US Dollar: Why Are Failed Auctions Important

Last updated 3/25/2009 5:34 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: WHY ARE FAILED AUCTIONS IMPORTANT
• GBP/USD: FAILED GILT AUCTION KILLS THE POUND
• EUR/USD: GERMAN IFO HITS 26 YR LOW
• NZD/USD: CURRENT ACCOUNT BALANCE DUE FOR RELEASE
• AUD/USD: RBA COMMENTS ON EFFECTIVENESS OF POLICY
• USD/CAD: OIL PRICES SLIP, GOLD PRICES HOLD STEADY
• USD/JPY: EXPORTS PLUNGE BY A RECORD 49.4%

EXPECTATIONS FOR UPCOMING FED MEETINGS

U.S. DOLLAR: WHY ARE FAILED AUCTIONS IMPORTANT

It has been an extremely interesting day in the currency market with Treasury Secretary Timothy Geithner tripping over his comments about the U.S. dollar and an auction of 5 year Treasury notes seeing surprising weak results. Geithner’s fumble could not come at a worst time as investors remain skeptical about the effectiveness of the Obama Administration’s efforts to stimulate the U.S. economy. Top that off with the failed Treasury auction and it is clear that the actions of everyone in the Obama Administration from the Treasury Secretary to the Federal Reserve Chairman have left an air of uncertainty across the financial markets. The U.S. dollar has weakened against the Euro and Japanese Yen but ended the day unchanged against the commodity currencies.

Why is the Weak Treasury Auction a Big Deal ?

The weak Treasury auction may not have been such a big deal if it wasn’t for a failed auction of U.K. Gilts hours earlier because a failed auction can have many implications. First, it drives yields higher than initially forecasted which means that the U.S. government will have to do more to bring yields down - higher yields will stifle the Fed’s recovery efforts. It also suggests that foreign investors are worried about the growing cost of the country’s stimulus package and bailout programs. Over the next few months, more debt will flood the markets as the U.S. tries to finance its stimulus initiatives and the fear is that future auctions could face similarly weak results. However before getting overly pessimistic, it is important to realize that options expiration recently occurred which may have contributed to the weak demand and although the results are significantly weaker than the February auction, it is only marginally weaker than the last 10 auctions.

The One Outcome China Is Happy Wit h

It is unrealistic for China to expect the U.S jump on the bandwagon and immediately support their call for a global reserve currency. However China’s comments earlier this week accomplished two very important goals – it increased the influence of the country’s leaders while challenging the credibility of the Obama Administration. China’s desire is to become a financial force to be reckoned with and the media coverage of their comments plus the response by the U.S. government legitimizes their international presence. Following Geithner’s fumble Volcker and IMF’s Strauss-Kahn all reaffirmed the U.S.’ strong dollar policy. This same view was shared by President Obama last night who downplayed the need for a global currency. Yet this morning Geithner still mistakenly suggested that the U.S. would be open to such an idea. Having triggered a sharp sell-off in the U.S. dollar, he quickly retracted his comments sending the dollar for a ride . Even though the threat of a new world reserve currency challenging the U.S. dollar is an insignificant one for the time being, Geithner’s words have left an air of uncertainty in the U.S. dollar and the current Administration.

Geithner Talks to CNBC About U.S. Economy, China and Dollar

US Data – Flirting with a Recovery, Will GDP be Next ?

Despite the doom and gloom outlook by some economists and the pessimistic feel on Main Street, recent economic data has shown signs of improvement. Over the past week, everything from consumer prices, the current account balance, jobless claims, leading indicators, the Philly Fed index, and existing home sales have surprised to the upside. Although this is partially due to the overly pessimistic forecasts, the data also suggests that the economy could be stabilizing. This morning's U.S. economic reports continue to flirt with recovery expectations. For the first time since July, orders for big ticket items (durable goods) and new home sales have increased. The final figures for fourth quarter GDP are due for release tomorrow and a downward revision of growth is expected. However given the recent string of good data, investors may look beyond a weak report.

GBP/USD: FAILED GILT AUCTION KILLS THE POUND

The British pound was the only major currency to weaken against the U.S. dollar today as the failed Gilt auction highlighted the vulnerability of U.K. finances. It was the first time in almost seven years that an auction was unfilled. This is a signal that the U.K. government is having a very tough time attracting investors willing to fund the nation’s growing debt. If the country is unable to secure enough buyers of the debt at current levels, they would have to increase the yield in order raise capital. In doing so, they also increase their debt burden. Finally, the failed auction also raises the question of whether the Bank of England’s Quantitative Easing program will succeed. Either way, the results of the auction is negative for the British pound. The CBI Distributive Trades survey was the only piece of U.K. data released this morning. According to the report, retail sales fell at a faster pace in March. Nationwide house prices and the official retail sales figures from the Office for National Statistics for the month of February will be released tomorrow. The largest increase in unemployment since 1971 and the sharp drop in the BRC retail sales report suggest that spending was very weak in the month of February. A soft report could drive the British pound lower against the Euro and U.S. dollar.

Implications of Failed U.K. Gilt Auction

EUR/USD: GERMAN IFO HITS 26 YR LOW

The Euro extended its gains against the U.S. dollar despite a very sharp decline in the German IFO report. The improvement in analyst sentiment and increased activity in the service and manufacturing sectors has failed to boost business confidence, which plunged to the lowest level in 26 years. A strong currency and a slowing global economy put a big dent into German exports. Although it will be difficult getting German businesses who deal with the global recession every day to believe that the outlook for the German economy will improve anytime soon, the expectations component of the IFO report has stabilized. In France, President Nicolas Sarkozy is introducing some legislation that sounds very familiar to what is being discussed by the Obama Administration. Sarkozy is pushing for a ban on all bonuses paid by companies that have received bailout assistance and supports a plan to limit executive compensation across the spectrum of French businesses. His plans also extend to such simulative policies such as cutting certain business taxes, while keeping demand nationalized by proposing new carbon taxes on imports. No meaningful economic data is expected from the Eurozone for the rest of the week, leaving the EUR/USD at the whim the market’s appetite for U.S. dollars.

NZD/USD: CURRENT ACCOUNT BALANCE DUE FOR RELEASE

The Australian, New Zealand and Canadian dollars ended the day virtually unchanged against the U.S. dollar. There was no economic data from any of the 3 commodity producing countries but RBA Governor Glenn Stevens commented on the effectiveness of the recent monetary stimulus. According to Stevens, the fact that banks have been reluctant to pass lower interest rates to borrowers does not mean that the rate cuts will be any less effective. However, as we have seen in other countries such as Great Britain, such an occurrence can pose real threats to the rejuvenation of credit markets. The economic calendar heats up for New Zealand tonight with the fourth quarter current account balance due for release this evening following by GDP and the trade balance on Thursday. The deficit is expected to narrow because trade has improved but non-resident bond holdings have dropped significantly.

USD/JPY: EXPORTS PLUNGE BY A RECORD 49.4%

To the dismay of the Japanese government, exports continued to plunge by record amounts. In the month of February, exports fell 49.4 percent, as global demand evaporates. The Yen however has been relatively unaffected as it trades. Imports also declined 43 percent, turning the country’s deficit back into a small surplus, the first in 5 months. Japanese exporters may find some relief from the comments made by the central bank of China who said that the economy has bottomed. The two countries are highly interdependent with China being Japan’s largest trade partner and Japan being China’s 3rd largest trade partner. In response to the concerning developments, Bank of Japan Deputy Governor Shirakawa made the bizarre statement that an additional rate cut should not be ruled out. When considering that Japanese rates are at 0.10%, one would assume that a cut to the definitive zero bound would be nothing more than a ceremonious gesture. However, it does indicate that the banks preexisting bias for monetary easing is still intact. National Consumer Prices are expected for tomorrow night.

GBP/USD: Currency in Play for Next 24 Hours

The GBP/USD will be our currency pair in play for tomorrow. The U.K. government is scheduled to release Retail Sales along with Total Business Investment at 5:30 am ET or 9:30 GMT. The US on the other hand will be revealing Final 4th Quarter GDP at 8:30 am ET or 12:30 GMT.

GBP/USD seems to be losing its grip on it significant multi-week rallies, but is still trading within the Bollinger band buy zone. The threat to a continued retracement should be supported by the Fibonacci retracements drawn from the March 11th low to yesterday’s high. The closest level of interest should be the 38.2% retracement of 1.4347. However, if today’s weakness turns out to be the extent of a potential retracement, we are looking at 1.5000 as the most important resistance. Not only did the level resist prices on February 9th, it should constitute a significant psychological barrier for further rallies. However, if today’s drop is exchanged for more strength, it is very possible that this level will be tested once again.

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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.