US Dollar: Forex Rally Fizzling

Last updated 3/16/2009 5:29 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: FOREX RALLY FIZZLING
• EUR/USD: RETREATS AFTER TEST OF 1.30
• GBP/USD: RALLIES DESPITE BOE WARNING OF DEBT DEFLATION TRAP
• AUD/USD: RBA TO EXPLAIN DECISION TO LEAVE RATES STEADY
• USD/CAD: CAPACITY UTILIZATION HITS RECORD LOWS
• NZD/USD: BIGGEST PERCENTAGE GAINER
• USD/JPY: BOJ SHOULD EXTEND QE MEASURES

EXPECTATIONS FOR UPCOMING FED MEETINGS

U.S. DOLLAR: FOREX RALLY FIZZLING

With no fireworks from this weekend’s 3 big event risks, the rallies in the currency and equity markets are fizzling. Having been up more than 150 points intraday, the Dow Jones Industrial Average ended the U.S. trading session down 7 points. This lack of follow through was replicated in the foreign exchange market with the Euro and British pound giving up earlier gains. Promises can only take the markets so far and the lack of concrete actions by the G20 has disappointed investors. Although we have previously mentioned that bear markets can rally as much as 25 percent, today’s intraday reversal is worrisome. Looking at the economic calendar this week, there is not much event risk to energize investors.

News Flash: U.S. Economy is Still Weakening

Amidst last week’s recovery in risk appetite, currency traders may have lost sight of the fact that the U.S. economy is still weakening. The Empire state manufacturing survey plunged to a record low in the month of March while Industrial production fell 1.4 percent, driving capacity utilization back to its record lows. Foreign investors reduced their holdings of U.S. assets by the largest amount since August 2007. Homebuilder confidence held near its record lows in the month of March as the slump in the real estate sector shows no signs of easing. Producer prices are due for release tomorrow and even though we believe that inflation ticked higher last month, the change in inflation pressures will not impact the Federal Reserve’s actions because deflation at this point is still a greater risk than inflation. The biggest event risk for the U.S. dollar this week is Wednesday’s FOMC rate decision but even that is not expected to have any meaningful impact on the currency market. We expect the Federal Reserve to repeat that interest rates will remain exceptionally low for some time and remain non-committal about purchasing long term U.S. Treasuries. Although this could be mildly dollar bullish, the disappointment should be neutral to negative for equity markets and risk appetite in general.

G20, OPEC, Bernanke All Disappoint

CNBC Video: G20 Meeting Synopsis

As for this past weekend’s 3 key events, the G20 made a lot of promises to boost the resources of the IMF and Asian Development Bank, increase oversight of credit agencies and increase financial sector regulations but they committed to no concrete actions. With 20 nations at the discussion table, it was a big opportunity for change but the chance of reaching a consensus was low. Market moving announcements usually come from the G7 / G8 Finance Ministers meeting and not from the G20 meeting. OPEC also failed to cut production, but the impact on oil prices was minimal. Keeping current production levels provides relief for the beleaguered global economy. In his first ever on the record interview with a journalist, Federal Reserve Chairman Ben Bernanke attempted to sooth concerns that the U.S. recession will turn into a depression. Coming off the heels of his forecast last week that 10 percent unemployment is possible, we believe that Bernanke’s optimistic was catered to the format (the on the record TV interview). His hope for a recovery was neutral to mildly positive for the financial markets but if he was pessimistic, the consequences would be severe. A turnaround is possible this year, but only if the financial sector stabilizes which at this point in time, would be tall task.

EUR/USD: RETREATS AFTER TEST OF 1.30

For the first time in the past month, the Euro has tested the 1.30 level. Unfortunately this test has failed but that does not rule out a successful run above the 1.30 level which is quite possible given the proximity of the resistance point. Eurozone consumer prices increased in the month of February, which was right in line with the higher price pressures reported in Germany and France. The EUR/USD also managed to hold onto some of its gains following comments from European officials. German Chancellor Merkel said this morning that Europe needs a strong euro in the crisis. Considering that they are an export dependent nation, her comments are baffling. ECB member Stark however continued to echo recent comments from central bank President Trichet who said that Zero Interest Rates will do little to stimulate the economy. The ECB believes that the region already has very low interest rates and even at 1.5 percent, there is little wiggle room. They have and will remain reluctant about cutting interest rates. The German ZEW survey of analyst sentiment is due for release tomorrow and given the deterioration in the Eurozone economy, further pessimism is expected.

GBP/USD: RALLIES DESPITE BOE WARNING OF DEBT DEFLATION TRAP

For the fourth day in a row, the British pound recovered against the U.S. dollar. The currency’s rebound is occurring despite the Bank of England’s warning in their Quarterly Bulletin that the country could fall into a debt deflation trap where U.K. families see themselves raking up debt every single month with a diminishing ability to pay off that debt. This is the same of type of scenario that drove the country into recession in the 1930s and there is a realistic fear that the same situation could happen again because the appetite for debt has been very high over the past few years. On a brighter note, deflation is expected to be short-lived as next to zero interest rates drives price pressures higher. The recent rally in the GBP/USD was confirmed by the improvement in house prices according to Rightmove, who reported two consecutive months of higher prices. There are no U.K. economic data on the calendar until Wednesday, but the data that is due for release on Wednesday should be pound negative.

CNBC Video: Rightmove Survey

AUD/USD: RBA TO EXPLAIN DECISION TO LEAVE RATES STEADY

The New Zealand dollar was the best performing currency today, rising strongly against the Japanese Yen and U.S. dollar. Economic data was neutral with manufacturing activity slowing but non-resident bond holdings rising. The strength of the kiwi-dollar is purely a reflection of the market’s risk appetite and the high beta nature of the New Zealand dollar. This means that the hawkish comments from the Reserve Bank of New Zealand last week has exacerbated the NZD/USD& #8217;s sensitivity to the changes in risk appetite. The big focus tonight is on the Australian dollar with the minutes from the most recent Reserve Bank of Australia meeting due for release. The RBA is expected to explain their decision to leave interest rates unchanged earlier this month. We will also be looking for clues about whether interest rates will fall further in the coming months. In addition to the RBA minutes, leading indicators are due for release. Meanwhile the Canadian dollar did not follow the other commodity currencies higher on the heels of weaker economic data and OPEC’s decision to leave production levels unchanged. Capacity utilization fell to 74.7 percent, the lowest level ever for Canada.

USD/JPY: BOJ SHOULD EXTEND QE MEASURES

USD/JPY remains relatively unchanged in a day that started with renewed optimism. The rallies in US indices failed to materialize, bringing the USD/JPY lower. It appears that the pair has lost its momentum as it slowly approached the pivotal 100.00 level. The Bank of Japan is set to hold their Monetary Policy Meeting tomorrow. For awhile, the BoJ meeting has been a non-event for currency traders because rates were too low to be cut any further. However, even though this condition still holds, the BoJ decision may regain some widespread interest. The possibility behind the extension of long-term bond purchases and a new program to acquire subordinated debt may be the BoJ’s next step in its quantitative easing measures. Unfortunately, existing attempts have only been met with a continued decline in every aspect of the nation’s economy. By extending policies already in place and adding subordinated debt to the mix, the BoJ is making another attempt to restore lending conditions and facilitate some relief for struggling banks. Furthermore, if these plans are announced, the yen should weaken on the news, boosting the resiliency of the trade dependent economy. For these reasons tomorrow’s decisions will be a little more pivotal than the ordinary BoJ meeting. Before the monetary decisions are released, the Japanese are scheduled to release the Tertiary Industry Index.

AUD/USD: Currency in Play for Next 24 Hours

AUD/USD will be the currency in play for the next 24 hours. The most important Australian report will be the RBA Minutes from their last interest rate decision, expected at 20:30 pm ET or 00:30 GMT. Furthermore, they will also release the Westpac Leading Index at 7:30 pm ET or 23:30 GMT. The US will report Producer Prices at 8:30 am ET or 12:30 GMT.

AUD/USD has staged five consecutive rallies, officially landing the currency pair in the Bollinger band buy zone. However, the risk to further rallies is in place as the 100-period SMA. The moving average has maintained considerable importance on price action, resisting the past two rally attempts. The break of the 100 day SMA would be a big victory for AUD/USD and may see prices rallying to about 0.6853, the next influential high. The most recent low at 0.6285 should act as support in case the moving average thwarts prices for a third straight time. Nevertheless, the 100 SMA will act as a strong psychological boundary that may ruin the most significant rallies since early February.

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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.