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THE STORIES IN THE CURRENCY MARKET

• US DOLLAR: FINANCIAL SECTOR RISK SENDS DOLLAR HIGHER
• GBP/USD: BREAKS BELOW 1.38 ON SURRENDER BY LLOYDS
• EUR/USD: STARK SUGGESTS AN END TO RATE CUTS
• USD/CAD: 1.3000 IS TESTED ONCE AGAIN
• AUD/USD: AWAITS NAB BUSINESS CONFIDENCE
• NZD/USD: RBNZ READY TO CUT ON WEDNESDAY
• USD/JPY: JAPANESE CURRENT ACCOUNT TURNS NEGATIVE

EXPECTATIONS FOR UPCOMING FED MEETINGS

CURRENT US INTEREST RATE: 0.25%					Rates Expected to Remain Unchanged in Feb and March
	3/18 Meeting	4/29 Meeting
NO CHANGE	100.0%	90.0%
CUT TO 0BP	0.0%	0.0%
INCREASE TO 50BP	0.0%	10.0%
INCREASE TO 75BP	0.0%	0.0%

US DOLLAR: FINANCIAL SECTOR RISK SENDS DOLLAR HIGHER

Markets are once again entrenched in a fear induced environment. Global equity markets are spiraling downward on continued disruptions in the stability of the global financial system. The promise of stability is nowhere to be found, as situations are only worsening despite continued governmental efforts. The concerns over the financial sector in particular have added to investors fears. Between the British nationalization of Lloyds Banking Group and AIG’s proposal for another bail-out, the survivability of financial companies is in question. Currencies have reacted with a determination on dollar strength. As the yen continues to lose its status as safe haven, the availability of a risk-free environment is almost completely limited to the United States. The dollar advanced against the Euro, Pound, Yen, Canadian dollar, Australian dollar, and New Zealand dollar.

AIG Threatens for Fourth Bailout

The end of big company bail-outs extending from the depths of the credit crisis in October have not yet come to an end. We are in perpetual cycle, in which the companies that have received assistance are suffering once again; approaching the Treasury with their hands held wide open. American International Group is this week’s example. In order to postpone the potential collapse of the company, executives are threatening the government in order to receive more assistance. In a 21 page document filled with promises of financial shockwaves in the event of a collapse, the ailing insurer petitions for its fourth government bailout. Their case exists along the fact that they are simply too large to fail. In the event of a collapse, AIG is certain that the market for money-market funds would freeze over, European banks would be left with crippling losses, while similar competing life insurers would be destined to failure. Furthermore, they boldly determine that if they do not receive more taxpayer money, the initial bailout funds have all but been wasted. In fact, this may be their most potent argument. As the government has already made substantial investments in the firm, it would severely hinder economic progress to see these efforts go completely to waist. The government however, may formulate different procedures when dealing with similar threats. One possibility is that the government could break up financial companies like AIG that are deemed “too big to fail”. This would facilitate an easier sale to other companies.

US Petitions for more Global Government Spending

As the United States government watches as stimulus plans fail to take proper impact, a new initiative will be brought forward at a G-20 summit in London next month. The US wants to persuade other countries to start picking up their government stimulus spending. The rationale is that if everyone develops stimulus plans, any perceived benefits should trickle into the entire global economy. However, the proposal is not expected to go over easy. It has been known that the European Union is putting forward a plan to revamp financial regulation during this same meeting. The Europeans, which have been largely resistant to increased spending, are more interested in imposing a global regulatory system in their efforts to prevent another global recession. Regardless, many are expecting a lot of market changing actions out of this meeting. However, with groups so ambitiously opposed in their obligations, it is likely that markets will have more reason to plunge on renewed disappointment.

GBP/USD: BREAKS BELOW 1.38 ON SURRENDER BY LLOYDS

The British pound is under significant pressure in today’s trading as it becomes obvious that the impact of the BoE’s easing has not insured a more stable monetary environment. After having their credit downgraded on Friday, Lloyds Banking Group conceded to government control. Their efforts to avoid further government involvement have been thwarted by the increasing severity of the financial crisis. The lending institution was forced to give up to a 77% government stake in turn for guarantees for £260B of risky assets. As Lloyds waves the white flag and surrenders to government ownership, we are met with the blunt realization that the tremendous amount spent on trying to revatilize the financial sector has been insufficient in providing stabilization, let alone improvement. The Bank of England and UK Treasury were once praised for their aggressiveness in monetary and fiscal stimulus, but their credibility has all but dissipated as situations only worsen. Uncertainty will continue to dominate pound trading as many assume that if Lloyds could not survive unassisted, other companies are vulnerable too. As the pound heads closer toward a fresh two-decade low, expect the combination of new Quantitative easing measures and banking concerns to take their toll on the ailing currency. The most important economic indicator for tomorrow will be Industrial Production.

EUR/USD: STARK SUGGESTS AN END TO RATE CUTS

Despite concerning economic information, the euro maintains only a slight drop in today’s trading. The rigidity of prices is mainly due to the fact that the European Central Bank reintroduced its reluctance to bring rates considerably lower. This time it is not Jean-Claude Trichet himself who is expressing these concerns, it is Juergen Stark. Stark is convinced that not only will cutting rates lower not assist the economy, it will serve as a worsening factor in promoting further destabilization. Even though situations in the Euro-zone clearly suggest that monetary easing is needed, Stark’s comments may suggest that the aid will be received in different forms. Once again this reintroduces the potential for the use of Quantitative easing, which seems to have lost its exotic following as many of the world’s largest nations are using the technique. The case is building for a transfer of interest rate dependent policies to those mostly associated with quantitative easing as Trichet himself noted its possibility during the conference following last week’s rate decision. The currencies resilience is also related to the strength experienced against the British Pound; EUR/GBP is rallying more than 150 pips. As another bearer of poor economic news, that clearly exhibit the need for further monetary action, Sentix investor confidence fell to an all time low at -42.7. Tomorrow’s notable releases include Germany’s CPI and Trade Balance.

USD/CAD: 1.3000 IS TESTED ONCE AGAIN

USD/CAD makes its fourth attempt to puncture the pivotal 1.3000 level since the initial rallies staged at the beginning of the financial crisis. As rallies have extended for the fifth consecutive trading day, the weakness in the CAD has seen intraday levels hitting prices not reached since 2004. On the general emotional disgust evoked by the weakness in worldwide equities, all commodity currencies sink lower on the risk aversion. Canadian Housing Starts fell to 134,600 units, the largest percentage decline in eight years. The harassment on growth an employment will inevitably prove to cause significant damage to the nation’s housing market. Ironically, the advances in USD/CAD were only partially alleviated after the disappointing report was released. The Kiwi has sacrificed more than 100 pips in today’s trading, while the Aussie is down more than 90 pips. For Australia, NAB Business Confidence, Westpac Consumer Confidence and ANZ Job Advertisements will be released tomorrow. New Zealand will produce the Terms of Trade Index. For later in the week, keep in mind that the RBNZ will have their Monetary Policy meeting on Wednesday, which should provide an additional 75bp of easing.

USD/JPY: JAPANESE CURRENT ACCOUNT TURNS NEGATIVE

USD/JPY is closing in the gap between current prices and the pivotal 100.00 level. The strength in the yen has all but diminished as the country faces economic strains that have removed the safe status label of the low-yielding nations. It has become increasingly clear that Japan’s prospects are dim in the event that a global recession continues to reduce international demand. The country reported today that their Current Account has reached a deficit for the first time in more than a decade. Exports simultaneously showed a sharp fall to -46.3% of the levels shipped internationally a year earlier. For a country that has assumed its position as a major economic power through its consistent Current Account Balance, the future of the Japanese economy dissuades any optimism. In the light of the negativity surrounding the report, the Nikkei 225 slipped to a new 26 year low, clearly offering a contradiction to the illusion that the yen is a safe haven for desperate investors. However, some economists are holding on to their optimistic sentiment as the ECO Watchers Survey increase from 22.1 to 26.5.

EUR/GBP: Currency in Play for Next 24 Hours

EUR/GBP will be our currency pair in play for the next 24 hours. Germany is set to release both their Consumer Price Index and Trade Balance at 3:00 am ET or 7:00 GMT. In addition, there will be EZ PPI at 6:00 am ET or 10:00 GMT. The British are scheduled to produce Industrial Production at 5:30 am ET or 9:30 GMT.

EUR/GBP is bolstered by 180 pips in today’s trading, cementing the pair well into the Bollinger band buy zone. However, resistance has taken noticeable impact. Drawing a Fibonacci retracement from January 26th to February 10th, highs today failed at the 61.8% retracement at 0.9182. As another target, there is the late-January high which lies about 350 pips away. Support can be seen as the 23.6% retracement of 0.8845, which also corresponds with lows experienced in early January. With the talk of EUR/GBP hitting parity in everyone’s minds, the break of the 0.9182 level should provide one step toward that possibility. Of course, there is still a lot that stands in the way of the parity of EUR/GBP.

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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.