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US Dollar: Waiting for Obama

Last updated 2/16/2009 4:53 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: WAITING FOR OBAMA
• GBP/USD: BOE SAYS GBP NEEDS TO FALL
• EUR/USD: NEARING 1 MONTH LOWS
• NZD/USD: INFLATION AND GROWTH SLOWING
• USD/CAD: MANUFACTURING SHIPMENTS PLUNGE
• AUD/USD: RBA MINUTES ON TAP
• USD/JPY: YEN RISES DESPITE WEAKEST GROWTH IN 35 YEARS

EXPECTATIONS FOR UPCOMING FED MEETINGS

US DOLLAR: WAITING FOR OBAMA

With US equity and bond markets closed for Presidents Day, trading was relatively quiet for currencies. The G7 meeting did not lead to any fireworks but the dollar did gap higher against all of the major currencies except for the Japanese Yen at the Asian open on Sunday. Despite the Congressional approval of the $787 billion stimulus package, the US dollar and Japanese Yen have strengthened across the board which indicates that risk aversion dominates. So far, the prospect of the bill being signed by President Obama has not helped the market. The official G7 statement singled out the Chinese Yuan but not the Japanese Yen. The tone towards China was rather conciliatory with the Group of Seven welcoming China’s fiscal stimulus measures and their steps towards a more flexible exchange rate. These comments and lack thereof suggests that the US is trying to play nice after Geithner suggested that China may be branded a currency manipulator. As for Japan, the lack of comments suggest that no is interested in intervening to stop the Yen from rising anything soon. There was no US economic data released this morning, but a number of reports are due for release over the next 24 hours. This includes the Empire State Manufacturing survey, the Treasury International Capital flow report and the NAHB housing market index. All of these are Tier 2 economic data which means that they should not have much of an impact on the US dollar. Instead, all eyes will be on how the market reacts to the official announcement of the Economic Stimulus Bill. 

GBP/USD: BOE SAYS GBP NEEDS TO FALL

The British pound continues to remain weak against the US dollar. House prices according to Rightmove increased in the month of February (the annualized pace decreased) and Lloyds Banking Group dismissed nationalization but the currency pair was hit by comments from Bank of England Deputy Governor Bean. Despite the fact that the British pound has already weakened significantly against the US dollar, Euro and Japanese Yen, he said that a further depreciation of the British pound is needed for rebalancing. In other words, the central bank wants the pound to weaken to help support external demand for goods and investments. Bean also said that inflation will remain well below the central bank’s target over the medium term and that the BoE will “probably need to take further action” to bring inflation back to target. His comments confirm the market’s speculation that the central bank could bring interest rates to US levels or lower. This combined with the prospect of Quantitative Easing has and should continue to weigh on the British pound. Given these dovish comments, it remains to be seen whether the market will respond to any increase in consumer prices. CPI is due for release tomorrow and the rise in producer and shop prices suggests that inflation pressures may have risen in the month of January. We think that any rally in the pound could be short lived ( Will EUR/GBP Hit Parity?).  

EUR/USD: NEARING 1 MONTH LOWS

Once again, the Euro is attempting to test its 1 month lows against the US dollar. Since there was no Eurozone economic data released this morning and all of the major currency pairs are lower, the weakness of the single currency is purely a reflection of the market’s risk appetite. In contrast to the aggressive monetary policies that we expect from other central banks around the world, European Central Bank member Stark warned against aggressive actions. He said that gradualism is needed in combating the global economic crisis and that aggressive action can lead to more economic uncertainty. He did indicate that interest rates will continue to fall, but his comments suggest that the next rate cut will be no more than 50bp. Compared to the BoE, RBA and RBNZ who cut interest rates by 100 to 150bp clips, the ECB has been very conservative. Only time will tell if their stubbornness will hurt or help them. If inflation skyrockets everywhere except for the Eurozone, the ECB will be vindicated but if their recession lasts much longer than everyone else then Trichet’s credibility will be severely tarnished. The German ZEW survey of analyst sentiment and the Eurozone trade balance are due for release tomorrow. We expect the numbers to be Euro bearish. 

NZD/USD: INFLATION AND GROWTH SLOWING

The New Zealand, Australian and Canadian dollars are weaker across the board today.   Economic data was mostly disappointing. Producer prices and service sector activity contracted in New Zealand, increasing the chances of another rate cut by the Reserve Bank. Despite a weak currency, falling commodity prices have driven inflationary pressures lower in the fourth quarter while weaker consumer spending and the recession has sent service sector PMI to a record low. New Zealand has no more economic data due for release this week and therefore these disappointments could continue to weigh on the currency, particularly against the Australian dollar. Meanwhile foreigners bailed out of Canadian dollar denominated investments at a slower pace in the month of December. Manufacturing shipments however plunged a whopping 8 percent. Weak demand for shipments will translate into weaker growth for the country as a whole. There was no economic data from Australia last night, but the Reserve Bank will be releasing the minutes from their most recent monetary policy meeting this evening. RBA official Ryan is also scheduled to speak. Compared to other central banks around the world, RBA officials have been more optimistic. The country is expected to skirt recession this year and that could help the currency outperform the New Zealand and Canadian dollars over the medium term.

USD/JPY: YEN RISES DESPITE WEAKEST GROWTH IN 35 YEARS

It says a lot when a currency can rally after reporting the weakest pace of growth in 35 years. The Japanese Yen is stronger across the board today despite GDP shrinking by 3.3 percent in the fourth quarter. The recession in Japan continues to deepen as the strength of the currency and job losses sap external and internal demand. On an annualized basis, GDP dropped 12.7 percent, which was more than the market expected and the sharpest decline since GDP fell by 13.1 percent in the first quarter of 1974. At that time, the oil crisis drove inflation through the roof and hampered domestic demand. Companies throughout Japan are laying off employees, which is in complete contrast to their corporate culture of keeping employees  for their entire working careers. Unfortunately Japanese growth will probably continue to contract. However as we have seen today, that does mean that the Yen will stop rising and start falling. The Yen’s strength is purely a reflection of the market’s demand for risk. One of the few things that could stem the currency’s rise would be physical intervention from the Japanese government. 

EUR/GBP: Currency in Play for Next 24 Hours

EUR/GBP is the currency in play over the next 24 hours with the UK Consumer Price Index due for release at 9:30 GMT or 4:30 ET and the German ZEW survey due for release at 10:00 GMT and 5:00 ET. EUR/GBP is trading within the range trading zone which we determine using Bollinger Bands. The 0.8748 level serves as decent support as it represents the 50 percent Fibonacci retracement of the October to December rally. In order for EUR/GBP to have any chance of challenging its December high, it would need to close above 0.9300.

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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.