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US Dollar: A Big Week Ahead

Last updated 3/27/2009 5:31 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: A BIG WEEK AHEAD
• EUR/USD: FINANCE MINISTER SENDS EURO ON A TAILSPIN
• GBP/USD: NO FISCAL STIMULUS ON THE WAY?
• NZD/USD: BETTER THAN EXPECTED DATA
• AUD/USD: GOLD PRICES AT $923.15
• CAD/USD: OIL PRICES FALL 4 PERCENT TO $52.09
• USD/JPY: REPATRIATION DRIVES YEN HIGHER

EXPECTATIONS FOR UPCOMING FED MEETINGS

U.S. DOLLAR: A BIG WEEK AHEAD

The U.S. dollar capped the week off with a strong rally that may have set the tone for trading in the coming week.  Despite a number of interesting political developments since Monday, the price action of most major currency pairs have been consolidative – up until now.   Many factors have contributed to the sharp appreciation of the U.S. dollar , but for currency traders, their primary question is whether the rally can be sustained in the new and extremely busy trading week.  Before even talking about the event risks, it is first important to remember that next week represents the end of the first quarter for many U.S. corporations and the end of the fiscal year for many Japanese companies.  Therefore we may have a lot of action in the currency market that is related more to repatriation than economic fundamentals.  

3 Key Events in the Coming Wee k

With that in mind, there are 3 key events on the global calendar this upcoming week starting with the European Central Bank interest rate decision and the start of the G20 Summit on Thursday followed by the U.S. non-farm payrolls report on Friday. Of all of the major central banks in the world, the one that still has investors guessing is the ECB.  After pausing last month, ECB President Trichet has previously said that the market’s 50bp rate cut expectation is appropriate.  However just as important as the interest rate change is what the central bank plans on doing next.  Regardless of what Trichet says or doesn’t say, we expect a lot of volatility in the EUR/USD on the heels of the press conference that follows the ECB monetary policy decision.  On the same day, G20 leaders will gather to discuss the global economy and other world issues.  Although we don’t expect any significant decisions to be made at the meeting, China could have some tricks up its sleeves that could elicit a reaction from the currency market. Finally, the week will end with the U.S. non-farm payrolls report. Another 656,000 Americans are expected to have lost their jobs in the month of March.  Although these are the 3 biggest event risks in the coming week, there are also other reports that could trigger volatility in currencies including the Japanese Tankan survey, Canadian GDP, Australian and German retail sales.  

What Could Sustain the Dollar Rally ?

It will not take much for the dollar rally to last because the previous sell-off in the dollar was triggered by better than expected economic data and hope that the Obama Administration’s alphabet soup of initiatives will work.  If investors become skeptical of a recovery, and they have a million reasons to be, equities could sell-off once again, driving the U.S. dollar higher.  Also if the European Central Bank caves and signals that they are ready to adopt Quantitative Easing, aggressive selling of Euros will push the dollar higher as well. According to a tip by 2 key governors to the U.K. Telegraph, the European central bank is ready to buy assets outright in the open market. From a broader perspective, there are still a lot of unanswered questions.  It will important to see how many banks fail to meet the Treasury’s stress tests and how willing private investors are to participate in the Public Private Investment Fund.  Any disappointments related to these uncertainties could more trigger volatility in the currency market. 

G20 Currency Concerns

EUR/USD: FINANCE MINISTER SENDS EURO ON A TAILSPIN

The euro plunged by more than 1.5 percent against the U.S. dollar following comments from German Finance Minister Peer Steinbruck. According to the Maastricht Treaty that was developed to establish certain economic principles for admittance into the European Monetary Union, a country must keep debt at a level lower than 3% of GDP. Steinbruck pointed out today that many countries are in danger of exceeding these limits on unabashed spending and stimulus. He says that, “if it is not taken seriously, then the euro at some point will have problems with credibility and stability.” The problem with strictly enforcing these levels at this point is that it is arguable whether or not these countries have spent enough to drag themselves out of recession. However, without a certain limit of control, government debt may spiral out of control. The euro fell today on the notion that limited government spending would at least postpone the region’s recovery. Evidence about the desperation of the economic environment in these regions was clearly exhibited by French GDP which contracted at the fastest past in more than 30 years. Meanwhile other economic news showed German inflation slowing to the weakest pace since 1999. Even though Steinbruck’s comments uphold an important monetary rule, it is questionable as to whether these countries can recover if spending limits were strictly imposed.  In addition to the ECB meeting next week, Eurozone retail PMI, confidence, German unemployment and retail sales are due for release. 

GBP/USD: NO FISCAL STIMULUS ON THE WAY?

The British pound extended its recent losses against the U.S. dollar on the heels of a broad dollar rally and weaker economic data. With pressures remaining on the U.K. economy, Britain’s GDP unsurprisingly contracted by more than previously estimated in the fourth quarter.  This was mainly due to a result of the declines in construction and consumer spending, both of which fell to three decade lows. The immediate response from such a dire GDP figure would leave many with an instantaneous assumption that government relief was just around the corner. Unfortunately, Gordon Brown made it obvious that it may not be so. The Prime Minister used the terms “cautious” and “targeted” when referring to the impending structuring of the annual budget. With the deficit expected to swell to 8% of GDP, Brown is being forced by both political and economic factors to start cutting back on some of the incessant spending that has persisted over the last few months. Of course, the Quantitative easing program is in full swing and may be able to pick up the slack where fiscal stimulus left off. For next week, the main releases to keep an eye on are the Manufacturing PMI on Wednesday and the Services PMI on Friday. 

 U.K GDP

NZD/USD: BETTER THAN EXPECTED DATA

Although the Australian, New Zealand and Canadian dollars all lost value against the greenback, things could have been worse.  GDP growth in New Zealand contracted by the largest amount in 16 years but the decline was smaller than the market expected while the trade deficit narrowed in the month of February.  Imports declined but exports increased which could be perceived as a positive change for the country.  Like many countries around the world, New Zealand is in recession, but according to central bank Governor Bollard earlier this month, the economy will not start growing until the second half of 2009.  We believe that the prospect of a turn to growth this year is positive and not negative for the country.  The recent rise in commodity prices is certainly helping and even though the RBNZ could continue to cut interest rates, they are nearing the end of rate cuts. Meanwhile the Canadian Dollar lost ground to the greenback as the prices of oil tumbled by 4 percent on the day. Moreover, Canada budgetary surplus narrowed to C$37 million or $30 million in January from C$1.16 billion a year earlier as revenue from corporate income taxes dropped prompting less options if economic situation worsens.  In the coming week the focus will return to Australia as the country has a number of economic data due for release including retail sales, service and manufacturing PMI. 

USD/JPY: REPATRIATION DRIVES YEN HIGHER

The Japanese Yen was stronger across the board against the other major currencies thanks to repatriation flows ahead of the March 31st fiscal year end.  Inflation rate within the economy remained flat for second month in a row, printing at -0.1% in February. Therefore, anticipation arises that the prices will likely continue to tumble in the upcoming month, resurging fears of Japan entering into a deflationary spiral. Adding to the array of negative economic figures, retail sales plunged the most in seven years. Consumer’s unwillingness to spend coupled with the big decline in exports spells more trouble for the Japanese economy. The combination of negative economic data could weigh heavily on the upcoming Tankan survey released next week. Large Manufacturer sentiment could fall below a 34 year low while the non-manufacturing Index could easily tumble to a record low as conditions deteriorate within the economy.  

EUR/GBP: Currency in Play for Next 24 Hours

EUR/GBP will be the currency in play for the upcoming Monday. U.K. will release the figures for Net Consumer Credit alongside Mortgage Approvals around 8:30GMT or 4:30AM EST. Thereafter, European Economic Confidence and Consumer Confidence will be released at 9:00GMT or 5:00AM EST.

Currently, the pair is lingering within the Range Trading Zone which is determined through the Bollinger Bands. The pair could once again continue the uptrend after breaking resistance which is at the 1st Standard Deviation at 0.9380. If the pair continues to lose momentum and drift lower the next level of support is between 0.9220 which is 50% retracement of last year’s high and this years’ low and 0.9200 which is 20-day SMA as well as a psychological level.      

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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.