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US Dollar: Trading G20 and ECB

Last updated 4/1/2009 5:33 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: TRADING G20 AND ECB
• EUR/USD: WHAT HAPPENS BEYOND 1 PERCENT?
• GBP/USD: SUCCESSFUL GILT AUCTION
• USD/CAD: CARNEY DELAYS QUANTITATIVE EASING
• AUD/USD: DROP IN RETAIL SALES OFFSET BY RISE IN PMI
• NZD/USD: OIL AT $48.53, GOLD AT $927
• USD/JPY: TANKAN INDEX HITS RECORD LOWS

EXPECTATIONS FOR UPCOMING FED MEETINGS

U.S. DOLLAR: TRADING G20 AND ECB

The next 48 hours in the foreign exchange market should be very interesting as we look forward to three significant events that could trigger massive volatility in the currency market independently, let alone collectively.   After some big moves earlier this week, most currency pairs have consolidated as traders wait for the European Central Bank interest rate decision, the G20 meeting and the U.S. non-farm payrolls report.  The U.S. dollar strengthened against the Euro and Swiss Franc but lost value against all of the other major currencies. This consolidation should just be a precursor to a bigger move.

Trading G20 and ECB Rate Decisio n

If you are interested in trading the G20 and ECB meetings, it is important to understand where the expectations and risks lie.  Earlier this week, the Financial Times released a draft of the G20 statement or communiqué.  Based upon the statement, there will not be any new fiscal stimulus and a global reserve currency will not be discussed.  However the G20 will commit more money for the IMF and will most likely agree to tighter regulation of hedge funds and stricter standards for banks.  Since investors do not expect anything groundbreaking from the G20, the risk is only to the upside.  This means that if the G20 delivers anything above and beyond more regulations and additional money for the IMF, it would be a pleasant surprise that could be taken positively by the currency and equity markets.  For the ECB on the other hand, the risk is to the downside.  The pressure is on for the central bank to announce unconventional measures to stimulate economy.  This is on top of a 50bp rate cut that has been discounted by the market.  The ECB rate decision could be a lose-lose situation for the euro ( Euro at Risk as ECB Faces Few Choices ).  If the ECB is as dovish as the market wants them to be, the euro could sell off.  If they refuse to talk Quantitative Easing or offer other alternative measures, the central bank could come under fierce criticism for lagging behind its peers, which would be long term bearish for the euro. 

G20 Meeting: Obama and the Economy

Equities and Currencies Shrug Off AD P

Part of the reason why equities and currencies have shrugged off the abysmally weak ADP employment report is because the market's focus will not turn to U.S. data until the ECB rate decision and G20 meeting has passed.  However that does not draw away from the strong possibility that non-farm payrolls could report its largest drop in more than 60 years on Friday.  The ADP report which measures private sector employment fell by -742k, the sharpest decline ever. Layoffs according to the Challenger report surged 180.7 percent, suggesting that job losses may have accelerated while weekly jobless claims exceeded 650k two out of the past three weeks. The only silver lining would have to come from the public sector, but there is little chance that the increase in government jobs would be more than 10k or 20k.  All other signs point to the biggest contraction in the labor market since September 1945.  Meanwhile manufacturing conditions showed a mild improvement in March with ISM rising from 35.8 to 36.3 while we continue to see signs of stabilization from the housing market. Construction spending fell by a much smaller amount in February while pending home sales rose 2.1 percent.  Jobless claims and factory orders are due for release on Friday.  The improvement in manufacturing ISM opens the door for a rebound in factory orders. 

EUR/USD: WHAT HAPPENS BEYOND 1 PERCENT?

The European Central Bank is running out of room to cut interest rates.  With the expectations of a half point cut on Thursday, Eurozone interest rates would hit 1.00 percent.  Unlike its peers, the ECB has been very frugal with easing monetary policy as ECB President Trichet repeatedly said that zero interest rates is not appropriate for the inflation focused central bank.  So that leads many traders to wonder if the ECB will continue to cut interest rate beyond 1 percent.  Based upon economic data ranging from Tuesday’s German unemployment report and this morning’s German retail sales and Eurozone manufacturing PMI reports, the ECB should seriously consider bringing interest rates down to U.S. or U.K. levels.  Inflation pressures have not ticked higher like it has in some other countries and therefore Trichet is left with few excuses.  However based upon the comments made by European monetary officials who say that deposit rates at the ECB are already at a very low 0.5 percent, they may be reluctant to take interest rates below 1 percent.  Thursday’s interest rate decision is probably more important than any other rate decision made by the ECB over the past 6 months.  Not only will the market be looking for clues about unconventional measures, but also about further rate cuts.  There are many different ways that the ECB rate decision could play out. Beyond cutting interest rates by 50bp, Trichet can either talk about unconventional measures vaguely or specifically. The more specific he is, the more bearish it will be for the EUR/USD. The vaguer he is about alternative measures, the less bearish it will be for the EUR/USD.  Meanwhile the Swiss Franc sold off against the Euro and U.S. dollar on the heels of a weaker than expected manufacturing sector PMI report. 

ECB Likely to Cut Rates, Buy Securities

GBP/USD: SUCCESSFUL GILT AUCTION

The British pound strengthened against the Euro and U.S. dollar on the heels of better than expected economic data. Manufacturing PMI increased from 34.7 to 39.1 in March to the highest level since October 2008.  According to the CIPS, the orders component rebounded to the highest level since August, fueling recovery expectations.  The better than expected number follows the improvement in consumer confidence reported on Tuesday.  Construction sector PMI is due for release tomorrow and unfortunately the housing market has not fared as well as the rest of the economy.  Meanwhile the British pound has also benefitted from a successful Gilt sale.  The sale of British securities conducted last week was met with few interested buyers, which not only said something about the government’s credibility but their ability to finance all of their spending packages and economic initiatives. Thankfully, today’s sale was met with more than twice the amount of buyers as securities available. The government’s ability to finance its activities is especially important after Gordon Brown reiterated his responsibility to act with “a sense of urgency” when responding to economic threats. With the G-20 meeting fast approaching, his initiatives are starting to realign with Obama’s call for cooperation on introducing more fiscal stimulus. Even though the Prime Minister as early as this week was supposedly cutting off spending in favor of a more modest budget, it appears that his plans have not been fully materialized.

USD/CAD: CARNEY DELAYS QUANTITATIVE EASING

The improvement in risk appetite helped to drive the Canadian, Australian and New Zealand dollars higher against the U.S. dollar.  There was no economic data from Canada, but central bank governor Carney made some interesting comments.  He said that the recession could extend to the end of the year which represents a more negative outlook from the bank’s previous forecast that growth will return in the third quarter.  More importantly after talking about Quantitative Easing during the last monetary policy meeting, he suggested that there is no pre-ordained timing for using alternative policy measures to stimulate the economy.  Instead, the implementation of Quantitative Easing would be based upon the effect it would have on achieving the central bank’s inflation target.  In other words, Carney is saying that the central bank can but will not start Quantitative Easing for the time being.  Meanwhile Australia reported mixed economic data with the drop in retail sales offset by an increase in manufacturing PMI.  The trade balance is due for release tonight and could improve based upon the manufacturing data. 

USD/JPY: TANKAN INDEX HITS RECORD LOWS

USD/JPY has come under selling pressure today despite some seriously concerning news about the level of confidence within the country. One of Japan’s most widely watched reports, the Tankan Index, showed undeniable economic deterioration. Every component of the report fell well below last month’s dismal release. Only the Large Manufacturer’s Outlook component managed to marginally exceed consensus. Otherwise the report gave no reasons for rejoice. The Tankan report is subdivided into the Large Manufacturing Index, Large Manufacturing Outlook, Non-Manufacturing Index, and the Non-Manufacturing Outlook. Sentiment from the large manufacturers has fallen to the lowest level on record, since the report’s inception more than a quarter-century ago. Furthermore, the non-manufacturing report faced the biggest monthly drop on record. Desperation is obvious at this point, and when compared with yesterday’s employment reports, this week has served a one-two punch for the Japanese economy. The losses incurred by Japanese companies has exacerbated this disturbing outlook, and should only result in more layoffs and reduced production. As mentioned in yesterday’s Daily Currency Focus, it now appears that the incidental announcement of more Japanese stimulus was a planned initiative. For tomorrow, traders will receive a much needed break in the rounds of disappointing economic data.

EUR/USD: Currency in Play for Next 24 Hours

EUR/USD will be our currency in play for tomorrow. The ECB’s Interest Rate decision is scheduled for 7:45 ET or 11:45 GMT while the U.S. Jobless Claims report is due for release at 8:30 am ET or 12:30 GMT followed by factory orders at 10:00 ET or 14:00 GMT.  

Trading in EUR/USD remains consolidative ahead of the ECB meeting, with the pair trading within the Bollinger band range trading zone. In indentifying support, we used the Fibonacci Retracement stretching from March 4th lows to March 19th highs. Even though price action is currently resting on the 38.2% retracement, the more significant area of support should be the 50% retracement at 1.3097. Resistance, in the event of a big move tomorrow, will be placed at the mid-March high of 1.3738. A break of this level may precede another substantial euro rally.

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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.