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U.S. Dollar: 3 Big Weekend Event Risks

Last updated 3/13/2009 5:33 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: 3 BIG WEEKEND EVENT RISKS
• EUR/USD: STALLS AHEAD OF 1.30
• GBP/USD: BOE DEFENDS QUANTITATIVE EASING
• USD/CAD: UNFAZED BY WEAK ECONOMIC DATA
• NZD/USD: RETAIL SALES MIXED
• AUD/USD: GOLD PRICES AT $929.75
• USD/JPY: JAPANESE GOVERNMENT MULLS STOCK PURCHASES

EXPECTATIONS FOR UPCOMING FED MEETINGS

U.S. DOLLAR: 3 BIG WEEKEND EVENT RISKS

This past week has been marked by recoveries in both the currency and equity markets thanks to better than expected U.S. economic data and reports of profitability from banks.  Although the price action that we have seen thus far is still in line with a bear market rally, the move higher has been a breath of fresh air for many investors.  For the time being, the downtrend in the EUR/USD has been broken. Even though the currency pair continued to edge higher, it remains to be seen whether the strength can continue.  There are a lot of economic data due for release next week, but not before this weekend 3 big event risks – the G20 Meeting, OPEC Meeting and Bernanke’s first ever on-the-record television interview as Fed Chairman.  

A Weekend that Cannot be Missed

Normally no fireworks are expected from the G20 meetings of Finance Ministers and Central Bankers because with a large group of developed and emerging countries in attendance, there are far more heated debates and discussions than decisions.  The outcome of the G20 meeting can be best summarized by a line once written by the commission who concluded that “the group has been particularly successful in sharing experiences and exchanging views on global issues.”  However with the deepening economic and financial crisis, the G20 could provide help for emerging market countries by approving a massive capital increase for the International Monetary Fund (IMF) and Asian Development Bank (ADB).  Such an announcement could be perceived as positive for the global markets because it would reduce the chance of those nations defaulting on their loans ( Will there be Fireworks after the G20 Meeting? ).  The G20 could also criticize currency intervention following the Swiss National Bank’s actions, but we think this is unlikely.  Treasury Secretary Geithner will be hosting a press conference following the G20 meeting on Saturday.  Once that is over, the second major event risk is the OPEC meeting on Sunday.  Oil prices have risen to $46.10 a barrel on the expectation that OPEC will announce a production cut this weekend.  If they fail to do so, we could see the Canadian dollar give back some of its recent gains.   Finally, a taped interview of Federal Reserve Chairman Ben Bernanke will appear on “60 Minutes” Sunday evening at 7pm ET.  It is very rare for a Fed Chairman to answer questions from the news media on the record in a taped interview but Bernanke and the Obama Administration as a whole has been trying to increase transparency.  He will be talking about what caused the economic crisis and when he expects the recession to end.  

Fed Meeting and Inflation

Bernanke’s comments are particularly important ahead of this upcoming week’s FOMC meeting.  The Federal Reserve has no room to cut interest rates but they could announce purchases of U.S. Treasuries which would be dollar negative.  In addition to the FOMC decision, consumer and producer prices are due for release along with the Treasury International Capital flow report and the Philadelphia Fed survey.  The smaller decline in import prices and the rebound in commodity prices could reduce deflationary pressures.  Meanwhile, the trade deficit narrowed to the lowest level in six years as imports fell more than exports.  Import prices also dropped for the seventh consecutive month by 0.2 percent.  In yesterday's Daily Currency Focus, we talked about the potential for a smaller trade deficit because of the rebound in the export orders component of manufacturing ISM.  The University of Michigan consumer confidence survey rebounded in March, but remained near 28 year lows.

EUR/USD: STALLS AHEAD OF 1.30

For the fourth consecutive day in a row, the Euro has strengthened against the U.S. dollar.  The rally is tempering which is not surprising given the constant reminder of weakness in the Eurozone economy.  Retail sales rose 0.1 percent in January, less than the market expected.  On an annualized basis, consumer spending is down 2.2 percent.  Next week, Eurozone inflation, trade, industrial production and the ZEW survey are due for release. Not all of the reports will be weak, particularly the inflation data.  ECB officials continue to lean towards hawkishness with Noyer’s comment this morning that Eurozone rates are closer to U.S. and U.K.’s than many would imagine.  He also believes that interest rates become less effective the closer they are to zero.  Meanwhile Angela Merkel, the German Chancellor, is deliberating new initiatives aimed at renewing normal lending conditions for the largest Euro-zone economy. Ironically, the plan involves the same “bad bank” idea that the US had toyed with but eventually dismissed a few weeks ago. The plan involves absorbing these toxic assets in a bad bank until they eventually mature. This allows Merkel to retain funds that would have otherwise been spent on another bank-bailout. The Swiss franc has not recovered after yesterday’s sharp losses suggesting that currency traders are not willing to fade the Swiss National Bank.  

GBP/USD: BOE DEFENDS QUANTITATIVE EASING

Even though the British Pound has rallied for three consecutive days, the losses incurred on Monday are still largely in place. The Bank of England continues to defend their use of quantitative easing. Kate Barker, a BoE member, reiterates her confidence in the bank’s decision to seek other methods of monetary easing. Barker mentions that the visible impact that their rate cuts were accomplishing became less and less as the bank brought rates to record lows. She mentions that the use of quantitative easing is “the best course in order to achieve our objective of keeping inflation to target.” In other British economic interests, their proposals during this weekend’s G-20 meeting are expected to be heavily on the side of financial regulation. Their interest is to develop a regulatory agency that is specifically able to deny the use of excessive risks to financial institutions. This requirement to revamp the financial system has been an interest expressed across Europe, and will no doubt be a central discussion at the meeting. The main event risk for next week includes the Bank of England Minutes and the change in Jobless Claims.

USD/CAD: UNFAZED BY WEAK ECONOMIC DATA

The Canadian, Australian and New Zealand dollars rose against the greenback as risk appetite continued to improve. The Canadian Dollar completely shrugged off weak economic data as Canada’s trade deficit and unemployment continued to rise.  More than 82,000 Canadians lost their jobs in the month of February, driving the unemployment rate up to 7.7 percent, the highest since October 2003.  The amount of jobs lost was more than 50 percent higher and analyst estimates and reflects the deteriorating conditions in the Canadian economy.  This was further confirmed by the trade deficit, which widened from 0.5B to -1.0B in the month of January as car exports fell to the lowest level since 1992.  Instead, broad dollar weakness and the anticipation of a production cut from OPEC have driven the Canadian dollar higher.  Meanwhile, the New Zealand dollar also gained strength despite a larger decline in retail sales. RBNZ Governor Allan Bollard stated that the economy will likely experience a contraction until the middle of the year, making the recession the worst in more than 30 years. Car Sales continued to drop as consumers are reluctant to buy any big ticket items as rising unemployment and deepening recession curbed consumer confidence. The Australian Dollar continued the rally from depressed levels gold prices near $930 an ounce. Early next week, the RBA is expected to release their Board Minutes which will elaborate on their most recent interest rate decision.  However the spotlight will be on Canada who has consumer prices and retail sales due for release.  

USD/JPY: JAPANESE GOVERNMENT MULLS STOCK PURCHASES

Speculation of the Japanese government introducing additional stimulus in the form of stock purchases drove the Yen lower against other major currencies on the fear that they would have to print money to fund these purchases. The Japanese stock market which plummeted to a quarter century low earlier this week responded by posting its largest increase since the beginning of the year.  A separate plan by Prime Minister Taro Aso will inject funds into three regional banks in order to improve liquidity and restore lending.  The government will acquire bank’s preferred shares in an amount over ¥121 Billion Yen or $12.1 Billion. Industrial production continued the decline falling by a larger amount than the previous month. Early next week, Japan will release figures for Department Store sales which will elaborate on the appetite of consumers.  In discussions with the U.S. Treasury Secretary, Japan’s Yosana said that currencies were not discussed and the U.S. agreed to boost capital for the Asian Development Bank.  

EUR/USD: Currency in Play for Next 24 Hours

The currency in play for Monday is EUR/USD. The Euro-Zone will produce several key economic indicators, including the EZ Consumer Price Index as well as the Employment Change at 6:00 am ET or 10:00 GMT. The US will report the Empire State Manufacturing Index at 8:30 am ET or 12:30 GMT and Industrial Production at 9:15 am ET or 13:15 GMT. The EUR/USD& #8217;s four consecutive daily rallies is keeping the pair in the Bollinger band buy zone. As we discussed in previous technical reports, the levels to watch in EUR/USD are 1.3000 and 1.2500. Since both of these levels are round numbers, they are respected because of their psychological significance. The resistance at 1.3000 also has the additional relevance added on by the 23.6% retracement from December to March lows. The support at 1.2500 has repelled further declines on at least three occasions. If EUR/USD garners enough momentum to break-through the 1.3000 level, we can expect new rallies to extend until about 1.3330 before reaching another important area of resistance at the 38.2% retracement.  

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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.