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THE STORIES IN THE CURRENCY MARKET

• US DOLLAR: FEBRUARY ENDS WITH A BANG
• EUR/USD: THE DOWNWARD THREAT TO PRICES SHOULD PROMPT ECB ACTION
• GBP/USD: BLANCHFLOWER SAYS RECESSION WILL DEEPEN SIGNIFICANTLY
• NZD/USD: BOLLARD CONVINCED THAT A WEAK KIWI WILL CUSHION ECONOMY
• AUD/USD: RBA SOMEWHAT SUCCESSFUL IN IMPROVING LENDING
• USD/CAD: CAD HIT HARD ON RISK AVERSION
• USD/JPY: CROSSES SUFFER AS JAPANESE RECESSION DEEPENS

EXPECTATIONS FOR UPCOMING FED MEETINGS

CURRENT US INTEREST RATE: 0.25%					A Rate Hike is Possible by April
	3/18 Meeting	4/29 Meeting
NO CHANGE	98.0%	90.3%
CUT TO 0BP	2.0%	1.8%
INCREASE TO 50BP	0.0%	7.9%
INCREASE TO 75BP	0.0%	0.0%

US DOLLAR: FEBRUARY ENDS WITH A BANG

The uncertainty expressed over the threat of a deep US recession and the third CitiGroup bail-out drove the dollar index to a three year high. Apparently, the dollar has maintained some of its safe haven status. Equities have finished a volatile trading day as a result, plummeting 125 points at the open, only to rally back. Unfortunately the bears won out in today’s battle at the tune of -60 points. The month of February reaped a toll on any possibility of a US rebound, as the Dow stumbled to lows not seen since the nineties. Hopefully, March will have more to offer.

Growth Shows Recession will not be Short-Lived

In the fourth quarter of 2008, GDP shrank a devastating 6.2%, the largest growth reduction since the recession in the early eighties. Declines in growth were widespread across all metrics, leaving little to show for any possible turnaround. As it seems now, a turnaround before 2010 is becoming less and less likely. Business Purchases in particular were hit the hardest in today’s report, falling to the lowest levels in a half century. Furthermore, consumer spending fell at a rate of 4.3%, again a multi-decade low. Clearly, with layoffs expected to continue and NFP to show a possible 600K or more loss in employment, consumer spending will continue to weigh down growth. Other measures of growth that were produced today include the Chicago Purchasing Manager Index, which showed that manufacturing contraction had continued for the fifth straight month. Unfortunately, these results are desperate and do not provide any optimistic numbers. We can expect that this recession will not be short-lived.

Government Stake in CitiGroup Reaches 37%

In the midsts of the vast range of economic concerns that we were met with today, a third rescue attempt for the faltering CitiGroup has been announced, which will only increase the government’s stake. It is currently it is hard to take governmental statements about the avoidance of nationalization as anything more than empty promises. The government plans on starting the conversion process of its preferred shares into common equity that should see their ownership reach nearly 40%. It seems that because the company is too large to fail, their plight has warranted the third attempt which has cost the taxpayers millions. Meanwhile, CitiGroup officially eliminated its dividend payout, serving as another blow to shareholders. Other government rescues and bail-out speculation have been temporarily shifted toward the auto part makers. As another proposal to assist the auto makers, the government is working on providing lending facilities for yet another struggling sector.

A Busy Week Ahead

Next week will present numerous market moving opportunities that are sure to have their impact felt on the markets for the weeks and months to come. The first spotlight of next week’s extravaganza will be four central bank interest rate decisions. The European Central Bank, bank of England, Bank of Canada, and Reserve Bank of Australia are all expected to make cuts to their target rate. Of course, the central banks will have to respond to the fact that the month of February has not reaffirmed any hopes or optimisms about stabilization or improvement. The 50bp cut should be the ammunition of choice for most struggling banks, while the RBA might be a little less willing to cut more than 25bp since they have so far been successful in avoiding a recession. The four central bank meetings is only the first part of the momentous week. There will also be GDP reported by Canada, Australia, Switzerland, and the Euro-zone. Contraction is expected for all countries except for Australia, who should be able to maintain themselves slightly above the zero growth line. And of course, Friday will have the biggest US related release of the month – the Non-Farm Payroll. Current consensus shows an undeniable expectation for there to be at least 600K jobs lost. The fourteenth month of consecutive jobs losses should be able to push the unemployment rate up to 7.9%, the highest since January of 1984.

EUR/USD: THE DOWNWARD THREAT TO PRICES SHOULD PROMPT ECB ACTION

Today, we learned the details of the most crucial measure of potential ECB decisions – the inflation rate. The Euro-Zone as a whole disappointed with Consumer Prices falling to 1.1% on an annualized basis. Germany, the region’s largest economy, reported an unexpected jump in inflation from 0.9% to 1.0%. However, it is expected that this is a one-time phenomenon based solely on a slight rebound in energy prices. All of this translates into the fact that the inflation rate continues to move below the ECB’s desired target range of “slightly” below 2.0%. At 1.1% the ECB will most certainly be called into action to save the day. As it stands, the ECB’s pause last month will cost them another one-meeting cut of 50bp – a large amount for the usually reluctant cutters at the ECB. The bank did reaffirm last month that if conditions worsened they would not stand idly by again. Unfortunately, Trichet’s hopes that monetary action would filter through the economy and reap immediate benefits failed to materialize, and may have even hindered their monetary efforts even more.  EUR/USD is practically unchanged on the news after rallying after earlier declines. The interest rate decision is scheduled for next Thursday.

GBP/USD: BLANCHFLOWER SAYS RECESSION WILL DEEPEN SIGNIFICANTLY

The confidence associated with the UK’s ability to cushion problems in the financial sector is hitting a new low today. Lloyd’s Banking company, one of the country’s largest commercial banks, is reluctant to hand over any more control to the UK treasury. If the bank should agree to join the government assurance program, they would be forced to surrender control and become nationalized. However, many fear that the organizations survivability is doubtful if an agreement is not reached. Scenarios such as this have prompted BoE policy maker David Blanchflower to call for a deepening UK recession. Gfk Consumer Confidence manages to push slightly higher, but is still very close to the 30 year low. The substantial worsening will undeniably mean a BoE cut during next Thursday’s meeting. A cut of 50bp starts to bring the bank dangerously close to the ZIRP. Of course, as we mentioned in Race to Zero Interest Rates , we expect the BoE to join the ranks of the Fed and BoJ to surrender to zero rates.

NZD/USD: BOLLARD CONVINCED THAT A WEAK KIWI WILL CUSHION ECONOMY

Alan Bollard, the RBNZ’s head, retained some optimism for his troubled country in a speech given today. Bollard maintains that the threat of a worsening New Zealand economy will be cushioned by the severe depreciation in the nation’s currency. The declines seem to be promoting healthy levels of trade with other countries. Bollard says that the weakness in the NZD is “helping make us more competitive”. On the other hand, he expressed one of his chief concerns as a continued heightening in the unemployment rate. Even though the RBNZ is not one of the banks on the chopping block for next week, Bollard’s statements do signal a seemingly content state. However, a small pocket of risk aversion was enough to push the kiwi down on the day. Australia continues to show its strength by example, as Private Sector Credit rose 0.6% after declining by 0.3% last month. A primary focus of all central banks, improving lending conditions is becoming a great success of RBA easing. However, despite the good news, the Aussie maintains a very tight trading range. USD/CAD surged higher by 150 pips on the combination of risk aversion and the near-promise that the BoC cut their target rate by 50% next week. 

USD/JPY: CROSSES SUFFER AS JAPANESE RECESSION DEEPENS

The yen crosses retraced on the day after experiencing a rapid rally throughout the week. The widespread fears that the world’s second largest economy is continuing to slip into deeper recession are mounting, largely in the reflection of deterioration in key economic figures. Japanese industrial production has contracted by 10% in the month of January, the widest margin on record and a third straight month of record-setting declines. An indication of the figures suggests that a lack of demand for Japanese exports is diminishing which is being supported by the figures from Vehicle Production Output that fell 41% from a year earlier, the biggest decline in 42 years. Furthermore, fears of deflation are stoked once again due to CPI figures being flat in January. The inflation was largely effected by a gradual plunge in household spending and retail sales as consumers are bracing themselves for the worst recession in 60 years. In order to address the economic problems, the Japanese government is on the verge of passing a record setting budget of ¥88.5 trillion yen or $907 billion. The budget will largely focus on improving economic conditions by focusing on job creation and public works projects. Early next week, Vehicle Sales figure are due for release that are likely continue its decline as consumers are cutting back on their purchases.

USD/CAD: Currency in Play for Next 24 Hours

USD/CAD is the currency in play for the upcoming Monday. Canada is expected to release GDP figures at 13:30GMT or 8:30AM EST. Followed by the release of ISM Manufacturing coming U.S. at 15:00GMT or 10:00AM EST.

The pair is currently trading within the Buy Zone which is determined through the Bollinger Bands. Finally, USD/CAD seems to be breaking the base of Double Head-and-Shoulder formation which eventually could help the pair test the high of last year. Yet, the Double Head-and-Shoulder formation tends to be tricky at times giving a minor retracement after a break of the patter, thereafter continuing the initial direction. Furthermore, a claim could be made that USD/CAD broke a triangle formation as well, which could take the pair higher. Current resistance is placed at this year’s high at 1.2765, if broken the pair could test the 1.30 level. Support is originating at the base of the triangle formation which is at 1.2400.

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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.