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FX: What To Expect From US And China

Last updated 5/10/2012 4:35 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

• FX: WHAT TO EXPECT FROM US AND CHINA
• EUR: THIRD TIME PROBABLY WONT BE THE CHARM FOR GREECE
• GBP: NO CHANGES TO MONETARY POLICY
• CAD: JOB GROWTH EXPECTED TO SLOW
• AUD: LIFTED BY BETTER THAN EXPECTED JOBS DATA
• NZD: SHRUGS OFF WEAKER BUSINESS PMI
• JPY: SOME RELIEF FOR THE JAPANESE

EXPECTATIONS FOR UPCOMING FED MEETINGS

FX: WHAT TO EXPECT FROM US AND CHINA

After obsessing about Greece for most of the week, there is finally some fresh and important data to draw our attention away from the country’s political drama. Even though this distraction will only be temporary, for the next few hours, investors will be holding their breath in anticipation of China’s latest economic reports. Last night’s larger than expected Chinese trade surplus sent most of the major currencies sharply higher despite concerns about the level of import and export growth. Their trade surplus nearly doubled in the month of April from $9.9 billion to $18.4 billion. However export and import growth slowed materially, raising widespread concerns about the growth in China. Tonight inflation, industrial production and retail sales numbers are scheduled for release. Like many other central banks, the People’s Bank of China keeps a close eye on CPI. After rising from 3.2 to 3.6 percent in March, inflationary pressures are expected to have eased in April. If industrial production and retail sales growth slow as well, the PBoC could react with another Reserve Requirement Ratio cut in May or June. For the currency market, weaker data could renew demand for safe haven currencies such as the Yen and U.S. dollar while at the same time pressure commodity currencies such as the Aussie and kiwi. Stronger data would help boost risk appetite and allow the AUD and NZD to continue to recover.

In the U.S., our focus is also on inflation with producer prices scheduled for release. PPI growth was flat last month and is expected to remain unchanged in April as well.   However we believe PPI growth may have turned negative last month according to the latest import price index which declined by 0.5 percent. Softening inflationary pressures will keep Federal Reserve officials dovish. According to Fed Chairman Ben Bernanke, who spoke today, residential mortgage lending has been sluggish along with demand for credit. These words are consistent with the overall weakness in the housing market. Aside from PPI, we also expect the preliminary May University of Michigan Consumer Confidence numbers and given the slide in equities and deterioration in the labor market, confidence should have weakened.   The most important piece of economic data out of the U.S. this morning was jobless claims. All of the central bank’s concerns stem from the labor market and even though claims have done a mediocre job of tracking payrolls, it is still a very important economic indicator. The latest report showed jobless claims dropping from 368k to 367k.  Although the prior report was revised slightly higher, the absolute level of claims is consistent with an improvement in the labor market.  In other words, the jobless claims figures were neither good nor bad but low enough to prevent USD bulls from going into panic mode. If jobless claims ticked back above 380k, we would expect payroll growth to weaken further in May but there is nothing to worry about in today's numbers.  The 4 week moving average also dropped to 379k from 384k while continuing claims dropped to its lowest level since summer of 2008. The U.S. dollar rallied following report, shrugging off the April trade balance which widened significantly from -$45.4B to -$51.8B.  Exports rose 2.9 percent while imports increased 5.2 percent. Trade activity in the first quarter is now expected drag GDP growth lower because of the sharp deterioration from Q4.  Thankfully manufacturing activity rebounded in April which suggests that the next trade balance report could show a smaller deficit.

EUR: THIRD TIME PROBABLY WONT BE THE CHARM FOR GREECE

The euro finally snaps its losing streak, rising for the first time in 9 trading days. There was not much in the way of good news but a decline in Spanish bond yields helped to lend support to the currency. Yet despite the recovery in the euro, investors remain nervous about Greece and they have good reasons to be. With Samaras and Tsipras failing to form a coalition government, the baton has now been passed to Pasok leader Venizeolos. It would be wishful thinking to hope that the third time will be the charm. Most likely, he will fail just as miserably as his predecessors, leaving the country with no other option than to hold another round of elections in June. Greek bonds have fallen to all time lows with investors wondering how likely a euro exit really is. The Democratic Left wants to keep the country in the euro, a view shared by most Greek citizens. However they may be forced to leave if they fail to meet bailout terms. According to the European Union, Greece has enough financing until the end of June but next week we have a large bond redemption that could trigger more uncertainty for the euro.  Greece will need to decide whether to default or pay the EUR450 million bond and with a hung parliament, the decision could be exceptionally difficult.   Most likely, Greece will take advantage of the 2 week grace period, postponing their decision to late May. The only Eurozone economic reports released today came from France and Italy. In France, industrial production dropped 0.9 percent, erasing all the past month’s rise. In Italy, production increased 0.5 percent. Final German consumer prices figures will be released tomorrow along with the European Commission’s Economic Growth Forecasts.

GBP: NO CHANGES TO MONETARY POLICY

The British pound strengthened against all of the major currencies today, touching the ever so important 0.80 against the euro. As expected, the Bank of England left its benchmark rate unchanged at 0.5 percent and held asset purchases at 325 billion pounds. Despite recent signs of economic weakness, central bankers steered away from any additional action amid rising inflation concerns. Consumer prices are reported to have increased in March, but we won’t know for sure until a few weeks from now. On May 16 ^th the Bank of England will release its Quarterly Inflation report which should go a long way in telling us exactly how far the central bank has moved from implementing more stimulus. While UK’s economy has fallen back into recession, we know that the risk of higher inflation has outweighed the call for more asset purchases. Economic data on the other hand was mixed with industrial production falling 0.3 percent and manufacturing production rising by 0.9 percent in March after a decline of 1.1 percent the month prior. The largest contributions to the increase were the manufacture of chemical and chemical products and the manufacture of transport equipment industries, the report said. However, the deteriorating European economies could present more risks to Britain. Spain, one of the UK’s biggest export markets in the eurozone, is struggling to turn their faltering economy around. If the Spanish government fails to avoid falling into the same traps as Greece and Ireland, we could see a rippling effect that could drag down the shaky recovery in UK. Tomorrow, we have consumer confidence and producer purchase index on the docket.

CAD: JOB GROWTH EXPECTED TO SLOW

The Canadian, Australian and New Zealand dollars rebounded thanks to better than expected economic data and stabilization in risk appetite. House prices in Canada rose 0.3 percent while the trade balance increased from 0.27B to 0.35B. While the surplus was smaller than anticipated, a surplus is still better than a deficit, something that Canadian traders became all too familiar with last year. Tomorrow is a big day for Canada with labor market numbers scheduled for release.   Back in March, more than 82k jobs were created, which was the most since 2008. A far more modest increase is expected in the month of April with a possible uptick in the unemployment rate. The labor market was also a big focus for Australia overnight. Our colleague Boris Schlossberg discussed this in significant detail. He said, “The economy surprised to the upside adding 15.5K new jobs versus forecasts of a decline of -4.8%. The unemployment rate dropped below the key 5% barrier printing at 4.9%. This was the first time that the unemployment rate dipped below 5% since June of 2011. Most of the job growth came from the part time sector, dampening investors enthusiasm somewhat, but the April data was nevertheless impressive and eased fears that the RBA  would be forced to reduce rates once again after its surprise 50 basis point cut earlier this month. The Aussie rallied in the aftermath of the release hitting a high of 1.0125 as shorts quickly scrambled for cover. With analysts expecting an overall loss in jobs, many traders positioned themselves for a break of the key parity level ahead of the release, but the surprisingly robust labor data caused a flurry of short covering. The New Zealand dollar also appreciated but economic data was not nearly as good as Canada and Australia. In fact, business PMI declined from 53.8 to 48.0 in April while house prices dropped 0.3 percent according to REINZ.

JPY: SOME RELIEF FOR THE JAPANESE

The Japanese yen weakened against all of the major currencies today. As market sentiment moderated, the yen’s safe-haven status lost its appeal with traders. Bank of Japan officials could breathe a sigh of relief, with the country’s currency retreating off its multi-month high. Meanwhile, BoJ board member Sayuri Shirai told a news conference that the BOJ would not rule out any monetary policy option if it were to judge that was necessary to support the economy with further easing. "As for the conduct of monetary policy, I will make a judgment based on three points: its effects and side-effects; whether it will distort market prices; and whether it will hurt the BoJ's financial health," she said. Since setting its inflation target of 1 percent in February, critics have questioned the bank’s determination in fighting deflation. BoJ boosted its asset purchase program at two different policy meetings aiming to convince politicians about the bank’s resolve. The renewed jitters could create more havoc for central bankers should risk-averse investors seek out safety in Japanese yen. On the economic front, Japan has printed a current account surplus for the second month but the nation’s adjusted current account total declined from Y856.2B to Y785.5B. According to Ministry of Finance, foreign income was the main contributing factor to a positive current account as foreign earnings tend to be higher due to repatriation flows before the end of fiscal year on March 31. Thus, there could be more weakness in the months ahead with increasing imports amid a shortage of energy. Without any major economic releases tomorrow, yen’s price actions will hinge on risk appetite.

USD/CAD: Currency in Play for Next 24 Hours

USD/CAD will be our currency pair in play for the next 24 hours. From Canada, we expect the employment data at 8:30AM ET/ 12:30GMT. The economic data from the US are producer prices at 8:30AM ET/ 12:30 GMT, followed by U of Michigan consumer sentiment at 9:55AM ET/ 13:55 GMT.

Despite today’s decline, USD/CAD still trades in an uptrend which we determined using the double Bollinger Bands. The closest support is at today’s low of 0.9979. A break below, the pair could target 0.9884, the 61.8% Fibonacci level. We drew our Fibonacci retracement from the swing low in July 2011 to high in Oct 2011. On the upside, the pair could find some resistance at yesterday’s high of 1.0062. Should USD/CAD rally higher, the level of contention could contain the pair at 1.0138.

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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.