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U.S. Dollar: Efforts of G20 and FASB

Last updated 4/2/2009 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: EFFORTS OF G20 AND FASB
• EUR/USD: ECB CUTS 25BP, PLANS FOR QE NEXT MONTH
• GBP/USD: FLIRTING WITH RECOVERY?
• AUD/USD: SOARS ON STRONGER DATA
• USD/CAD: MORE STIMULUS ON THE WAY?
• NZD/USD: OIL PRICES UP 8.47%
• USD/JPY: YEN CROSSES SURGE

EXPECTATIONS FOR UPCOMING FED MEETINGS

U.S. DOLLAR: EFFORTS OF G20 AND FASB

The rally in U.S. equities and the improvement in risk appetite drove the U.S. dollar lower against all higher yielding currencies.  Thanks to some extra efforts by the G20 and relaxation of mark to market accounting by the Financial Accounting Standards Board (FASB), investors have become more optimistic.  However a big event risk lies ahead for the U.S. dollar and it remains to be seen whether the positive sentiment following the G20 and FASB can be sustained.  The non-farm payrolls report is traditionally one of the most market moving pieces of data for the foreign exchange market and with the strong possibility of another sharp decline in jobs, it is too early to completely buy into the recovery story ( How Could the Dollar React to Non-Farm Payrolls? ).  

Non-Farm Payrolls Preview

There is a significant chance that in the month of March, U.S. non-farm payrolls fell by the largest amount in 60 years. What this means is that job losses could have exceeded 700k, a figure not seen since the 1940s. Ask any person living in the United States and they will tell you that the labor market is weak and will probably worsen before it improves. Stocks are up but the layoffs announcements have keep on coming. As recently as this week, Sun Microsystems and 3M announced that they will lay off another 1,500 workers each. As a result, March will mark the fifteenth consecutive month of net job losses, matching the length of negative NFPs recorded during the 2001 to 2003 recession. Aside from an improvement in consumer confidence, all signs point to rising job losses in the month of March. This morning, jobless claims rose 12,000 to 669,000 the highest level in more than 25 years. Throughout the month of March, jobless claims have been above 640k. Continuing claims, which measure the amount of Americans who are currently collecting unemployment benefits, hit a record high of 5.73 million in the week ended March 21st. Layoffs have increased 180 percent which is in line with private sector payroll provider ADP’s report that corporations cut 742k jobs last month. 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, providing little offset. The unemployment rate is expected to hit 8.5 percent, the highest level since November 1983.

Markets Unlikely to React to Jobs Data

G20 and FASB

As for the G20 meeting, as President Obama said the $1.1 trillion announcement could be a “turning point” for the global economy.  As we mentioned yesterday, the only way the G20 could have surprised the markets would be to over deliver and it appears that they have done so.  You can read about all of the details in our comments on the G20 statement , but basically more funding has been provided to the IMF to help emerging market nations, the group has agreed to more regulations and oversight.  On currencies, they have pledged against “competitive devaluation” and there is a good chance that the countries will hold to this unless they want to face fierce criticism by the other 19 countries.  This means that Switzerland and to some degree the U.K. will not be allowed to artificially push their currencies lower either through verbal or physical intervention which is negative for the dollar.  Meanwhile, bank stocks are trading higher after the FASB agreed to give banks more flexibility in applying mark to market accounting on their toxic assets.  By allowing the banks to use a more realistic price to value their assets, it can make assets appear more valuable. It remains to be seen whether the change in mark to market accounting and the stimulus provided by the G20 will be enough to cement a bottom in the equity markets.  We are skeptical especially ahead of the March non-farm payrolls report.  

EUR/USD: ECB CUTS 25BP, PLANS FOR QE NEXT MONTH

You can never underestimate the hawkishness of the ECB. This morning, the central bank cut interest rates by 25bp to 1.25 percent, driving the EUR/USD sharply higher following the smaller than expected move. Based upon ECB President Trichet's comments at the post meeting press conference, the decision to make the smaller cut was aimed at buying themselves time before delivering a game changing announcement next month. Trichet was crystal clear that 1.25 percent will not be the "low" for interest rates and that future rate cuts will be "measured" which means small. In later comments he added that 25bp is considered a "measured move." On May 7th, the central bank will decide if nonstandard measures like Quantitative Easing are necessary and if so, they will reveal the "FULL" details on what they plan to do. The ECB basically delayed nonstandard measures like Quantitative Easing for another month but suggested that they will eventually follow the path of the Federal Reserve and the Bank of England.  The decision was not unanimous but reached by consensus. The bottom line is that the central bank wants to maintain the rate corridor which is the difference between the deposit rate (0.25%) and the fixed rate (1.25%). Given that he said the deposit rate will not change from here and he does not exclude "narrowing" the rate corridor, this leaves only one option which is to cut the fixed rate.  The positive impact of today's rate decision on the EUR/USD should be limited by the expectation that Eurozone rates will eventually reach the 1 percent level in May and that nonstandard measures like Quantitative Easing will begin then. It is important for currency traders to realize that all the ECB has done today is to delay the inevitable which can be perceived as Euro bearish and not bullish because it postpones further relief for the Eurozone economy. However at the same time it is important to recognize that the rally in the euro represents position adjustments as many traders discounted a 50bp move.

ECB Discusses Rate Cut

GBP/USD: FLIRTING WITH RECOVERY?

For the third day in a row, the British pound strengthened against the U.S. dollar and Euro.  Economic data from the U.K. has been surprisingly strong which suggests that either economists have set the bar too low or we may be finally be seeing signs of a recovery in the U.K. economy.  After the improvement in consumer confidence and manufacturing sector PMI, construction sector PMI and Nationwide House Prices have also edged higher.  With manufacturing and construction sector activity improving, there is a decent chance that service sector activity may have accelerated as well – the number is due for release tomorrow. The U.K. government has come under fierce criticism for yielding little results after committing a tremendous amount of public money.  Now, they may feel vindicated as it appears that their efforts are paying off.  The 1.4780 level is the 30 day high in the GBP/USD, if that level is broken the next area of resistance is not until 1.50.  Interestingly enough, there was speculation that the U.K. may seek a bailout from the IMF.  The country was forced to do so in the 1970s when skyrocketing debt got out of control.  Prime Minister Gordon Brown denied the need to do so this time around.  

AUD/USD: SOARS ON STRONGER DATA

The Australian dollar extended its gains on the heels of stronger economic data.  Following the recent improvement in manufacturing PMI, the trade surplus ballooned to AUD2109 million from AUD926 million.  The sharp rise was triggered by a decrease imports and an increase in gold exports which is not all that surprising since the Quantitative Easing measures implemented by the central banks across the globe have encouraged diversification into the one currency that cannot be printed, gold.  The decline in imports and the gold related increase in exports indicate that the Australian trade report is not without its flaws since core demand has not changed.  Service sector PMI is due for release this evening and we believe that it will extend the recent trend of better than expected economic reports.  Meanwhile Bank of Canada Governor Mark Carney with the support of Prime Miter Stephen Harper announced a need for extraordinary measures in monetary policy to ignite the slowing economy. Policy makers stated that they are ready to implement quantitative and credit easing policies which will be discussed more thoroughly in late April.  The Bank of Canada is expected to start buying corporate debt and commercial paper.  Oil prices are also up close to 8.5 percent today on the market’s overall optimism.  

USD/JPY: YEN CROSSES SURGE

USD/JPY came close to testing the 100 price level which continues to remain a critical level of resistance.  All of the Yen crosses soared significantly as the outcome of the G20 meeting leads to an improvement in sentiment. AUD/JPY and NZD/JPY advanced to 5-month highs on the expectation that conditions will improve in the global economy. Meanwhile, Japan’s Monetary Base expanded by 6.9% in March, the biggest margin in roughly 5 years as the economy continues to battle a persistent credit crunch. Furthermore, the Japanese government is working to finalize a plan to extend an emergency lending program for banks by ¥10 Trillion or USD$100 Billion. The newly developed plan’s submission to parliament will come as soon as next week increasing BoJ’s funding by tenfold. Low-interest loans remain in great demand as Japanese economy is facing the roughest stretch in more than half a century.          

GBP/USD: Currency in Play for Next 24 Hours

The GBP/USD is the currency in play for the upcoming 24 hours. Britain’s Service PMI figures will be released at 8:30GMT or 4:30AM EST. Thereafter, U.S. will release the latest Non-Farm Payroll figures at 12:30GMT or 8:30AM EST. Throughout this past week the GBP/USD has rallied, taking the currency pair into the Buy Zone, which we determine using Bollinger Bands. In order to continue rallying the pair will need to breach its resistance level at 1.4780, the 30-day high.  If that level is broken, the next area of resistance is at the important psychological level of 1.5000. The buy zone will be negated upon the break of support which is the 1st Standard Deviation of the Bollinger Bands and the 100-day SMA at 1.5460.

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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.