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THE STORIES IN THE CURRENCY MARKET

• U.S. DOLLAR: 3 REASONS WHY IT IS HIGHER
• EUR/USD: HIT BY WEAKER DATA AND DOVISH COMMENTS
• EUR/GBP TESTS 90 CENTS
• NZD/USD: PRESSURE ON RBNZ TO CUT RATES
• AUD/USD: UNFAZED BY RATE CUT
• USD/CAD: ADDITIONAL HELP FOR AUTO PARTS MAKERS
• USD/JPY: YEN BOUYED BY STIMULUS PACKAGE

EXPECTATIONS FOR UPCOMING FED MEETINGS

CURRENT US INTEREST RATE: 0.25%					Rates are Expected to Remain Unchanged in April and June
	4/29 Meeting	6/24 Meeting
NO CHANGE	80.0%	66.8%
Cut to 0.00%	20.0%	15.6%
Increase to 0.50%	0.0%	17.6%
Increase to 0.75%	0.0%	0.0%

U.S. DOLLAR: 3 REASONS WHY IT IS HIGHER

For the second day in a row, the U.S. dollar has appreciated significantly against the Euro and is also trading higher against the New Zealand dollar and Swiss Franc. However, the extent of today’s rally in the greenback basically ends there. The dollar is practically unchanged against the British pound and Australian dollars and is trading lower against the Canadian dollar and Japanese Yen. The 2.3 percent sell-off in U.S. equities coupled with the outperformance of the two lowest yielding G7 currencies indicates that risk aversion is the dominant theme. Yet, with no major U.S. economic data or market moving news over the past 48 hours, traders may be wondering, what changed. As recently as last week, investors were optimistic about a turnaround in the global economy following the more substantial outcome from the G20 meeting. Here are 3 reasons why the U.S. dollar is trading higher today:

1. Weak TALF Auction and Moody’s Downgrade

Over the past few months, the U.S. government has introduced no less than 20 different programs with a variety of acronyms. One of the more important ones is the Term Asset-Backed Securities Loan Facility (TALF). This facility is aimed at lowering consumer lending costs by supporting the issuance of asset backed securities (ABS) that are collateralized by student, car and credit card loans. In other words, investors can apply for financing by posting collateral. The first auction occurred last month and was unfortunately met with weak demand. The reception of today’s auction was even worse despite the fact that the Fed expanded the type of securities it was willing to accept. Weak participation in the TALF could be a result of a number of factors ranging restrictions of hiring of foreign workers, fear of legislative changes to investors shopping around for better deals or cheaper funding. Regardless of the reason, much of the U.S. recovery and stabilization of the financial sector hinges upon the success of programs like the TALF and its failure puts the U.S. recovery story in question. For the first time ever, rating agency Moody’s also downgraded the outlook for U.S. local governments. Although this is not an official credit rating downgrade, it is a credit watch which means that local U.S. governments or municipalities has not lost but is at risk of losing their AAA rating. If this happens, not only could it shake up the bond markets, but it could also spur speculation that U.S. Treasuries may be put on credit watch.

2. Earnings Season Underway

Earnings season is also underway and unfortunately Alcoa turned a larger than expected loss in the first quarter. More disappointments are likely with banks slashing earnings estimates and issuing sell recommendations on a variety of companies. This has caused many experts such as Soros and El-Erain of PIMCO to warn that the recent recovery in equities is just a bear market rally. We agree because on many occasions we have compared the current rebound in the stock market to bear market rallies during the Great Depression . Recent improvements in U.S. economic data have made us a bit more optimistic but unfortunately the underlying problems in the U.S. economy have not been resolved and so far, the government’s alphabet soup of programs have not been enthusiastically received. Earnings are expected to be very weak this quarter but all eyes are on the banking sector which does not start releasing earnings until next week. The changes to mark to market accounting rules could help to make their balance sheets appear healthier.

El-Erian of PIMCO on the Recovery

3. Profit Taking Ahead of Shortened Trading Week

Finally, it is shortened trading week in the U.S. with equity and bond markets closed on Friday for the Easter Holiday. This has encouraged some profit taking amidst the dearth of economic data and the uncertainties that lie ahead. The only pieces of U.S. economic data released were the IBD Economic Optimism index and Consumer credit. Economic optimism improved but the IBD index does not have the same following as the Conference Board or University of Michigan sentiment reports. Credit on the other hand plunged as massive job losses held back financing of new purchases by U.S. consumers. Mortgage applications, wholesale inventories and the minutes from the March FOMC meeting are the only pieces of event risks on the U.S. calendar tomorrow. The data will have a zero to limited impact on the dollar. The FOMC minutes will shed more light on the central bank’s decision to start buying longer term U.S. Treasuries. The only way the minutes could impact the foreign exchange is if they suggest that more unconventional measures are expected. As you can see, the dollar’s rally today has been spurred by skepticism. Investors are not convinced that equities have hit a bottom and until skepticism turns into confidence, we could see more volatility in the currency and equity markets.

EUR/USD: HIT BY WEAKER DATA AND DOVISH COMMENTS

The euro was hit by weaker economic data and dovish comments from European Central Bank officials. Fourth quarter GDP was revised from -1.5 to -1.6 percent, the weakest level ever since the introduction of the euro. Slower growth forced Eurozone companies to scale back production while rising unemployment caused consumers to cut spending. Many ECB officials have acknowledged the deterioration in growth and indicated that more support will come from the central bank at the next monetary policy meeting. ECB member Constancio said that new tools will be announced at the next meeting while member Provopoulos said the ECB could cut interest rates below 1 percent if the economy worsens. The latest economic data shows that the economy was very weak in the first quarter of 2009 and he pointed out that the OECD and IMF expect a deeper recession than the ECB. Should the central bank announce new measures next month, Provopoulos expects them to focus primarily on banks. German factory orders and the German and French trade balance are due for release tomorrow. Weaker global growth is expected to drive down exports for both countries and lead to a smaller trade surplus for Germany and a larger trade deficit for France.

Ireland Takes Loans from Banks

EUR/GBP TESTS 90 CENTS

Although the British pound held steady against the U.S. dollar, the action has been in EUR/GBP which fell for the eighth consecutive trading day. The currency pair is now flirting with 90 cents, a critical support level. The outperformance of the British pound against the Euro is directly tied to the recent surprises in U.K. economic data and the market’s belief that the European Central Bank will continue to cut interest rates. This morning, industrial and manufacturing production fell less than expected in the month of February, which is in line with the recent improvement in manufacturing sector PMI. However, problems still loom for the U.K. economy as a recovery is far from certain. The Royal Bank of Scotland announced this morning that they will be cutting 9,000 jobs, half of which will be in the U.K. Nationwide consumer confidence is due for release tomorrow and given the recent improvements in economic data, there is a decent chance that consumer confidence has ticked higher as well, which could fuel further gains in the British pound.

NZD/USD: PRESSURE ON RBNZ TO CUT RATES

It has been a rollercoaster ride for the Australian dollar today. The currency fell sharply against the U.S. dollar following the Reserve Bank of Australia’s surprise 25bp rate cut but quickly recovered it losses to trade up to a high of 0.7170. It then fell 100 pips during the early European trading session before rallying once again. The best way to describe the price action of the AUD/USD is with the letter “M.” This volatility reflects on the market’s confusion about what to make of the recent rate cut by the RBA. The Reserve Bank of Australia unexpectedly reduced the interest rates by quarter of a percent, to a 49-year low, as the economy is on a verge of entering its first recession since 1991. The Board felt that a further contraction in the global economy and a lack of improvement in sentiment needed to be addressed. Furthermore, the central bank expects the labor markets to worsen and inflation to remain at 2 year lows. However RBA Governor Glenn Stevens was reluctant to cut interest rates by more than 25bp, noting lagging effects of fiscal and aggressive monetary policy as well as potential stabilization of the Chinese economy and therefore this rate cut could be the RBA’s last. Meanwhile the New Zealand dollar was the worst performing currency today because the RBA rate cut now puts pressure on the RBNZ to do the same. Business confidence deteriorated last quarter to the weakest level since 1970 while the Dominion Post also added fuel to sell-off by publishing an article suggesting that unemployment could exceed the Treasury’s worst forecasts. As for the Canadian dollar, it has held onto its gains against the U.S. dollar following the additional C$700 million (US$567 million) insurance on sales that the Canadian government is supplying to auto-parts makers and guarantee of consumer warranties for new GM and Chrysler vehicles.

USD/JPY: YEN BOUYED BY STIMULUS PACKAGE

The Japanese Yen has strengthened across the board following a larger than expected stimulus package. With the economy in the deepest recession since 1945, Japan was widely expected to announce more fiscal stimulus. However what was expected was something far smaller than the 10 trillion Yen or USD$100 billion plan announced by Finance Minister Yosano last night. According to Yosano, Aso has ordered for spending to exceed 2 percent of GDP. Like many of heads of state across the globe, Aso has been determined to combat the recession with aggressive government spending. With an approval rating at 30 percent, the Prime Minister has a lot to lose and unfortunately, the central bank’s hands are tied. The BoJ left interest rates unchanged at 0.1 percent last night and instead has expanded the collateral it accepts from commercial banks. The program implemented by the central bank will accept municipal and government bonds in an effort to ease credit and encourage lending to companies. Therefore, the collateral held by the bank currently in the sum of ¥111 Trillion or $1.1 Trillion will increase by an additional ¥5 Trillion, in the hopes of unfreezing the credit markets. Despite their efforts, central bank governor Shirakawa remains pessimistic about the outlook for the economy and warned that declining exports will make a recovery difficult. The trade balance and current account figures are due for release this evening along with the Bank of Japan’s monthly report and the Eco Watchers survey. After reporting a deficit in the month of January, Japan is expected to turn a trade and current account surplus in February thanks to the recent weakness in the Japanese Yen (in February, USD/JPY rose more than 10 percent).

BoJ Moves to Ease Credit Strains

EUR/USD: Currency in Play for Next 24 Hours

The EUR/USD will be the currency in play for the next 24 hours. Tomorrow, German Trade Balance and Current Account figures will be released at 6:00GMT or 2:00AM ET. Afterwards, in the U.S., the FOMC minutes will be released at 18:00GMT or 2:00PM ET. After a rapid rally from this year’s low the pair stalled and is currently trading within the Range Trading Zone of the Bollinger Bands. The pair needs to clear current resistance in order to continue its uptrend. Current resistance lies between the 1st Standard Deviation of the Bollinger Bands at 1.3530 and 50% retracement of December’s high and this year’s low at 1.3580. Meanwhile, current support is presented by the 100-day SMA around 1.3150.

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.