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US Dollar: Treasury Releases Details, Bernanke Downplays Nationalization

Last updated 2/25/2009 4:57 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: TREASURY RELEASES DETAILS, BERNANKE DOWNPLAYS NATIONALIZATION
• EUR/USD: HIT BY CREDIT DOWNGRADES
• GBP/USD: BOE OFFICIALS TALK DOWN CURRENCY
• USD/CAD: BIG JUMP IN OIL FAILS TO PUSH CAD HIGHER
• AUD/USD: GOLD PRICES SLIP
• NZD/USD: TRADE BALANCE ON TAP
• USD/JPY: JAPANESE TRADE BALANCE FALLS TO 28 YEAR LOW

EXPECTATIONS FOR UPCOMING FED MEETINGS

US DOLLAR: TREASURY RELEASES DETAILS, BERNANKE DOWNPLAYS NATIONALIZATION

All eyes have been on Washington today with Fed Chairman Ben Bernanke testifying before Congress and Treasury Secretary Geithner releasing details on the US’ capital assistance program . The financial markets have been waiting for the details from the Treasury since they first announced the Financial Stability Plan and now investors have reacted positively. The Dow Jones Industrial Average turned positive temporarily after having been down close to 200 points this morning. Interestingly enough, the recovery in US equities has failed to have a meaningful impact on the currency market. The US dollar strengthened across the board and has remained strong going into the close of the US trading session. 

Bernanke Soothes Nationalization Fears

Part of the dollar’s strength stems from Bernanke downplaying full-fledged nationalization. During his testimony before the House, he said nationalization would mean zeroing out shareholders and doing so is not a part of the Fed’s current plans.  However he did say that taking further substantial stakes in banks is still a possibility. In a prior edition of the Daily Currency Focus , we said that nationalization is bearish for the US dollar because it could trigger a capital flight by foreign investors and increases the debt burden for US taxpayers. If nationalization is not a threat, then investors holding bank stocks can be less afraid that their shares will become worthless. 

Details on the Treasury’s CAP Plan

The US government has provided more details on the stress tests for banks. Over the next few weeks we will learn about which banks are healthy and which are not. Regulators have given the nation’s19 largest banks 6 months to raise new capital after their balance sheets are reviewed. If they cannot raise the necessary capital, they can accept taxpayer funds but any new government investment would involve handing over convertible preferred securities that contain the option for voting rights. There is no stated limit on the capital assistance program. According to US officials, the goal is to provide enough capital for the duration of the downturn. Taxpayers will be able to monitor the performance of banks receiving the capital at www.FinancialSTabiity.gov  (more details on the terms and conditions of the Capital Assistance Program can be found on the Treasury’s website ).   Investors are cheering this news because the US government has laid out a roadmap for stabilizing the banking sector. Although it will be a long time before we see any results and stocks could still turn lower after the names of undercapitalized banks are revealed, at least today, hope is reigning over the financial markets.

Economic Data: Durable Goods, Jobless Claims, New Home Sales

Sales of previously owned homes plunged to a 12 year low in the month of January. The housing market remains the Achilles heel of the US economy as prices fall and demand wanes. New home sales are also expected to be weak. In addition to the housing data, durable goods and jobless claims are due for release. With the US economy in shambles and unemployment rising, purchases of big ticket items should continue to fall. Jobless claims are expected to remain above 600k for the fourth consecutive week. 

EUR/USD: HIT BY CREDIT DOWNGRADES

The Euro has been hit by credit downgrades in Eastern Europe. Standard and Poor’s reduced Ukraine’s credit rating by 2 levels, cut Latvia’s credit rating to junk and put Lithuania and Estonia on credit watch. Although these countries are not a part of the Eurozone, this adds to the fear of major defaults by Eastern European borrowers. To put this into perspective, Ukraine’s credit rating is now on par with Pakistan. Within the Eurozone, conditions seem to be worsening. Germany reported the worst level of GDP growth since 1987. The third contraction is further supplanting the recession in Germany. Other reports also showed that exports dropped by 7.3%. The country is very dependent on its export industry which has seen activity fall steadily due to sluggish economic situations world-wide. The statistics office told investors that the drop in exports single-handedly accounted for 2.0% of the decline in GDP, showing how vital it is for the country to maintain healthy trading. However, with economic conditions likely to worsen rather than improve, exports should continue to have a detrimental impact on growth. In France, depression among investors has seen the CAC index decline for its eighth straight session, its worst losing streak in seven years. The euro suffers as a result, erasing about 150 pips from yesterday’s gains. Another strenuous list of data is expected for tomorrow with a special emphasis on Germany. The country will report Consumer Prices, the Unemployment Rate, and Consumer Confidence. For the region as a whole, M3 and Economic Confidence are expected.

GBP/USD: BOE OFFICIALS TALK DOWN CURRENCY

The British pound extended its losses against the US dollar following comments from Bank of England officials. BoE policy maker Barker commended the weakness of the currency for helping the UK economy by shifting demand away from imports. BoE member Blanchflower did not talk about the currency but he did say that this is not the bottom of the economic slump and he expects the recession to worsen significantly. This grim forecast comes on the heels of the sharpest economic contraction since 1980. Although the GDP report was marginally better than expected, growth is still very weak. Like the US, the troubles in the financial sector have not gone away. Chancellor Darling is in tense talks with banks about the terms to insure toxic assets. Nationwide house prices are the only a piece of UK economic data due for release over the next 24 hours. The housing market report should add pressure on the British pound. 

USD/CAD: BIG JUMP IN OIL FAILS TO PUSH CAD HIGHER

Commodity currencies are currently losing strength, with the Canadian dollar posting the most losses. However, the crosses have held steady on significant Yen weakness. Commodities on the other hand remain mixed. Oil took a big boost today, flying 6.00% in US trade, while gold dropped 1.7%. The Canadian dollar, which would normally be boosted by oil, is hit on an envelope of risk aversion ruining a five day CAD rally. Jim Flaherty, the Canadian Finance Minister reiterated his forecast that the economy will shrink by 2.7% this year. The lack of consolation cost the CAD more than 100 pips. No influential Canadian indicators are expected for the rest of the week. The Aussie and Kiwi are only down marginally as the distinction between safe havens and risky currencies continue to be blurred. The Australian Conference Board’s Leading Index is expected tonight. New Zealand will report their Trade Balance later today along with NBNZ Business Confidence report tomorrow.

USD/JPY: JAPANESE TRADE BALANCE FALLS TO 28 YEAR LOW

USD/JPY has been on an impressive three day rally, posting gains totaling more than four hundred pips. The image of the Japanese “safe haven” is currently unraveling due to an-ever worsening economic climate. This week in particular has proven to defeat the myth that contributed to yen strength. The true Achilles heel in the world’s second largest economy is being fully exploited as their trade deficit plummeted to a twenty-eight year low. Exports fell nearly 50% in the span of January alone. Trade has been battered from two lethal angles. First, the financial meltdown nearly evaporated international demand for Japanese imports. Secondly, as investors clambered into yen denominated assets, the currency was set on an historical rally versus virtually all other major currencies. At this point, market participants are finally starting to trade the yen based on fundamental characteristics instead of risk aversion. Fortunately, if the yen weakness continues it should prove to enliven the export industry. The spotlight on Japan should last for the rest of the week as the country is set to release a bevy of economic reports. For tomorrow, expect the Jobless Rate, Household Spending, Consumer Prices, Retail Trade, and Industrial Production. This shopping list of economic indicators may provide another blow to the yen.

EUR/USD: Currency in Play for Next 24 Hours

EUR/USD will be the currency in play for the next 24 hours. The Europeans are set to produce a long list of economic indicators during tomorrow’s trading. The list includes German Consumer Prices, German GFK Consumer Confidence at 2:10 am ET or 7:10 GMT, German Unemployment at 3:55 am ET or 8:55 GMT, and Euro-zone M3 at 4:00 am ET or 9:00 GMT. The US will produce Durable Goods at 8:30 am ET or 13:30 GMT and New Homes Sales at 10:00 am ET or 15:00 GMT.

Technically, EUR/USD has maintained within the range-trading Bollinger band zone. Currently, we are lying half-way between the 1.3000 – 1.2500 trading range we discussed in Monday’s commentary. Not only have these levels been significant throughout the last few months, they are important psychological levels certain to deter the uncertain trader. Also notice that the 23.6% retracement from December highs to January lows further adds some significance to the 1.3000 resistance. With the sheer magnitude of economic reports coming tomorrow there is a good chance that the current range will be tested.

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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.