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US Dollar: Bear Market Rally Over?

Last updated 3/30/2009 5:29 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: BEAR MARKET RALLY OVER?
• EUR/USD: IRELAND AND HUNGARY DOWNGRADED
• GBP/USD: FINALLY SOME IMPROVEMENTS IN DATA
• USD/CAD: CARNEY BACKS NEW REGULATORY MEASURES
• NZD/USD: OIL PRICES DOWN 7 PERCENT
• AUD/USD: HOME SALES SLOW
• USD/JPY: YEN OUTPERFORMS ALL MAJOR CURRENCIES

EXPECTATIONS FOR UPCOMING FED MEETINGS

U.S. DOLLAR: BEAR MARKET RALLY OVER?

Over the past 24 hours, it has become increasingly clear that the bear market rally in currencies and equities is over.  U.S. stocks plummeted close to 4 percent sending investors back into the safety of the U.S. dollar and Japanese Yen.  Renewed concerns about the U.S. economy was the primary catalyst for the risk aversion but repatriation also added to the upside pressure in the two lowest yielding currencies.  With 24 hours to go before the end of the quarter for most U.S. companies and the end of the fiscal year for the Japanese, repatriation has been particularly strong as companies bring money home to window dress their balance sheets.  The U.S. dollar strengthened against every major currency except for the Japanese Yen.

Is the Bear Market Rally Over ?

The close to 25 percent rally in the S&P 500 between March 6th and March 26th has been impressive.  However, the size of the move was right in line with the previous relief rallies during the Great Depression ( A New Bull Market or Just a Bear Market Rally ).  If you recall, the catalyst for the rally was a few pieces of better than expected economic data, the Federal Reserve’s decision to start buying longer term U.S. Treasuries and more details from the Obama Administration on the Public Private Investment Program.  For the rally to last and for these programs to work, it would require the confidence of investors and unfortunately confidence is a luxury these days.  Also throughout the rally, investors forgot about the serious and unresolved problems in the U.S. economy and these problems have come back to haunt us.  March 31st was the deadline set by the Bush Administration for automakers to get their acts together and for the government to decide whether more aid can help the company survive and return to profitability or whether a managed bankruptcy is a better option. This morning the Obama Administration gave ultimatums to General Motors and Chrysler.  GM has 60 days to develop a more aggressive restructuring plan or face bankruptcy while Chrysler is being forced to engage in an alliance with Fiat to be considered for further government aid. On top of this, the credit ratings of Ireland and Hungary have been downgraded by Standard & Poor’s, raising fresh concerns about the Eurozone economy.  Don’t forget that the U.S. employment report is due for release on Friday while stress tests for banks are underway and the results could be announced over the next few weeks.   Any surprises could trigger fresh concern about the financial sector and the economy as a whole, which would exacerbate the sell-off of higher yielding currencies and the rally in the U.S. dollar.  The bottom line is that there are still a number of uncertainties in the U.S. economy and these uncertainties should keep the downtrend in the currency and equity markets intact.  

G20 Draft Communique is Dollar Bullis h

One of the biggest event risks this week for the foreign exchange market is the G20 meeting held on April 2nd in London. Unfortunately even before the start of the meeting, it is proving to be a big disappointment. The Financial Times has gotten its hands on a draft of the G20 communique or "statement" that the leaders of the world's 20 largest economies will release on Thursday. The communique mentioned nothing about currencies and contained no fresh fiscal stimulus. This of course is just a draft and many changes could be made at the meeting but on a day when the market is worried about a GM or Chrysler bankruptcy, the failure to provide any specific financial commitment to boosting the global economy has been a huge disappointment. The dollar's rally reflects the increased pessimism and relief that a global reserve currency to replace the greenback was not mentioned at the meeting.

G20 Agenda According to British Secretary

Fed Begins Purchases of Longer Dated Treasurie s

Meanwhile the Federal Reserve has begun to purchase longer dated Treasuries with August 2026 and February 2039 maturities.  This has helped to drive yields lower and will probably continue to keep yields pressured with purchases of up to $300 billion expected over the next 6 months.  There was no major economic data released this morning but the calendar will heat up on Tuesday with house prices, the Chicago PMI report and Consumer confidence due for release.  Although the Empire State manufacturing survey declined, the Philly and Dallas Fed manufacturing surveys improved.  Also, the housing market has shown signs of stabilization which may provide relief for house prices.  

EUR/USD: IRELAND AND HUNGARY DOWNGRADED

Ireland and Hungary have joined the list of European countries whose sovereign debt ratings have been downgraded by rating agencies. Having lost its prized AAA rating, Irish debt is now rated AA+ by Standard & Poor’s.  Hungary’s rating on the other hand is skirting on junk status.  As a member of the Eurozone, Ireland’s sovereign debt rating is important to the euro but Ireland is not the only Eurozone member country to have its credit rating downgraded.  Spain lost its AAA rating in January.  A lower credit rating raises the cost of borrowing for Ireland and can lead to selling by global fund managers who are mandated to invest in only AAA assets because a credit rating reflects the risk of default.  The reaction in the euro has been modest because deteriorating fiscal finances is a problem plaguing most countries within the Eurozone.  However if German or French debt was downgraded, the sell-off in the euro would probably be far more significant.   Comments from ECB President Trichet also added pressure on the euro.  He said that "Latest information suggests economic activity has deteriorated further in the first quarter of 2009. Looking ahead, we expect demand to remain very weak throughout 2009, both at the global level and in the euro area, before gradually recovering in the course of 2010. As in the case for inflation, this outlook remains surrounded by uncertainty."  "Since my appearance before the European Parliament on January 21, the economic situation and outlook have weakened further."  With less than 3 days before the ECB meeting, these words support the case for a 50bp rate cut.  As for economic data, retail PMI improved in the month of March despite declines in consumer and business confidence.  German labor market data is due for release tomorrow and the unemployment rate is expected to hit 8 percent, which would be the highest level in more than a year.  

Hungary Rating Cut to BBB-

GBP/USD: FINALLY SOME IMPROVEMENTS IN DATA

Like all of the other major currencies, the British pound sold off against the U.S. dollar.  However thanks to better than expected economic data, the sell-off was not as large on percentage basis as the Euro and commodity currencies.   Mortgage Approvals rose by the largest amount in 3 years; giving some economists hope that Britain’s battered housing market has finally stabilized on the new financing resources that are becoming available.  Net Lending Secured on Dwellings increased indicating that new homeowners are getting financing. Business loans are also up but it is important to remember that all 3 reports come off of very low levels.   While it is far too early to say that the improvement is here to stay, any sign that Britain’s most troubled markets are returning to normal functionality is a boost in credibility for the British government and Bank of England.  Consumer confidence is due for release this evening. 

USD/CAD: CARNEY BACKS NEW REGULATORY MEASURES

The commodity currencies are facing the brunt of the selling today with the Australian, New Zealand and Canadian dollars all down more than 1 percent against the greenback.  The 7 percent decline in oil prices has pushed USD/CAD up more than 200 pips. Mark Carney, the Bank of Canada Governor said in an interview that he strongly believes that financial actions that carry unusual amounts of risk should face additional regulation. The global initiative to impose these new regulatory pressures will definitely be a topic of heated discussion during the G-20 meeting this week. The topic is already mentioned in the draft of the G20 communique.  Meanwhile economic data showed that Australian New Home Sales were up by 3.90%, which is a steep decline from last month’s 8.3% rise. New Zealand Money Supply numbers clearly reflecting the RBNZ’s easing efforts, with supply jumping to 8.70%. Tomorrow, New Zealand’s NBNZ Business confidence index and Canada’s monthly Gross Domestic Product figures are due for release.

USD/JPY: YEN OUTPERFORMS ALL MAJOR CURRENCIES

The Japanese Yen outperformed all of the major currencies thanks to repatriation flows.  The fiscal year end always tends to lead to a rally in the Yen but this year the demand has been unusually strong probably because of the need for Japanese companies to make their balance sheets appear as healthy as possible.  It has been a very difficult year in Japan and one that will probably worsen with export demand collapsing.  This year, investors will not only be scrutinizing the revenue of Japanese corporations but also the risk of their investments abroad.  The latest IMM data of JPY positioning added fuel to the currency’s rally as JPY short positions increased to -7.6k for the week ending March 24th, the highest since August 2008.  The IMM positioning is frequently looked at as a contrarian indicator. Meanwhile economic data continues to be weak.  Even though industrial production fell at a slower pace in February, the annualized pace of contraction in the manufacturing sector accelerated. Labor market and consumer spending data are due for release from Japan this evening.  The unemployment rate is expected to rise to 4.3 percent, matching the 2 year high reached in December.

EUR/CAD: Currency in Play for Next 24 Hours

EUR/CAD will be the currency in play for the next 24 hours. The Europeans will produce a full schedule of economic data which includes German ILO Unemployment Rate at 2:00 am ET or 6:00 GMT, German Unemployment Rate and Unemployment Change at 3:55 am ET or 7:55 GMT, and the Euro-Zone Consumer Price Index estimate at 5:00 am ET or 9:00 GMT. The Canadians are set to release their monthly GDP report along with the Raw Materials and Industrial Product Price Indices at 8:30 am ET or 12:30 GMT.

EUR/CAD remains in the range trading zone despite today’s accelerated rallies. As of now, the closest resistance is the one-standard deviation Bollinger band. Above lies the previous high from March 20th at 1.6972 that should provide a significant barrier for an extended rally. Drawing a Fibonacci retracement from February lows to the March high, the 50% retracement at 1.6306 should provide for the next area of support. Nevertheless, if EUR/CAD should puncture the 1.6972 resistance, it is possible that an extension to the February to March rally could reinvent itself.

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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.