield paid at a similar auction last month. With ten year Spanish, French and Italian bond yields up across the board this morning, it will be difficult for the EUR/USD to rally.

According to the latest GDP numbers, the U.S. economy grew by only 2.0 percent in the third quarter versus a prior forecast of 2.5 percent. The downward revision to growth was caused primarily by lower inventories which is not necessarily bad news for the U.S. economy. With the holidays coming in the fourth quarter, inventory buildup could contribute positively to Q4 GDP growth. However whether the inventory is snapped up will depend on the extent that consumers are willing to spend in a high unemployment, stagnant wage growth environment. Personal spending was revised down slightly from 2.4 to 2.3 percent. This afternoon's FOMC minutes will most likely paint a grim outlook for the U.S. economy, reinforcing everyone's concerns that growth could remain slow in the fourth quarter. Retail sales rose by only 0.5 percent in October and unless spending picks up significantly in November and December, consumer spending could end up subtracting from growth. 

Meanwhile up North, retail sales growth in Canada rose 1.0 percent in September, which was double the market's expectations. Excluding autos, spending rose a more tepid 0.5 percent. Although both numbers were better than expected, the impact on the Canadian dollar was nominal. For the Bank of Canada, stronger retail sales reduces the chance of a rate cut which could limit the losses in the Canadian dollar if risk continues to sell off.

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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.