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According to the latest Treasury International Capital flow report, foreign investors were net sellers of U.S. investments and U.S. dollars in the month of January.  Private individuals continued to park their money into the safety of U.S. Treasuries but government agency bonds like Fannie Mae and Freddie Mac were dumped in size.  Hedge funds in the Caribbean were the biggest sellers followed by European nations such as the U.K., Ireland, Norway, and Italy.  Japan and China continued to be net buyers.

With a month to go before the report is due for release, China is flexing their muscles. This weekend, Chinese Premier Wen Jiabao signaled to the U.S. that they are fully aware of the power they have on the U.S. economy and how the U.S. needs China just as much as China needs the U.S. He said that “we lent such huge funds to the United States, and of course we’re concerned about the security of our assets.” If China decided that U.S. investments are no longer safe, their liquidation would drive yields significantly higher and stocks significantly lower. The consequences of infuriating China are severe because they have the power to retaliate.

CNBC VIDEO:  Is US Debt Still Desirable to China?

Interestingly enough, the U.S. dollar gained strength in the month of January despite the largest single month exodus by foreign investors since August 2007.  Given the tardiness of the data, the impact on the currency market has been limited.

Instead, the Euro and British pound are retaining their gains against the U.S. dollar as the market holds onto the hope of a recovery in 2009 following comments from Bernanke last night.  Having heard more than his 60 minutes interview in the past month, we know Bernanke was a bit more optimistic than he actually feels in his first on the record TV interview by a journalist.  The manufacturing sector remains in shambles with the Empire State manufacturing survey falling to a record low in the month March and industrial production falling more than expected.  Capacity utilization is now at 70.9 percent, matching its record low. 

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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.