US Dollar: Next 48 Hours

Last updated 3/4/2009 5:11 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: NEXT 48 HOURS
• EUR/USD: ECB TO CUT INTEREST RATES BY 50BP
• GBP/USD: BOE TO TAKE RATES BELOW 1 PERCENT
• AUD/USD: GROWTH CONTRACTS FOR THE FIRST TIME IN EIGHT YEARS
• USD/CAD: IVEY PMI ON TAP
• NZD/USD: FALLS TO 6 YEAR LOW INTRADAY
• USD/JPY: EYES 100

EXPECTATIONS FOR UPCOMING FED MEETINGS

US DOLLAR: NEXT 48 HOURS

Things will get very interesting in the currency market over the next 48 hours. The Bank of England and the European Central Bank will be making interest rate decisions on Thursday and non-farm payrolls are due for release in the US on Friday. Alone, any one of these releases could trigger significant volatility in the currency market but together, they could easily lead to major breaks especially since the EUR/USD and GBP/USD have been fluctuating within tight trading ranges. The US dollar traded lower against all of the major currencies except for the Japanese Yen. Risk appetite has improved thanks to a new stimulus package for China, more details on the Treasury’s $75B mortgage plan and a stronger than expected service sector ISM report. The Fed’s Beige Book report signaled worsening economic conditions across the nation, but that failed to cause a dent in the currency or equity markets.

3 Factors Fueling the Forex Rally

There are 3 primary factors driving currencies higher today, the most significant of which is the possibility of a new stimulus package for China. There is a good chance that Chinese Premier Wen Jiabao could make an announcement tonight. Demand from China has supported the global economy for the past decade and if the country recovers, many nations will benefit. Meanwhile the Obama’s Administration $75 billion mortgage program is now up and running. The Treasury provided more details on how their loan modification and refinancing programs will work. Under the program, Americans that are at risk of foreclosure could have the terms of their loans renegotiated so that their monthly payments are no more than 31 percent of their monthly gross income. For homeowners that are struggling but not delinquent, they may also be able to refinance into lower cost loans. Borrowers can start contacting loan services immediately. Meanwhile, the service sector ISM report was slightly better than expected but weaker than the previous month. The silver lining in the report was the employment component which rebounded significantly. The improvement suggests that non-farm payrolls could surprise to the upside on Friday .

The Fed Needs to Tighten Before a Rebound?

Not all news was good news however as the various Fed districts reported broad based economic deterioration. Consumer spending is very weak and the residential real estate markets are dead. There is little to no signs of slowing in house price decline while credit remained very tight. Federal Reserve President Lockhart echoed the negative sentiment when he said that incoming data give us little reason to be upbeat about the immediate future as unemployment continues to rise. Interestingly enough, Fed President Hoenig who is a non-voter on the FOMC panel this year said that the central bank may have to start tightening its “extremely accommodative” monetary policy well before the economy recovers to avoid serious inflation pressures in the future. Although we are far from a rate hike, this is an important point to keep in mind. In the meantime, jobless claims and factory orders are on the US calendar tomorrow. These pieces of data should take a backseat to the BoE and ECB rate decisions.

EUR/USD: ECB TO CUT INTEREST RATES BY 50BP

The Euro strengthened against the US dollar on the heels of marginally better economic data and talk of a Chinese stimulus plan. The final figure for Eurozone service sector PMI rose from 38.9 to 39.2 in the month of February. According to the UK Telegraph, the EU has contingency plans to rescue Eurozone states that are at risk of default. There has been a lot of speculation about a potential a breakup of the Eurozone. We believe that this will not happen because of the cost of leaving the Eurozone for counties like Greece, Italy, and Austria are too significant. Meanwhile, the European Central Bank is expected to cut interest rates by 50bp to a record low of 1.50 percent on Thursday. The ECB rate decision could have a very significant impact on the currency market because there are a lot of uncertainties. The central bank could ease more or less than expected for a variety of reasons and they could suggest that they are looking into Quantitative Easing. As usual, the ECB rate decision will be followed by a press conference from central bank head Trichet. The press conference which begins at 8:30am ET or 13:30 GMT is oftentimes more market moving than the actual rate announcement (Read our special report on How the EUR/USD could respond to different outcomes for ECB meeting ). In addition to the rate decision, German retail sales, French employment and fourth quarter GDP are due release tomorrow, so expect a volatile day for the EUR/USD.

GBP/USD: BOE TO TAKE RATES BELOW 1 PERCENT

Stronger economic data drove the British pound higher against the US dollar and Euro as service sector PMI rose from 42.5 to 43.2 in the month of February. The Nationwide consumer confidence report also rose from 41 to 43. Like the ECB, the Bank of England will be making an interest rate announcement on Thursday. They are expected to take interest rates to 0.5 percent, a record low for the 300 year old central bank. Having already reduced interest rates by 475bp since November 2007, the central bank remains one of the most aggressive. UK monetary policy officials agree that the recession will deepen significantly and so far their fiscal and monetary stimulus has yet to work. In the minutes from the previous monetary policy meeting, the members unanimously agreed that central bank Governor King should ask the Chancellor for the authority to start purchasing government securities. In other words, they are seeking the permission to engage in Quantitative Easing. On Tuesday, Chancellor Darling hinted that QE will be approved which would allow the central bank to start “printing money.” There are 2 uncertainties for tomorrow’s rate decision, the size of the Quantitative Easing program and whether or not the BoE will continue to lower interest rates . Fundamentally, Quantitative Easing is bearish for the British Pound.

AUD/USD: GROWTH CONTRACTS FOR THE FIRST TIME IN EIGHT YEARS

The Australian economy has been viewed with much enthusiasm and promise as of late. However, today’s contraction in growth seems to contradict with the hope that at least one country will resist a recession. Even though Australia is not in a recession yet (as defined by two consecutive quarters of negative GDP), today’s dismal report showed the first decline in growth in eight years. GDP officially came in at -0.5%, far below estimates. Two factors are largely to blame: Housing and Exports. The Australian housing market has been suffering as the result of a global housing slump and limited credit availability. The declines in commodity prices on the other hand have been a detrimental factor for trade. The news presents some fuel for RBA critics for the refusal to take rates lower. In a statement made today, RBA Assistant Governor Edey called for more “short-term weakness”, an ominous message for a country trying to avoid recession. Despite the bad news, AUD/USD has strengthened significantly. Earlier weakness was completely erased in both the Australian and New Zealand dollars. Last night, the NZD/USD fell to a 6 year low of 0.4896. Canadian IVEY PMI is due for release tomorrow and we believe that the data will be weak considering the big drop in leading indicators and wholesale sales.

USD/JPY: EYES 100

The Japanese yen has weakened across the board as risk appetite recovers. USD/JPY is continuing to extend its gains and is quickly approaching the pivotal 100.00 level. Serious economic troubles in one of the world’s leading economies are finally catching up with the currency. Of course all of this is to the delight of the Japanese government. The declines in the yen should eventually serve to enhance the competitiveness of Japanese exports. A more sustained and severe yen depreciation will be needed to lift the country out of recession, but it is an optimistic start. However, the decline in the currency is not the only promising implications for the economy. Talks about a potential Chinese stimulus plan may provide Japan with a revitalized market for materials and machinery. China presents trade opportunities because of their proximity to Japan, but their needs fall very closely in line with what Japanese industrial companies are best at producing – namely infrastructure building supplies. Of course the potential implications for Japan will take a while before they are reflected in economic indicators. The only potent report expected from the region for the rest of the week will be Capital Spending, scheduled for later today.

EUR/GBP: Currency in Play for Next 24 Hours

The joint interest rate decisions by the BoE and ECB make EUR/GBP the perfect pair to watch over the next 24 hours. The BoE’s decision is expected to come at 7:00 am ET or 12:00 GMT while the ECB will be reporting forty-five minutes later at 7:45 am ET or 12:45 GMT. European economic data does not stop there. There is still German Retail Sales for 2:00 am ET or 7:00 GMT and fourth quarter GDP expected for 5:00 am ET or 10:00 GMT.

EUR/GBP is currently trading within the range trading zone as determined by Bollinger bands. The tight range is mostly attributable to the anticipation of tomorrow’s decision. A change in the rate differential will have strong implications for the pair’s movement. Currently, the EUR/GBP range has established 0.8748 as support and 0.8997 as resistance. These levels are important because they are the 50% and 38.2% retracements of the Fibonacci levels drawn from October lows to December highs. Also notice that the trendline drawn from the peaks of late-December and late-January should provide further resistance. If price action should supersede the aforementioned levels, the 23.6% retracement is the next level in reach at 0.9305. Expect the interest rate decision to provide enough catalyst for the tight trading range to be challenged.

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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.