US Dollar Gives in to 497 Point Rally in Stocks

Last updated 3/23/2009 5:40 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 GIVES IN TO 497 POINT RALLY IN STOCKS
• EUR/USD: TRICHET PLAYING WITH FIRE?
• GBP/USD: GROWING PRESSURE ON BROWN
• AUD/USD BREAKS 70 CENTS
• USD/CAD: LEADING INDICATORS FALL BY LARGEST AMOUNT SINCE 1981
• NZD/USD: OIL PRICES AT $53.87, GOLD AT $938.15
• USD/JPY: JAPANESE DATA SHOWS NO IMPROVEMENT

EXPECTATIONS FOR UPCOMING FED MEETINGS

U.S. DOLLAR GIVES IN TO 497 POINT RALLY IN STOCKS

The U.S. dollar initially traded higher after the Treasury released details for the Public-Private Investment Program aimed at taking bad debts off bank balance sheets. Their actions help to create a floor under the toxic assets, reassuring global investors. However early gains in the U.S. dollar was overshadowed by the massive rally in the U.S. equity market. The 6.8 percent rise in the Dow or close to 500 point move reflected stronger risk appetite and growing demand for higher yielding currencies such as the Euro, Australian and New Zealand dollars at the expense of the greenback. If the Dow hits 8000, we could see a new 2 month high in the EUR/USD above 1.38.

Will the Treasury’s Plan Work ?

The Treasury’s plan ( full details ) is ambitious because it hopes to reinvigorate demand and create a market for otherwise illiquid assets. The Obama Administration is moving ahead with all of the programs announced over the past months. The Treasury even patted themselves in the back by pointing out that their program to help families refinance their mortgages and avoid foreclosures has already led to a 30 percent increase in mortgage refinancing. The positive results of their efforts were further confirmed by the rebound in existing home sales. However the big question is – will the plan work? The threat of retroactive taxes on bonuses has made investors extremely skeptical of taking any carrots from the U.S. government. Banks may also be less willing to part with the debt that they have already written off. Sharp criticism of the plan has already surfaced. Nobel Prize Winner Paul Krugman argues that the plan is only aimed at boosting confidence and does not recognize the fact that banks have made really lousy investments and the only real backstop is nationalization. The plan could work, but if it doesn’t, the Obama Administration may not have enough political capital for a second chance. Nonetheless, the price action of the financial markets does not indicate that investors are worried about failure. Pimco and BlackRock have already announced that they will be participating in the plan. Legendary investor Mark Mobius of Templeton Asset Management even went so far to say that the new bull market has begun. We are skeptical but hope that he is right.

Geithner Talking About the Treasury's Plan Part 1

Geithner Talking About the Treasury's Plan Part 2

Dollar Downtrend Continu e s

From nearly all directions, the outlook for the U.S. dollar is bleak. Last week’s announcement of long term Treasury purchases by the Federal Reserve ignited the downtrend in the U.S. dollar. Although it will be months before the U.S. government officially starts buying the toxic assets from banks, the ultimate outcome is that the U.S. government will become a partial owner to a growing pile of low rated debt. At the same time, if investors continue to approve of the Treasury’s announcement, currency pairs such as the EUR/USD, AUD/USD and NZD/USD could trail equities higher. As we have previously suggested, the currencies that will do best against the U.S. dollar are the ones whose central banks are reluctant to join the Quantitative Easing party. There are no major U.S. economic releases on the calendar tomorrow but Federal Reserve Chairman Ben Bernanke and Treasury Secretary Tim Geithner will be testifying to the House Financial Panel on AIG. In a late day announcement, the Fed and Treasury issued a statement clarifying the lines between fiscal and monetary objectives. They decided that the NY Fed’s assets which include Bear Stearns and AIG holdings will be transferred to the Treasury.

Hope in Housing

EUR/USD: TRICHET PLAYING WITH FIRE?

The euro appreciated in value against the U.S. dollar thanks to the strong rally in U.S. equities. Eurozone economic data was weak with the trade deficit increasing materially in the month of January. European exports to the U.S. fell 4 percent last year, the most since 2003. Exports to the U.K. also declined by the same amount. As an export dependent region this news spells big trouble for the Eurozone economy. Yet, ECB President Trichet encouraged individual nations to refrain from boosting stimulus. He said that instead of introducing new programs, they should move faster on their current ones. This leads us to wonder if Trichet is playing with fire because we have yet to see any positive results from the ECB and individual nations’ efforts. The recent strength of the euro will only compound the central bank’s headaches and we are really curious to see how the ECB’s tardy response to the financial crisis will leave things when the dust settles. We expect tomorrow’s service and manufacturing PMI numbers for the month of March to reflect the continued weakness in the Eurozone economy. However, EUR/USD traders need to keep in mind that the currency pair is trending higher not because of the improving outlook for the Eurozone economy but because of the market’s waning appetite for U.S. dollars.

GBP/USD: GROWING PRESSURE ON BROWN

The British pound has been extremely resilient despite growing pressures on Gordon Brown to change government policies. Faced with a deteriorating public finances, the Confederation of British Industry is calling on Brown to cap tax reductions and spending plans. The commission is worried that additional spending would be throwing good money after bad and would only return limited results. They suggest that the U.K. government first wait to see how the economy responds to the monetary and fiscal stimulus injected so far before making further commitments. They are confident that the Quantitative Easing plans are enough to stabilize the economy for the time being. It is estimated that public sector net borrowing could hit 12.6 percent of GDP by next year. But the U.K. government is faced with a very difficult decision because they do share the optimistic outlook of the CBI. Bank of England member Blanchflower, who is usually more pessimistic than his peers warned that unemployment could double to as high as 4 million if the government does not take drastic action to tackled the recession by spending up to GBP90 billion on programs designed to generate and retain jobs. UK consumer prices and BBA loans are due for release tomorrow. Higher gas prices have driven consumer prices higher in many countries and we believe that the U.K. will be no exception. Producer prices were mixed and shop prices have already ticked higher.

UK Public Finances Alarming: CBI

AUD/USD BREAKS 70 CENTS

The Australian, New Zealand and Canadian dollars were the best performing currencies in today’s trading. The rally in U.S. equities single handedly drove these currencies higher in the face of weaker economic data and pessimistic comments from central bank officials. Last night, Australian Treasurer Wayne Swan warned that it will be “virtually impossible” for the country to avoid contractionary growth in the midst’s of one of the worst financial crisis. Swans comments are not too reassuring for one of the only remaining bright spots in the global economy. With growth turning negative in the fourth quarter, it is seems more and more likely that the country will be forced to submit to the recessionary virus. However, as AUD/USD breaks 70 cents, investors do not seem too worried about the outlook of the Australian economy. Relative growth is the big focus for investors so even if Australia falls into a recession, their downturn could be shallow. There was no economic data from New Zealand, but Canada reported the sharpest decline in leading indicators since 1981. The details show weakness in nearly all components of the report except for money supply, but the biggest drop was in housing.

USD/JPY: JAPANESE DATA SHOWS NO IMPROVEMENT

USD/JPY is stronger for the second straight day, even as dollar strength seems to be fleeting as the result of the massive government plans being conducted in the US. Nevertheless, the Japanese yen is not in a position to boast its strength. In fact, we were met with a broad variety of economic reports that certainly reintroduce concern over the fate of the world’s second largest economic power. In a quarterly report produced by the Japanese Finance Ministry, Manufacturing sentiment plunged by the most on record. The BSI index for Large Manufacturing declines to -66, while the broader All Industry Index fell to -51.3. The dissatisfaction among Japanese manufacturers can be attributed to the significant deterioration in the countries trade balance. We can expect a large reduction in spending and employment to ensue as a result. Furthermore, Japanese Supermarket and Convenience Store Sales far exceeded the declines experienced in prior months. News like this combines to pressure Prime Minister Taro Aso for a more drastic stimulus package. As it stands, many caution that the planned ¥10 trillion stimulus package may not provide sufficient effect. Many expect that the size of the plan will be doubled to effectively combat the recessionary plague.

EUR/GBP: Currency in Play for Next 24 Hours

EUR/GBP will be the currency in play for the next 24 hours. Economic data from the Euro-Zone consists of PMI data from France and Germany as well as the Euro-zone Composite PMI at 5:00 am ET or 9:00 GMT. Releases in the United Kingdom consist of the Consumer and Retail Price Index at 5:30 am ET or 9:30 GMT.

Despite three consecutive declines in EUR/GBP, the currency pair still resides in the Bollinger band buy zone. Resistance is most predominantly exhibited by the 0.9519 high placed back in January. The rallies over the past few weeks have seen been unable to successfully break the level. The next most visible support appears to be the low at about 0.9144 placed on March 16th. However, price action appears to be contained by the one-standard deviation Bollinger band and the 0.9300 level for the moment. If the buy zone should hold to see rallies continue past 0.9519, we might see a test of the all-time high of 0.9800. Of course, after that, only parity lies as resistance.

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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.