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U.S Dollar: Topic Of Verbal War With China

Last updated 3/24/2009 5:56 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

• EUR/USD: UPSIDE RISK FOR IFO?
• GBP/USD: STRONG GAINS ALL AROUND
• AUD/USD: RALLY COMES TO A HALT
• USD/CAD: OIL PRICES HOLD STEADY
• USD/NZD: PESSIMISTIC COMMENTS FROM RBNZ
• USD/JPY: JAPANESE GOVERNMENT ASKS BOJ TO PROVIDE MORE FUNDS

EXPECTATIONS FOR UPCOMING FED MEETINGS

Compared to yesterday’s sharp moves in the currency and equity markets, trading has been relatively quiet.  U.S. stocks meandered in and out of negative territory while the U.S. dollar traded higher against nearly all of the major currencies.  Profit taking has hit the financial markets dragging equities and currencies lower.  This consolidation gives investors the time to think about whether Monday’s rally is the beginning of a new bull market or just a strong bear market rally .  Since March 6th, the S&P 500 has increased 23 percent, which is marginally less than some of the rebounds that we saw during the Great Depression.  The point is that equities could still extend its gains while remaining in an overall downtrend.  

China and U.S. Engaged in Verbal Battle over the U.S. Dollar

The big story today was China’s talk of creating a new alternative “Super Currency” to replace the dollar as the world’s standard reserve currency.  As U.S. finances continue to deteriorate ahead of the G20 leaders meeting in April, the Asian giant is turning up the heat on the Obama Administration in the hopes of gaining the upper hand.  Last week, China’s Premier expressed their concern about their holdings of U.S. debt.  Yesterday, Central Bank Governor Zhou released a paper calling for the IMF to create a “super-sovereign reserve currency,” a proposal that is backed by countries like Russia.  Although part of their concern can be attributed to the weakness of the U.S. dollar, China’s comments are probably more politically motivated.  Having grown into an economic powerhouse over the past 3 decades, they now have greater ambitions for the Chinese Yuan.  At the same time, they want to reduce the global significance of the U.S. dollar and in turn, put themselves on a more level playing field.  In reaction to China’s comments, Obama Advisor and former Federal Reserve Chairman Paul Volcker said that the Chinese are “disingenuous” with their complaints about the U.S. dollar because they want to buy dollars to keep their currency from appreciating.  Although the U.S. government may be taking China’s comments with a grain a salt, the politically astute nation who announced a stimulus package days before the last G20 meeting could have some tricks up their sleeves. Currency traders however have completely shrugged off the release which should have driven the U.S. dollar lower.  

More Signs of Stability in the U.S. Housing Market

The latest report on the housing market is showing more signs of stability.  For the first time in 12 months, house prices increased in the month of January.  According to the Federal Housing Finance Agency, prices on average rose 1.7 percent with every part of country except for the Pacific reporting an increase in home values.  This optimistic report suggests that we could also see an increase in new home sales.  However a stronger number is not guaranteed because foreclosures have been driving existing home sales higher and unfortunately tomorrow’s report is for sales of homes that have not been previously owned.  As for the manufacturing sector, activity in the Richmond area continued to weaken suggesting that durable goods orders, which are due for release tomorrow should fall as well.  The Treasury will begin their purchases of long term U.S. Treasuries tomorrow, which could weigh on yields.  

Mixed Signals on Housing

EUR/USD: UPSIDE RISK FOR IFO?

The euro slipped against the U.S. dollar in the face of mixed economic data.  Eurozone manufacturing and service sector PMI advanced in the month of March, reflecting mild stability in the Eurozone economy but the good news was challenged by the sharp increase in the current account deficit.  The German IFO business confidence report should provide support for the euro.  Not only has manufacturing and service sector activity improved, but so has analyst sentiment and business confidence in Belgium, which has a very strong correlation with the German IFO report.  Meanwhile Swiss Central Bank President Roth said that bond market intervention is in its introductory phase, which can be interpreted to mean that more intervention could be expected in coming months.  He also added that growth could stagnate in 2010.  The Swiss franc has been unaffected by the comments, but they serve as a harsh reminder that the central bank stands ready to combat Franc strength if needed.  

GBP/USD: STRONG GAINS ALL AROUND

Over the past 2 weeks, the British pound has soared more than 8 percent against the U.S. dollar. Like many countries around the world, the U.K. has succumbed to higher gas prices while the weakness of the British pound has exacerbated the rise in inflation. Hotter consumer prices helped to fuel today’s gains, but it was comments from Bank of England Governor King that took the GBP/USD above 1.47. Quantitative Easing has been kept a lid on gains in the pound, causing it to under perform currencies such as the euro. The CPI numbers are significant because annualized CPI is now back above BoE’s 3 percent target. This morning, BoE Governor King talked up the pound, which is a dramatic departure from his previous comments. He said that there is “no reason why the sterling should go any lower” and that the sterling’s fall was not engineered. He also said that the central bank originally aimed for GBP75bn of Asset Purchase Facility over 3 months but “might need to do less if it works.” These positive comments are a reaction to the recovery in the equity markets and the recent drop in bond yields which is why the comments from MPC member Blanchflower should not be ignored.  He has been particularly critical of the BoE’s actions and has regularly voted in favor of larger rate hikes.  This morning, he said that the central bank’s inflation targeting has failed and that the country faces a protracted recession.  As a result, accommodative policy will remain for the foreseeable future.

AUD/USD: RALLY COMES TO A HALT

The rally in the Australian and New Zealand dollars came to a screeching halt today with U.S. equities giving back their gains.  Both currencies have seen a tremendous rally over the past 2 weeks with virtually no retracement.  The economic calendar was devoid of any meaningful data and the first piece of market moving news is not due for release until Wednesday afternoon for New Zealand.  Commodity prices also held steady, adding little to today’s losses.  Reserve Bank of Australia Governor Stevens will be speaking this afternoon and his comments could affect the Australian dollar.  New Zealand Reserve Bank Governor Allan Bollard warned that curbed demand for exports and stalled investments may put the economy on a track for the worst performance in over 30 years. Forecasts predict that the economy shrank by 1.1% in the 4th Quarter of 2008 and would not expand until later half of this year. The highest jobless rate in 5 years, contraction in export prices and demand, alongside negative growth in the economy are likely to add pressure on Bollard to cut interest rates again this year end.

Australian Prime Minister Rudd on Global Recession

USD/JPY: JAPANESE GOVERNMENT ASKS BOJ TO PROVIDE MORE FUNDS

USD/JPY continued to gain strength for the third consecutive day, while EUR/JPY rose to a five month high before retreating on the hope that financial conditions are finally improving. However, the situation remains grim for Japan. The BoJ’s minutes revealed a greater need for funds to be channeled into the economy to ease the nation’s recession.  Japan’s Ministry of Finance continued to pressure the central bank to extend purchases of corporate debt to ease liquidity constraints. Members also agreed to continue the purchase of commercial paper as well as an unlimited collateral-backed lending. Furthermore, the Cabinet Officials warned about the need to structure an exit plan from the assets acquired by the bank. Meanwhile, manufacturing weakness continues as the global recession forced Toyota to cut production by 53% from last year, the most in nearly quarter century. Honda and Nissan had reduced their production by 43% and 51% respectively from the previous year as credit is hard to come by in Europe and America. Later in the day, Japan will release Import and Export Merchandise Trade figures that should show a continued deterioration as conditions worsened through the month of February.

GBP/USD: Currency in Play for Next 24 Hours

The currency in play for the upcoming 24 hours is GBP/USD. The United States will release the figures for Durable Goods Orders around 12:30GMT or 8:30AM EST, followed by the release of New Home Sales at 14:00GMT or 10:00AM EST. After failing to breach a low set last year, the pair rallied tremendously in the past couple weeks currently trading within the Buy Zone of the Bollinger Bands. Evidently, the pair seems to be overbought with a strong possibility of reaching the next resistance level. Current resistance is originating at 23.6% retracement of last year’s high and low at 1.4925. The Buy Zone will be negated upon the break of support which is placed at 1st Standard Deviation of the Bollinger Bands at 1.4390.

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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.