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U.S. Dollar: A Turning Point?

Last updated 4/3/2009 4:54 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 TURNING POINT?
• EUR/USD: TO UNDER PERFORM?
• GBP/USD: SERVICE PMI HITS 6 MONTH HIGH
• AUD/USD: MORE GOOD NEWS FOR AUSTRALIA
• USD/CAD: CARNEY EXPECTS HORRID EMPLOYMENT NUMBERS
• NZD/USD: OIL PRICES AT $52.45, GOLD AT $892.05
• USD/JPY: BREAKS 100

EXPECTATIONS FOR UPCOMING FED MEETINGS

U.S. DOLLAR: A TURNING POINT?

The U.S. dollar has ended the week lower against all higher yielding currencies as the actions by Washington and leaders of the 20 largest economies have helped to restore risk appetite.  USD/JPY which tracks the market’s sentiment broke 100, to trade at the highest level since November.  The fate of the dollar in the week ahead will be largely dependent upon whether we are at a turning point in the global recession or if investors have been misled by false expectations.  

Equities, Earnings and the U.S. Dollar

Since risk appetite has been driving the currency market, the central question is whether the rally in the equity market is here to stay.  The additional money that the G20 has provided to the IMF and the FASB mark to market changes has lifted banking stocks.  However first quarter earnings season has begun and the continuation of the equity market rally will be dependent upon whether there are more surprises or disappointments in U.S. corporate earnings.  If the banks apply the FASB changes to first quarter earnings, their balance sheets could appear healthier and in turn fuel speculation of a turnaround in the banking sector. Last month, the CEOs of a few banks including Bank of America said that they expect to make a profit this year.  As Federal Reserve Chairman Ben Bernanke has previously suggested, stability in the financial sector will precede stability in the U.S. economy.  The earnings of banks are not due until the week of April 13th, but in the meantime, upside surprises from companies could help to sustain the rally in equities and the weakness in the U.S. dollar.  In the month of March, the dollar sold off against most major currencies and that weakness is helping to support the manufacturing sector as evidenced by the improvement in the manufacturing sector ISM survey.  The service sector on the other hand, is less sensitive to the value of the U.S. dollar and has therefore shown no signs of improvement.  Service sector ISM dropped from 41.6 to 40.8 in the month of March.  

Bernanke Talks Inflation

One of the biggest concerns of central bankers and economy watchers is that all of the monetary and fiscal stimulus will lead to massive inflationary pressures in the future.  The counter argument is that slower global demand will cap inflation pressures.  However the more important question to ask is if inflation pressures picked up, how would central banks responded.  According to comments made by Bernanke today in North Carolina, the central bank must retain the flexibility to withdraw its record injection of credit or reduce money supply if they believe that inflation will become a problem. Although this is not a risk at this time, it is one that is worth considering especially because it would mean that the Fed would have to tighten up monetary policy quickly.

Bernanke on the Economy  

Traders Shrug Off Non-Farm Payrolls, What’s Next?

In any other environment, news that 663k people lost their jobs in a single month would be devastating. However after watching jobs erode for fifteen consecutive months, investors were relieved that job losses did not top 700k in the month of March. Before getting too excited however it is important to point out that even though the February data remained unrevised, January job losses were revised again from -681k to a whopping -741k. So job losses cracked the 700k mark, just not this month. The unemployment rate also hit 8.5 percent, the highest level since November 1983. Based upon average earnings and weekly hours for March, U.S. workers made less money and spent less time on the job. There is no question that with another 2 million Americans out of work since the beginning of the year, the labor market is in the Achilles heel of the U.S. economy.  Some people have downplayed the significance of the payrolls number by arguing that it is lagging indicator but it is a leading indicator for consumer spending which makes it extremely important.  The U.S. economic calendar in the coming week is light with only the minutes from the most recent FOMC meeting and the trade balance due for release.  It will also be a shortened trading week with the equity and bond markets closed for Good Friday.  The lack of any U.S. major event risks could keep the U.S. dollar under pressure.  The action will be elsewhere with 3 central banks making interest rate announcements – namely the Bank of Japan, Reserve Bank of Australia and the Bank of England.

EUR/USD: TO UNDER PERFORM?

There is a very strong chance that over the next few weeks, the euro could underperform most major currencies.  The European Central Bank’s monetary policy decision this week is more of a disservice to the euro than anything else because it extends uncertainty. The underperformance could be particularly prevalent against the Australian dollar and British pound, since the central banks of both countries are expected to keep their interest rates unchanged next week.  Unfortunately the Eurozone has not benefitted from the same breadth of improvements in the economy that we have seen in the U.K. this past week.  EUR/GBP has sold off for six consecutive trading days and is at risk of breaking below 90 cents.  Meanwhile a few weeks ago we mentioned the German Finance Minister’s comments on growing budgets deficits within the Eurozone. We have already started to see his concerns turn into action. France and Spain have been handed a deadline of three years to bring their budget deficits within the mandated level of 3.0% of GDP.  France is currently running a 5.4% deficit and Spain a 6.2% deficit. These levels are out of control, and as Peer Steinbrueck cautioned is a threat to the stability of the Euro-zone.  Economic news for today showed that the Service Sector has broadly improved across the Eurozone.  Next week, we are expecting Eurozone producer prices, retail sales and the German trade balance.

GBP/USD: SERVICE PMI HITS 6 MONTH HIGH

The British pound has traded higher every day this week thanks to better than expected economic data.  The dissatisfaction with Britain’s economic situation has taken a turn this week, fueling speculation of potential stabilization in the U.K. economy.  Adding to recovery expectations is the improvement in service sector PMI. The report climbed for the fourth consecutive month to 45.5 compared with 43.2 from a month earlier. In addition to hitting a six month high, Britain’s services industry is back on the road towards expansion (a number over 50.0 reflects expansionary conditions). The good news today follows the rise in Manufacturing and Construction sector PMIs earlier this week. It may be too early to tell, but it is a compelling argument that the British economy has rebounded off of what will be the worst that the recession has to offer. In order to sustain this sentiment, the pound will have to survive the Industrial Production, the NIESR GDP Estimate, Producer Prices, Trade Balance and of course the BoE rate decision next week. Since growth concerns have not been negated by the Services number, it makes IP and the GDP estimate even more important.  As for the BoE Rate Decision, the central bank is expected to keep interest rates unchanged at a record low of 0.5 percent for the first time since September of last year.

AUD/USD: MORE GOOD NEWS FOR AUSTRALIA

The Australian dollar sold off against the U.S. dollar despite a stronger than expected service sector PMI report.  Economic data has surprised to the upside for most of the week, fueling strong gains in the currency.  Unfortunately the Australian dollar gave back earlier gains following a piece in the Australian Financial Review arguing that the Reserve Bank could cut interest rates next week.  The market is currently looking for the central bank to leave interest rates unchanged for the second meeting in a row.  In February, New Zealand’s budget deficit widened more than expected as recession impacted government’s resources. The operating deficit was NZ$8.4 billion or $4.9 Billion as tax revenue and losses on financial instruments contributed to the decline. Meanwhile, Canadian Prime Minister Stephen Harper stated that conditions within the economy will deteriorate further with the imminent rise in the unemployment rate. Harper went on to elaborate that conditions remain better in New Zealand than in other G7 nations with the prospect of a recovery in the upcoming year. We are suspicious of this rosy outlook considering the Canadian economy’s vulnerability to the U.S. economy. This statement will be tested on Monday upon the release of IVEY PMI.   

USD/JPY: BREAKS 100

USD/JPY has pierced through 100.00 for the first time since November 4th of 2008. Clearly this level of resistance opens the door for more gains in the currency pair.  The Nikkei pushed higher for fourth consecutive week as the recent weakness in the Yen helps to boost the manufacturing sector and exports. Since early March, the S&P 500 increased by 26% while Nikkei advanced 24%, respectably.  The Bank of Japan is expected to maintain their interest rates at 0.10% on Monday. The central bank’s interest rate needs to remain close to zero in order to ease deflationary fears and supply liquidity to the economy. Nonetheless, investors will be looking for expansion in measures to support businesses and easing of credit. Trade Balance figures released next Tuesday will elaborate further on the progress of the economy. If exports continue to plummet, the dire situation within the economy may remain bleak for a considerable amount of time. Eco Watchers Survey released on Wednesday is expected to improve but remain at very low levels. Optimism about the turnaround of the global economy is supported by the improvement in China’s Purchasing Managers Index which advanced to 52.4, the first expansion since September 2008.

EUR/AUD: Currency in Play for Next 24 Hours

EUR/AUD will be the currency in play for the upcoming Monday. Australia will release the figures for TD Securities Inflation and AiG Construction Index art 23:30GMT or 8:30PM EST on Sunday.  Thereafter, ANZ Job Advertisement data will be released at 1:30GMT or 10:30PM EST. Euro-zone Producer Prices and Retail Sales will be released at 9:00GMT or 5:00AM EST After establishing a temporarily downward trend, EUR/AUD hovers near this year’s low and is trading within the Sell Zone which we determine using Bollinger Bands. In order to maintain the current downtrend, the pair needs to breach its next support level. Current support is placed at the lowest point this year around 1.8605. The Sell Zone will be negated upon the break of resistance which is placed at the 1st Standard Deviation of the Bollinger Bands around 1.9120.

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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.