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FX: QE3 for the US? Any Hope for EZ?

Last updated 11/29/2011 5:16 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

• USD: FED OFFICIALS DEBATE NEED FOR QE3
• EUR: ANY HOPE FOR EUROPE?
• GBP: OBR EXPECTS FISCAL MANDATE TO BE MET 2 YRS LATER
• AUD: LOWER GROWTH OUTLOOK, BUT POSITIVE SIGNS
• NZD: JOHN KEY REELECTED
• CAD: SHARP IMPROVEMENT IN CURRENT ACCOUNT BALANCE
• JPY: BETTER THAN EXPECTED DATA

EXPECTATIONS FOR UPCOMING FED MEETINGS

USD: FED OFFICIALS DEBATE NEED FOR QE3

U.S. economic data was better than expected but as a safe haven currency, stronger consumer confidence drove the dollar lower against everything except for the Japanese Yen. The weakness of the greenback was further compounded by Federal Reserve Vice Chairman Janet Yellen’s talk of more stimulus. Not all Federal Reserve officials agree that more asset purchases are necessary but Yellen who is a voting member of the FOMC sees strong reason for policies that would support the housing market and consumer demand because it is not in the world’s interest to have a faltering U.S. economy. She feels that it is a dangerous moment for the global economy and the Fed is actively considering ways to clarify their guidance on monetary policy. Given her concerns about the U.S. economy, there is no question that policymakers want investors to realize that they have no plans to tighten monetary policy anytime soon. Instead, Yellen believes that the Fed can ease through rate guidance or additional asset purchases. The Fed will take other steps before resorting to QE3 and that will be to increase transparency. However the number of mixed views within the central bank means that any decision will not be achieved easily. Fed President Lockhart who is not currently a voting member of the FOMC but who will be voting next year said today that he is skeptical of whether more bond buying will actually help the economy. Instead he prefers to enhance their communication which appears to have far more support within the central bank. The recent improvements in U.S. economic data and the stabilization in the financial markets reduce the urgency to increase stimulus. QE3 is probably the most powerful tool in the central bank’s arsenal right now and one that Fed officials will want to save for a time when it is needed the most. Lockhart said it best – he argued that the U.S. is not near the severe conditions needed for QE and that bond buying makes more sense in recession – a risk that the U.S. economy faces in 2012. 

Also the latest economic data shows U.S. consumers growing more optimistic, which explains why Black Friday and Cyber Monday sales were so strong.  Every single one of the major consumer sentiment reports have pointed to an improvement which would normally be extremely well received by the market if not for the risks in Europe. In fact, if this were more normal times, we could even argue that the U.S. is on its way to recovery following the increases in spending and sentiment. Unfortunately the fiscal battle in Washington and the ongoing crisis in Europe leaves the U.S. economy vulnerable to further weakness. Americans grew more optimistic about present and future economic conditions as the consumer confidence index rose to 56 from 40.9, the largest increase since 2003. This has helped to lift equities and currencies but investors will still have their reservations about the sustainability of any rally until there are signs of progress in Brussels. Tomorrow is a heavy day for U.S. data with the ADP report, Challenger Layoff report, Chicago PMI, pending home sales and the Beige Book report are scheduled for release tomorrow and most likely these reports will paint a mixed picture about the current state of the U.S. economy. The leading indicators for non-farm payrolls will be the most important because they will set the tone for Friday’s labor market report. 

EUR: ANY HOPE FOR EUROPE?

The euro held steady against the U.S. dollar but weakened against the British pound. Europe’s effort to expand its bailout fund to 1 trillion euros ($1.3 trillion) is falling short, forcing renewed consideration of a role for the European Central Bank in insulating Spain and Italy from the debt crisis. Luxembourg Finance Minister Luc Frieden said the goal of leveraging the European Financial Stability Facility to boost its capacity to 1 trillion euros will be “very difficult to reach” given current market conditions. The EFSF alone will not be able to solve all the problems, Frieden continued, noting that Europe will have to work together with the IMF and the ECB in the framework of its independence. Finance ministers are holding an initial discussion today on channeling ECB loans to cash-strapped euro nations through the International Monetary Fund, aiming to bring the central bank onto the front lines without violating its ban on direct lending to governments. With intensifying prodding from the United States, European leaders are considering a fifth “comprehensive” fix after an October blueprint failed to stop a widening rout in Italian markets or quell speculation that France will lose its top credit rating. Germany is pushing for governance changes at a summit next week that would tighten enforcement of budget rules, a move that might make it easier for the ECB to step in. Italy’s conditions are not improving as it was again forced to pay above the 7 percent threshold that led Greece, Portugal, and Ireland to seek bailouts when it sold 7.5 billion euros ($10.1 billion) in bonds today, short of the maximum target for the auction. The 2014 note yielded 7.89 percent, the highest since September 1996 for a three-year bond. The only bright side to Italy’s story is that the Italian Treasury managed to allocate a big chunk of its debt today. Eurozone finance ministers agreed today to release an 8 billion euro ($10.7 billion) aid payment to Greece, part of a 110 billion euro package of support agreed with Athens last year. The joint EU/IMF payment is the sixth installment of loans to help Greece finance itself. The payment was dependent on a written commitment from Greece that it would meet its obligations to cut its budget deficit and keep finances in check. The payment had been held up for a month because of delays in Greece’s commitment to cut spending and increase taxes. The business climate indicator dipped in the Eurozone in November for the ninth month in a row. The indicator printed at minus 0.44 versus expectations of minus 0.30 and following minus 0.19 in October. Consumer confidence was unchanged in November at minus 20.4 while economic, industrial, and services confidence further deteriorated. Economic confidence fell to 93.7 from 94.8 in October, industrial confidence fell to minus 7.3 from minus 6.5, and services confidence dropped to minus 1.7 from a positive 0.1. Tomorrow is a heavy day for economic data from the Eurozone. ECB President Draghi will speak, the summit will be held in Brussels, and CPI flash estimate and the unemployment rate will be released. 

GBP: OBR EXPECTS FISCAL MANDATE TO BE MET 2 YRS LATER

The British pound strengthened against both the euro and the U.S. dollar. As expected, the Office for Budget Responsibility (OBR) announced today that the government remains on track to meet its fiscal mandate. However, a much weaker demand outlook and evidence of a more intense structural weakness mean the OBR now expects the mandate to be met some two years later than it had predicted at the time of the March Budget. Chancellor Osborne delivered an Autumn Statement that aims to provide a little more support to near-term demand offset by more aggressive tightening in future years. As had been widely expected, the OBR lowered its forecasts for GDP growth this year and next, to 0.9 percent and 0.7 percent, respectively, compared with 1.7 percent and 2.5 percent in March. The OBR cited that euro crisis and an external inflation shock as the main factors underlying its growth downgrade. The OBR’s projection for government borrowing is expected to be 127 billion pounds in the current fiscal year, slightly higher than the 122 billion pounds projected in March. The overall effect of government retrenchment on demand is likely to be large, reducing annual GDP growth by more than 1 percentage point a year. Expectations are for the central bank to ease further and increase asset purchases by an additional 75 billion pounds in February of next year. Meanwhile house prices continued to creep up in November, increasing by 0.4 percent, which was in line with expectations. Total lending to individuals rose by 1.3 billion pounds in October, exceeding expectations of 1.0 billion pounds. The twelve month growth rate of lending was unchanged at 0.8 percent. The GfK consumer confidence index is scheduled for release later tonight. It posted minus 32 in October and is expected to come in at minus 33. A worse reading could signal increased troubles relating to end-demand which could undermine an economic recovery.

AUD: LOWER GROWTH OUTLOOK, BUT POSITIVE SIGNS

The Canadian, Australian, and New Zealand dollars all strengthened against the greenback. Australia’s Treasury and the Organization for Economic Cooperation and Development (OECD) trimmed their growth outlooks yet noted many positive points. The OECD warned that Europe is the largest threat to the global economy, but noted that Australia is relatively safe. Australia is forecast to grow 4 percent next year before slowing slightly to 3.2 percent in 2013. However, that is revised down from the 4.5 percent figure the OECD released in June. The situation in the Euro area is rapidly deteriorating and contagion is spreading. However, in a statement, the OECD said that investment and exports, along with the mining boom, should “offset the negative impact on activity of a persistently strong exchange rate and fiscal consolidation.” Unemployment in Australia is expected to stay low and underlying inflation to be contained. Australia’s government slashed growth forecasts in its Mid Year Economic and Fiscal Outlook, but said the country will return to a surplus in 2012-2013. Fitch Ratings also upgraded Australia’s default rating to AAA from AA+, joining Standard & Poor’s and Moody’s in giving Australia the highest possible rating. This makes Australia one of just 15 countries to hold the top rating. The rating reflected fundamental strengths, “including its high value-added economy, strong political, civil, and social institutions and its flexible policy framework,” said a director at Fitch. Canada’s current account deficit narrowed $4.0 billion in the third quarter to $12.1 billion, largely due to higher exports of goods. The goods balance returned to a surplus and the majority of export strength was reflected in trade with countries other than the United States. Better risk appetite helped fuel gains in the Canadian and New Zealand dollars as Italy drew more offers than available bonds in an auction.  Oil also advanced as investors were less concerned that Europe’s debt crisis will derail the global recovery. New Zealand’s Prime Minister John Key was re-elected with his party’s biggest mandate in 60 years, strengthening his ability to balance the budget. The market liked the clean election results and the fact that New Zealand will have a stable government for the next three years. New Zealand is scheduled to release its building consents later tonight. Last month they dropped 17.1 percent; anything less than that will be positive for the New Zealand economy.

JPY: BETTER THAN EXPECTED DATA

The Japanese yen weakened against all of the major currencies with the exception of the U.S. dollar and euro. Japan released household spending numbers, the unemployment rate, and retail sales figures last night. October retail sales rose more than expected at 1.9 percent from a year earlier, underlining firm personal consumption in the face of slowing growth at home and overseas. This follows a 1.1 percent drop in September. Household spending fell less than expected in October at 0.4 percent versus a 1.4 percent forecast drop. This marks the eighth straight month of spending falls and is the latest sign that faltering global growth is weighing on consumption. Spending fell 1.9 percent in September. Japan’s unemployment rate ticked up in October to 4.5 percent from 4.1 percent last month. This was more than the expected 4.2 percent figure as firms are cautious about hiring due to worries about the impact of the euro zone debt crisis and a strong yen. The rising unemployment rate will add pressure on the central bank to ease further as Japan’s economy remains depressed. The manufacturing segment has been hit especially hard as the yen’s strength against the dollar erodes profits and many companies still struggle to fully recover from the March earthquake that closed many factories and disrupted supply chains. The initial boost Japan’s economy got from its recovery from March’s earthquake has started to wear off, the Organization for Economic Cooperation and Development said.  The OECD also said Japan’s economy should benefit next year from improved financial conditions and the government’s planned reconstruction spending. It expects the gross domestic product to grow 2 percent in 2012. Possible threats to that growth target include softer global growth and continued appreciation of the real exchange rate. 

EUR/USD: Currency in Play for Next 24 Hours

EUR/USD will be our currency pair in play for Wednesday. German retail sales for October are scheduled for release tomorrow at 2:00 AM ET / 7:00 GMT. German labor numbers for the month of November are schedule for release at 3:55 AM ET / 8:55 GMT. The November Eurozone consumer price index estimate and October unemployment rate are scheduled for release at 5:00 AM ET / 10:00 GMT. From the United States, we expect ADP employment change for the month of November at 8:15 AM ET / 13:15 GMT. At 10:00 AM ET / 15:00 GMT, U.S. pending home sales will be released for October. Then at 2:00 PM ET / 19:00 GMT the Federal Reserve will release the Beige Book Economic Survey.

EUR/USD has been sliding recently and is still trading in a down trend, which we identified with Double Bollinger bands. First support may be found at 1.3145, the low achieved on October 4 ^th . If that level is broken, significant support may be found at the psychologically significant 1.3000 price. To the upside, first resistance may be found at 1.3341, today’s high. If that level is broken, heavy resistance may be encountered at the 20-day SMA of 1.3542.

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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.