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U.S. Dollar: Quarter Ends With a Bang

Last updated 3/31/2009 5:46 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: QUARTER ENDS WITH A BANG
• EUR/USD: PRESSURE GROWS IN ECB
• GBP/USD: FINALLY SOME IMPROVEMENTS IN DATA
• NZD/USD: HIT BY RBNZ COMMENTS
• USD/CAD: INFLATION PRESSURES INCREASE
• AUD/USD: COULD THE RBA PAUSE NEXT WEEK?
• USD/JPY: STIMULUS PACKAGE TO OFFSET TANKAN?

EXPECTATIONS FOR UPCOMING FED MEETINGS

U.S. DOLLAR: QUARTER ENDS WITH A BANG

The last trading day in the first quarter of 2009 has ended with a bang.  The U.S. dollar sold off against most of the major currencies as repatriation flows come to an end.  U.S. economic data was weak, but not a game changer and therefore currency investors chose instead to focus on the positive implications of Japan’s stimulus package and the IRS’ new tax break for U.S. car buyers.  The currencies that are performing the best against the U.S. dollar are the ones whose central banks are not expected to adopt quantitative easing, namely the Australian New Zealand dollar.  

Asia Steps Up to the Plate

With the Europeans reluctant to announce any new spending and the U.S. embroiled in laying out the details for its own stimulus package, Asia has stepped up to the plate to the relief of currency and equity traders.  Prime Minister Taro Aso of Japan has announced a new of 10 trillion ($102 billion) to 40 trillion yen stimulus package hours before leaving for the G20 meeting in London.  Rather than wait for the rest of the world to drag them out of recession, Japan has taken matters into their own hands and is doing all that they can to prevent the economy from collapsing completely.  This is the fourth stimulus package announced from Japan, a country that is facing its worst recession since World War II.  China is also doing their part to help the world as they have expanded swap lines worth 100 billion with Malaysia, Hong Kong, Belarus, Indonesia, Argentina and South Korea.  We do not think that making these announcements ahead of the G20 meeting is a coincidence.  Instead, the Asian Giants are taking steps to avoid criticism and gain the upper hand at the meeting of the world’s 20 biggest economies.

Leading Indicators for Non-Farm Payrolls

Although the European Central Bank interest rate decision and the G20 meeting will distract currency traders from Friday’s U.S. employment report, focus will begin to shift to the non-farm payrolls release as the leading indicators for NFPs start to come in.  This includes the Challenger layoffs report and the ADP private sector payroll report which is due for release on Wednesday.  There is no question that Americans are losing their jobs by staggering amounts, but some improvements in U.S. economic data suggests that the pace of job losses could have slowed.  Wednesday’s reports will shed more light on the state of the labor market. Downside risk is still significant as the latest string of economic data takes a turn for the worse.  Manufacturing conditions in the Chicago region hit a record low in March while house prices fell by 18.97 percent in January, the sharpest decline ever. Consumer confidence improved marginally after hitting a record low last month but the improvement was much smaller than expected. These disappointments throw a wrench into the U.S. recovery story and suggest that there could be a prolonged recession.

EUR/USD: PRESSURE GROWS IN ECB

With the German unemployment rate rising to the highest level in more than a year and Eurozone countries being downgraded by rating agencies, the pressure is growing on the European Central Bank to cut interest rates and start talking Quantitative Easing.  A total of 69k Germans lost their jobs in the month of March, the largest single monthly increase in 4 years.  Like many other export dependent nations, Germany has suffered significantly in the global slowdown.  As the largest nation within the Eurozone, the health of the German economy is particularly important for the European Central Bank.  With inflation remaining low, there are no real excuses for the ECB to avoid being dovish.  German retail sales are due for release tomorrow and the decline in retail PMI suggests that spending could have contracted for the second month in row.  On Monday, Germany was the only country to report a drop in retail PMI as the rise in Italian and French retail PMI pushed the Eurozone index higher.  In Europe, the focus is shifting to the G20 meeting.  French President Sarkozy has threatened to walk out of the G20 meeting if France’s demands for tougher financial regulations are not met.  Although we do not think that he will actually follow through with his threat, Sarkozy’s comment reflects France’s commitment tohaving more than just a heated discussion in London on Thursday.  

GBP/USD: FINALLY SOME IMPROVEMENTS IN DATA

An improvement in consumer confidence has helped the British pound appreciate marginally against the U.S. dollar and Euro.  The recent rally in equities as well as the aggressive fiscal and monetary stimulus from the U.K. government may finally be paying off as Gfk consumer confidence rises to the highest level since May. Britons may also be happy with the fact that Barclays Bank has decided against participating in the government’s insurance program which suggests that they are healthy.  Manufacturing sector PMI is due for release tomorrow and despite the improvement in consumer confidence, business activity is expected to have slowed.  The CBI Industrial Trends survey tends to be a good leading indicator for manufacturing PMI and the sharp deterioration signals weaker business activity.  

Barclays' President Discusses their Decision to Forgo Government Help  

NZD/USD: HIT BY RBNZ COMMENTS

The New Zealand dollar sold off aggressively in late U.S. trading on surprisingly dovish comments from the RBNZ. Having already cut interest rates by 525bp, the central bank is now suggesting that either more rate cuts may be needed or that they could start buying long term bonds. In contrast to recent improvements in economic data, RBNZ Governor Bollard believes that the economic recovery will be gradual and that for the time being, the risks to their outlook are still to the downside. Therefore the rise in long term interest rates has no real justification and is inconsistent with the RBNZ's monetary policy outlook. For anyone that thought that the RBNZ is done with cutting rates, the comment from Dr. Bollard is a reality check that the central bank's work is not done. Their next monetary policy meeting is on March 29th and there is a strong chance that they will cut interest rates by 50bp to 2.5 percent. In complete contrast to the RBNZ, many people are starting to speculate on the possibility that the RBA could leave interest rates unchanged next week.  The market currently expects a 50bp rate cut but a report from Goldman Sachs and an editorial in the Daily Telegraph suggests otherwise. As for the Canadian dollar, it is unchanged on the day as oil prices hold steady.  Although GDP fell 0.7 percent in the month of February, slightly less than the previous month, raw materials and industrial product prices have risen, reflecting stronger inflationary pressures.   

USD/JPY: STIMULUS PACKAGE TO OFFSET TANKAN?

The Japanese government announced a major stimulus package last night and we wonder if the timing of this announcement was impacted by tonight’s Tankan report.   The Quarterly survey of business sentiment is expected to fall to the lowest level in more than 30 years.  The deepening recession has caused Japanese corporations to suffer sharp losses and unfortunately the outlook remains grim.  Domestically, layoffs have taken a big toll on consumer spending. According to the latest labor market report, unemployment is rising.  The jobless rate rose from 4.1 percent to 4.4 percent in the month of February.  This has also affected household spending which has fallen for the eleventh consecutive month.  The only silver lining was the improvement in manufacturing PMI and small business confidence.   A weak Tankan report could weigh heavily on USD/JPY as well as the other Yen crosses.  

Japan's Labor Pains

EUR/USD: Currency in Play for Next 24 Hours

The EUR/USD will be the currency in play for the upcoming 24 hours.  German and European Manufacturing PMI will be released tomorrow at 8:00GMT or 4:00AM EST. Afterwards, U.S. ISM Manufacturing figures will be released at 14:00GMT or 10:00AM EST. The EUR/EUD currently lingers within Range Trading Zone which is derived through Bollinger Bands. Nonetheless, the pair could form a temporarily down trend upon breaking current support. Current support is placed at the 100-day SMA which coincides with 50% retracement of the lowest and highest point in 2009 at 1.3100. The pair could also continue to fluctuate upward upon the break of resistance which is placed at the 1st Standard Deviation of the Bollinger Bands at 1.3460.  

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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.