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US Data: Strong Demand for Dollars, Lackluster PPI and IP

Last updated 1/18/2012 9:17 AM ET (GMT -5) 0 Comments - Add your comment

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Kathy Lien

Director of Currency Research, GFT

It has been a very busy morning in the foreign exchange markets with the EUR/USD being taken for a rollercoaster ride throughout the European trading session. Talk of resolution on the Greek PSI that would involve passing a new law that would mandate bondholders to take a haircut on Greek loans and news that the IMF is thinking about expanding its lending facility by up to $1 Trillion provided underlying support for the euro. Rating agencies have taken some harsh steps in recent days and now investors are looking for a response from policymakers. In fact, the strong short covering in the EUR/USD could be directly tied to the expectations of a wider rescue plan for Europe. Yesterday, there was speculation about QE from the ECB and today, investors are looking to the IMF for help. Although very few people will argue that European sovereign debt crisis will intensify in the coming months, the EUR/USD is rallying on the hope of additional support from inside or outside of Europe. 

Meanwhile there was also quite a bit of U.S. data this morning. Producer prices fell 0.1 percent last month, but excluding food and energy costs, prices rose 0.3 percent. This data shows that the outlook for inflation in the U.S. is relatively stable, providing little concern for the central bank. Industrial production also rose 0.4 percent, which was slightly weaker than expected but still an improvement from the previous month when activity declined by 0.3 percent. Over the past few months, the U.S. dollar has benefitted significantly from safe haven flows according to the Treasury International Capital flow report. Foreign demand for U.S. dollars rose $48.6 billion in November, with purchases of long term securities rising by $59.8 billion. Demand was particularly strong from the Japanese, who intervened aggressively in USD/JPY in the beginning of the month. Investors in the U.K., hedge funds in the Caribbean, oil exporters and a handful of European investors also bought dollars. With the rally in the greenback gaining momentum in December, we expect the demand to have increased further at the end of the year. The need for safety has been the number one driving force for the dollar over the past few months and explains why the greenback had such a muted reaction to this morning's reports. It is too early to expect U.S. data to improve or deteriorate enough to have a material effect on Fed policy. The central bank is currently on hold with a bias towards more stimulus and this game plan will not change unless there are consecutive months of improvement in the U.S. economy

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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.