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US Dollar: Will the Volatility Continue?

Last updated 3/6/2009 4:50 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: WILL THE VOLATILITY CONTINUE?
• EUR/USD: STUCK IN A RANGE
• GBP/USD: HIT BY LLOYDS DOWNGRADE
• NZD/USD: RBNZ EXPECTED TO CUT RATES
• AUD/USD: GOLD PRICES EXTEND GAINS
• USD/CAD: OIL AT $46.10 A BARREL
• USD/JPY: HOLDS STEADY AHEAD OF BUSY ECONOMIC CALENDAR

EXPECTATIONS FOR UPCOMING FED MEETINGS

US DOLLAR: WILL THE VOLATILITY CONTINUE?

All of the major currencies ended Friday’s trading session virtually unchanged against the US dollar.  However the muted performance masks significant intraday volatility.  The Euro for example raced to a high of 1.2754 following the US non-farm payrolls release but choked up nearly all of its gains on more uncertainty in the financial market.  Similar price action was seen in USD/JPY.  The currency pair dropped to a low of 96.58 in the European trading session but after a post payrolls rally it ended the US session above 98.  The equity market was not spared from the volatility with the major indices falling to fresh 12 year lows before significant reversals.  With no major US economic data near the beginning of the week, fear and uncertainty could lead to more volatility in the currency market.  

New Concerns for Financial Sector

The large amount of job losses in the month of February is an easy excuse for the earlier weakness in US equities.  However a look at the intraday price action in both the equity and currency markets reveal that traders reacted positively and not negatively to the non-farm payrolls report.  The -651K decline in payrolls could have contributed to the sell-off but the reversal was primarily triggered by new concerns for the financial sector.  Paul Volcker who was a former Chairman of the Federal Reserve and the current head of President Obama’s Economic Recovery Advisory Board suggested this morning that the US government should divide up the commercial and investment banks.  Federal Reserve President Hoenig echoed this sentiment when he said that “if firms are too complex to manage, break them up.”  Meanwhile Federal Reserve President Dudley warned that the deleveraging in the financial markets is far from complete.  Should more trouble hit the financial sector and breakups start to occur, it would add uncertainty to the financial markets and in turn, resurrect risk aversion.  

Unemployment Rate Surges to 8.1%, 25 Year High

A total of 651k jobs were cut by US corporations in the month of February.  Since January 2008, more than 4.2 million Americans have lost their jobs. This represents a rebound from the previous month but only a very mild one after another 57k jobs cuts were tacked onto the January data. With the downward revision, January represented the single worst month for the labor market since 1945.  The unemployment rate hit 8.1 percent, the highest level in 25 years. Nearly all sectors of the US economy cut jobs except for education and government.  In response to the payrolls numbers, there was brutal initial spikes in the currency market, but other than that, it has been anti-climatic.  From all angles this negative number represents severe weakness in the US economy but going into the release, there was a rumor that non-farm payrolls could fall by 1 million. The fact that the data was better than the whisper number actually drove USD/JPY higher.  

Retail Sales and Trade Balance

Next week, we have the U.S. retail sales report and the trade balance due for release.  These numbers will not come out until Thursday which gives currency traders a few days to mull over how bad consumer spending was in the month of February. The labor market has been very weak which suggests that consumer spending could contract, but stronger sales at Wal-Mart indicate that the decline may not be as bad as one would expect.  The trade deficit is also expected to narrow for the thief consecutive month as the strength of the US dollar reduces global demand.  It will be interesting to see if consumer confidence holds up with the University of Michigan reporting the preliminary March confidence numbers.  Daylight Savings Time is this weekend, so please remember that GMT is now 4 hours ahead of Eastern Time. 

EUR/USD: STUCK IN A RANGE

Over the past 48 hours, we have seen a tremendous amount of market moving economic data. Yet the EUR/USD has refused to break out of its 1.25 to 1.30 trading range.  The lows are getting lower and a downside breakout is likely, but it is a testament to the resilience of the Euro in that a rate cut and the talk of quantitative easing has failed to push the currency pair below 1.25.  Next week, there are a lot of Eurozone economic data that could add pressure to the currency pair. This includes the German trade balance, producer prices, industrial production and retail sales.   It should just be a matter of time before we see further weakness in the EUR/USD as economic data continues to surprise to the downside.  In the meantime, Switzerland has an interest rate decision next week. They are expected to cut interest rates from 0.5 to 0.25 percent.  Risk aversion has driven the Swiss Franc dramatically higher against the Euro to the dismay of the central bank.  In addition to the rate decision, employment numbers are due for release.  

GBP/USD: HIT BY LLOYDS DOWNGRADE

Unlike the other major currencies, the British pound has failed to rally against the US dollar.  Lloyds Banking group was downgraded by Standard & Poor’s from A-minus to A, reflecting concerns that the bank could face more losses in 2009.  The ratings agency also downgraded the group’s hybrid securities from A to BB-plus.  The UK government owns 43 percent of Lloyds and this represents a significant blow to confidence.  The banking group is already asking for another injection from the UK government.  There are also concerns that Quantitative Easing will weigh on the British pound in the near future.  Producer Prices came in at expectations but below prior month levels. Since one of the main fears surrounding the use of QE measures is inflationary pressures, tame prices should alleviate some uneasiness. It has been shown in other circumstances that the effect of flooding the market with such high levels of money results in unstable prices, and in some cases hyper inflation. There is no doubt that the Bank of England and the Treasury will keep a particular eye on the progression of the inflation rate, which when all things considered, is still rather high compared with deflationary pressures elsewhere. Even though we will not receive any indication of price levels as the result of Quantitative Easing for some time and the BoE does expect inflationary pressures to remain low, next week will see the release of Industrial Production and the Trade Balance.

NZD/USD: RBNZ EXPECTED TO CUT RATES

The Australian, New Zealand and Canada dollars strengthened marginally against the greenback as equities rebound and commodity prices edge higher. Construction sector PMI deteriorated materially in Australia adding skepticism to the Reserve Bank’s optimistic outlook for the Australian economy.  The RBA left interest rates unchanged this week, but if economic data continues in this direction, the central bank may be forced to resume their rate cuts next month.  Australian employment numbers are due for release next week and unfortunately the sharp decline in the employment components of service, manufacturing and construction sector PMI suggest that net job losses were seen in the month of February.  New Zealand has an interest rate decision next week and the RBNZ is expected to cut interest rates by 75bp.  The rate cut would make the New Zealand dollar a lower yielding currency than the Australian dollar.  Retail sales and business PMI are also due for release and unfortunately only bearish numbers are expected from New Zealand.  Canada has a relatively barren economic calendar with the employment numbers on Friday being the only significant release on the calendar.  The recent weakness in the economy suggests further job losses.  

USD/JPY: HOLDS STEADY AHEAD OF BUSY ECONOMIC CALENDAR

The Japanese economy which is experiencing the worst economic crisis in decades is continuing to show no signs of recovery. Lending remains tight causing the Bank of Japan to elaborate on the possibility of extending purchases of corporate debt to prevent a shortage of credit. Combined with the decline in corporate profits, this will likely enhance alternative actions from the BoJ. Meanwhile, the Japanese government is pondering the idea of prolonging short-selling restrictions on stock trading as Nikkei hovers near a 27 year low. The fear persists that further deterioration of the stock market will diminish corporate capital and discourage lending.  A lack of demand coming from abroad is raising concerns that production cuts from Toyota will cause bankruptcies among suppliers. Toyota may ask for up to ¥200 billion yen or $2 billion in loans from the Japanese government to combat rough waters. Most of the funds will likely be used to support the suppliers to ensure a continuation in production. Monday will be a busy day for economic figures with Bank Lending, Current Account, and Trade Balance being released.  

CHFJPY: Currency in Play for Next 24 Hours

CHF/JPY will be the currency in play for Monday. Japan is set to release its figures for Current Account, Trade Balance, and Bank Lending on Sunday at 23:50GMT or 8:50PM EST.

Currently the pair is in a Buy Zone of the Bollinger Bands after rallying from multi-year low established in late January. Current resistance is structured at 2nd Standard Deviation of the Bollinger Bands at 86.05 which also coincides with a high for this year. The Buy Zone pattern will be negated upon the break of 1st Standard Deviation. So far, the 1st Standard Deviation of the Bollinger Bands proved to be an effective support for the pair for 4th consecutive session and represents our current support which is around 83.50.

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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.