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EUR: The Teflon Currency

Last updated 1/18/2012 5:04 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

• THE TEFLON EURO
• USD: US DATA IS SIDESHOW TO EUROPE
• GBP: UNEMPLOYMENT RATE HITS 16 YEAR HIGH
• CAD: BOC EXPRESSES CONCERNS ABOUT EUROPE
• NZD: FRESH 2 MONTH HIGHS
• AUD: EMPLOYMENT NUMBERS ON TAP
• JPY: AZUMI SAYS JAPAN CANT INTERVENE LIKE THE SWISS

EXPECTATIONS FOR UPCOMING FED MEETINGS

THE TEFLON EURO

The euro’s Teflon coating has protected the currency extremely well this week, keeping it immune from the intensification of the region’s sovereign debt crisis. As much as we believe that the EUR/USD should be trading much lower, we have to respect the recent moves in the currency. Positioning can be a strong driver of currency flows and in the case of the EUR/USD, speculators are covering their shorts in anticipation of a response from European policymakers. Although borrowing costs in Europe have not increased materially since S&P’s downgrade, few people will argue against the increased risks that the downgrades pose on Europe in general. In no way shape or form has policymakers across the region downplayed the significance of the downgrades. In fact, talk of additional measures to increase the safety net has only increased since S&P’s action. On Tuesday, there were reports that the ECB could be contemplating Quantitative Easing and today, there was widespread belief that the IMF was looking to increase its lending capacity. None of this has been verified and in the case of the IMF, the U.S. government has already expressed opposition to providing more money to the fund. The U.S. Treasury believes that the IMF can only supplement Europe’s own efforts especially since the Europeans have the ability to increase their own firepower. For this reason, the U.S. has no plans to ask Congress for additional resources for the IMF. Without the help of the Americans, Europe can only turn to China, who has stayed relatively silent about further commitments. Nonetheless, the EUR/USD shrugged off the Treasury’s comments and weaker U.S. earnings reports to end the day sharply higher against the U.S. dollar. The possibility of a Greek PSI deal by the end of the week is keeping the currency bid, but it would be remiss not to mention that Germany themselves have revised down their 2012 GDP forecasts from 1 to 0.7 percent. The European Union’s Juncker was even more pessimistic, saying that the Eurozone is at the brink of recession. Independent rating agency Egan Jones even downgraded Germany’s credit rating one notch to AA- from AA. Clearly there is more bad news than good news for the euro, but the Teflon currency continues to hold strong.

USD: US DATA IS SIDESHOW TO EUROPE

The U.S. dollar lost value against all of the major currencies which is good for the market because it means investors have grown less risk averse. How long the easing of safe haven flows will last remains to be seen but for the time being, many currencies including the euro are experiencing strong rallies. This morning’s U.S. economic reports do little to threaten the improvement in risk. 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. Thursday is another busy day in the U.S. with consumer prices, housing starts, building permits, jobless claims and the Philly Fed index scheduled for release.

GBP: UNEMPLOYMENT RATE HITS 16 YEAR HIGH

The British pound soared against the U.S. dollar as sterling traders shrugged off the latest disappointment in U.K. data. Although jobless claims rose by only 1.2k last month, which was less than expected, the November ILO unemployment rate rose to 8.4 percent, its highest level in 16 years.  Labor market conditions in the U.K. have been weak for some time and despite the need for part time hires during the London Olympics, budget cuts by Prime Minister Cameron will lead to a loss of approximately 700k jobs over the next 5 years. The prospect of slower growth in the Eurozone and the U.K. this year also dampens the outlook for hiring. Not only has the level of unemployment increased, but Britons are also earning less with average weekly wage growth slowing to 1.9 from 2.1 percent. The weak labor market and slower inflation pressures combined will keep U.K. policymakers at the edge of their seats, ready and willing to increase stimulus. As mentioned yesterday, it is our belief that the minutes from this month’s meeting, which will be released next week will show that easier monetary policy is still very much in the minds of the central bank. Consumer confidence numbers will be released this evening and with unemployment rising, confidence is expected to have deteriorated in the month of December. This may be important and ultimately prove to be a drag on the GBP/USD but for the time being, the fact that sterling traders have shrugged off 2 negative reports confirms that they are taking their cue from risk appetite. 

CAD: BOC EXPRESSES CONCERNS ABOUT EUROPE

With equities rising, risk appetite improving and the EUR/USD extending its gains, it is natural to see the Canadian, Australian and New Zealand dollars trading sharply higher. Despite the decline in house prices last month according to REINZ, the New Zealand dollar climbed to its highest level ever against the euro and a 2 month high against the greenback. The strength of the NZD mostly has to do with the currency’s high interest and the central bank’s monetary policies. Even though the RBNZ is on hold, last year, they stood ready to increase interest rates to unwind previous rate cuts. As the European sovereign debt crisis intensified towards the end of the year, the RBNZ moved from a tightening bias to neutral. The recent price action in the NZD suggests that investors are positioning for a more hawkish stance from the RBNZ this year following stronger data from China and the resilience of equities and currencies. Following up on yesterday’s Bank of Canada rate announcement, the central bank released their Quarterly Monetary Policy Report.  Even though growth forecasts were revised higher for 2012, the BoC is very concerned about the European debt crisis and are looking for a recession in the Eurozone that will cut Canadian growth by 0.6 percent. Rates are expected to be increased gradually through 2013 but with inflation expected to slow to 1.5 percent in the second quarter of 2012, they remain comfortably on hold for the time being. Meanwhile thanks to recent rate cuts by the Reserve Bank of Australia, consumer confidence increased in January. Employment numbers will be released this evening and the number of new jobs is expected to have risen slightly last month

JPY: AZUMI SAYS JAPAN CANT INTERVENE LIKE THE SWISS

The Japanese Yen traded lower against all of the major currencies with the exception of the U.S. dollar, against which it held steady. Last night’s Japanese economic reports provided very little cause for enthusiasm. Industrial production was revised lower with activity now having fallen 2.7 percent in November compared to a prior estimate of -2.6 percent. On annualized basis, IP is down 4.2 percent. The manufacturing sector in Japan has suffered greatly last year from the earthquake, floods in Thailand and a strong Yen. Barring any fresh natural disasters, 2012 should be a year of slow recovery in Japan. Unfortunately unless the currency reverses its trend, the recovery will be anemic at best. The problem for the Japanese government is that they their ability to weaken the Yen is very limited. Interest rates are next to nothing while intervention efforts have steadied the currency but not reverse its rise. Even Finance Minister Azumi admits that it is hard for Japan to intervene in the FX market in the same manner as the Swiss who have done a fabulous job of keeping their currency above 1.20 against the EUR for the past 4 months. The only hope for Japan is an improvement in the European sovereign debt crisis. Demand for the Japanese Yen has been caused mostly by demand for safe haven currencies and deleveraging. If the risks in Europe begin to recede and investors start to dip their toes back into the water, the Yen will weaken naturally.

AUD/USD: Currency in Play for Next 24 Hours

AUD/USD  will be our currency pair in play for the next 24hrs. with Australian employment numbers will be released at 7:30PM ET/ 00:30 GMT. From the US, we expect consumer prices, housing starts, building permits and jobless claims at 8:30AM ET/ 13:30 GMT, followed by the Philly Fed survey at 10AM ET/ 15 GMT. 

The AUD/USd has performed extremely well since the beginning of the year and is within a whisker of reaching a fresh 2 month high. Having cleared the 200-day SMA, the currency pair is in an uptrend according to our Double Bollinger Bands. Should the rally gain momentum, the psychologically significant 1.05 level will be resistance. Support on the other hand is at the 10-day SMA of 1.03.

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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.