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THE STORIES IN THE CURRENCY MARKET

• GREEK DEAL FAILS TO HELP EUR
• USD: DON’T LOOK TO EXISTING HOME SALES FOR ANY FIREWORKS
• GBP: WHAT TO LOOK FOR IN BOE MINUTES
• CAD: RETAIL SALES CONTRACT IN DEC
• AUD: HAWKISH RBA MINUTES OFFSET BY CONCERNS ABOUT AUD
• NZD: INFLATION EXPECTATIONS EASE
• USDJPY TARGETING 80

EXPECTATIONS FOR UPCOMING FED MEETINGS

CURRENT US INTEREST RATE: 0.25%
	03/13 Meeting	04/25 Meeting
NO CHANGE	44.0%	44.5%
CUT TO 0BP	56.0%	53.7%
HIKE TO 50BP	0.0%	1.8%
CUT TO 75BP	0.0%	0.0%

GREEK DEAL FAILS TO HELP EUR

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With no major U.S. economic data on the calendar today, it has been a quiet North American trading session.  The euro consolidated for most of the day, taking its cue from equities, which oscillated in and out of negative territory.  Greece secured a second round of financing from the Eurozone but unfortunately this highly anticipated development failed to lift the euro.  The problem is that doubts linger about the country’s ability to meet its debt obligations and default.  Greece still needs to persuade private bondholders to accept the PSI deal and if they fail to convince enough of them to do so, a credit event or default could be triggered.  One level of uncertainty may have been removed from the market with the approval of the bailout but plenty of other loose ends remain.  This week, like past weeks, the euro has been a victim of headline risk and unfortunately this is will not change anytime soon. The only difference is that we have Eurozone PMI numbers this week.  Part of the reason why the EUR/USD has been so firm is because of the resilience of the German economy.  The PMI reports will provide investors with the most up to date assessment of how the Eurozone is doing – if the data surprises to the upside, the fear of recession in the region as a whole will recede.  If it misses to the downside, the EUR/USD could break lower.  

 

After more than 13 hours of deep discussions, Eurozone Finance Ministers agreed to a second bailout that will provide Greece with up to EUR130 billion in additional aid through 2014. The terms of the deal are also more generous than previously anticipated, which should help Greece achieve their goal of bringing their debt as a percentage of GDP ratio down to 120 percent by 2020.  This includes a higher PSI haircut (52.5% notional haircut versus 50% previously agreed) that will bring the implied net present value loss that private investors must incur from 70 to as much as 75 percent.  Greece will also have a permanent task force in place that will monitor their progress as well as an escrow account they cannot touch.  Instead of passing their profits to individual European governments, the European Central Bank decided to forgo profits on their holdings and return those funds over to Greece.  In other words, Greece has received a much better deal than they could have hoped. Yet the euro failed to sustain earlier gains because investors fear that it may not be the end to all of Europe's troubles.  ? The IMF still has to decide their level of contribution and it is not clear how much voluntary participation there will be by private bond holders.  A credit event (or default) could still occur if Greece imposes a retroactive collective action clause (CAC) that forces all bondholders into a debt swap.  If any private bond holders decide not to participate, then a credit event could be triggered. As long as default remains a risk, the EUR/USD could have a tough time rallying. In addition, the bailout terms are strict and any missteps or deviation from program could send debt to GDP back to 160 percent by 2020.  None of the bailout terms help Greece grow and recover - they only reduce debt at the expense of growth.  Contagion remains a risk and we will be watching European credit spreads carefully to see if investors start pricing in this possibility.  The next step is for national parliaments to approve the second bailout.  Germany will be voting on the deal Monday.  The IMF and EU are expected to determine their exact contributions by early March, which should be enough time to release funds for their March 20th payments. @import url(/css/cuteeditor.css);

USD: DON’T LOOK TO EXISTING HOME SALES FOR ANY FIREWORKS

@import url(/css/cuteeditor.css); The U.S. dollar ended the day unchanged or higher against all of the major currencies.  With no major U.S. economic data released today, the focus has been on Europe. The light economic calendar this week means that the desire for safety will be the dollar’s primary driver.  The lack of a significant reaction to the Greek deal has sent some investors back into the arms of the greenback as they wonder for how much longer the market will be held hostage by Europe’s troubles. Existing home sales are on the calendar tomorrow and economists expect a small increase in the sale of previously owned homes.  The housing market has long been one the country’s greatest trouble spots and unfortunately we do not expect any significant momentum in the sector until the economy enjoys a stronger recovery.  Even if the housing market has bottomed, the recovery will be excruciatingly slow. Stocks on the other hand are slowly grinding higher with the Dow Jones Industrial Average perking above 13,000 intraday.  The disconnect between currencies and equities suggests that their movements are motivated by different factors.  Equities have performed well because of easy monetary policy while currencies have floundered because of the continued cautiousness by central banks.  This leads us wonder if equity investors are overly optimistic or currency traders are overly cautious and we suspect it is the latter and not the former. There may be U.S. economic data on the calendar tomorrow but the focus will remain on Europe. @import url(/css/cuteeditor.css);

GBP: WHAT TO LOOK FOR IN BOE MINUTES

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The British pound ended the day lower against the U.S. dollar and euro.  The only news out of the U.K. today were the country’s public sector net borrowing numbers.   According to the latest report, public sector net borrowing was much weaker than expected which should be good news for the pound.  The U.K. media is already applauding the Prime Minister for his recent austerity efforts, which have yielded the country its highest monthly surplus in four years.   Despite the weakness of the economy, tax receipts have been strong.  Public sector net borrowing fell by GBP7.8 billion last month and another way to look at it is that public sector net borrowing is now in surplus by GBP7.8 billion.   Although this figure can be volatile, it is good news for the U.K. government and their overall financial health.   Rating agency Moody’s put the U.K. on credit watch negative last week, giving Prime Minister Cameron a strong case to push forward with austerity.  The government is on track to achieve their borrowing target of no more than GBP127 billion this year. The minutes from the most recent Bank of England meeting where the monetary policy committee decided to increase asset purchases will be released tomorrow.  The Quarterly Inflation report provided very little clues on how quickly the MPC could boost QE again, if at all. This makes the BoE minutes very important in providing insight into the degree of consensus around the decision.  If a good number of MPC members voted for larger action, it would be bearish for the GBP.  If a good number of MPC members voted for no action at all, it would be positive for the currency.

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CAD: RETAIL SALES CONTRACT IN DEC

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Despite the rise in equities, the Canadian, Australian and New Zealand dollars weakened against the greenback.  The CAD was hit by weaker consumer spending numbers.   Retail sales fell 0.2 percent in the month of December and excluding the impact of lower auto sales, consumer spending was flat.  The holiday shopping season was not very kind to retailers but with volumes relatively stable, it appears that the drop off in sales could be largely attributed to discounting. Consumer spending had also been rising every month for the past 4 months from October through November, minimizing the significance of the pullback.   In no way shape or form is consumer demand healthy but the drop in retail sales will not be enough to convince the Bank of Canada that more easing is necessary.  Even after today’s report, the BoC remains comfortably on hold for the time being.  The bigger story over the past 24 hours was out of Australia.  According to the minutes from the most recent Reserve Bank meeting, the central bank is in no rush to cut interest rates.  Investors had priced in 50bp of additional easing by the RBA in 2012 but with growth and inflation expected to be in line with their forecasts, there is very little chance of a rate cut next month.  The RBA was pleased to see the recent improvements in U.S. economic data, which provided a mild boost to the financial markets and they felt less concerned about the situation in Europe.  According to the central bank, “While the financial situation in Europe remained fragile, the likelihood of an extremely bad outcome seemed to have diminished somewhat over the previous couple of months, partly reflecting actions by the European policymakers.” Interestingly enough, the AUD/USD has not benefitted from the less dovish comments from the RBA and the reason was because RBA member Ridout, who is new to the monetary policy committee expressed concerns about the strong Aussie.  Meanwhile New Zealand inflation expectations eased in the first quarter from 2.8 to 2.5 percent, which may have contributed to the weakness in the NZD.  

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USDJPY TARGETING 80

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It was a mixed day for the Japanese Yen, which weakened against the U.S. dollar, euro and Swiss Franc and strengthened against the Australian and New Zealand dollars. There was very little in the way of Japanese economic data aside from the all industry activity index which showed a 1.3 percent increase in activity in January compared to the prior month.  The negative impact that a strong currency was having on the Japanese economy became very clear on Sunday when the country’s trade deficit hit a record high. Today, USD/JPY has extended a rally that began in early February.  This is the longest stretch of USD/JPY strength in nearly a year.  The currency pair is trading above the high reached following the central bank’s most recent intervention.  80.00 is clearly the next level of resistance for the pair and based upon how USD/JPY has traded today, it may not be an easy break but the currency pair is slowly chipping away at that level.  Nonetheless the recent sell-off in the Japanese Yen should bring extensive relief to the Japanese economy.  It has lasted for longer than any of their prior intervention efforts and the BoJ will do all that it takes to keep the Yen from rising again.  Japanese supermarket sales are due for release tonight and a decline is expected, like what has been seen in Tokyo, nationwide and convenience store sales.  

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EUR/GBP: Currency in Play for Next 24 Hours

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EUR/GBP will be our currency pair in play for the next 24 hours.  German PMI numbers will be released at 3:30 AM ET / 8:30 GMT followed by Eurozone PMI numbers at 4:00 AM ET / 9:00 GMT.

The recent rally in EUR/GBP has taken the currency pair to the top of its 2.5 month long range.   The 0.8415 has capped gains for the past 10 weeks and is therefore the currency pair’s main resistance level.  If it is broken, the next resistance will be 85 cents.  0.8275 on the other hand has been support during this same period and will continue to serve that purpose for the time being. 

 

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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.