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Why EUR and GBP Have Failed To Rally

Last updated 3/26/2009 6:01 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

• US DOLLAR: Why EUR and GBP Have Failed To Rally
• EUR/USD: PRIME FOR A BREAKOUT
• GBP/USD: SHARP PLUNGE IN RETAIL SALES
• NZD/USD: RECESSION EXPECTED TO DEEPEN
• USD/CAD: OIL PRICES HIT 4 MONTH HIGH
• AUD/USD: POSITIVE RBA COMMENTS LIFT AUD
• USD/JPY: BROAD YEN WEAKNESS

EXPECTATIONS FOR UPCOMING FED MEETINGS

US DOLLAR: Why EUR and GBP Have Failed To Rally

Over the past few months, a rally in U.S. equities has generally been met with a sell-off in the U.S. dollar.  The primary reason was because parking money into the low yielding U.S. dollar was synonymous with risk aversion.  Therefore one would expect that today’s 2 percent rally in equities should have driven the U.S. dollar lower against all of the major currencies.  We did see dollar weakness, but it was only against the Australian and New Zealand dollars.  The greenback increased in value against the Euro and British pound leading many traders to wonder why those currencies failed to participate in the rally.

The Underperformance of the EUR and GBP

There were a number of factors preventing the Euro and British pound from appreciating including the surprisingly weak economic data in Europe, better than expected data in the U.S. and the successful 7 year U.S. Treasury note auction.  One undersubscribed Treasury auction has not made a trend to the relief of global investors.  If Wednesday’s failed auction was just a fluke then the U.S. government will not have to worry about doing more to meet its funding obligations.  This twist of fate may have enticed some investors back into U.S. dollars.  Also, relative growth is very important at this point and the outlook is certainly brighter for Australia and New Zealand. The Eurozone is widely believed to be behind the curve with their lagging monetary policies.  The Euro could really suffer if the ECB is forced to step on the pedal.  The U.K. government on the other hand is struggling.  According to the Financial Times, Gordon Brown suggested that they do not have much more room to cut taxes or increase spending.  Their hands are tied from a both a fiscal and monetary perspective which could foreshadow more trouble ahead for the U.K. economy.  Although the Obama Administration’s initiatives have also come under fierce criticism, the risk of a downside surprise is certainly greater in Europe.

U.S. Recession to End this Year?

Despite the doom and gloom outlook by some economists and the pessimistic feel on Main Street, recent economic data has not been as weak as everyone expected. Contrary to the overly pessimistic call by economists, GDP growth was revised from -6.2 percent to -6.3 percent in the fourth quarter, far less than the -6.6 percent forecast. GDP growth was still the weakest in 26 years as profits plunged 16.5 percent, the largest decline in 55 years. Currency traders shrugged off the underlying weakness because the GDP report is backward looking. The smaller revision provides relief but investors are still cautious about believing in a recovery. The unemployment rolls continued to grow with continuing claims hitting 5.56 million, another record high. Weekly jobless claims have increased once again from 644k to 652k last week.  The weak labor market has not stopped Minneapolis Fed President Stern from saying that the recession is likely to end around mid-year, but the recovery will be subdued.  He believes that the stimulus package will help to boost demand “in a timely way” and that “If economic growth resumes in the U.S. as I expect, the threat of deflation should diminish commensurately."  Stern also believes that the central bank has plenty of time to reduce liquidity if inflation pressures become a concern.  U.S. personal income and personal spending are due for release on Friday.  Even though retail sales were very weak, we would not rule another surprise given the recent trend of U.S. data.  

Comments on U.S. Data

EUR/USD: PRIME FOR A BREAKOUT

The Euro lost value against the U.S. dollar on the heels of weaker consumer confidence. For the first time in 7 months, consumer confidence has dipped adding concerns about the health of the Eurozone economy.  With the German IFO report of business confidence falling to the lowest level in 26 years, there is no question that the mood is sour.  Businesses are worried about demand for their goods and services while consumers are worried about keeping their jobs.  If economic data continues to disappoint, the European Central Bank may be forced to do more. New industrial orders are expected from the Eurozone on Friday.  The sharp decline in German factory orders suggests similar weakness for the European manufacturing report.  Meanwhile the Swiss Franc weakened modestly against the Euro and U.S. dollar.  The Swiss National bank released their quarterly bulletin this morning and unfortunately they expect a difficult year to come with exporters seeing no sign of improvement in the months ahead.  

GBP/USD: SHARP PLUNGE IN RETAIL SALES

Throughout the downturn in the global economy, U.K. consumers have been surprisingly resilient.  Despite falling house values, declining share prices and growing unemployment, consumers continued to spend, but that may have finally changed.  Retail sales fell 1.9 percent in the month of February, the sharpest monthly decline since June.  Compared to a year earlier, sales rose only 0.4 percent, the weakest since 1995.  It was only a matter of time before rising unemployment finally catches up to U.K. consumers.  In the month of February, jobless claims increased by 138.4k, the largest increase ever.  To throw salt in the wound, the cost of imports such as food is rising, leaving retailers with the tough decision of raising prices or taking a hit to margins.  The final figures for fourth GDP are due for release and even though retail sales are a key input into GDP, the latest figures are for the month of February.  Therefore the GDP report should only have a nominal impact on the British pound.  With that in mind however, the currency may have a tough time rallying because when consumers cut back, it is rarely for just one month.  In the U.S. for example, retail sales were negative 7 out of the past 8 months.  Therefore the British pound remains vulnerable to continued weakness in the U.K. economy.  

NZD/USD: RECESSION EXPECTED TO DEEPEN

The improvement in risk appetite drove the Australian, New Zealand and Canadian dollars higher against the greenback.  New Zealand’s current account deficit narrowed from the previous quarter but less than the market expected, driving the NZD/USD slightly higher following the release.  The spotlight remains on New Zealand this evening with GDP and the trade balance on tap.  The recession is expected to deepen with fourth quarter growth predicted to fall by 1.1 percent, which would be the largest decline since the first quarter of 1991.  The odds are skewed towards a stronger report because even though retail sales have been very weak, trade has improved.  The February trade figures will be released at the same time and the deficit is expected to turn back into a surplus, which would be positive for the NZD/USD.  The prospect of stronger numbers may help to explain why the New Zealand dollar is the day’s strongest performer.  Meanwhile the Australian dollar was also lifted by the comments made by the RBA who basically said that the Australian economy is in better shape than many other countries.  Their rosier outlook was confirmed by a mild improvement in consumer confidence.  Finally, oil prices hit a 4 month high helping to lead the Canadian dollar higher.  

USD/JPY: BROAD YEN WEAKNESS

The Japanese Yen lost ground to the U.S. Dollar as risk appetite returned to the markets. So far, USD/JPY advanced over 13% from the lowest point this year, reflecting waning demand for the lowest yielding currency.  Yet, a weaker Yen is a favorable outcome for the Japanese as the collapse in exports may push the Tankan Large Manufacturing Index to the lowest level in 30 years. Shockingly, Japanese exports plummeted by a record 49% last month while GDP shrank 12.1%. The non-manufacturing sector is also expecting wider declines in confidence due to mounting job-losses triggered by production cuts. Unwillingness of consumers to spend during uncertain times may deepen the downturn within the struggling economy.  In order to survive the current slump many corporations have chosen to create joint ventures with foreign firms. Mitsubishi UFJ Financial announced that they will combine forces with Morgan Stanley Japan Securities to create the country's third-largest brokerage. Later in the day, Retail Sales alongside National Consumer Price Index will shed more light on the health of the consumer.  

 I was on Fox Business this afternoon - It was an hour show.  If you can sit through it, I come up at 27:30 and the interview lasts until  37:30

NZD/USD: Currency in Play for Next 24 Hours

NZD/USD will be the currency in play for the upcoming 24 hours. New Zealand is expecting the release of GDP figures later today at 21:45GMT or 5:45PM EST. Tomorrow, U.S. will release the figures for Personal Consumption Expenditures at 13:20GMT or 8:30AM EST. After reaching a bottom, the pair rallied significantly and is currently lingering in the Buy Zone of the Bollinger Bands. The upcoming level of resistance is a 78.6% retracement of December 2008 high and this year’s low which coincides with the 2nd Standard Deviation at 0.5825. The Buy Zone will be negated upon the break of support below 1st Standard Deviation which is around 0.5550.

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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.