U.S. Dollar: Bear Market Rally?

Last updated 3/10/2009 5:57 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

• U.S. DOLLAR: BEAR MARKET RALLY?
• GBP/USD: WEAKEST OF THE BUNCH
• EUR/USD: RALLY FIZZLES
• NZD/USD: 50BP RATE CUT EXPECTED
• AUD/USD: GOLD PRICES FALL BELOW $900
• USD/CAD: OPTIMISTIC COMMENTS FROM HARPER QUESTIONABLE
• USD/JPY: EQUITY RALLY NOT DOING IT FOR USD/JPY

EXPECTATIONS FOR UPCOMING FED MEETINGS

U.S. DOLLAR: BEAR MARKET RALLY?

With U.S. equities rising more than 5.5 percent today, one would expect the improvement in risk appetite to drive the U.S. dollar lower against all of the major currencies.  Unfortunately we did not see a broad based sell-off in the U.S. dollar.  The greenback only weakened against the Euro and commodity currencies because investors continued to bail out of British pounds and Swiss Francs.  It is also interesting that the EUR/USD is well off its highs indicating that the market’s appetite for dollars has not waned dramatically.  The catalysts for today’s rally are not convincing and the moves in the currency market are fizzling, which suggests that we have witnessed nothing more than a bear market rally.

Why Did the Dow Rise 379 Points?

Stocks are higher primarily because the CEO of Citigroup came out and said that the bank is having its best quarter since Q3 2007 when they earned $2.2 billion.  This is great news because most people thought Citigroup was losing money and if they are doing well, it reduces the likelihood of nationalization. However are the problems in the financial sector really behind us?  Probably not.  Even if Citi manages to rise from the ashes, when the U.S. government announces the results of their stress tests on banks, any surprises about who fails to make the cut could drag all the financial stocks down once again.  Wholesale inventories also fell less than expected in January while the IBD/TIPP Economic Optimism index reported an improvement in confidence.  We have stopped seeing back to back weakness in U.S. economic data and have started to see the good mixed in with the bad.  According to the Manpower employment index, job prospects in the U.S have hit 27 year lows.  The main reason why we are suspicious of today’s rally and believe that it could be a dead cat bounce is because the recent strength of the dollar is having a negative impact on U.S. corporate earnings.  The consequences of a strong dollar are beginning to appear once again and that is another reason why we believe that the Dow could see 5,000 before 10,000.  In this case, the dollar could resume its rally once again.  

Bernanke and Geithner: Mixed Messages

The mixed messages from Federal Reserve Chairman Ben Bernanke and Treasury Secretary Tim Geithner suggest that they also have no clue how quickly the U.S. economy will recover.  This morning, Bernanke talked mostly about supervision of financial firms but he said that 10 percent unemployment is well within realm of possibility and if banks stabilized, the recession could be over before the end of the year.  Geithner was not as optimistic.  He said that recessions are intensifying globally and that the current recession in the U.S. could last longer than usual downturns.  Some banks could also require significant capital injections.  His comment about automakers provides clues on where the Obama Administration stands.  They are looking very carefully at restructuring the auto sector because the failure of an automaker would cause widespread damage.  Looking ahead, there are still a lot of uncertainties in the global economy and therefore demand for U.S. Treasuries should remain robust, limiting any major decline in the U.S. dollar.  In order for the equity market rally and recovery in risk appetite to last, the stress tests for banks need to be behind us.  

GBP/USD: WEAKEST OF THE BUNCH

The British pound was the weakest currency in the foreign exchange market today. After falling 400 pips yesterday, the currency has failed to recover despite a massive rally in U.S. equities and positive comments from HSBC, the nation’s largest bank.  The CEO said that January has been a very good month and they will not need government support.  This is in dramatic contrast to the fate of Lloyds, who have now given up 75 percent of their company to the U.K. government.  Barclays also received a warning that they could receive a very critical review of their balance sheet should they decide to dump toxic assets on the taxpayer.  There are a lot of problems going on in the U.K. financial sector and unfortunately this has overshadowed the good news from HSBC.  Economic data was weaker than expected with house prices declining 78 percent while industrial and manufacturing production plummeted  The trade balance is due for release tomorrow and we believe that the deficit widened because the export and new orders component of manufacturing PMI deteriorated materially.  Another round of bad news could drive the GBP/USD closer to 1.35.  

EUR/USD: RALLY FIZZLES

The euro strengthened against the U.S. dollar today but the rally has fizzled significantly.   The biggest news out of Europe is their reluctance to help themselves and their peers.  Although the U.S. government has been pressing Europe for more stimulus, countries like Germany responded by saying that they have no plans to add to their already announced fiscal stimulus packages.  Having already committed 1.5 percent of GDP, they want to first see how the economy responds.  Germany also expressed reluctance about providing aid for other Eurozone nations which is why the IMF is considering stepping up to the place.  They are talking about extending a new credit line for emerging market countries.  The German trade balance increase in the month of January but the current account surplus shrank.  This confirms that investors have been pulling money out of Euros.  German producer prices are due for release tomorrow and we believe that price pressures may have actually increased due to the weakness of the currency and a smaller decline in wholesale prices.  

NZD/USD: 50BP RATE CUT EXPECTED

The currencies that benefitted the most from the equity market rally were the Australian, New Zealand and Canadian dollars.  The AUD was actually the best performing currency today, rising more than 2 percent against the U.S. Dollar and Japanese Yen.  Australian economic data was actually weak with the Job Advertisements falling significantly and business confidence holding near record lows.  The New Zealand dollar also rose 2 percent following a sharp increase in credit card spending.  The Reserve Bank of New Zealand is expected to cut interest rates by 50bp tomorrow afternoon to 3 percent.  A rate cut of this size would leave the Australian dollar as the highest yielding G10 currency.  The New Zealand recession is now in its fifth quarter and despite aggressive fiscal and monetary stimulus, New Zealand’s economy has not seen much recovery.  In order for the economy to truly see a recovery, the Australian economy needs to recover first.  Meanwhile, in Canada Prime Minister Stephen Harper predicted that they will be the first country to emerge from the recession.  This is overly optimistic, but nevertheless has contributed to the rally in the Canadian dollar.  The comments from the Prime Minister also contradict with Canada’s banking regulator Julie Dickson, who declared that current conditions will hurt the profits of the country’s banks, making it harder for them to extend credit.  

USD/JPY: EQUITY RALLY NOT DOING IT FOR USD/JPY

The Yen crosses were virtually unchanged as the Dow Jones soared over 375 points, confirming that the correlation that used to dominate is diminishing.  This is due entirely to the weakness of the Japanese economy, which is seeing no relief.  The decline in the Coincidence Index in combination with the Leading Index reflects an ongoing deterioration in both current and future business conditions. The housing market has also consistently remained a problem for all of the nations facing a deepening recession, yet Japanese real estate markets seem to be affected the most. Pacific Holding, a real estate investing firms, filed for country's third-biggest bankruptcy this year.  Combined with the deteriorating factors in the economy, the Nikkei fell to a 26-year low prompting former BOJ Deputy Governor Toshiro Muto to comment that the government along with the central bank may need to buy shares to support the ailing stock market. Later in the day, Japan is set to release Machine Orders along with Domestic Corporate Goods Prices which are all expected to shrink as lack of demand is continues to erode the country’s competitiveness.

NZD/USD: Currency in Play for Next 24 Hours

The currency in play for the upcoming 24 hours is NZD/USD based on tomorrow’s RBNZ interest rate decision at 20:00GMT or 4:00PM EST. After a prolonged sell-off the pair bounced back, currently stationed in the Range Trading Zone of the Bollinger Bands. The temporarily bounce from lower levels structured support at multi-year lows around 0.4895. If the NZD/USD fails to break into Sell Zone of the Bollinger Band, we could see the pair test resistance which is originating at the first standard deviation of the Bollinger Bands around 0.5165. A surprise in the interest rates decision could lead to a test either levels.     

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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.