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EUR: IMF To The Rescue?

Last updated 11/22/2011 4:15 PM ET (GMT -5) 2 Comments

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Kathy Lien

Director of Currency Research, GFT

THE STORIES IN THE CURRENCY MARKET

• EUR: IMF TO THE RESCUE?
• USD: FED OPEN TO MORE EASING
• GBP: WEAK AHEAD OF BOE MINUTES
• CAD: STRONGER RETAIL SALES
• AUD: OIL AND GOLD PRICES REBOUND
• NZD: HOLDS STEADY AT 7 MONTH LOW
• JPY: SAFE HAVEN DEMAND EASES

EXPECTATIONS FOR UPCOMING FED MEETINGS

EUR: IMF TO THE RESCUE?

The International Monetary Fund has come to the Eurozone’s rescue but is their attempt to provide additional liquidity to cash strapped nations enough?  The big question for EUR/USD traders today is whether the IMF’s support is a bazooka or band-aid.  Midday, the Washington Based fund agency introduced a 6 month credit line called the Precautionary and Liquidity Line that would allow economically strong countries with short term liquidity needs up to borrow up to 5 times their contribution to the IMF.  This line replaces the existing precautionary credit line and effectively expands its use to liquidity shortages.  Even though the goal is to “break the chain of contagion” according to the IMF, the price action in the currency and equity markets indicates that investors are skeptical about its effectiveness and believe the IMF is still using a bb gun when they should be bringing out the big bazookas.  The IMF currently has $400bn in lending capability and with a cap of 5 times contribution Italy would only receive a loan of $60 billion, a number too small to meet their more than $350B in refinancing needs over the 6 months.  This new instrument is too small and too limited to help countries like Italy and Spain but some help is better than no help at all which is why the euro has held onto its gains and why European bond yields will probably decline on Wednesday.  The new facility will provide much better support for smaller countries such as Hungary and Portugal.  According to Portugal’s former Treasury Secretary who was instrumental in the negotiations for the country’s EUR78 billion bailout another EUR20-25B in rescue funds could be needed to support companies shut out of the bond market.  For the time being, the IMF is still seen as a supporting cast member of the European bailout with the EU pledging more significant support and everyone looking for the ECB to step in as the lender of last resort. No major Eurozone economic reports were released this morning but a small consumer confidence report showed sentiment deteriorating in November.  The prospect of greater austerity does not sit well with anyone in Europe and we expect this sentiment to also be reflected in tomorrow’s manufacturing and service sector PMI reports.  The latest activity indicators from Europe are expected to show a further slowdown in economic activity and a step closer to recessionary conditions.  Perhaps Eurozone officials should really take a page out of the Swiss National Bank’s books. After establishing a floor under EUR/CHF, the Swiss National Bank has stabilized their currency and their economy.   Trade activity rebounded in October with the trade surplus rising to 2.15B from 1.91B thanks to higher imports and exports.

USD: FED OPEN TO MORE EASING

After trading sharply higher against all of the major currencies on Monday, the dollar gave back a small part of its gains against the euro and commodity currencies.  The FOMC minutes were released this afternoon and the main take away from the report is that some members of the FOMC supported more accommodation while others backed linking their interest rate pledge to the inflation and/or unemployment rate.  Some also felt that it would be more useful to specify a period of time rather than a calendar date for the length of time that rates will remain at exceptionally low levels.  Even though committee members believe that the economy will continue to improve in 2012 and 2013 with the help of accommodative monetary policy, the tone of the minutes make it clear that the Federal Reserve is ready to take additional steps – either in the form of communication or policy changes to get investors to realize that they will continue to provide support to the U.S. economy.  We know that the Federal Reserve is in easing mode and there is very good reason to believe that asset purchases will not be increased in December but there is not enough agreement within the central bank for us to say definitively that interest rates will be tied to economic data next month.  A hearty debate will take place with FOMC voters such as Kocherlakota voicing concern about the danger of targeting unemployment which could take the central bank’s focus off inflation and in turn allow inflation expectations to rise.  Meanwhile 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.  Durable goods, personal income, personal spending and jobless claims are scheduled for release tomorrow.  Weak average hourly earnings and retail sales point to the possibility of softer U.S. economic data.

GBP: WEAK AHEAD OF BOE MINUTES

The British pound weakened against both the U.S. dollar and the euro.  Britain’s budget deficit narrowed in October as Chancellor of the Exchequer George Osborne slashed spending at government departments.  Public net borrowing fell to 6.5 billion pounds ($10.2 billion) from 7.7 billion pounds a year earlier; the shortfall was in line with expectations.   Outlays at government departments dropped 3.1 percent, limiting overall spending growth to 1.1 percent.  Osborne and Prime Minister David Cameron have made all but eliminating a budget deficit of 9 percent of economic output by 2015 the centerpiece of their economic strategy, rebuffing opposition criticism that the cuts are hampering growth.  Only Greece, Ireland, Portugal and Iceland face a tighter fiscal squeeze among advanced economies.  Sterling is also under pressure ahead of the Bank of England’s minutes from the monetary policy meeting held on November 10 ^th .  Many investors believe that the minutes tomorrow will show policy makers leaning toward further monetary stimulus as the economy slows.  The 10-year yield declined to within four basis points of a record low as Bank of England policy maker David Miles said the U.K.’s recovery has faltered and growth is now “close to zero.”  In a speech he delivered in New York today, he noted that the housing market remains depressed and it undergoing an “extraordinary period of adjustment.”  Real disposable income of the majority has fallen significantly and uncertainty about future income has risen sharply.  The soaring earnings of top bankers including the chief executive officer of Barclays Plc are having a “corrosive” effect on the U.K. economy, the High Pay Commission said.  Politicians have said that when pay for senior executives is set behind closed doors, does not reflect company success and it fueling massive inequality it represents a deep malaise at the very top of Britain’s society.  Former Barclays CEO John Varley was awarded 4.4 million pounds ($7 million) for 2010, 169 times that of the average worker in the U.K.

CAD: STRONGER RETAIL SALES

The Canadian dollar strengthened against the U.S. dollar while the Australian and New Zealand dollars held steady.  Canadian retail sales rose 1.0 percent which was more than expected in September, reflecting growth at most store types.   This marks the fifth increase in six months and was the largest advance since November 2010.  Gains were reported in 9 of 11 subsectors, representing 90 percent of retail sales.  Oil abundance in Canada provokes anxiety as Alberta, Canada is among the planet’s most coveted – and contested – petroleum hot spots.  The 74 square mile oil sands are laden with 143 million barrels of crude – only Saudi Arabia, with 264 million barrels, and Venezuela, with 211 million, enjoy greater proven reserves.  Canada’s reserves were valued at $14 trillion in mid-November.  New Zealanders expect inflation of 2.8 percent in the third quarter going forward.  Expectations are less than what they were last quarter due to fear of contagion from Europe’s sovereign debt woes.  New Zealand’s dollar also dropped as U.S. lawmakers announced they failed to reach an agreement on budget cuts, discouraging demand for higher-yielding assets.   No new economic data was released from Australia today.  Australia’s lower house of parliament passed a mining tax bill after independent lawmakers lent their support to Prime Minister Julia Gillard’s plan.  Iron-ore and coal producers face paying about $11 billion Australian dollars in extra charges in the first three years of the levy.   Australian bonds also gained as demand picked up for the relative safety of government securities.  Yields on the 10-year Australian government note slid to within nine basis points of a record, the least since January 2009.   Later tonight Australia will release the CB leading index and construction work done in the third quarter.   Additionally, RBA Assistant Governor Debelle will be speaking on the state of the financial markets.   Construction work is expected to have picked up in the third quarter to 2.1 percent from 0.7 percent the quarter earlier.

JPY: SAFE HAVEN DEMAND EASES

The Japanese yen weakened against all the major currencies with the exception of the New Zealand dollar after rating agencies affirmed the United States’ credit rating, reducing demand for safer investments.   No new economic data was released from Japan today.  A seismologist says Japan still underestimates threat to nuclear reactors.  Japan has about 10 percent of the world’s earthquakes and what is missing is recognition of the danger.  The Kobe professor suggests that Japan rank its power plants by risk and then phase out the worst.  Many of the older nuclear reactors have been built on top of fault lines and without the recent insights of modern earthquake science.  The Bank of Japan has intervened several times over the past few months in an attempt to weaken the yen and its strategy has befuddled the market.  Japan has mixed highly public forays into the market with stealth intervention, and this has left investors uncertain of what to expect next.  People familiar with the government’s intervention measures have said the latest round of publicly announced yen selling on October 31, estimated at a record 7.5 trillion yen, was followed for at least a week by hidden intervention.  By keeping the market guessing over its approach, the government may be able to make its interventions more effective in stemming the strength of the yen.  The recent strength of Japan’s currency has been hurting exporters and companies whose supply chain has been disrupted by the floods in Thailand.  In order to get more complete information about the intervention, the market will have to wait for quarterly figures, which show the direct intervention on a day-to-day basis, which will be released in February.  Until then investors will have to guess whether quick moves in the yen are just a spurt of stop-loss buying by commercial players or if the invisible hand of the BOJ was actually responsible.  Inflation numbers will be released on Thursday and are expected to have eased slightly.

GBP/USD: Currency in Play for Next 24 Hours

Our currency pair in play for Wednesday is GBP/USD.  The Bank of England will release minutes from the monetary policy meeting it held on November 10 ^th tomorrow at 4:30 AM ET / 9:30 GMT.  Also at that time the U.K will release October loans for house purchases.  From the United States durable goods, capital goods, personal income, spending, and consumption/expenditures, and jobs numbers all for October are due to be relased at 8:30 AM ET / 13:30 GMT.  University of Michigan confidence numbers for November will be released at 9:55 AM ET / 14:55 GMT.

GBP/USD has been pretty volatile over the past few days and is currently trading in a down trend, which we determined with Double Bollinger bands.  Nearest support is at today’s low of 1.5581.  Should the pair continue to slide, significant support will be found at 1.5488, the 50% Fib.  We drew our Fibonacci retracement from the low in May 2010 to the high in April 2011.  Looking up, nearest resistance is at 1.5690, today’s high.  Should the pair break out of that level, heavy resistance will be found at 1.5770, where the 50-day SMA and lower first Bollinger band converge.

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Comments (2)

moonie

November 22, 2011 at 10:15 PM ET

you're the best.

InvTraKS

November 23, 2011 at 08:47 AM ET

Agree.
invtraks.com

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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.