Daily Market Commentary
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US Dollar: FOMC Over, Now What?
Thu, Jan 29 2009, 02:42 GMT
by Kathy Lien
US Dollar: FOMC Over, Now What?
Although the Federal Reserve did not change interest rates this afternoon, the FOMC announcement led to a significant amount of volatility in the currency market. In our FOMC Instant Insight, we talked about how the dollar rallied because the Fed said that they “may” and not “will” start buying US Treasuries. The market was looking for something more radical such as inflation targeting or a bold announcement that they will immediately start buying long term Treasuries in size, which would have been dollar bearish. In the grand scheme of things, the Federal Reserve delivered nothing new today. So with that in mind, what should we expect now that the FOMC meeting is behind us?
No Action from the Fed Until Spring
In the Federal Reserve’s eyes, their previous rate cuts and programs such as the Term Asset-Backed Securities Loan Facility (TALF) has not really had the chance to impact the US economy. This is why they want to continue to focus on extending credit to households and small businesses rather than jumping in and buying massive amounts of US Treasuries to drive down bond yields. The next monetary policy meeting is not until March which means that we may not see anything new from the Fed until the spring. This leaves the US dollar vulnerable to the developments in the US economy as well as announcements from the Treasury. In other words, the Treasury is stepping up to plate and the Fed is taking the backseat. Treasury Secretary Geithner said today that a Bank Rescue plan is on its way driving stocks higher. If the plan hits any stumbling blocks, risk aversion could return quickly. However if President Obama is as effective in bolstering investor confidence as he has been in boosting public confidence, currency investors may no longer need to hide in the safety of the low yielding US dollar. The only clear consequence of the Fed’s statement is that yields will rise as traders who banked on the Fed’s purchases of US Treasuries reverse their positions – and higher yields are dollar bullish.
Still Watching the Economy
We are still watching the US economy. Durable goods, jobless claims and new home sales are due for release on Thursday. The deterioration in manufacturing PMI suggests that durable goods orders could suffer. Boeing aircraft orders are a big component of durable goods and the company announced this morning that they plan on laying off 10,000 workers. If orders were strong, they would probably not be reducing their workforce. Existing home sales were stronger than expected which suggests that we could see a similar rebound in new home sales. However any inventory that is moving on the housing market has been driven entirely by lower prices. Finally jobless claims were 589k the last time that we saw the report. If claims crack the 600k mark, January non-farm payrolls could be as weak as the November and December numbers.
EUR/USD: TRICHET COMMENTS ON INTEREST RATES
Having rallied as high as 1.3328, the Euro staged a dramatic reversal following the Federal Reserve’s interest rate decision. The earlier strength of the Euro was supported by the rally in equities, the return of risk appetite, stronger economic data and comments from ECB President Trichet. Despite the recession in the Eurozone, consumer confidence held steady in Germany and improved in France. This follows yesterday rebound in German business confidence which suggests that the largest nation in the Eurozone is doing something right. Inflation however continues to fall with German consumer prices easing in the month of January. The annualized pace of CPI growth of0.9 percent is well below the ECB’s target. Meanwhile in an interview with Reuters, central bank President Trichet reminded traders that the next important ECB meeting for rates is in March not February. In other words, he is telling everyone that interest rates will probably remain unchanged at their next monetary policy meeting. Although Trichet believes that economic growth will be negative this year, he feels that very, very low rates are inconvenient. At 2 percent, the Eurozone has the third highest interest rate in the developed world. Looking ahead, German unemployment, retail PMI and Eurozone confidence numbers are due for release. Given the sharp drop in the employment components of PMI, we expect the German unemployment rate to tick higher.
GBP/USD: BRITISH POUND PRESSES HIGHER
For the third consecutive trading day, the British pound pressed higher against the US dollar. There was no UK economic data released this morning, but the government announced a GBP2.3 billion package for the auto industry. They were quick to say that this was not a bailout package but instead one to revitalize the troubled industry by helping them invest in green, low carbon vehicles. The UK government has been hitting the economy from all angles with tax cuts and different stimulus plans and that is why when risk appetite improves, the British pound is one of the first currencies to benefit. In fact, the pound is one of the few currencies that to strengthen against the greenback today. Of course, the UK economy still has its own problems and we may be far away from a recovery, but no one can say that the government isn’t doing all that they can. Nationwide house prices are due for release on Thursday. The housing market has been the Achilles Heel of the UK economy and unfortunately that is not likely to change anytime soon.
NZD/USD: RBNZ CUTS INTEREST RATES BY 150BP
The Reserve Bank of New Zealand cut interest rates by 150bp to 3.5 percent, the lowest level ever. Over the past 2 months, the RBNZ has cut interest rates by 3 percent. The New Zealand government was late to the game and they are making up for it now. Interest rates are still expected to come down as RBNZ Governor Bollard points out that there is plenty of room to move. However future rate cuts will not be as large. The central bank expects the recession to last for the first half of the year as the global slowdown takes a bite out of New Zealand exports. This concern was not confirmed by the December trade numbers. The deficit shrunk to -346M from -588M as imports slowed and exports rebound. For the first time since December 2003, New Zealand now has a lower interest rate than Australia. The Australian dollar rebounded as data was mixed. Leading indicators were weaker than expected but consumer prices beat expectations. Treasurer Swan believes that there are underlying strengths in the Australian economy and promised to act swiftly and decisively. He pointed out there is room to move on interest rates and a rate cut is exactly what the market expects from Australia at their monetary policy meeting next week.
The rebound in the US equities drove all of the Japanese Yen crosses higher. Risk appetite is playing a key role in the day to day performance of all of these pairs and there is no reason for that to change any time soon. The biggest market mover was CAD/JPY as the Canadian dollar soared on merger and acquisition related flow. Small business confidence in Japan hit a record low in the month of January as the rising Yen hurts exports. More economic data is expected from Japan this evening and they are may not be pretty. Large retail sales are forecasted to drop by 5.2 percent in the month of December which would be the largest drop in 3 years. Japan and the world economy are also very sensitive to the developments of China. Prime Minister Wen tried to offer some encouraging words at Davos this morning by saying that even though severe challenges lie ahead, the Chinese economy is in good shape on the whole and will definitely maintain strong economic growth.
EUR/USD: Currency in Play for Next 24 Hours
The currency in play for the upcoming 24 hours will be EUR/USD. German unemployment numbers are due for release at 3:55am ET or 8:55 GMT followed by Eurozone retail PMI numbers at 4:00am ET or 9:00 GMT. US durable goods and jobless claim are due for release at 8:30am ET or 13:30 GMT.
The EUR/USD is trading within the range trading zone but stiff resistance lies above. There is a confluence of moving averages (20, 50 and 100-day SMA) as well as the 61.8 percent Fibonacci retracement of the October to December rally. The levels to watch are 1.3395 on the top side and 1.3020 on the downside. If the currency pair rallies above 1.3395, there is a chance that we could see a move above 1.35. If it breaks below 1.3020, the EUR/USD would have reentered the sell zone, signaling more losses ahead.
Published on Thu, Jan 29 2009, 02:42 GMT
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New Zealand Cuts Interest Rates by 150bp to 3.5%
Thu, Jan 29 2009, 02:40 GMT
by Kathy Lien
New Zealand Cuts Interest Rates by 150bp to 3.5%
The Reserve Bank of New Zealand has surprised the markets once again by cutting interest rates 150bp to 3.5 percent, the lowest level in 10 years. Today's rate cut matches their move in December, which at that time, was the largest ever.
Over the course of 2 months, the RBNZ has cut interest rates by 3 percent. Since July of 2008, they have reduced interest rates by a total of 475bp. The larger move was motivated by a worsening outlook for New Zealand exports and the need for more stimulus. The New Zealand government was late to cut interest rates and they are making up for it now.
More rate cuts are still expected according to RBNZ Governor Bollard but they will not be as large. New Zealand rates will probably come down to at least 2.5 percent before they hit a bottom. For the first time since December 2003, Australia now offers now a higher interest rate than New Zealand. This should lead to more strength for AUD/NZD.
The prospect of more rate cuts as well as the threat of a credit rating downgrade should be bearish for the New Zealand dollar and could drive the NZD/USD back towards 50 cents.
Published on Thu, Jan 29 2009, 02:40 GMT
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FOMC Instant Insight: Fed Announcement Triggers Dollar Rally
Wed, Jan 28 2009, 23:20 GMT
by Kathy Lien
FOMC Instant Insight: Fed Announcement Triggers Dollar Rally
The Federal Reserve has officially run out of room to cut interest rates. For the first time since August 2007, they left interest rates unchanged at a target range of 0 to 0.25 percent. The dollar rallied because the Fed did the minimum of what was needed to pacify the market, which was to say that they could purchases Treasuries but are not going to do so right now. Currency traders were looking for something more radical such as inflation targeting or a bold announcement that they start buying long term Treasuries in size - which would have been dollar bearish. Interest rates could remain at current levels for the next six months as the central bank focuses on credit easing. The Federal Reserve was pessimistic about the outlook for the US economy and said that inflation could continue to remain weak in the coming quarters.
In the long run, the Fed’s lack of commitment is still dollar bullish more action will be needed and delaying inevitable could hurt more than it helps. The central bank is simply buying time before they commit to anything new because they may want to see how the economy absorbs all their recent stimulus. In the meantime, investors are happy that Treasury Secretary Geithner has promised a Bank Rescue Plan “relatively soon.” The prospect of a plan should boost risk appetite. If fourth quarter GDP is not as bad as the market’s extremely pessimistic forecasts, we could see the dollar rally further in February. Growth is expected to be the slowest in more than 20 years because consumer spending has been inexistent, but the trade deficit improved materially in Q4 so GDP may not fall as much as the market’s 5.5 percent forecast. If President Obama is as effective in bolstering investor confidence as he has been in boosting public confidence, currency investors may no longer need to hide in the safety of the low yielding US dollar.
Comparing the FOMC Statements:
FOMC Statement January 28, 2009
The Federal Open Market Committee decided today to keep its target range for the federal funds rate at 0 to 1/4 percent. The Committee continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.
Information received since the Committee met in December suggests that the economy has weakened further. Industrial production, housing starts, and employment have continued to decline steeply, as consumers and businesses have cut back spending. Furthermore, global demand appears to be slowing significantly. Conditions in some financial markets have improved, in part reflecting government efforts to provide liquidity and strengthen financial institutions; nevertheless, credit conditions for households and firms remain extremely tight. The Committee anticipates that a gradual recovery in economic activity will begin later this year, but the downside risks to that outlook are significant.
In light of the declines in the prices of energy and other commodities in recent months and the prospects for considerable economic slack, the Committee expects that inflation pressures will remain subdued in coming quarters. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.
The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. The focus of the Committee's policy is to support the functioning of financial markets and stimulate the economy through open market operations and other measures that are likely to keep the size of the Federal Reserve's balance sheet at a high level.The Federal Reserve continues to purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand the quantity of such purchases and the duration of the purchase program as conditions warrant. The Committee also is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets. The Federal Reserve will be implementing the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Committee will continue to monitor carefully the size and composition of the Federal Reserve's balance sheet in light of evolving financial market developments and to assess whether expansions of or modifications to lending facilities would serve to further support credit markets and economic activity and help to preserve price stability.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Dennis P. Lockhart; Kevin M. Warsh; and Janet L. Yellen. Voting against was Jeffrey M. Lacker, who preferred to expand the monetary base at this time by purchasing U.S. Treasury securities rather than through targeted credit programs.
FOMC Statement December 16, 2008
The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent.
Since the Committee's last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined. Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further.
Meanwhile, inflationary pressures have diminished appreciably. In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate further in coming quarters.
The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.
The focus of the Committee's policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve's balance sheet at a high level. As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant. The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities. Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Christine M. Cumming; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh.
In a related action, the Board of Governors unanimously approved a 75-basis-point decrease in the discount rate to 1/2 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Cleveland, Richmond, Atlanta, Minneapolis, and San Francisco. The Board also established interest rates on required and excess reserve balances of 1/4 percent.
Published on Wed, Jan 28 2009, 23:20 GMT
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Currencies Rally on Obama's Plan to Save Banks
Wed, Jan 28 2009, 23:17 GMT
by Kathy Lien
Currencies Rally on Obama's Plan to Save Banks
Investor confidence has improved this morning, driving currencies higher. Traders are quietly moving out of US dollars and back into higher yielding currencies thanks to news that President Obama is considering creating a bank that would absorb toxic assets. On Friday, we talked about the 3 Big Threats to the US dollar this week and one of them was a bad bank plan. A bad bank plan is positive for the markets because it shifts low grade or bad assets to a new bank, leaving them with only high grade assets. This helps to improve the bank's balance sheet and hopefully makes the banks more attractive to investors. More immediately it squeezes shorts on financial stocks, driving equities and currencies higher.
The house is set to vote on Obama's stimulus plan this morning which is nearing $900 Billion. President Obama isn't wasting any time at all and is making the most of his first 100 days. With the Federal Reserve expected to leave interest rates near zero this afternoon (FOMC Preview), fiscal stimulus is the only thing that investors have to cheer about. In the past 50 years, stocks have ended higher after the first 100 days of a President's term approximately 70 percent of the time.
Although we are optimistic about what President Obama can do for the economy, he has an exceptionally difficult task before him. The unemployment rate is on the rise and if more people continue to lose jobs, delinquencies and defaults will rise, turning some high grade assets into low grade ones creating a toxic cycle that may be difficult to reverse. What Americans need are more jobs and unfortunately a bad bank plan does not solve that problem.
Published on Wed, Jan 28 2009, 23:17 GMT
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US Dollar: Acts of Desperation?
Wed, Jan 28 2009, 02:56 GMT
by Kathy Lien
US Dollar: Acts of Desperation?
The Federal Reserve is currently holding a two day monetary policy meeting and it will be interesting to see whether they are desperate enough to introduce radical programs that can incite the enthusiasm of investors. With interest rates virtually at zero, a rate cut is not expected, but the central bank is under pressure to take further action. So far, their effort which includes 500bp of easing has helped to prevent the recession from turning into a depression but it has yet to stabilize the economy. The latest string of economic data indicates that the US economy is still on a downtrend and headed lower. The FOMC rate decision tomorrow could be a nonevent for the US dollar, but if the Federal Reserve is desperate enough, they still have the power to surprise the markets.
FOMC Rate Decision - 2 Analogies
There are two analogies that can help us understand the potential outcome for tomorrow’s rate decision. The Federal Reserve’s current position is similar to their situation in 2003, when interest rates were lower to 1 percent. At that time, rates were not expected to break the 1 percent level and the central bank made it known that their easing cycle had come to an end. From there on forward, until the market started speculating about the possibility of a rate hike, traders started to become indifferent to the Fed’s rate decisions since no changes were expected from the central bank. No changes are expected this time around so there may not be the same type of volatility that we have seen with past rate decisions. The second analogy is the Bank of Japan rate decision which investors hardly bat an eye at. For the FOMC meeting to matter, we will need to see acts of desperation from the Federal Reserve. Read our full FOMC Preview and see charts of previous FOMC price action at FX360.com.
Growing Problems in the US Economy
Incoming economic data certainly calls for acts of desperation. Consumer confidence fell to a record low in the month of January while house prices according to S&P/Case-Shiller dropped by the largest amount on record. The only way to move inventory in the housing market is to lower prices and even then, sales are exceptionally sluggish. It was not particularly surprising to see consumer confidence continue to weaken because job security is a major concern. Weak earnings have forced companies to continue to tighten their belts which have meant more layoffs or pay cuts. According to the Wall Street Journal, the unemployment rate of some states has hit or is close to hitting 10 percent. This includes Michigan (10.6%), Rhode Island (10.0%), South Carolina (9.5%), California (9.3%) and Nevada (9.1%). The nationwide unemployment rate is currently 7.2 percent and with the recent layoff announcements, there is a realistic chance that the unemployment rate could hit 9 percent. As former Fed Chairman Paul Volcker has warned, the US recession could enter extra innings. Therefore any rallies in US equities could be short-lived and we may soon see another wave of risk aversion.
EUR/USD: STRONGER ECONOMIC DATA KEEPS EURO BID
The Euro has held onto its recent gains thanks to a surprising rebound in German business confidence. Despite a recession in the Eurozone, the IFO index rose from 82.7 to 83.0. The Belgium Business Confidence index, which reported an improvement last week has once again proved itself to be a strong leading indicator for the German IFO report. The German government has announced an EUR80 billion stimulus plan which will help to stabilize the German economy while the European Central Bank cut interest rates in January. It may not be long before German business confidence resumes its downtrend however it will be difficult for German businesses to escape the same fate as their US counterparts. Global demand will continue to slow forcing many German corporations to cut costs and possibly even eliminate workers. The only saving grace is the fact that the EUR/USD has weakened materially since the beginning of the year. Seasonal factors are playing a big role in the weakness of the currency. In the beginning of the month, we talked about how the EUR/USD has fallen 8 times in the past 11 years during the month of January. So far, that trend appears to be repeating itself once again.
The British pound was the best performing currency today, having rallied against the US dollar, Euro, Japanese Yen and Swiss Franc. We have long argued that the pound will be one of the best performing currencies when the dust settles and the global economy stabilizes because the UK government has been at the forefront of monetary and fiscal stimulus. Although the dust has far from settled and the UK economy remains weak, today’s better than expected economic data and the mild recovery in risk appetite has helped to drive the British pound back above 1.40. The CBI distributive trades survey rose from a record low of -55 in December to -47 for January. The gains in the survey were propelled by an increase of retail sales which were largely influenced by large discounts during the holiday season alongside cuts in the VAT tax rate. However, the confidence still remains bleak for the upcoming months as the majority of retailer’s expect a contraction in sales. The manufacturing sector, which has been hit the hardest is expected to receive some support from the government who announced that they are willing to lend approximately £2.3 Billion ($3.2 Billion) to automakers in order to cope with the recession. Another positive for the pound was the announcement from Barclays bank assuring that they will not be in need of a bailout from the government as record revenue will cover the write downs. There is a lack of economic indicators coming from UK until Thursday when House Prices are set to be released which are projected to decline. Yet, the housing prices are expected to contract at a slower pace than in previous months as a lower supply due to reduction in completions and starts will play a part in the recovery.
NZD/USD: 100BP RATE CUT EXPECTED
The commodity pairs were virtually unchanged against the dollar as prices of oil fell due to continuing weakness in the U.S. economy. The Reserve Bank of New Zealand is projected to lower its interest rates by 100 basis points tomorrow, reducing the rates by 425 basis points since June 2008 to 4.00%. An aggressive reduction in the interest rates has not been very effective for New Zealand as the economy is still projected to contract by 1.3% this year. The New Zealand economy is continuing to sink into a deeper recession as dampening exports hurt the labor market. Further, earlier in the month Standard & Poor’s revised the outlook on the credit rating to negative for New Zealand. The eroding situations within the country are likely guidelines that Reserve Bank Governor Alan Bollard could bring rates to 3% by the early summer. Australian business confidence rose from the lowest levels on record, yet still remaining in a negative territory for 12th consecutive month as further contraction in industries are expected to continue. Business confidence rose as a direct effect of aggressive rate cuts alongside a stimulus package focusing on reviving confidence within the country. The Producer Price Index rose stronger than anticipated as prices of imports were higher, reflecting the weakness in the Australian Dollar. The following might have a surprising effect on the CPI which is set to be released tomorrow. Deputy Prime Minister Julia Gillard stated that the government is ready to do more if the global recession will continue to deepen. So far, the government distributed A$8.7 billion ($5.8 billion) to families in order to supplement the rise in unemployment and a slump in consumer spending, while RBA is projected to lower its rates by additional 50 basis points in next week’s decision. Meanwhile the Canadian government has announced that they will post the first budget deficit in decades. The hope is that stronger spending will jolt the economy out of the recession as cuts in taxes and an increase in spending on infrastructure will boost the economy. Finance Minister Jim Flaherty stated that the fiscal plan will contribute to easing of credit markets as more funds will be available to businesses, building on guarantees of corporate debt and buying of mortgages from banks.
USD/JPY: JAPAN ANNOUNCES PLAN TO BUY SHARES
The Japanese yen was mixed today despite an announcement from the Japanese government that they proposing a plan to acquire stakes in companies that are struggling to raise capital. The plan is instrumented to purchase common and preferred shares in companies, while guaranteeing a portion of the investments if the companies file for bankruptcy. The goal is to slow the rise in the unemployment rate and possibly even help turn some struggling companies around. The policy is coming on the midst of a struggling economy which is expected to shrink by 1.8% this year, the biggest contraction in the economy since 1945. Further, talks of intervention in foreign exchange markets by Bank of Japan are continuing to remain as a possibility if the yen falls below 87.00 against the dollar. The Bank of Japan stated in the latest release of policy meeting minutes that they will continue to ease credit for companies, especially focusing on longer-term borrowing. The bank stated that it is considering taking steps to put a downward pressure on the corporate debt for which interest rates still remain high. Tomorrow, Japan is set to release its figures for Retail Trade which is expected to contract as consumer confidence and consumption are continuing to be affected by deepening recession.
AUD/USD: Currency in Play for Next 24 Hours
The currency in play for the upcoming 24 hours will be AUD/USD due to Westpac Leading Index from Australia released today at 23:30GMT or 6:30PM EST, followed by CPI at 00:30GMT or 7:30PM EST. Tomorrow, the Federal Reserve is expected to announce its interest rate decision around 19:15GMT or 2:15PM EST. After exiting the Sell Zone established through the Bollinger bands the day prior, the pair is on the verge of entering it once again, yet it still trades within Range Trading Zone. Current resistance is originating at the high of the day around 0.6720, which coincides with 20-day EMA. While support is placed at 0.6490, which is a 61.8% retracement of the lowest point reached in 2008 and the highest point reached in 2009. The pair might propose a continuation in a downward trend if it enters and closes within the sell zone which is structured below 0.6570. With a key economic release on the agenda for the upcoming 24 hours, it is likely that the pair will test either of the levels.
Published on Wed, Jan 28 2009, 02:56 GMT
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FOMC Preview: Will the Rate Decision Impact the Dollar?
Wed, Jan 28 2009, 01:41 GMT
by Kathy Lien
FOMC Preview: Will the Rate Decision Impact the Dollar?
For the first time since August 2007, the Federal Reserve is not expected to change interest rates. With the fed funds rate now set to a target range of 0 to 0.25 percent, the Federal Reserve has maxed out on their most conventional monetary policy tool. Although they still have different ways of adding liquidity to the financial system and stimulating the economy, what was once the second most market moving event risk for the foreign exchange market could become a non-event. Going forward, traders may have the same disregard for FOMC rate decisions as they do for Bank of Japan meetings. The only way for Wednesday’s FOMC rate decision to hurt the dollar would be if the central bank announces that they will be purchasing long term US Treasuries in size or if they add more ingredients to their alphabet soup of new programs. There is nothing to support the dollar on the upside as the Fed is not expected to start talking about raising interest rates.
FOMC Decisions Could Become a Non-Event for the US Dollar
The last time that the Federal Reserve drew an end to a major easing cycle was in 2003 when they took interest rates to 1 percent from a high of 6.5 percent in 2000. At that time, interest rates hit the lowest level in more than 40 years. The last rate cut that the Federal Reserve made during that easing cycle was in June 2003. The following charts illustrate how the EUR/USD traded following the next 2 interest rate decisions at which interest rates were left unchanged at 1 percent. In August of 2003, the EUR/USD fell 30 pips in the hour following the rate decision and by the open of the European trading session it was down a total of 80 pips. The move was very gradual and happened over the course of many hours, which is unlike the type of volatility seen after recent FOMC rate decisions. The same indifference to the FOMC rate decision happened in September 2003 as well. The EUR/USD fell less than 20 pips in the hour following the rate decision and proceeded to fall another 30 pips over the next 8 hours. These analogies as well as the market’s lack of reaction to Bank of Japan rate decisions suggest that we may not see much of a reaction to Wednesdays’ FOMC announcement. The sell-off in the US dollar against the Euro, British pound and commodity currencies going into the rate decision indicates that traders expect the Federal Reserve to announce some new measures that would indicate that they are moving deeper into credit easing. If that is the case, we could see more dollar weakness but if the Fed under delivers and does nothing but express concern about the outlook for the US economy it could help more than it hurts the US dollar because credit easing is dollar negative.
US Economic Performance Since Last Rate Decision
Ask the average American and they will tell you that the US economy has worsened since the last interest rate decision and the numbers also show that. Unemployment has soared to 7.2 percent, consumer confidence has hit a record low, while inflation and equity prices continued to fall. The massive layoff announcements on Monday are just be the tip of the iceberg. More layoff announcements are expected and unfortunately that can create a vicious cycle of weaker consumer spending and corporate earnings. The US economy is in urgent need of some additional stimulus but the more that the US government spends the greater the risk of a turn in the US dollar. Here is a snapshot of how economic data has fared since the December rate decision.
What to Expect from Credit Easing
Two weeks ago, Federal Reserve Chairman Ben Bernanke outlined what he plans to do now that interest rates are basically at zero. In a speech at the London School of Economics, Bernanke talked about the additional tools available to the Fed, an orderly exit strategy, concerns about inflation and suggestions about how the Obama Administration should use the remainder of the TARP funds. Most importantly, Bernanke created a new name for his regime – credit easing. In contrast to Quantitative Easing, which Bernanke explains focuses on the liabilities portion of the central bank’s balance sheet, Credit Easing focuses on expanding the asset side of the balance sheet. However since the balance sheet is suppose to balance, this may be nothing more than a difference of semantics since both efforts ultimately add liquidity into the financial system. The Federal Reserve wants to draw a distinction between their current policies and the Bank of Japan’s policies between 2001 and 2006.
The Fed’s Toolbox
As for the tools that they have at their disposal, there is nothing groundbreaking. Their number one tool is policy communication, followed by liquidity facilities for banks, facilities for other markets and purchases of long term securities. Interest rates will remain low for an extended period of time. In terms of an exit strategy, Bernanke expects demand for the emergency facilities to wane as the US economy improves. Like many members of the Bush Administration, Bernanke supports using the rest of the TARP funds on the credit markets. Without stabilization in the financial system, he does not believe that any fiscal stimulus will have a lasting impact on the economy.
Published on Wed, Jan 28 2009, 01:41 GMT
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Dollar Rallies as Consumer Confidence Hits Record Lows
Tue, Jan 27 2009, 21:45 GMT
by Kathy Lien
Dollar Rallies as Consumer Confidence Hits Record Lows
In more than 40 years, we have never seen US consumers this pessimistic. The Conference Board's report on consumer confidence fell to 37.7, the lowest level on record. The disappointing consumer confidence report will drag down risk appetite and drive investors into the safety of US dollars. The rally in the US dollar is a reflection of more panic selling and not optimism about US economy. On the heels of the report, we have already seen the EUR/USD and equities turn negative. We may not see a recovery in confidence Until job security is no longer a major concern. Unfortunately with headlines in national papers touting the 74k jobs axed in one day this morning, consumers will not turn optimistic anytime soon. The one silver lining in the report is that we have seen an increase in plans to buy automobiles within the next 6 months. Major discounts are enticing consumers to buy new cars. Looking ahead, discounts and incentives will be the only for businesses to push inventory. Fourth quarter GDP is due for release on Friday and weak consumer confidence supports the market's belief that growth was the weakest in 26 years.
Earlier this morning, S&P/CaseShiller reported that house prices fell 18.18 percent in the month of November, the largest decline on record. Unfortunately house prices still have room to fall as the labor market remains weak and more inventory floods the market over the next few months.
Published on Tue, Jan 27 2009, 21:45 GMT
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A Global Rally May be Short−Lived
Mon, Jan 26 2009, 22:14 GMT
by Kathy Lien
A Global Rally May be Short-Lived
For the most part, markets today expressed a tone of relief and satisfaction for global economic events. We have seen the classic pattern of dollar and yen weakness across the board that is quite the mainstay in markets that think the worst is over. However, we are cautioning that this brief level of renewed sentiment may be short lived. In the US the euphoria that was left over from European trading seemed to dwindle in the latter part of the trading day. The Dow finished one of its typical whipsawed trading sessions, falling off of highs of more than 100 to dip in to negative territory. The index did finish in positive ground. This level of uncertainty definitely casts some doubt on the continuation of this renewed confidence in the financial markets.
The True Health of the US Economy
Today presented several factors that helped promote advances in equities and commodity prices. For one Existing Home Sales proved to be a tremendous surprise, showing a 6.5% increase over last month’s dismal -9.4% plunge. In addition, the Leading Indicators also pointed higher, increasing 0.3% over last month’s -0.4%. However, it is unfortunate that the good feelings evoked by these releases should be taken lightly. It is actually quite easy to explain the positive number with negative economic factors. Home sales were boosted by the historic declines in home prices. The leading index was easily improved by the Fed’s measures to flood the financial markets with liquidity. To take even more of the positive implication out of this report, it would be wrong to conclude that the employment situation has improved as to the heavy weight home sales places on the health of the consumer. Most of the largest US companies are forecasting additional rounds of layoffs to ease the strains they face. Specifically, Home Depot will be cutting an additional 7,000 jobs while Sprint-Nextel plans additional layoffs totaling 8,000. In fact, Bloomberg estimates that in total, 72,500 firings were reported today. This is an amazing amount that will surely spell problems for February Non-Farm Payrolls and GDP (expected for release on Friday).
What is the Fed Prepared to Do?
It is never too early to start speculations for potential policy shifts in the upcoming FOMC meeting. Ceremoniously, we will no longer refer to it as an interest rate decision because interest rates will not be changed. However, we are waiting on something more important; a telling factor for continued monetary policy decisions. One possibility is that the Fed announces a target as to the size of its balance sheet. They would therefore be able to present something more concrete to the market as an explanation that they are coming to the rescue. It is very likely that the central bank continues to expand the levels of assets it purchases. Many expect that the Fed will reignite purchases of very long-term treasuries in an effort to push down yields enough to improve long-term borrowing. Regardless of which actions the Fed puts into action, the true face of American monetary policy has changed as a result of the near-zero interest rates.
EUR/USD: EUROPEAN EQUITIES STAGE IMPRESSIVE RALLIES
EUR/USD managed to push higher in an effort to lift off of multi-week lows. Even though the excited state of US equity markets failed to materialize throughout the day, we have seen some impressive rallies in European markets. Exchanges in Germany, France, and Italy all manage to push forward by at least 3.0%. Germany is finishing its drafts of a 2009 Budget that should include a tremendous amount of debt. The country has been quite active in the round of bail-out and stimulus packages, actions that will prove to only bolster the levels of borrowing the country depends on. The advances of similar policies across the Euro-zone should reignite talks about continued credit downgrades for other faltering European countries. If this happens, the momentary strength in the euro will be completely reversed. Today’s trading occurred without the release of any import economic indicators. Tomorrow will reveal if rallies in the euro and European equities are warranted. We are expecting the influential German IFO as well as the EZ Current Account.
GBP/USD: CREDIT CONDITIONS PROVE TO BE DIRE
GBP/USD is finally making some effort to pull out of the recent hole it finds itself in. Reaching the pivotal quarter-century low in the pair should start to strain the BoE and the UK government on how to respond to the devaluation. However, the answer as to how they are affected by it seems a little unclear. While some argue that a weaker pound is beneficial to companies that depend on international markets; others believe that the severity of the decline will limit the Britain’s competitiveness on a global scale. It is important to keep in mind the reaction by government officials in the wake of extended pound declines. As another detrimental factor that the BoE will continue to struggle with will be the availability of credit. We learned today that banks reduced loans for potential home-buyers by almost 50% from last year. This report clearly reflects the sheer inability of the government to successfully reduce fears of the banks. Even after a second round of banking bail-outs and stimulus plans to reduce the amount of toxic assets on the balance sheets of the banks, home loan rates only declined modestly. The two-year home loan rate is still at an incredible disparity with the rate that the BoE uses to target monetary policy. The fact that the rate has been cut to a three-century low at 1.5% has produced only minimal relief for the vital lending sector.
USD/CAD: CAD STRENGTH SETS IN FOR THE FOURTH STRAIGHT DAY
USD/CAD is the big mover among commodity currencies in today’s trading. The CAD has strengthened for an impressive fourth straight day, as the prospects for commodity prices are beginning to change. In the commodities markets, the big story is the advances in gold, which is currently seeing a three month high with a gain of nearly 1.50%. The metal has been gradually regaining its reputation as the true safe haven for the legions of risk-adverse investors. It seems that the dollars status as the secure vehicle of choice is beginning to wane as US fundamentals are concerning. In Canada, we are expecting the 2009-2010 Annual Budget, which should entail the use of a lot of debt. It is most likely that spending projects on infrastructure and other fiscal stimulus will be used as an attempt to boost the economy. However, such policy agendas are not without their opponents. If we do not see a large spending increase, it is likely CAD traders will be disappointed. Despite the holiday in many Asian countries, New Zealand has managed to produce a wealth of data. Credit Card Spending continues to falter as the report falls to -3.9% from -0.9% a month earlier. We are now seeing some of the worst consumer credit situations in New Zealand’s history. The Performance of Services Index had a bit more to offer in terms of positive implication; the number surprised to the upside at 38.0. However, the figure has been in the contractionary state for the past nine months. Activity in Australia will be depressed until tomorrow’s Producer Price Index, NAB Business Conditions, and Westpac Leading Index.
USD/JPY: 87.00 REMAINS THRESHOLD FOR JAPANESE INTERVENTION
Trading in USD/JPY maintains itself within a tight range on trading holiday in many Asian countries. This directionless trading also has fundamental reasoning in the fact that traders are unsure as to the possibility of continued equity rallies and the possibility for a Japanese intervention. In fact, there are many market factors that are acting as negating forces on any prospect for currency movement. For the last week, we have all been intently listening to any talk about a Japanese foreign exchange intervention. It is likely that 87.00 areas will be the threshold for the possibility of such action. However, the talk about Japan’s plans to combat their recession does not stop with the chance of an intervention. It has also been speculated that a nationalized Japanese bank plans on buying equity stakes in a variety of Japan’s struggling firms. Although this plan will exclude financial companies, it should provide a confidence booster for the businesses operating in the country. Once more, we also will be keeping an eye on the BoJ Monetary Meeting Minutes, expected for release later today. There is an inherent possibility in discovering continued plans by the BoJ to buy an ever-expanding range of Japanese assets.
EUR/USD: Currency in Play for Next 24 Hours
EUR/USD will be our currency pair in play on many important economic releases expected for tomorrow’s trading. The important German IFO, which covers expectations, business climate, and current assessment, is expected at 4:00 am ET or 9:00 GMT. The Euro-zone Current Account will be released at the same time. The US will release Consumer Confidence at 10:00 am ET or 15:00 GMT.
The technicals on EUR/USD price action are very bullish at the moment. Prices finally managed to exit the Bollinger band sell zone, after remaining in our sell zone for eleven trading days. This could provide a foundation for further advances in the pair. Resistance stands in the way of continued rallies at 1.3225 or the 23.6% retracement from mid-December highs to yesterday’s low. The most immediate support is located at yesterday’s low of 1.2765. Of course, if this level should be breached, there is the multi-year low at 1.2228 that should support further declines. However, the break out of the sell zone was very significant and may result in a continuation of today’s rally.
Published on Mon, Jan 26 2009, 22:14 GMT
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US Dollar: 3 Big Threats
Mon, Jan 26 2009, 02:20 GMT
by Kathy Lien
US Dollar: 3 Big Threats
The US dollar continues to rise, but the rally is tempering. After sharp losses this past week, the Euro, Japanese Yen and Australian dollar are beginning to stabilize against the greenback. US equities have been in the red throughout the day, which is why most currencies remained negative despite sharp intraday reversals. Over the next week, the US dollar faces 3 big threats that all traders and investors should be aware of – a bad bank plan, central bank intervention and economic data:
1. Bad Bank Plan - There is no question that equities are still leading currencies for the time being and over the next few weeks, the Obama Administration could announce a plan to create an “aggregator bank” that would soak up the bad debt sitting on bank balance sheets. This would free up capital for the banks which would hopefully encourage lending and restore investor confidence. If Obama announceS a bad bank plan, it could squeeze shorts in financial stocks and take the entire index higher. Since currencies are still moving in lockstep with equities, a rebound in stocks could help reduce risk aversion and take some of the steam out of dollar rally.
2. Central Bank Intervention – As we indicated in our intraday comment on USD/JPY this morning in FX360.com, fear of Bank of Japan intervention helped the currency pair keep its head above water. The risk of central bank intervention is growing and the BoJ is not the only one that could take action. Earlier this week, the Swiss National Bank also threatened to intervene in their currency. Although a BoJ intervention would be far more significant than a SNB intervention, any physical intervention period could stabilize the Yen crosses, lifting the US dollar, Euro and British pound.
3. FOMC Meeting and GDP Report – This past week, currency traders were off the hook when it came to US economic data but in the coming week that will change significantly. The US economic calendar is extremely busy with the Federal Reserve interest rate decision, fourth quarter GDP and other reports due for release. Economists currently expect growth to contract by 5.5 percent, which would be the largest decline since the first quarter of 1982. This means that the US economy would have undergone the weakest pace of growth in 26 years. The sheer reality of this could hurt the US dollar especially since growth in the Eurozone and the UK for example are not expected to contract as much. For the first time in more than a year, the Federal Reserve is not expected to cut interest rates, as indicated by our Fed expectations table above. However the FOMC could remind traders that interest rates will remain low for a long time or even make new announcements regarding policy measures, inflation targeting or introduce more creative acronyms like TALF, CPFF and TARP.
What are Gold Bugs Telling Us
The other big story in the financial markets today is the sharp move in gold prices. The price of the yellow metal rose more than $42 an ounce to an intraday day high of $903.80. Gold is typically seen as a recession and inflation hedge so today’s move suggests that gold bugs are telling us they think more trouble lies ahead. With central banks around the world firing up their printing presses, it was only a matter of time before gold prices rebounded. Bond yields are also rising, confirming the bearish sentiment shared by investors.
The UK economy fell into recession with growth contracting by the largest amount since the 1980s. Fourth quarter GDP fell 1.5 percent, 2 times more than the previous quarter. The UK skirted recession in 2008, but would not be able to do the same this year with the global economy still in a downward spiral. To everyone’s surprise, consumer spending jumped in December with retail sales rising 1.6 percent. Despite the weakening labor and housing markets, UK consumers cannot stop spending. Holiday shopping is certainly a contributing factor but Americans celebrated their Christmas holidays by cutting spending 2.7 percent. The UK economy will continue to slow but the weakening currency will help. Many Britons look at the falling pound as a bitter pill that is necessary for recovery. There are no major UK economic releases next week but everyone is keeping an eye on the banking sector. Banking shares have been under assault and there is rampant speculation that another rescue may be needed. There is also fear that the Royal Bank of Scotland, Lloyds and Barclays could become fully nationalized even though Prime Minister Gordon Brown rejected suggestions that the government will be nationalizing more banks. A bank rescue plan could be underway and it remains to be seen whether that would be accepted warmly by investors and currency traders because recent announcements have not.
EUR: HANGS TIGHT DESPITE WEAK DATA
The euro shows some surprising resilience in its ability to rally after some significant losses earlier in the day. At one point the EUR/USD was down more than 200 pips. On a positive note PMI data coming from the entire Euro-zone showed some signs of stabilization. The PMI Composite report rose to 38.5, which is slightly higher than last month’s 38.2. However, the news is not entirely good as any reading below 50 still reflects contraction. Problems from Germany, the largest of the EZ countries, were only offset by France’s improved PMI performance. In response to worsening economic conditions, German policy makers are toying with the idea of extending banking guarantees from three to five years. This should ultimately prove to lighten the load on Germany’s most important lending institution. However, complete solace cannot be found in France’s exhibition of mild economic strength. There is an unfortunate possibility that France will be the next European country to suffer from a credit downgrade. Such a blow would be devastating as the country is becoming more and more dependent on its debt to finance activities; its budget deficit has swelled to 4.4% of GDP. A drop in its credit rating would send borrowing costs through the roof for the ailing economy. EZ data to look out for next week includes German IFO, EZ Current Account, German Unemployment, and the Consumer Price Index.
CAD: CANADIANS ARE SUFFERING FROM DEFLATIONARY VIRUS
A couple of weeks ago, RBA Governor Glenn Stevens warned that there was significant risk of the country talking itself into recession. Comments made by former RBA Governor Bernie Fraser certainly pose significant challenges to such risk. The former central bank head believes that the recession will be so bad that the central bank will have to cut its target rate dramatically, perhaps below 2.0%. Australian indices responded to this premonition with dismay, as stocks slid to a five-year low. The Aussie is flat while the kiwi is up marginally on the day, after recovering from earlier losses. Price action in USD/CAD far surpasses that of fellow commodity currencies. Despite a weaker inflation report, USD/CAD collapsed. The Canadian Consumer Price Index showed prices fell for the fourth time in five months. The cause of this continuous inflationary assault is obviously closely correlated with the extreme declines in oil prices. The advance in the CAD is a bit counter-intuitive as lower inflation usually means a greater chance of a rate cut. The rally in CAD may be tied to the rally in oil. Important commodity currency data for next week will include AUD Producer and Consumer Prices, AUD Westpac Leading Index, NZD Trade Balance, and CAD Gross Domestic Product. The Reserve Bank of New Zealand also has a monetary policy decision at which they are expected to cut interest rates by another 100bp.
JPY: SONY WARNS OF RECORD LOSSES
The Japanese economy is contracting at an accelerated rate, which is reflected by a reduction in assessment of the domestic economy coming from BoJ’s monthly report. Economic figures seem to support BoJ’s claim as All Industry Activity Index has contracted to the lowest level in nearly 3 years. BoJ stated that the effects of lower interest rates have become significantly limited for businesses. The following leaves the central bank with few options, while a stronger yen and a slump of demand for exports will add to speculation of foreign exchange intervention. The threat of deflation that has eroded the domestic economy during 1990’s has been labeled as a concern by BoJ. The problems within the economy are being reflected by losses at major corporations. Sony, the second largest consumer electronic company, has warned that they will be reporting record losses this coming year. Summing up all of the negatives economic figures, in addition to political troubles, the central bank may need to resort to drastic measures in order to navigate from a deepening recession.
USD/JPY: Currency in Play for Next 24 Hours
The currency in play for Monday will be USD/JPY. The US is set to release its figures for Existing Home Sales at 15:00GMT or 10:00AM EST. While the Bank of Japan will release its Policy Meeting Minutes for December at 23:50GMT or 6:50pm EST. USD/JPY is currently trading within the Sell Zone which we establish using Bollinger Bands. After retracing from a 13-year low reached earlier this week, the pair appears to be carving out a double bottom. Current support is placed at the 13-year low of 87.10. While the pair was depreciating for the past few month sit followed a strict downward line as resistance, almost perfect 45 degree line, and that resistance now creates a triangle. The level to watch on the topside is 89.60, the high for the day, which coincides with 10-day SMA. If resistance is broken the pair will exit the Sell Zone and breach the triangle formation. If risk aversion continues to dominate the markets the pair could test the support, while a deviation away from safe havens could push the pair higher.
Published on Mon, Jan 26 2009, 02:20 GMT
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USD/JPY: Keeping Its Head Above Water Thanks to BoJ
Sun, Jan 25 2009, 21:35 GMT
by Kathy Lien
USD/JPY: Keeping Its Head Above Water Thanks to BoJ
There is a lot of talk this morning that the Bank of Japan is checking currency rates. The Japanese Yen has continued to rise over the past 24 hours and by checking rates, the central bank is keeping a very close eye on where the Yen is trading. Given that it is almost 11pm in Japan right now on a Friday, the central bank is either very serious about intervening in the currency market or they want to keep currency traders on their toes. The 87.00 level for USD/JPY could very well be their breaking point. The risk of intervention is limiting the decline in USD/JPY on a day when the sharp drop in Dow futures should be driving it much lower. Over the past 6 months, we have seen a significant appreciation in the Japanese Yen to the point where the central bank can no longer ignore it. For example, the Yen has risen more than 40 percent against the British pound, Australian and New Zealand dollars.
Source: FX360.com
The Bank of Japan has not physically intervened in the currency market to sell the Yen since March 2004. If they intervened now it would open up the floodgates and possibly cement a bottom in the Yen crosses. Although physical intervention rarely works in the long run, many traders remember the BoJ's aggressiveness when they did intervene between 2002 and 2004. When the BoJ intervenes, we can see 200 pip movements in USD/JPY within a matter of seconds.
With the global economy slowing and the Yen rising, Japanese corporations are most likely pressuring their government, which already has ultra low approval ratings to take action. The central bank and the Ministry of Finance may no longer be able to turn a blind eye to the recent strength of the Yen that has brought the currency to the highest level in 13 years against the dollar and the highest level ever against the British pound.
US Should Take Cue from Japan
US traders should pay attention to what is going on in Japan. The rapid appreciation of the Yen played a central role in driving Toyota to its first loss in 67 years. Disappointing earnings is a major reason why the US equity market is doing so poorly. Not only are US companies losing more money than anticipated but they are warning of further losses to come. We often said that the strength of the US dollar will weigh heavily on US corporate earnings for the fourth quarter, but if the dollar does not reverse its slide in February, first quarter earnings could be even worse. More weakness in equities will drive more investors into the safety of the US dollar, the Japanese Yen and gold, which is up more than $22. This vicious cycle can continue until traders capitulate or governments step in.
But if there is no intervention, USD/JPY may not be able to keep its head above water for long.
Published on Sun, Jan 25 2009, 21:35 GMT
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Obama's New Strategy on China is USD Negative
Fri, Jan 23 2009, 01:31 GMT
by Kathy Lien
Obama’s New Strategy on China is USD Negative
The US dollar and the Japanese Yen, the two lowest yielding G10 currencies continue to be the two best performing. It is important to remember that the dollar and the Yen are not rallying because investors have grown more optimistic about those currencies but because they are more pessimistic about the outlook for the US and global economy. We have seen an unusual amount of currency related comments made by central banks and government officials around the world because of the sharp rally in the dollar and the Japanese Yen. As these currencies continue to rise, the risk of a reversal grows. Tim Geithner has been confirmed as the new US Treasury Secretary but rather than cheer his confirmation, analysts are worried about some of the comments he made at his confirmation hearing.
Obama’s New Strategy on China is USD Negative
According to Geithner, the Obama Adminstration will be saying goodbye to the buddy versus bully approach to China. He believes that Obama will "aggressively try to change Yuan policy" and that China will no longer get a free pass in trade violations. Geithner even went one step further by saying that Obama believes that China is "manipulating" its currency. Many people fear that this is rookie rookie mistake. China does not readily succumb to political pressure. That is why former Treasury Secretary Paulson allowed China to appreciate the Yuan on their own terms. To a large degree this strategy has worked because over the past 3 years, the Yuan has risen more than 15 percent. This is a bad time to ask for Yuan strength because growth in China has slowed materially. To force China to appreciate its currency means less demand for US Treasuries and US dollars and unfortunately that is not something the US can afford right now when the government needs to spend its way out of recession. Furthermore, turning up the heat on China could lead to an economic war. Geithner also reiterated that the US has a strong dollar policy which interestingly enough runs completely counter to his calls for a stronger Chinese Yuan. Like his predecessors, Geithner is doing nothing more than paying lip service to the strong dollar policy because in reality he is advocating a weaker dollar against one of the country’s largest trading partners. In addition everything that the US government has done so far to address the economic crisis leads to a weaker dollar. So there is no real meat to Geithner’s comments on the greenback; the Yuan on the other hand is completely different story.
Dollar Strength Poses Major Risks
The stronger the US dollar becomes, the more pressure it puts on major central banks like the Bank of Japan, the Bank of England and possibly even the Federal Reserve to take action. In a normal economic environment where growth is steady or improving, central banks may not be compelled to intervene in the currency market but if the Yen continues to fall and Japanese corporations start exerting pressure on the BoJ, we could see the first physical intervention in more than 4 years. The UK is already receiving pressure from its French neighbors who want them to stop the pound from falling. As for the US, a strong dollar hurts more than it helps and that could lead to some pointed comments from Bernanke who could criticize the deflationary impact of a strong currency. Switzerland has already warned about currency intervention and if the BoJ, BoE, ECB or Fed talk currencies as well, we could see a significant reaction in the US dollar. Jobless claims and housing starts highlight the seismic challenges facing the US economy. Jobless claims hit the highest levels since 1982 while housing starts and building permits hit a record low.
After yesterday’s dramatic intraday recovery in the British pound, the currency is having a tough time extending its gains. Underscoring the weak conditions in the UK were more disappointments in economic data. The CBI industrial trends survey which measures factory orders fell to the lowest level since 1992 while home repossessions in the third quarter rose 92 percent from the year prior. Technically, the UK economy is not currently in recession but as of tomorrow, the recession should be official. In the third quarter growth contracted by 0.6 percent and in the fourth quarter, GDP is expected to fall by another 1.2 percent. The trade deficit increased in the last 3 months of the year while consumer spending slowed and unfortunately the Bank of England expects the weakness to continue. With the economy headed for its first recession in 17 years, more interest rate cuts are expected. In addition to the GDP report, retail sales are due for release which should fall as well. With the market so bearish British pounds, disappointing economic data could lead to another round of selling.
EUR/USD: DOWNGRADE FOR PORTUGAL
The euro was virtually unchanged against the dollar due to a lack of influential economic data. French consumer spending on goods contracted by a larger amount than anticipated, as a rise in unemployment contributed to the decline. Consumer spending which counts for 15% of the economy helped France dodge a recession in third quarter, but will not contribute to the same outcome as the economy is expected to contract by 1.1% in the fourth quarter. Portugal joined Greece and Spain in becoming the latest country to be downgraded in their credit rating by S&P. The following puts more pressure on ECB to lower their interest rates in the near future. Nevertheless, ECB President Jean-Claude Trichet stated that he will be reluctant to take the rates to zero as he does not expect inflation to stay at low levels for considerable amount of time. Industrial Orders within Euro-zone continued to depreciate reflecting a rapid contraction within manufacturing sector, which could spill into more problems for the region as a whole. The current devaluation of the Ruble by Russian Central Bank might play in some favor for the euro, as Russia will be net buyer of the currency. Tomorrow, Germany and Euro-zone is expected to release its PMI purchasing and services which all are expected to contract. With a decrease in the manufacturing sector and a rise in unemployment throughout Europe, the ECB will be expected to bring the interest rates down to 1.5% at the March meeting.
USD/CAD: CANADIAN DOLLAR SHRUGS OFF SHARP DECLINE IN RETAIL SALES
The commodity pairs were mixed in today’s trading with the greenback appreciating against Australian and New Zealand Dollar, while losing ground against the Canadian Dollar. The Canadian Dollar shrugged off negative economic news today as retail sales fell the most in more than a decade while leading indicators contracted for the 4th consecutive month. Even more surprisingly the Canadian Dollar appreciated as the government announced that it will post first budget deficit in more than a decade. The Canadian economy is expected to shrink 0.4% this fiscal year as demand for big ticket items has declined both, domestically and abroad. According to the Bank of Canada, lack of exports will shave off 2.6% points from GDP this year, before rebounding in 2010 as weaker currency and a rebound in U.S. demand will spur the economy by 3.8%, an optimistic view for most analysts. Tomorrow, Canada will release CPI which expected to contract, but deflationary fears were negated as a concern by Finance Minister Jim Flaherty. The Australian government stated that they may establish a fund lending directly to companies, if foreign banks should fail to contribute $49.5 billion in loans. The funds will be available if foreign banks withdraw from the Australian markets while national banks can not cover the required loans. The following policy will counteract for a shortfall in credit that may push the economy into recession for the first time in nearly 20 years. New Zealand’s Performance PMI rebounded to 42.5, but the report still signals that the economy is shrinking. Australia is set to release its figures for Export/Import Price Index tomorrow, while New Zealand does not have any economic news on the agenda.
USD/JPY: STRONGER US STANCE ON CHINA WOULD REDUCE INTERVENTION RISK
In the US dollar portion of our commentary, we talked about how pressure on China to revalue the Yuan is dollar negative. However it is also Yen positive. One of the main reasons why Japan has not intervened in the Yen since March 2004 is because they wanted to give China the floor to appreciate their currency. China may have balked if Japan was weakening theirs at a time when China was asked to strengthen theirs. If Geithner or Obama is successful in getting China to agree to a stronger Yuan, one of the more immediately consequences could be a stronger Yen. The Japanese Yen has long been a proxy for Asia and as a competitor to China in global trade a stronger Yuan would reduce the need for a stronger Yen. The report that could brand China as a currency manipulator does not come out until April, so we have a few more months before Obama will consider drastically changing the US’ strategy towards China. Meanwhile, the Bank of Japan kept interest rates unchanged at 0.1 percent last night. In an effort to add liquidity to the financial system, the BoJ announced that they are considering buying corporate bonds. Economic data remains weak with the trade deficit widening and exports plunging. This has forced the BoJ to reduce their growth forecasts. They now expect growth to contract 1.8 percent in the fiscal year ending in March and by 2 percent next year.
GBP/USD: Currency in Play for Next 24 Hours
The currency in play for the upcoming 24 hours will be GBP/USD. The UK is expected to release its figures for GDP and Retail Sales at 9:30GMT or 4:30AM EST, which should guide the movement of the pair drastically. After a rapid selloff to a 7 year low the pair has rebounded modestly, although still lingering within the Sell Zone established through the Bollinger Bands. Support is placed at 1.3620 which is the low reached yesterday, as well as a lowest level in 2001. As the pair seems oversold for the time being, the resistance is originating at 1.4250. Resistance represents first standard deviation of the Bollinger Bands; if it is broken the pair will negate the sell zone and could continue to appreciate. Further, resistance coincides with a base of down sloping triangle which was breached earlier in the week. With influential economic data coming from the U.K. resulting in an increase of volatility, either of the levels could be tested.
Published on Fri, Jan 23 2009, 01:31 GMT
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US Treasury Secretary Geithner Backs Strong Dollar Policy, Talks China
Thu, Jan 22 2009, 22:21 GMT
by Kathy Lien
US Treasury Secretary Geithner Backs Strong Dollar Policy, Talks China
In his confirmation hearing with the Senate Finance Committee, Treasury Secretary Nominee Tim Geithner said that a "strong dollar is in America's National Interest." As potential Treasury Secretary, we expected Geithner to adopt the stance of his predecessors, which is to pay lip service to the strong dollar policy. Over the past few years, the consequences of the US government’s fiscal and monetary actions is a weak and not strong dollar. For any country that is slowing or in recession, a weaker currency is more helpful than a strong one. So there is no real meat to Geithner's comments especially as the Federal Reserve embarks on their "credit easing" policies. It would also have been a mistake for Geithner to say anything otherwise about the dollar at his hearing because rocking the boat could risk his confirmation.
A Different Approach for China?
More significantly, he also suggested that the Obama Administration will may be saying goodbye to the buddy versus bully approach to China. He believes that Obama will "aggressively try to change Yuan policy" and that China will no longer get a free pass in trade violations. Geithner went one step further by saying that Obama believes that China is "manipulating" its currency and therefore the new President wants currency realignment. This represents a dramatic departure from the Bush Administration's strategy. Former President Bush and former Treasury Secretary Paulson have allowed China to appreciate the Yuan on their own terms and to a large degree it has worked because over the past 3 years, the Yuan has risen more than 15 percent. It is still undervalued by at least 10 percent but China is not one to buckle down to political pressure even if it comes from Obama. This is a bad time to ask for Yuan stregnth because growth in China has slowed materially. If the US brands China as an official currency manipulator it will be interesting to see what type of backlash or economic war comes out of it.
(Read our previous article Tim Geithner: Will He Be Confirmed, Impact on Dollar) .
Jobless Claims and Housing Starts Highlight Seismic Challenges Facing U.S. Economy
The rebound in the foreign exchange market on Wednesday was short lived as another wave of risk aversion hits currencies. US economic data was very weak with jobless claims rising to the highest level since 1982 and housing starts dropping 15.5 percent to the worst level ever. Starting with the labor market, continuing claims, which measure the number of people remaining on unemployment rolls rose to 4.607 million. So far we have seen 12 consecutive months of negative non-farm payrolls and as long as claims remain above 500k, we will continue to see net job losses in the US economy. If a bellwether like Microsoft can announce that they are planning to cut 5000 workers, more companies will follow suit especially smaller ones who may not have rainy day funds to weather the storm. In past recessions job cuts have lasted for a minimum of 15 months which means that non-farm payrolls may not turn positive until the second half of the year.
The housing market is crippled by the falling consumer wealth and tight credit markets. Even potential homeowners who actually have the money to by are having a very difficult time obtaining financing. Good credit ratings don't really matter any more. with so much inventory still on the market, housing starts and building permits should continue to drop.
The labor and housing market data highlight the seismic challenges that the US economy faces but the dollar continues to benefit from safe haven flows. In times of economic uncertainty, investors flock into the lowest yielding currencies.
Published on Thu, Jan 22 2009, 22:21 GMT
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US Dollar Hits Historic Levels
Thu, Jan 22 2009, 01:45 GMT
by Kathy Lien
US Dollar Hits Historic Levels
It is not often that we can see the US dollar hit a 23 year high against one currency and a 13 year low against another on the very same day. However that was exactly what happened this morning when the greenback surged against the British pound and collapsed against the Japanese Yen. Volatility ripped through the foreign exchange market as central bank and other US officials comment on their economies and currencies. The milestones were not limited to the GBP/USD and USD/JPY as the NZD/USD and EUR/JPY also fell to a 6 year low intraday. However what was most impressive is the fact that none of the staggering losses were sustained.
What Was Volcker Thinking?
Comments from former Fed Chairman Paul Volcker triggered a wave of risk aversion that led to a technical break in the currency market. He said the US is “in serious recession, with no end clearly in sight." Although there is no question that the US economy is in trouble, by saying that there is no end in sight suggests that there is no hope. Coming from the chairman of Obama's newly formed Economic Recovery Advisory Board, we would expect more advice. Treasury Secretary Nominee Geithner expects an Obama economic stimulus plan to be released in the next few weeks but unfortunately Volcker's comments overshadowed the prospect of a stimulus plan for the foreign exchange markets. Investors were already nervous following yesterday’s sell-off and Volcker's comments pushed them over the edge.
FX, Stocks and Bonds: Who is Right?
With the Dow rising 279 points, the correlation between the currency and equity market broke down leading traders to wonder which market participants had the right reaction to Volcker and Geithner’s comments. Given that bond and gold prices fell as well, it suggests that today’s developments made investors less pessimistic about the outlook for the US economy. Therefore we could see currencies “catch up” over the next 24 hours which means the potential for a corresponding bounce in the EUR/USD, GBP/USD and USD/JPY. We are already beginning to see an intraday reversal going into the US close and we would not be surprised to see it continue in Asia and Europe. Looking ahead, housing market data and the weekly jobless claims report are due on Thursday. The NAHB Housing market index measuring builder confidence fell to another record low in the month of January.
GBP/USD: IS THE RECOVERY FORESHADOWING A BOTTOM?
The British pound staged a dramatic recovery after having fallen to a 23 year low of 1.3621 against the US dollar. The strength of the reversal will have many investors wondering if the currency has hit a bottom. Since last Friday it has fallen more than 1000 pips as the market grows more concerned about the UK’s ability to pay for all of their stimulus packages and the threat of Standard and Poor’s putting the country on credit watch negative. The sell-off in the British pound over the past few trading days has been driven by a pessimistic outlook for the UK economy and there has been no UK news during the US trading session to fuel the currency’s reversal. Therefore the GBP/USD could still resume its downtrend since nothing has changed that can shift UK sentiment. According to the minutes from the most recent Bank of England meeting, the members of the monetary policy committee voted 8-1 to cut interest rates by 50bp in January. The dissenter continues to be Blanchflower who called for a larger 100bp rate cut. The minutes were not entirely dovish as the committee also considered leaving interest rates unchanged. Their plans to buy private sector assets is a move towards quantitative easing which suggests that the BoE will continue to cut interest rates. Employment data was mixed with the number of people claiming jobless benefits rising more than expected but the unemployment rate surged while average hourly earnings plunged. Given that the outlook for the pound has not changed, the latest rally could be nothing more than a bear market bounce.
EUR/USD: TRICHET TALKS MORE RATE CUTS, SNB WARNS
The Euro rebounded strongly despite ECB President Jean-Claude Trichet’s warnings of further rate cuts. German producer prices continued to fall, albeit less than the market expected. Trichet defended the central bank’s less aggressive monetary policies and indicated that they have decided if 2 percent is the lowest level for interest rates. However declining prices will support the market’s call for more rate cuts from the ECB. Trichet reiterates that there is presently “no threat of deflation” and recognized the recent downgrades in the credit rating of Spain and Greece. With more downgrades expected to follow, Trichet is convinced that the vast span of the European Union will inevitably have certain disequilibriums. Meanwhile the Swiss franc collapsed after SNB Hildebrand said that the central bank is considering selling francs to halt the currency’s gains. With interest rates already at 0.5 percent, there is no room to ease monetary policy and they may have to resort to fixed rate currency intervention. We believe that this is more bark than bite from the SNB since they have always opted for verbal over physical intervention.
The Australian, New Zealand and Canadian dollars have recovered against the greenback. The rallies are based on a small pocket of risk tolerance as spurred by advances in US indices and some significant rallies in Crude Oil. Crude showed more than a 8.3% gain in today’s trading. The Canadian dollar has reacted favorably. The level of urgency expressed within the ranks of Canada’s economic policy-makers has not alleviated since the rate cut. We are now learning that the Finance Minister, Jim Flaherty, is trying to obtain the power to inject capital directly into the country’s banks. Even though this technique was common practice in the last few months, it appears that the Canadians are seeing their situation worsen considerably. We saw a disappointing Wholesale Sales report today which should be overshadowed by the importance of tomorrow’s Retail Sales figures. New Zealand’s Minister of Finance, Bill English, had some more upbeat news to share with traders. Apparently the quick recovery many were expecting may be materializing for the country as the severe depreciation in the NZD is starting to benefit exporters. However, Mr. English acknowledged the fact that the country was put on S&P’s warning list for a credit downgrade as well as the need for additional rate cuts. For Australia, no economic news will be reported until tomorrow’s Consumer Inflation Expectations and New Motor Vehicle Sales.
USD/JPY: BOJ TO LEAVE RATES UNCHANGED
The unrelenting strength of the yen presents many questions for the rate decision expected tomorrow. It is clear that rate cuts are over as the Japanese are looking at practically zero interest rates despite the marginal 10bp buffer. Therefore the potential for something truly market moving will exist in either the BoJ’s announced attempts to combat the strength in the Yen or some more proposed strategies that will replace rate cuts as the monetary tool of choice. One major probability is that the bank tries to talk down currency prices like many expect the SNB is doing. This should provide a relatively short period of breathing room for the Japanese to plan for a large scale decision. One major catalyst for a potential intervention would be a break of the 87.00 level in USD/JPY, which would bring the pair down to fifteen year lows. Aside from the rate decision, we expect the Merchandise Trade Balance to come in tonight.
EUR/USD: Currency in Play for Next 24 Hours
EUR/USD will be the currency in play for the next 24 hours. A vast array of European data is expected, which includes French Consumer Spending at 2:45 am ET or 7:45 GMT, the ECB Monthly Report at 4:00 am ET or 9:00 GMT, and EZ Industrial New Orders at 5:00 am ET or 10:00 GMT. Following these European events will be Housing Starts and Building Permits reported by the US at 8:30 am ET or 13:30 GMT.
EUR/USD has managed to stay in the Bollinger band sell zone for an impressive eight days. The sheer strength of the upswing encountered in the month of December has almost been completely countered. The retracement levels drawn from the October 28th lows to the December 18th high does a fairly good job at providing us with the most relevant levels. For support, we have seen prices fail the 78.6% retracement at 1.2839 for the second consecutive day. For resistance, we have the confluence of the 61.8% retracement, one-standard deviation Bollinger band, and the 10-day SMA. Since prices have not been able to break from the sell zone, it is likely that this level will be sufficient in pushing prices downward. A break of the 1.2839 support should see prices extend down to 1.2328, or the October 28th low.
Published on Thu, Jan 22 2009, 01:45 GMT
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USD/JPY Hits 13 Yr Low, Will BoJ Intervene?
Thu, Jan 22 2009, 01:42 GMT
by Kathy Lien
USD/JPY Hits 13 Year Low, Will BoJ Intervene?
There has been a lot of volatility in the foreign exchange market this morning, driving currencies to historic levels:
GBP/USD - 23 Year Low
USD/JPY - 13 Year Low
NZD/USD - 6 Year Low
EUR/JPY - 6 Year Low
CAD/JPY - 13 Year Low
GBP/JPY - Record Low
NZD/JPY - 8 Year Low
The most significant moves have been in the British pound, which fell to a 23 year low against the US dollar and in USD/JPY, which fell to the lowest level in 13 years. Comments from former Fed Chairman Volcker triggered a wave of risk aversion that led to a technical break in the currency market. He said "we are in serious recession, with no end clearly in sight." Although there is no question that the US economy is in trouble, by saying that there is no end in sight means that there is no hope which coming from the chairman of Obama's newly formed Economic Recovery Advisory Board is significant. By saying that he does not an end to the recession is certainly not good advice. Treasury Secretary Nominee Geithner expects an Obama economic stimulus plan to be released in the next few weeks but unfortunately Volcker's comments overshadowed the prospect of a stimulus plan. Yesterday's sharp sell-off made investors nervous but Volcker's comments pushed them over the edge.
We are continuing to see flight to safety into the US dollar and Japanese Yen. Investors are looking to hide in the lowest yielding currencies.
Will the Bank of Japan Intervene?
With the Japanese Yen hitting levels not seen against the US dollar in more than a decade, the question hanging over the markets is whether the Bank of Japan will intervene to weaken the Japanese Yen. They have tried verbal intervention and it hasn't worked. Up until now, the Japanese have been reluctant to physically intervene because they may not have support from the US or Europe. However there comes a point when they may have to stop thinking about other people and start thinking about themselves. Japanese corporations like Toyota have suffered greatly from the strength of the Yen and these companies may be exerting pressure on the government to take action. The risk of BoJ intervention is growing and if USD/JPY falls below 85, the BoJ may have to step in.
Published on Thu, Jan 22 2009, 01:42 GMT
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How Obama's First 100 Days Can Impact Currencies
Wed, Jan 21 2009, 22:13 GMT
by Kathy Lien
How Obama's First 100 Days Can Impact Currencies
President Obama inherits a very troubled economy and he certainly has his work cut out for him over the next few years. However brighter times may lie ahead for US stocks based upon the performance of the Dow in the first 100 days on a President’s term.
The first 100 days of an Administration can define a President. Barack Obama is expected to usher in a number of reforms that may help to reinvigorate the American economy and boost consumer confidence. The fact that stocks have fallen more than 8 percent since the beginning of the year provides a low base for any bounce. More importantly however we typically see the Dow rise in the first 100 days of a new President’s Administration as investors become optimistic about new policies. Stocks rose in the first 100 days of a President’s term 11 out of 16 times. Political party doesn’t really matter but of the 5 times that equities dropped in the first 100 days, 4 out of the 5 were during Republican Presidencies. So even though President Obama is handed an ailing economy, the silver lining is that history is on his side and most likely he will be celebrating a stronger stock market after his first 100 days. A stronger stock market should mean a recovery of risk appetite, which could help reverse some of the losses that we have seen today in the EUR/USD, GBP/USD and USD/JPY. It is important to keep in mind that a rally is not guaranteed as the recession in the US economy is the worst since the Great Depression. The economic outlook can weigh on equities which would diminish the significance of the historical price pattern.
Published on Wed, Jan 21 2009, 22:13 GMT
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How Obama's First 100 Days Can Impact Currencies
Wed, Jan 21 2009, 01:31 GMT
by Kathy Lien
How Obama's First 100 Days Can Impact Currencies
In yesterday’s Daily Currency Focus we warned that investors should not bank on an Obama bounce. Based upon 5 decades worth of data, the Dow Jones Industrial Average fell more often than it rose on Inauguration Day. In fact stocks fell more on Barack Obama’s Inauguration Day than any other President. Since currencies are taking their cue from equities, we have seen a sharp slide in almost all of the major currency pairs. The dollar has outperformed the Euro and British pound but it has declined against the Japanese Yen indicating that the dollar’s rally is a reflection of pessimism and not optimism. We are seeing a flight to safety into US dollars but bonds are the instruments of choice and not equities. President Obama inherits a very troubled economy and he certainly has his work cut out for him over the next few years. However brighter times may lie ahead for US stocks based upon the performance of the Dow in the first 100 days on a President’s term.
The first 100 days of an Administration can define a President. Barack Obama is expected to usher in a number of reforms that may help to reinvigorate the American economy and boost consumer confidence. The fact that stocks have fallen more than 8 percent since the beginning of the year provides a low base for any bounce. More importantly however we typically see the Dow rise in the first 100 days of a new President’s Administration as investors become optimistic about new policies. Stocks rose in the first 100 days of a President’s term 11 out of 16 times. Political party doesn’t really matter but of the 5 times that equities dropped in the first 100 days, 4 out of the 5 were during Republican Presidencies. So even though President Obama is handed an ailingeconomy, the silver lining is that history is on his side and most likely he will be celebrating a stronger stock market after his first 100 days. A stronger stock market should mean a recovery of risk appetite, which could help reverse some of the losses that we have seen today in the EUR/USD, GBP/USD and USD/JPY. It is important to keep in mind that a rally is not guaranteed as the recession in the US economy is the worst since the Great Depression. The economic outlook can weigh on equities which would diminish the significance of the historical price pattern.
A day after Spain’s sovereign debt rating was downgraded, the Euro continued to fall. Many funds are mandated to invest in only AAA assets and the decline in the Euro partially represents those funds liquidating out of their exposure to Spain. There is a lot of concern that Ireland may be next with banking stocks plummeting. Their financial sector is a mess and the Irish government may have to step and nationalized all of the banks. If this happens, the country’s fiscal position would deteriorate immediately which could lead to a downgrade by Standard and Poor’s. In the Eurozone, it is everyone for himself. Individual nations have been forced to fix their own problems and are unfortunately suffering for it. Interestingly enough, despite the dismal outlook for the Eurozone economy, analysts grew less pessimistic in the month of January. Now that the EUR/USD has broken below the psychologically important 1.30 price level, the next major support for the currency is not until 1.25. German producer prices are due for release tomorrow and even if they fall less than expected, it may not be enough to offset the bearish sentiment in the EUR/USD.
GBP/USD: HITS 7 YEAR LOW, HOW MUCH FURTHER CAN THE GBP FALL?
The British pound has fallen to a 7 year low against the US dollar and a record low against the Japanese Yen. Over the past 3 trading days, the GBP/USD has dropped more than 1000 pips or 7 percent. Consumer prices were hotter than the market expected, leading investors to wonder what has fueled the aggressively selling? One answer – FEAR. The market is afraid that the UK will turn into the next Spain or Greece. Over the past few months, they have been working overtime to inject more stimulus into the economy, but the more that they spend, the worse the UK’s fiscal position. Deteriorating public finances has been the primary motivation for the recent downgrades of sovereign debt ratings by Standard and Poor’s. The FSA has dismissed this rumor but that doesn’t mean that the UK can’t be put on credit watch negative which would be one step closer to a downgrade. Investors are selling now and asking questions later because a downgrade would mean more losses for the British pound. Whenever a country loses its AAA rating, funds that are mandated to invest in only AAA assets need to liquidate and shift their positions elsewhere. We have seen this with Spain and could see it again with the UK. Bank of England Governor Mervyn King appears to be undeterred by the sell off in the British pound as he openly discussed the need to consider more ways to fix the UK banking sector. He expects to start buying corporate bonds and commercial paper in the next weeks. More interest rate cuts are expected but rate cuts alone are not enough. Expect more action in the British pound with employment data and the minutes from the latest monetary policy meeting due for release on Wednesday. The GBP/USD has broken 2 key support levels - 1.45 and 1.40. Trends can last for a very long time in the currency market which is why there is a decent chance that we could see the GBP/USD slip to 1.3685, the June 2001 low. If that price level is broken, it would be a 16 year low for the currency pair. The 1.40 level is pretty critical on a closing basis. If the GBP/USD closes above 1.40 today, we may actually see a larger bounce, but don’t expect the currency pair to revisit the 1.45 level any time soon.
USD/CAD: CUTS INTEREST RATES TO RECORD LOW
The Bank of Canada cut interest rates to 1.00 percent, the lowest level ever for the 75 year old central bank. They also signaled that they could bring interest rates down to US levels. The historic move was motivated by the sharp downturn in the US economy and the continual slide in oil prices. Not only are Canadians making less, but they are seeing their household wealth plummet as well. The Canadian economy is not expected to grow in 2009, which is why more rate cuts are needed. The BoC is far from done and could realistically match US rates. Inflation is not a problem since consumer prices are expected to be negative for the next 2 quarters. The prospect of lower interest rates should continue to weigh on the Canadian dollar in the coming weeks. Risk aversion has also weighed on the Australian and New Zealand dollars. New Zealand consumer prices dropped more than the market expected, driving the kiwi within a pip of its 2 month lows. Retail sales are due for release tonight. Although consumer spending is expected to drop as well, visitor arrivals have increased which may have supported spending.
USD/JPY: POLITICAL GRIDLOCK DOESN’T HELP
Japanese yen crosses collapsed today as risk aversion continues to guide the markets. The economy is in trouble and unfortunately it is not getting much help from the government. Prime Minister Aso has proposed a Y5 trillion or $55.2 billion stimulus package but political gridlock in Japan is preventing the package from being passed. The upper house dominated by the opposition party and they appear to be more focused on politics than economics. A stimulus package is desperately needed to help offset Japan’s downward spiral. The appreciation of the Japanese Yen will weigh heavily on the overall economy. USD/JPY is below 90, NZD/JPY is trading at an 8 year low while GBP/JPY is at a record low. Consumer confidence is continuing to deteriorate as lack of exports is putting pressures on the labor market. Japanese consumers have not been this pessimistic in more than 26 years. The Tertiary Industry Index also fell by a larger amount than anticipated. The only positive economic news coming from Japan was the increase in the convenient store sales, which were guided by the new regulation restricting access to cigarettes from vending machines. Sales rose by the largest margin in 8 years, as day to day goods are starting to replace once purchased luxury items. With an increase in uncertainty within the government adding to the pressures of economic woes, Japan might be in deeper trouble than previously forecasted. Tomorrow, the Bank of Japan begins their two day monetary meeting. Actions beyond interest rate cuts will be discussed but no easing is expected.
GBP/USD: Currency in Play for Next 24 Hours
The currency in play for the upcoming 24 hours will be the GBP/USD. The UK has an overwhelming amount of data released tomorrow which can sway the markets in either direction. This includes the BoE Minutes, Jobless Claims, and Public Sector net borrowing which are all expected to be released tomorrow at 9:30GMT or 4:30AM EST. The pound fell to the lowest levels against the dollar in 7 years after a break of downward triangle. Currently, the pair is trading well within the Sell Zone which we establish using Bollinger Bands. Support is placed at 1.3685 the 2001 low. If support is broken, the pair will be in the territory not seen since 1986. Yet, the pair could continue to go lower as a bearish head-and-shoulder pattern was formulated within the downward triangle. If counting from the base of the head-and-shoulder formation to the head and adding it to the break of the formation, the next level of support will be around 1.3350. The sell pattern will be negated after a break of resistance which is placed at the First Standard Deviation of the Bollinger Bands at 1.4420, which coincides with the base of the downward triangle.
Published on Wed, Jan 21 2009, 01:31 GMT
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Will Currencies Rally on Obama's Inauguration Day?
Tue, Jan 20 2009, 01:21 GMT
by Kathy Lien
Will Currencies Rally on Obama's Inauguration Day?
Flight to safety continues to drive the US dollar higher against all of the major currencies outside of the Japanese Yen. US markets were closed today in observation of Martin Luther King, Jr. Day but that has not limited the volatility in the currency market. Europe dominates the headlines with big developments in the UK and Spain. Most Americans will be distracted by the Presidential Inauguration tomorrow, which leads us to comment on the possibility of an Obama Bounce on Tuesday.
On January 20th, the United States of America will swear in a new President. Unlike many other Presidents in the past, the Obama phenomenon spans the globe. This international support has spurred speculation that we may see an Obama Bounce in US equities and currencies on Tuesday. However based upon the past price action of the Dow Jones Industrial Average on Inauguration Day (Jan 20), investors should think twice about an Obama Bounce.
Taking a look at 50 years worth of data that spans 10 Presidents, Inauguration Day results in more down days than up. The Dow fell on January 20th 12 out of the past 16 Inaugurations. Although the trend was much more significant in the 60s and 70s, it has remained been relevant since then. The pattern also does not hold any bias to the party of the new President as exactly half of the positive days occurred during either party’s new administration.
However it can be argued that the global adoration of Obama is unique. Many people call Barack Obama the John Kennedy of our times and it should be worth noting that stocks rallied on the day that Kennedy took office. History does not support arguments for an Obama Bounce but one is still a possibility. Since currencies are taking their cue from equities, if investors express their optimism towards Obama by buying stocks, we could see a bounce in currencies as well.
EUR/USD: DOWNGRADE OF SPAIN DRAGS EURO LOWER
With the US markets closed for Martin Luther King’s Day, the odds were skewed towards a quiet trading. However, big news in Europe has made it anything but quiet. After hitting an intraday high above 1.33, the EUR/USD has sold off aggressively on news that Standard and Poor’s downgraded the sovereign debt rating of Spain from AAA to AA+. The outlook is stable which means that further downgrades for the country is unlikely. However this could be the beginning of more downgrades in the Eurozone. Last week, Greece’s sovereign debt rating was downgraded as well to A- while Ireland and Portugal have been placed on credit watch negative. The reasons for the downgrades are obvious. The Eurozone is in recession and many countries have suffered greatly. Public finances have deteriorated materially since the governments are trying to spur growth by spending. Given this dismal outlook, there is little chance that analysts have grown less pessimistic about the outlook for the Eurozone economy. Therefore we expect a further decline in the German ZEW survey. With the EUR/USD trading below 1.32, the next support for the currency pair may not be until 1.30.
GBP/USD: SECOND BANK BAILOUT RECEIVES CRITICISM
The British pound fell as low as 1.4450 on an intraday basis after the UK Treasury announced another bailout for the banking sector. They have set up a program that would allow the Bank of England to buy up to GBP50 billion in private sector assets, guarantee the toxic debt of banks, extend Northern Rock’s payment deadlines and increase the government’s stake in the Royal Bank of Scotland from 58 to 70 percent. This step is aimed at injecting more money into the economy and can be argued as a move towards quantitative easing. Even though more stimulus should be positive for the UK, we have not seen this reflected in the currency. Instead, the British pound has sold off aggressively on concern that the bailout plan was motivated by a deeper downturn in the UK economy and the fear that the government’s efforts will not pay off. However Prime Minister Gordon Brown has received a lot of criticism over how much the bailouts would ultimately cost, who would shoulder the burden and whether it will work. We still believe that in the long run, all of the stimulus that the UK government has injected will help make the country be one of the first to recover when the global economy stabilizes. Consumer prices are due for release tomorrow and given the rise in shop prices and the smaller than expected drop in producer prices, CPI may beat the market’s low forecasts.
USD/CAD: 50BP RATE CUT EXPECTED
The Canadian dollar has sold off aggressively ahead of the Bank of Canada’s interest rate decision. With oil prices falling and the US economy continuing to slow, the BoC is expected to cut interest rates by another 50bp on Tuesday to 1 percent. Since the middle of 2007, the central bank has taken interest rates from 4.5 percent to 1.50 percent, the lowest level in 50 years. Tomorrow's rate cut will make the Canadian dollar the fourth lowest yielding G10 currency. The reason why the Bank of Canada needs to continue to aggressively stimulate the economy is because we are seeing a major slowdown in both the East and West. In the month of December, the unemployment rate rose to the highest level in close to 2 years. The IVEY PMI index of manufacturing activity hit a record low while Canada's trade surplus fell to the lowest level in more than 10 years. This morning's international transactions data indicated that foreigners were net sellers of Canadian dollar denominated investments for the fourth time in five months. According to Statistics Canada, the Canadian economy slipped into recession in the beginning of the fourth quarter. The Canadian government is very concerned that the recession will deepen in the coming months and they are probably right since oil prices have fallen 35 percent since December. Consumer spending within the country is just starting to contract as Retail Sales in October fell by the biggest amount in 2 years. The big question is will the Bank of Canada take interest rates as low as the US? Since the US, Japan and Switzerland already have interest rates near zero, if Canada chose to "join the club," it would not be out of ordinary. The economy is weakening so much that the Bank of Canada has its back against the wall and therefore we could realistically see 0.5 percent interest rates or lower in 2009.
YEN RISES DESPITE WEAK ECONOMIC DATA
Japanese Yen crosses were weaker across the board today as the ratings downgrade of Spain set a wave of risk aversion through the financial markets. The biggest losers were GBP/JPY and EUR/JPY on a percentage basis as Eurozone and UK news stole the headlines. The Japanese Yen continued to gain strength despite weak economic data. Industrial production saw its steepest decline in more than 55 years as slower global demand cripples the Japanese economy. Domestically, Japanese consumers are not spending either as department store sales drop by the largest amount in 10 years. This trend will probably continue, which will weigh heavily on Japanese corporations and unfortunately the strength of the Yen is not helping either. Consumer confidence is due for release this evening. If consumers were more confident about the economy, they would have probably not cut their spending by as much as they did in December.
USD/CAD: Currency in Play for Next 24 Hours
USD/CAD is the currency pair in play for the next 24 hours with manufacturing shipments due for release at 8:30am ET or 13:30 GMT and the Bank of Canada rate decision at 9:00am ET or 14:00 GMT.
USD/CAD is trading within the Buy Zone, which we determine using Bollinger Bands. The uptrend remains intact as long as the currency pair holds above 1.2235, which is the 50% Fibonacci retracement of the 1.3019 to 1.1465 sell off and the 50-day SMA. If the Bank of Canada is as dovish as the market expects and signals more rate cuts to come, USD/CAD could rally to its 30 day high of 1.2674. Above that, it could challenge the triple top at 1.30.
Published on Tue, Jan 20 2009, 01:21 GMT
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What Does It Mean to Have Your Credit Rating Downgraded?
Mon, Jan 19 2009, 22:34 GMT
by Kathy Lien
What Does It Mean to Have Your Credit Rating Downgraded?
This morning, Standard and Poors downgraded the sovereign debt rating of Spain from AAA to AA+ (read the commentary from our colleague Boris Schlossberg). With Greece’s rating downgraded last week and Ireland and Portugal on credit watch negative, this could be the beginning of more downgrades in the Eurozone.
Therefore it is important to consider what it means for a country to have their credit rating downgraded:
To have your credit rating downgraded means higher costs of borrowing. The Euro is slipping as we are seeing an exodus out of Spanish bonds because some funds are mandated to invest only in AAA debt. A credit rating reflects the risk of default and a lower credit rating means that a country is at greater risk of defaulting on their debt.
On a local level, we expect investors to shift their money out of Spanish debt and into countries with a higher credit rating such as Germany or even countries outside of the Eurozone. Spanish bond prices have dropped significantly since the beginning of the year, driving yields higher. The gap between the interest rates on German and Spanish bonds have hit the highest level in 10 years, reflecting the sharp divergence in economic performance. According to the following chart, the spread between German and Spanish interest rates have doubled since November.
Talk of Spain leaving the Eurozone is irrelevant because their cost of borrowing would skyrocket if they chose to do so. We think that there is a greater chance that those countries will be kicked out of the Eurozone than leave it voluntarily.
Published on Mon, Jan 19 2009, 22:34 GMT
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Why The Rally May Continue
Mon, Jan 19 2009, 03:01 GMT
by Kathy Lien
Why The Rally May Continue
The price action in the currency markets over the past 2 trading days indicates that investors may be growing less pessimistic. Although US economic data continues to disappoint, investors are starting to become immune to the weak economic data. So much of the bad news has already been priced into the markets and therefore investors have latched onto any good news. Currencies and equities rallied strongly today following reports that Bank of America and Chrysler have both received government aid. With US markets closed for Martin Luther King Day on Monday and little meaningful economic data on the calendar next week, the currency pairs that rallied today could extend their gains in the new trading week.
Chrysler Gets $1.5B, Bank of America Gets $20B
After a month or so of little developments from a fiscal perspective, government bailouts are returning. The timing of these bailouts is a bit surprising since they come days before the new Administration takes office. The US recession has hit Chrysler hard with sales plunging 30 percent last year. The new loan has allowed the automaker to offer zero interest financing which they hope will drive more sales of cars and trucks. Bank of America on the other hand received another $20B to ease their absorption of Merrill Lynch. These loans will make survival easier for both companies, but it remains to be seen whether it is enough to turn them around. Nonetheless investors are happy to see more initiatives by the US government. Stocks have rallied and since currencies have been taking their cue from equities, USD/JPY, EUR/USD and GBP/USD appreciated as well.
Foreigners Sell US Dollars, Sharp Decline in Industrial Production
As for economic data, consumer prices continued to fall, foreign demand of dollar denominated investments was the weakest since September 2007 and industrial production declined for the fourth time in five months. The overwhelmingly dollar bearish news only had a limited impact on the dollar as most investors are already expecting a weak set of economic data this month. The bigger surprises will come from earnings which is why we are keeping a close eye on equities. Taking a look at the data in more detail, headline consumer prices dropped 0.7 percent last month while core prices held steady. The annualized pace of CPI growth slowed to 0.1 percent. This is smallest increase in consumer prices in 54 years. Discounts on clothing and lower gasoline prices have driven inflation lower. For the Federal Reserve, this will support their plans to keep interest rates at ultra low levels for at least the next 6 months. In terms of the Treasury International Capital flow report, net long term flows declined by $21.7B. The numbers show that China is still buying US assets, but at an increasingly slower pace. Japan was a net seller but in general, we saw a large exodus out of all debt instruments including treasuries, corporate and agency bonds. Clearly the dollar's low yield is turning foreign investors away. The manufacturing sector still has many problems as indicated by the 2 percent decline in industrial production.
Next week, the market’s focus should shift to Europe. The US economic calendar is very light, but there are a number of potentially market moving reports on the Eurozone calendar. This includes the ZEW survey of analyst sentiment, producer prices, the ECB’s monthly report, service and manufacturing PMI. The economic data should reflect a continual deterioration in the Eurozone economy. When the central bank cut interest rates by 50bp earlier this week, ECB President Trichet warned that growth could slow further. We have already seen a sharp deterioration in trade. For the ninth consecutive month, the Eurozone trade balance was negative. Exports plunged 10 percent on an annualized basis while import fell 4 percent. The Euro began strengthening against the British pound in November, but the bulk of the appreciation did not happen until December. Trade next month will probably be even worse with the deficit possibly hitting the high that we saw in January. However with that in mind, weak economic data may not the hurt the Euro since ECB President Trichet has indicated that he may refrain from cutting interest rates next month. These counteracting forces could keep the EUR/USD confined within a 1.30 to 1.37 trading range next week.
GBP: MAJOR INTRADAY REVERSAL AHEAD OF BUSY WEEK
It has been an unusually volatile trading day for the British pound - having come within a whisker of the 1.50 price level at the open of the US trading session, the currency pair fell significantly following the release of US economic data and ended the day at 1.4734. This past week, the British pound has been at the whim of the market’s risk appetite and announcements from the UK government. Next week however, there will be a number of economic data for UK traders to key off of. There is a much awaited speech by Alistar Darling, Chancellor of the Exchequer. The Chancellor could discuss additional guarantees for assets that are eating away at bank’s balance sheets. Theoretically, if the banks were to be freed from these securities and assets they should be more confident in their lending efforts. However, the UK government has already poured nearly £100B into similar efforts, only to see financial institutions continue to resist any possible risks in potential defaults. In addition to the speech, the minutes from the most recent Bank of England meeting are also due for release. Traders will be looking at this report for clues on how much the central bank could ease interest rates. Consumer prices, employment numbers, retail sales and GDP are also due for releasing, promising an exciting week for the GBP/USD.
CAD: ANOTHER RATE CUT FROM THE BANK OF CANADA?
An initial bout of revitalized risk appetite fails to sustain itself through the entire day as all commodity currencies have lost much of their earlier gains. In particular, price action in USD/CAD has seen a 250 pip range. After losing 200 pips the pair retraced and turned into positive territory, only to see gains quickly evaporate. On a weekly basis, the Canadian dollar lost an amazing 600 pips against the dollar, its worst weekly performance since the height of the financial crisis. This is a good indication of how fear and uncertainty in the market has not relinquished. The most important catalyst for USD/CAD next week is the BoC Rate Decision on Tuesday. The market is pricing in a 50bp cut, bringing rates down to 1.00%. The Australian and New Zealand faced a similarly difficult week only to experience small gains in today’s trading. Commodity Prices manage to pull ahead during the brief envelope of renewed risk appetite. Gold rallied up 3.10% on the day, while oil managed to post a gain of 1.4%. The economic calendar for next week shows New Zealand CPI for Monday, NZD AON 1-Year Inflation Expectations, NZD Retail Sales, and the BoC Rate Decision for Tuesday, CAD Retail Sales on Thursday, and CAD CPI on Friday.
JPY: RISK APPETITE RETURNS, DRIVING YEN CROSSES HIGHER
The yen crosses continued to recover for a second consecutive day as risk aversion declines. Earlier in the day, the Bank of Japan announced that the economy has weakened across all of the country’s nine regions over the past quarter as slumping exports and a rise in the yen prompted businesses to reduce production and lay-off workers. As a result of sluggish economic data and a global recession, the BoJ has decreased its regional assessments for all areas in the second quarter. The cut in assessments were guided by the lack of demand for goods, weakness in employment, and decrease in private consumption. Further, Japan announced that they will miss the projections to balance the budget by 2011 due to the severity of the recession. Calculations by the Cabinet Office predicted that the balance will be between 2.3% and 2.9% of the GDP starting April of 2011. The budget was revised to reach its goal by 2018. On Monday of next week, Japan is set to release Dept. Store Sales along with Tertiary Industry Index. If the weakness in the economy persists, additional speculation will arise on a possibility of BoJ buying corporate bonds in order to relieve the credit freeze.
GBP/JPY: Currency in Play for Next 24 Hours
GBP/JPY will be the currency pair in play for Monday. The UK is scheduled to release Rightmove House Prices at 7:00 pm ET Sunday or 1:00 GMT. Japanese Industrial Production is also expected to come in at 11:30 pm ET Sunday or 4:30 GMT. GBP/JPY has retained its range bound trading for more than a month, as it firmly supplants itself in the Bollinger band range trading zone. The development of this month long range zone is based on the significance of the 140.00 and 130.00 levels. The pair has lacked needed conviction to exceed movement beyond these levels. As resistance, we are using the 140.00 level. Even though it is not the precise high of January 1st it does a good job of equalizing highs and lows placed during prior months. Combined with the psychological nature of the level, it proves to be fairly significant. As support, the 130.00 has the psychological factor firmly in place as it supported two lows and represents a record low in the pair. A break to the downside should see substantial declines. The sheer longevity of the consolidation makes a break much more significant.
Published on Mon, Jan 19 2009, 03:01 GMT
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Tim Geithner: Will He Be Confirmed, Impact on Dollar
Sun, Jan 18 2009, 22:10 GMT
by Kathy Lien
Tim Geithner: Will He Be Confirmed, Impact on Dollar
Uncertainty about the future of President-elect Barack Obama’s cabinet and staff are mounting. We are now met with controversy over one of the most crucial positions, Treasury Secretary. It was recently reported that the nominee for the position, Timothy Geithner, failed to pay a large portion of his taxes, casting doubt upon the certainty for his seemingly inevitable nomination. These indiscretions involved $34,000 of unpaid social security and Medicare payments. One senator iterates the irony of having a tax-delinquent Treasury Secretary who has responsibilities for the tax policies of the IRS. In response to these developments, Geithner’s confirmation hearing has been postponed until the day after Obama’s inauguration. The strength of Obama’s proposed “Dream Team” of staff and advisors is beginning to show some weakness. The Geithner news follows Bill Richardson’s withdrawal as Commerce Secretary, Ray LaHood’s possible withdrawal as Secretary of Transportation, and scandals with the Attorney General nominee Eric Holder. In the event that Geithner is stripped from his nomination, it is likely that Stuart Levey, the Treasury’s Undersecretary for Terrorism and Financial Intelligence will take the position.
Geithner Possesses “Unique Qualifications”
Despite the very embarrassing and hypocritical nature of Geithner’s problems, there is very little speculation surrounding the possibility of his confirmation. Stuart Levey, the stand-in until someone is officially appointed, lacks one major quality that makes Geithner a perfect choice, the ability to satisfy bipartisan requirements. In fact, Geithner’s status as an independent policy maker is most likely the reason why he will be confirmed as Treasury Secretary. Combined will his experience in dealing with the financial crisis, he is still the undeniable choice. The urgent economic challenges ahead may be enough by itself to overshadow his tax problems. Senator Lindsey Graham mentions that, “These are not the times to think in small political terms.” A decision to remove him as nominee would serve as a destabilizing factor for the financial markets, something that the Obama administration will prevent from doing at all costs. Since no better candidate exists, if he is not confirmed, uncertainty about who will be the next Treasury Secretary could hurt the US dollar. Although his experience with domestic tax policy will be directly targeted, many policymakers are still convinced that he has “unique qualifications” that makes certain discrepancies worth overlooking.
Geithner Policy Responses
As Treasury Secretary, the policies of Tim Geithner will probably mirror his efforts during his tenure as President of the New York Federal Reserve. Geithner played an instrumental role in the round of corporate bail-outs that have become the hallmark of government action during the crisis. His involvement in securing the purchase of Bear Stearns by J.P. Morgan essentially founded a course of action to be followed in the mists of the inevitable storm. It is possible that he will continue to provide a sympathetic ear for struggling companies approaching the government with their hands held out. Furthermore, another pressing question that will have to be addressed is where the additional $350B in the TARP program is spent. Obama’s current political stance is to deviate from the use of the funds on the banking sector to direct stimulus for the housing market and consumers. Congressional Democrats are more interested in using the remaining funds on helping homeowners facing foreclosure. Fed Chairman Ben Bernanke believes that for any fiscal stimulus to work, the financial markets need to stabilize first. He is a big supporter of continuing to use the TARP funds on the financial sector. It remains to be seen whether Geithner will side with his former colleague at the Federal Reserve or his new boss, Barack Obama.
Here is more information on Geithner:
Timothy Geithner has been serving as the President and Chief Executive Officer of the Federal Reserve Bank of New York since 2003. Up until the latest financial crisis, he has been relatively unknown especially when compared to Summers and Volcker. However he has been instrumental in helping Hank Paulson resolve the current financial crisis by first brokering the JPMorgan Chase acquisition of Bear Stearns. Since then he has called for overhauling the regulation in the financial industry, been intimately involved in the government’s decision to let Lehman Brothers fail and played a key role in the dispute between Citigroup and Wells Fargo over Wachovia.
Geithner is also a protégé of Lawrence Summers and has been involved in the bailouts of Brazil, Mexico, Indonesia, South Korea and Thailand in the 1990s as the Undersecretary of the Treasury. He has less far less enemies than Summers and works well with both Republicans and Democrats. Geithner is credited with warning Wall Street Banks in 2006 and 2007 to figure out what would happen to their portfolios if one their main competitors failed. He was worried about the smoke and mirrors that complex credit derivatives can have on balance sheets. Geithner’s only shortfall is that he has worked too closely with Paulson in resolving the current financial crisis which has both strong supporters and critics.
Published on Sun, Jan 18 2009, 22:10 GMT
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US Dollar: Finally Some Good News?
Fri, Jan 16 2009, 00:12 GMT
by Kathy Lien
US Dollar: Finally Some Good News?
Better than expected US economic data was like a breath of fresh air for the currency markets today. Producer prices fell less than expected last month while manufacturing conditions in the Empire State and Philadelphia regions improved. The dollar rebounded against the Japanese Yen indicating that risk aversion is abating, albeit modestly. The overwhelmingly pessimistic investors will not be easily swayed by a few pieces of secondary economic data, especially since all of the numbers are still in negative territory. Looking ahead, we will have another busy day in the currency market with US consumer prices, the Treasury International Capital flow report, industrial production and consumer confidence due for release.
Good News Fails to Impress
With the US economy in recession, any good news is still shrouded in weakness. Despite the rebound, a sharp decline was seen in the employment component of the Empire State and Philly Fed surveys. Much of the improvement can be attributed to lower oil prices and softer inflationary pressures. We see the same story in the producer price report. Oil prices fell more than 35 percent in the month of December, driving producer prices lower for the fifth consecutive month. Excluding the more volatile food and energy components, producer prices actually rose 0.2 percent last month. However the big story was the jump in jobless claims which rose to 524k from 470k. Since the beginning of November, weekly jobless claims have averaged above 500k. The dip in the last week of December and the first week of January was most likely due to seasonal factors. It is earnings season and unfortunately the earnings reports are being accompanied by layoff announcements. Pfizer recently announced a round of layoffs while Microsoft is expected to cut staff next week. With job security still a major problem for many Americans, consumer confidence should remain weak.
Impact of Lower Oil Prices
Oil prices dropped below $35 barrel today for the first time in close a month after OPEC warned that demand will fall this year as fuel use decreases. China is no longer growing at the double digit rates that they have been known for and along with that, their demand for oil is falling. Lower oil prices will help to support the global economy but for countries in the Middle East or Canada, the double blow of slowing global demand and falling commodity prices could force these big spenders to cut back significantly. For central banks around the world, lower inflationary pressures will allow them to continue to ease monetary policy or at least maintain ultra low interest rates for an extended period of time.
Will the Obama Administration Change Its Approach on China?
Tomorrow’s Treasury International Capital flow report will shed more light on whether the low yield in the US has driven sovereign wealth funds out of the US dollar. According to a recent report by China, they have continued to buy US dollars despite doubt that they would be unwilling to fund the growing US deficit. With the Bush Administration leaving office on Tuesday, it is interesting to consider if the Obama Administration will change its approach on China. As Treasury Secretary, Paulson has favored the buddy versus bully approach to China. Although the Chinese Yuan has appreciated 15 percent over the past 2 years, it is still considered undervalued. If Obama labels China as a currency manipulator or takes more active measures to get the Asian giant to strengthen the Yuan, it could lead to further USD/JPY weakness as it would give the Bank of Japan less reason to intervene and sell the Yen.
EUR/USD: ECB CUTS 50BP, SIGNALS POTENTIAL PAUSE IN FEB
After having cut interest rates by 50bp this morning to 2 percent, ECB President Trichet is finally buckling down and signaling that he is ready to cut interest rates again BUT NOT UNTIL March. Despite the weakness in the economy and softer inflation pressures, the hawk in Trichet refuses to die. By saying that the Feb meeting will not be important suggests that pausing is still an option. The next meeting that matters is in March at which the ECB will release new projections. The Feb meeting is only 3 weeks away but by March, they will have a lot more economic data to base their decisions. The possibility that the ECB could leave interest rates unchanged next month is driving the Euro higher. We will probably see the Euro recover for the rest of the week but it is important for FX traders to realize that Eurozone interest are still coming down. Zero interest rates are not an option but the terminal rate for the ECB is likely to be as low as 1.25 percent.
Up until now, Trichet’s biggest concern is price stability and for the first time in this easing cycle, he believes that the risks to price stability are broadly balanced. This is a big shift for the central bank and one that should not be ignored. The 50bp rate cut today reflects weaker growth and lower inflation risks. A lot has changed since the last meeting as the problems in the Eurozone economy worsen. Not only is the region in recession but many countries are at risk of getting their sovereign debt rating downgraded. Greece’s credit rating was cut by S&P yesterday. There are no silver linings for the Eurozone. Unemployment is rising and consumer spending is contracting. According to the Trichet, the risks to growth are certainly to the downside. Eurozone governments will have to dig deeper into their pocketbooks to deliver enough fiscal stimulus to turn their own economies around. Over the next few months, we expect weaker economic data that provides more of evidence of the continual slowdown in the Eurozone economy.
GBP/USD EXTENDS GAINS FOR SECOND DAY
For the second day in a row, the British pound has strengthened against the US dollar and Euro. No economic data was released from the UK and nothing is expected for the next 24 hours. In their continuing efforts to stimulate the economy, the UK has unveiled a new plan to help the auto industry. They are considering providing a special liquidity program that would allow auto loan providers to give favorable terms to customers looking to buy new cars. They are also talking about setting up a bank that would absorb toxic debt. We continue to believe that the innovative efforts by the Bank of England will pay off in the long run and the price action of the British pound indicate that the market may be waking up to this notion as well. This could lead to further gains in the British pound, particularly against the Euro.
The Canadian and New Zealand dollars continued to slip against the greenback. As oil prices drop, so does the Canadian dollar. Economic data was also weak with new motor vehicle sales in Canada falling 7 percent in the month of November, the largest decline in 3 years. The US is the largest importer of automobiles manufactured in Canada and unfortunately demand has waned significantly. New Zealand house prices also saw a larger decline in the month of December but the currency’s weakness is most likely tied to concerns about a potential downgrade of their sovereign debt rating. Meanwhile the Australian dollar was the only commodity currency to rally against the US dollar. Labor market numbers were much stronger than the consensus forecast with employment falling by only 1.2k in the month of December. The unemployment rate ticked higher, but the important thing is that less people lost their jobs.
USD/JPY: STOCKS STABILIZE, YEN CROSSES RECOVER
Japanese Yen crosses recovered thanks to the mild rebound in US equities. Having been down as much as 2.5 percent, the Dow Jones Industrial Average experienced a dramatic reversal that left it up 0.15 percent on the day. The economic outlook for Japan continues to be grim, as the Machinery Order fell by a record 16.2% from the previous month. The current outlook for the intermediate timeframe continues to be negative as economic figures on business sentiment and spending continues to get worse. A testament to the following is cuts in the production of vehicles from Nissan, which joined its rivals, Honda and Toyota in the reductions of output. BoJ announced earlier, starting this month that it is planning on buying as much as ¥22 trillion yen ($22.2 Billion) of commercial paper in order to supply liquidity and unfreeze credit. Later in the day, Bank of Japan will have its Quarterly Branch Managers' Meeting which will primarily focus on alternative option in order to unfreeze credit for struggling businesses.
USD/CHF: Currency in Play for Next 24 Hours
The currency in play for the upcoming 24 hours will be USD/CHF. Switzerland is expected to release its figures for Producer and Import Prices at 8:15GMT or 3:15AM EST. United States will be announcing its figures for CPI around 13:30GMT or 8:30AM EST, along with U. of Michigan Confidence which will be released at 15:00GMT or 10:00AM EST.
After a vast depreciation in last 2 month of the past year, USD/CHF rallied drastically and is currently trading within the Buy Zone which is established using Bollinger Bands. Currently, the trend seems slightly overbought as the pair appreciated roughly 800 pips from the beginning of the year. The current level of resistance is placed at 1.1330, which is a 50% retracement of November high and December low, in addition to it being a 2nd Standard Deviation. Support is originating around the 38.2% retracement of November high and December low, which coincides with the 20-day EMA. The uptrend is negated on the break of support which is currently placed around 1.1100-1.1105.
Published on Fri, Jan 16 2009, 00:12 GMT
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Euro Rallies as Trichet Signals Potential Pause in Feb
Thu, Jan 15 2009, 23:13 GMT
by Kathy Lien
Euro Rallies as Trichet Signals Potential Pause in Feb
After having cut interest rates by 50bp this morning to 2 percent, ECB President Trichet is finally buckling down and signaling that he is ready to cut interest rates again BUT NOT UNTIL March. Despite the weakness in the economy and softer inflation pressures, the hawk in Trichet refuses to die. By saying that the Feb meeting will not be important suggests that pausing is still an option. The next meeting that matters is in March at which the ECB will release new projections. The Feb meeting is only 3 weeks away but by March, they will have alot more economic data to base their decisions. The possibility that the ECB could leave interest rates unchanged next month is driving the Euro higher. We will probably see the Euro recover for the rest of the week but it is important for FX traders to realize that Eurozone interest are still coming down. Zero interest rates is not an option but the terminal rate for the ECB is likely to 1.25 percent.
Up until now, Trichet's biggest concern is price stability and for the first time in this easing cycle, he believes that the risks to price stability is broadly balanced. This is a big shift for the central bank and one that should not be ignored. The 50bp rate cut today reflects weaker growth and lower inflation risks. Alot has changed since the last meeting as the problems in the Eurozone economy worsen. Not only is the region in recession but many countries are at risk of getting their sovereign debt rating downgraded. Greece's credit rating was cut by S&P yesterday. There are no silver linings for the Eurozone. Unemployment is rising and consumer spending is contracting. According to the Trichet, the risks to growth are certainly to the downside Eurozone governments will have to dig deeper into their own pocketbooks to deliver enough fiscal stimulus to turn their own economies around. Over the next few months, we expect weaker economic data that provides more of evidence of the continual slowdown in the Eurozone economy.
Published on Thu, Jan 15 2009, 23:13 GMT
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Retail Sales Tank, Expect Q4 GDP to Be Very Weak
Wed, Jan 14 2009, 22:20 GMT
by Kathy Lien
Retail Sales Tank, Expect Q4 GDP to Be Very Weak
For the 6th month in a row, US consumers have cut back spending. The December consumer spending data tells us that retailers had a very tough time this holiday shopping season. Consumers reduced their spending by 2.7 percent but if you take out year end deals in the auto sector, retail sales actually fell 3.1 percent, the largest decline in at least 16 years. The Grinch really stole Christmas this year and no one is happy about it. Lower gasoline prices continued to drive down gas station receipts, but weaker spending was seen across the board. The worry now is that more retailers will be forced to file for bankrupcty protection and the latest consumer spending reinforces those fears. With more than 1 million Americans out of work in the last 2 months, concern about job security lead to more nimble shopping over the Christmas holidays.
Import prices dropped for the fifth month in a row, but by less than the market had expected.
Expect fourth quarter GDP to be very weak. Retail sales is one of the primary inputs to GDP and the sharp drop in consumer spending suggests that GDP could have fallen as much as 4 percent. The dollar should continue to weaken against the Japanese Yen but the Euro has its own host of problems. There are reports that Ireland may call in the IMF if the economy weakens. This is yet another reason why the ECB could cut interest rates on Thursday.
Published on Wed, Jan 14 2009, 22:20 GMT
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Dollar Rallies on Bernanke's Action Plan and Trade Numbers
Wed, Jan 14 2009, 22:14 GMT
by Kathy Lien
Dollar Rallies on Bernanke's Action Plan and Trade Numbers
The US dollar strengthened across the board today following better than expected economic data and more clarity from the Federal Reserve on their plans to stimulate the economy going forward. However the strength of the greenback could be fleeting particularly against the Japanese Yen as the upside surprises in US data masks underlying weakness. The December retail sales report is due for release tomorrow. Even though there is a chance that we may see an upside surprise, consumer spending is still expected to be negative for the sixth consecutive month.
Bernanke: Credit Easing Not Quantitative Easing
For the first time since cutting interest rates to 0.25 percent, Federal Reserve Chairman Ben Bernanke outlined his plan of action. In a speech at the London School of Economics, Bernanke talked about the additional tools available to the Fed, an orderly exit strategy, concerns about inflation and suggestions about how the Obama Administration should use the remainder of the TARP funds. Most importantly, Bernanke created a new name for his regime – credit easing. In contrast to Quantitative Easing, which Bernanke explains focuses on the liabilities portion of the central bank’s balance sheet, Credit Easing focuses on expanding the asset side of the balance sheet. However since the balance sheet is suppose to balance, this may just be a difference of semantics since both efforts ultimately add liquidity into the financial system. The Federal Reserve wants to draw a distinction between their current policies and the Bank of Japan’s policies between 2001 and 2006.
The Fed’s Toolbox and Exit Strategy
As for the tools that they have at their disposal, there was nothing groundbreaking. Their number one tool is policy communication, followed by liquidity facilities for banks, facilities for other markets and purchases of long term securities. Like Federal Reserve President Lockhart, Bernanke expects interest rates to remain low for an extended period of time. As we expected, inflation is not a concern because the Fed believes that weaker growth will keep inflation low. In terms of an exit strategy, he expects demand for the emergency facilities to wane as the US economy improves. Like many members of the Bush Administration, Bernanke supports using the rest of the TARP funds on the credit markets. Without stabilization in the financial system, he does not believe that any fiscal stimulus will have a lasting impact on the economy.
Trade Deficit Hits 5 Year Low, Retail Sales Outlook
Meanwhile the US trade deficit narrowed materially in the month of November to the smallest level since June 2003. The better than expected report helped to fuel the dollar’s rally. Although a narrower trade deficit is normally something to cheer about, the details of the report indicate that the only reasons why trade improved are because of falling oil prices and slower domestic demand. The big story is in imports, which plunged 12 percent in November. Unfortunately the strength of the dollar did not drive stronger US demand for foreign goods but it did cut exports by 5.8 percent. The IBD/TIPP economic optimism index also improved marginally. However dollar bulls need to cautious ahead of tomorrow’s retail sales report. There is no question that consumer spending will be negative but the pace of contraction could slow given the smaller decline in the ICSC and SpendingPulse reports. If retail sales drops less than the market expected, the US dollar could extend its gains. The Fed’s Beige Book report is also due for release and we expect the report to cast more doubt on the health of the US economy.
EUR/USD CONTINUES TO WEAKEN AHEAD OF ECB MEETING
If inflation is only thing keeping the European Central Bank from cutting interest rates, then the latest wholesale price report from Germany should eradicate their concerns. Wholesale prices plunged 3 percent on a monthly and annualized basis. This sharp decline can be almost entirely attributed to lower commodity prices. Other than a much weaker than expected US retail sales report, there is nothing stopping the EUR/USD from falling further ahead of the monetary policy decision. With US equities falling for the fifth consecutive trading session, risk aversion is also weighing on the EUR/USD. The market is already pricing in a 50bp rate cut for Thursday and the price action of the EUR/USD indicates a similar belief amongst currency traders. As a result, the risk is for a more Euro bullish outcome. ECB officials have been moaning and groaning about having to cut interest rates, which means that 25bp rate could be the middle ground.
GBP/USD BREAKS 1.45 AS TRADE DEFICIT HITS RECORD LEVELS
The UK trade deficit for the month of November hit the highest level since the country began keeping records in 1697, more than 300 years ago. The last time there was a surplus in the visible trade balance was in May 1985. Exports dropped 6 percent while imports fell 2 percent. Unfortunately the weakness of the British pound has failed to increase foreign demand. In the month of November, EUR/GBP rose from 79 cents to 85 cents while the GBP/USD fell from 1.6050 to 1.49. The latest trade data indicates that weakening global demand has completely dwarfed the stimulative effects of a weak currency. Based upon this data alone, the Bank of England will have no choice but to continue to cut interest rates because demand is not improving. According to the British Retail Consortium, retailers have suffered the weakest Christmas on record. The only silver lining is the hope that the impact of currency fluctuations on trade will hit the economy with a lag which means that the December figures could be better. Now that the GBP/USD has broken below the 1.45 level on an intraday basis, there is no major support until the 6 year low of 1.4350.
NZD/USD: S&P DOWNGRADES NEW ZEALAND’S CREDIT OUTLOOK
The Canadian, Australian and New Zealand dollars continued to weaken against the greenback as risk aversion sent investors flocking into the safety of the US dollar. Both the New Zealand and Australian dollars weakened significantly, breaking important support levels in the process. There was no Australian or New Zealand economic data released last night, but Standard and Poor’s reduced their credit rating for New Zealand from stable to negative, which puts the country at risk of losing its AAA sovereign debt rating. Meanwhile Canada reported a much weaker than expected trade balance. The country’s trade surplus shrank from 3.3B to 1.3B, an 11 year low. The toxic combination of falling oil prices and weaker US demand for vehicles has caused exports to drop 6.8 percent. Exports have fallen for the fourth consecutive month and will probably continue to fall in the months ahead. The disappointing report has sent the Canadian dollar lower against the US dollar and Japanese Yen. Over the next 24 hours, the market’s focus will shift away from the Canadian dollar and onto the Australian and New Zealand dollars. Australian business confidence, home loans and investment lending reports are due for release tomorrow while New Zealand will be releasing its building permits data.
GBP/JPY HITS 30 YEAR LOW DESPITE WEAK ECONOMIC DATA
The Japanese yen appreciated against all of the major currencies today but the most significant gain was against the British pound. On an intraday basis, GBP/JPY fell to the lowest in more than 30 years. Weak economic data has not stopped the Japanese Yen from rising, but it will stop the Japanese economy from improving. The country’s trade surplus turned into a deficit in the month of November. The current account surplus also dropped 65 percent due to a 26 percent decline in exports. The current account now stands at JPY581 billion, down from JPY960.5 billion. The amount of the negative news associated with trade and current account balance reports might support the claim that BOJ needs to intervene in the foreign exchange markets and stop the JPY from rising. This is a very tough decision for the BoJ and if verbal intervention continues to fail, they may have to resort to physical intervention for the first time since 2004. In reaction to the trade numbers, Finance Minister Nakagawa told the markets that he is watching the foreign exchange markets carefully and that rapid moves in currencies is undesirable. Other economic data also provides cause for concern. Bankruptcies surged 24 percent in December, the highest in close to 8 years. Bank lending accelerated at the fastest pace in 16 years, climbing to 4.1% in the month of December as companies are scrambling to receive monetary support to stay in business. Consumers are also feeling the pressure of the slowdown, as the Economy Watchers index plunged to the lowest levels since its initiation. Tomorrow, Japan is set to release its numbers for Machine Tools orders and Domestic Corporate Goods Prices which should confirm that manufacturing sector is continuing to contract.
EUR/USD: Currency in Play for Next 24 Hours
The currency in play over the next 24 hours is the EUR/USD. Eurozone industrial production numbers are due for release at 10:00 GMT or 5:00 EST while US retail sales numbers are due for release at 13:30 GMT or 8:30 EST.
The EUR/USD is trading well within the Sell Zone, which we determine using Bollinger Bands. It has also broken below the 50-day SMA, which was the closest level of support for the currency pair. It is now flirting with the 1.32 level, which is the 23.6 percent Fibonacci retracement of the 1.6037 to 1.2330 sell-off that lasted from July to October of 2008. The next level of support is not until the psychological level of 1.30. If the EUR/USD manages to rally back above today’s high of1.3375, we could see a stronger rally that takes the currency pair above 1.35. However if it rallies, a close above 1.3600 will be needed to negate the downtrend.
Published on Wed, Jan 14 2009, 22:14 GMT
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Trade: US Deficit Improves, Canadian Surplus Shrinks
Tue, Jan 13 2009, 22:15 GMT
by Kathy Lien
Trade: US Deficit Improves, Canadian Surplus Shrinks
The US trade deficit narrowed materially in the month of November to the smallest since June 2003. Although the narrower trade deficit is normally something to cheer about, the details of the report indicate that the only reasons why trade improved was because of the fall in oil prices and slower domestic demand. The big story is in imports, which plunged 12 percent in November. Unfortunately the strength of the dollar did not drive stronger US demand for foreign goods but it did cut exports by 5.8 percent. The US dollar strengthened following the report but the gains may be limited because the report reflects the weakness rather than strength of the US economy.
Meanwhile Canada is at the brink of turning a deficit for the first time in 10 years. Their trade surplus shrank to 1.3B in November, the smallest since October 1997. The toxic combination of falling oil prices and weaker US demand for vehicles has caused exports to drop 6.8 percent the fourth consecutive month.
Unsurprisingly, USD/CAD has soared the following the release on the better trade report from the US and weaker report from Canada.
Published on Tue, Jan 13 2009, 22:15 GMT
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3 Forces Driving the EUR/USD Lower
Tue, Jan 13 2009, 07:17 GMT
by Kathy Lien
US DOLLAR: CURRENCIES HIT BY RISK AVERSION
It is a new trading week and growing doubt about the global economy has seeped through the financial markets once again. For the foreign exchange market, we are seeing broad based liquidation or weakness in all of the major currency pairs. The concerns are not unique to the US economy which is why we have not seen any consistent behavior in the US dollar. The greenback weakened against the Japanese Yen but it rallied against the Euro, British pound and the commodity currencies. For currency traders who simply have a view on the US economy and nothing else, the price action of USD/JPY has been best aligned with the trend of the US economy. All of the other currency pairs are diluted by speculation about upcoming interest rate decisions and commodity prices.
Desperate Times, Desperate Measures
So far, the month of January has been particularly tough for the US equities market. The Dow Jones Industrial Average has ended lower for the fourth consecutive trading session. Earnings season has begun and the reports that we have seen so far give more reasons for concern than relief. Alcoa is set to report this afternoon and if earnings were healthy, they would not have to make plans to lay off 13,500 employees. The strength in the US dollar in the fourth quarter will contribute to weaker earnings. There is also talk that Citigroup is considering selling a controlling stake in their brokerage operations to Morgan Stanley. This division is one Citigroup’s most prized possession and the fact that they are even entertaining this notion suggests that they are in desperate need of capital. Desperate times call for desperate measures and this may only be the beginning of more “weddings” in the banking sector.
We are also keeping a close eye on the retail sector. Now that the holiday shopping season is over, retailers are reviewing their books and are faced with the difficult decision of whether or not to file for bankruptcy protection. According to this morning's WSJ, Loehmann's, Duane Reade, Bon-Ton Stores and Claire's Stores are all at risk. However, there is a chance that we could see a smaller decline in consumer spending since the pace of contraction in December is slowing according to the ICSC and SpendingPulse report. Before Wednesday’s retail sales report, we have Tuesday’s trade balance numbers. The export component of ISM remained in contractionary territory which suggests that exports in general have been weak. This is hardly a stretch considering the state of the global economy.
Monetary and Fiscal Stimulus: What to Expect
With US interest rates effectively at zero, many people are wondering what to expect from the US government. On Tuesday January 20th, the US will usher in a new President that has pledged to hit the ground running when he takes office. This morning, Barack Obama said that he has already asked President Bush to tap the rest of the TARP funds to get the ball rolling. The Bush Administration has already used $350 billion, leaving another $350 billion for the Obama Administration. Obama plans on using the money to help ease housing foreclosures and small businesses. This is a dramatic departure from the Bush Administration who spent the first half of the TARP funds providing support for the banking sector. As for monetary policy, Federal Reserve President Lockhart, who is a voting member in the FOMC said that the central bank could keep interest rates at zero for the entire year. If the US economy continues to weaken, expect the Fed to inject more liquidity into the financial system by buying up more US debt. With oil prices falling, inflation is not a problem. Looking ahead, we continue to expect more dollar weakness against the Japanese Yen but the EUR/USD may be nearing support.
EUR/USD: 3 FORCES DRIVING EUR/USD LOWER
There were 3 forces driving the Euro lower today – risk aversion, speculation about interest rate cut from the European Central Bank and the potential downgrade of Spain’s AAA sovereign debt rating. Fears about consumer debt and the nation’s finances have compelled Standard and Poor’s to put the country on a negative ratings watch. They did the same for Greece on Friday and have recently cut the outlook for Ireland’s rating from stable to negative. The risk of a deeper recession in the Eurozone is growing and that is why the market has priced in a 50bp rate cut by the European Central Bank on Thursday. However given the recent comments from the ECB, the risk is for a more Euro bullish outcome. The ECB could cut interest rates by 25bp instead of 50 and even if they do acquiesce by cutting interest rates 50bp, don’t expect particularly dovish comments from ECB President Trichet. Like in past meetings, he will most likely moan and groan about having to cut interest rates and risk boosting price pressures. He will also give little signal as to where interest rates are headed next. Being behind the curve will hurt the Eurozone economy in the long run, but the ECB’s reluctance to cut interest rates again could help the EUR/USD in the short term. Individual nations in the Eurozone have resorted to their own fiscal measures to stimulate their economies. Germany is planning to adopt a 2 year EUR50 billion fiscal package that would include EUR100billion worth of credit guarantees to help businesses raise debt.
GBP/USD: WEAKENS AHEAD OF TRADE NUMBERS
Despite more innovative measures by the UK government to stimulate the economy, the British pound continued to weaken against the Euro and US dollar. The latest announcement from the UK government includes an emergency GBP500 million plan for employers to recruit and train new staff and cash for unemployed people looking to set up businesses. The UK has done everything from cutting interest rates, reducing the VAT tax, pumping money into the financial sector and taking stakes in banks. Now they are taking steps to directly reverse the weakness in the labor market. It will just be a matter of time before the UK government’s aggressive efforts pay off. The deeper the sell-off in the British pound, the more optimistic we are about an end of the year recovery in the UK. However pound traders are not looking at the potential turnaround in the UK economy 3 months now. Instead, their focus is shorter term. The UK trade balance is due for release tomorrow and despite the improvement in manufacturing PMI, new and export orders declined.
USD/CAD: WEAKER COMMODITY PRICES DRAG CURRENCIES LOWER
The Canadian, Australian and New Zealand dollars sold off aggressively as weak economic data and lower commodity prices dragged the currencies lower. Oil and gold prices fell dramatically with crude trading at $37.70 a barrel and gold trading at $821 an ounce. The sell-off in commodities reflects the market’s expectation for weak global growth. Back in December, oil prices fell to $33.87 a barrel, a 4 year low. Canadian economic data remains weak with house prices falling for the second consecutive month and business sentiment slipping to a 10 year low. The Canadian trade balance is due for release tomorrow and the drop in the IVEY PMI index signals a smaller trade surplus. Meanwhile job advertisements in Australia fell by the largest amount in 26 years, reflecting overall weakness in the Australian labor market. Business sentiment has also deteriorated materially in New Zealand according to the NZIER business opinion survey.
USD/JPY: CHINESE IMPORT DEMAND SLOWS MATERIALLY
The sell-off in US equities dragged all of the Japanese Yen crosses lower. Japanese markets were closed yesterday for Coming of Age day but they are set to reopen this evening in force. There are ton of economic data from Japan this week starting with the trade and current account balance reports this evening. The strength of the Yen should turn Japan’s trade surplus into a deficit in the month of November. In the British pound commentary we said that the deeper the decline in the pound, the more optimistic we are about a UK recovery. For Japan, it is the complete opposite. The stronger the rally in the Japanese Yen, the more pessimistic we are about the outlook for the Japanese economy. Toyota, the world’s largest car maker has already suffered greatly from weaker global demand and a strong currency. It also doesn’t help that Chinese imports have slowed materially - in December, imports fell 21 percent. As the primary engine of global growth over the past 10 years, slowing Chinese demand will have severe consequences for countries like Japan
Published on Tue, Jan 13 2009, 07:17 GMT
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Another Big Week Ahead
Sun, Jan 11 2009, 22:46 GMT
by Kathy Lien
Another Big Week Ahead
The US dollar surged against all of the major currencies expect for the Japanese Yen following the December non-farm payrolls report. More than half a million Americans lost their jobs last month but the data was not nearly as bad as the whisper number that ran as high as -700k. The number of jobs cut was also less than the previous month, which was revised from -533k to -584k. By all counts, the labor market report was bad, particularly since the unemployment rate soared to 7.2 percent. Yet the US dollar managed to rally because meeting expectations these days is more positive than negative for a currency. My friend Andy Busch at BMO said it best, “After the ADP/Monster/Challenger numbers all were horrible, today's data at -525k and 7.2% doesn't seem so bad. It's like being in Chicago when the temperature is at 10 F for a week and then we get 25 F. You go outside without a coat and say how warm it is.”
Modest Rebound in NFP Only a Precursor to More Losses
If you read the non-farm payrolls preview that we published on Thursday, the modest rebound in non-farm payrolls should not be all that surprising. In the past 5 decades, we have seen a rebound every single time job losses topped 500k, and this time it was no different. The employment component of service sector ISM, one of the most reliable leading indicators for NFP improved last month, also signaling slower job losses. We have just endured one of the worst strings of job losses that this generation has ever seen and unfortunately the pain will continue. Alcoa and Intel have already announced layoffs. The US is in recession and in previous recessions, job cuts have lasted for at least 15 months. So far, we have only seen 12 consecutive months of job losses which mean that non-farm payrolls will not turn positive until the second half of the year.
Big Event Risks for the Upcoming Week
More risks lie ahead for the US dollar in the coming week with retail sales, producer prices, consumer prices, the Treasury International Capital (TIC) flow report, Empire State and the Philadelphia Fed index due for release. Given that more than a million Americans lost their jobs in the last 2 months, consumers should have been more frugal in the month of December. However the contraction in spending may not be as bad as the previous month because it was the holiday shopping season and both SpendingPulse and ICSC reported a slower decline in retail sales. As for inflation, the drop in oil prices and slower global demand will continue to ease price pressures. Inflation is not a priority for any central bank at this point. The one number that we are particularly interested in seeing is the TIC report. Yesterday, we talked about how China could be losing its appetite for US debt. The TIC data will tell us if that is true and whether other central banks and foreign investors in general are following suit.
EUR/USD vs. USD/JPY
However with that in mind, the US dollar may trade very differently against the Euro than the Japanese Yen next week. USD/JPY has had the purest reaction to any US data while the Euro has been impacted by expectations for next Thursday’s ECB interest rate decision. If expectations for a rate cut continue to grow, the EUR/USD could extend its sell-off despite the problems in the US economy. As for the dollar’s performance against the other major currencies, that should depend on the market’s risk appetite.
EUR/USD: WILL THE ECB CUT INTEREST RATES?
With the US non-farm payrolls release behind us, the currency market’s focus will shift to Eurozone and the ECB interest rate decision on Thursday. After cutting interest rates by 150bp last year, the central bank has hinted that they may refrain from easing again in January. As a staunch fighter of inflationary pressures, central bank President Trichet has been deathly afraid of the risks of cutting interest rates too much. In the past, if the central bank is relatively confident about changing interest rates, they would warn the markets weeks in advance. However, they are entering their pre-meeting quiet period where they avoid any public comments without providing any clear direction. Economic data has been weak and even Trichet has acknowledged that there has been a significant deterioration in the real economy. By not cutting interest rates this month, the ECB risks putting themselves even further behind the curve. We believe that they will buckle down and cut interest rates, albeit begrudgingly. Although German and Eurozone retail sales rebounded in November, the annualized pace of consumer spending slowed materially. French and German industrial production also tumbled, reflecting the difficult conditions in the manufacturing sector. In addition to the ECB rate decision, Eurozone consumer prices and the trade balance are due for release next week.
GBP/USD: RECESSION DEEPENS BUT PRICES ARE RISING
The British pound strengthened against the Euro for the fifth consecutive trading day. The market is starting to realize that the ECB will have its hands full with battling an economic crisis when the Bank of England is beginning to reap the benefits of the aggressive fiscal and monetary stimulus. Even if they refrain from lowering rates next week, the ECB will have to reduce interest rates in February. UK economic data was mixed. Industrial production dropped 2.9 percent, matching the largest decline since 2002. The recession in the manufacturing sector and the economy as a whole has deepened as demand slows to a halt. However, price pressures are rebounding. Input and output prices rose in the month of December as lower gasoline prices were offset by higher tobacco and alcohol prices. The recent weakness of the British pound could also be contributing to the higher price pressures. The uptick is not much of a concern for the central bank because they believe that inflation will ease significantly in the coming months. Next week the UK economic calendar is very light with only the trade balance and BRC retail sales due for release.
USD/CAD: CANADIAN UNEMPLOYMENT HITS 3 YEAR HIGH
The double blow of falling oil prices and slowing growth in the US is having its toll on Canada. The labor market has deteriorated significantly with the unemployment rate rising to 6.6 percent, the highest level since January 2006. With more than 34k Canadians losing their jobs last month, the Canadian dollar sold off aggressively. Although this number may seem small compared to the staggering loss in the US, it is important to realize that Canada’s population is one tenth of the US. This should be the beginning of more job losses to come. Canadian officials were out in force today talking about the economy and stimulus measures. Finance Minister Flaherty said that Canadians should expect substantial job losses in the months to come and that the deficit will be huge. Prime Minister Harper promised 3 to 5 years of economic measures which will surely turn the country’s budget surplus into the big deficit mentioned by Flaherty. With that in mind, the Bank of Canada is expected to bring interest rates below 1.00 percent. Canadian trade balance and Australian employment are the most important event risks for the 3 commodity producing countries in the coming week. Interestingly enough, the employment component of service, manufacturing and construction sector PMI all improved in Australia last month.
USD/JPY: YEN CROSSES PLUNGE POST PAYROLLS
Unfortunately, the brief sense of relief initiated by a weakening yen has all but diminished. As we cap up a three-day winning streak for the yen against the dollar, fears have reignited about the ability of the Japanese economy to sustain itself if the dollar weakens further. Japanese equities are feeling the morbid effects of a strong currency, as Japanese equities are off for the second day in a row. This is after a promising seven day rally that brought the Nikkei up more than 8.0%. If the troubling news coming out of the US economy is not quickly offset by something surprising, talks about a BoJ foreign exchange intervention will be reignited. However, such policy actions will probably be used in the worst case scenario, as it is likely that they will have to act alone in devaluing their currency. We were finally privileged to the first piece of economic data in what seems like weeks. As a promising start to the year, the Leading Index came in as expected at 85.2. However when considering the figure fell 3.7 from last month, we are hesitant to call the figure a success. The coincident indicator, a measure of current business conditions, also came in as expected at 94.9. Next week the Japanese economic calendar will be picking up with the Trade Balance, Current Account, Eco Watcher’s Survey, and Machine Orders due for release.
USD/CAD: Currency in Play for Next 24 Hours
The currency in play on Monday will be USD/CAD. This is due to Canada’s release of New House Prices at 13:30 GMT and 8:30 EST and their Business Sales Future Outlook at 15:30GMT or 10:30AM EST.
The pair is currently trading within the Sell Zone, which was determined using our Bollinger Bands. Our current support level is placed around 1.1660, which is a 50% retracement of September low and December high, in addition to 100-day SMA. The pattern will be negated upon the break of resistance, which is placed at the high of the day around 1.1970. The break of resistance will drive the pair away from the sell zone and appreciate past 61.8% retracement of September low and December high.
Published on Sun, Jan 11 2009, 22:46 GMT
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Another Big Week Ahead
Thu, Jan 8 2009, 22:51 GMT
by Kathy Lien
Another Big Week Ahead
The US dollar surged against all of the major currencies expect for the Japanese Yen following the December non-farm payrolls report. More than half a million Americans lost their jobs last month but the data was not nearly as bad as the whisper number that ran as high as -700k. The number of jobs cut was also less than the previous month, which was revised from -533k to -584k. By all counts, the labor market report was bad, particularly since the unemployment rate soared to 7.2 percent. Yet the US dollar managed to rally because meeting expectations these days is more positive than negative for a currency. My friend Andy Busch at BMO said it best, “After the ADP/Monster/Challenger numbers all were horrible, today's data at -525k and 7.2% doesn't seem so bad. It's like being in Chicago when the temperature is at 10 F for a week and then we get 25 F. You go outside without a coat and say how warm it is.”
Modest Rebound in NFP Only a Precursor to More Losses
If you read the non-farm payrolls preview that we published on Thursday, the modest rebound in non-farm payrolls should not be all that surprising. In the past 5 decades, we have seen a rebound every single time job losses topped 500k, and this time it was no different. The employment component of service sector ISM, one of the most reliable leading indicators for NFP improved last month, also signaling slower job losses. We have just endured one of the worst strings of job losses that this generation has ever seen and unfortunately the pain will continue. Alcoa and Intel have already announced layoffs. The US is in recession and in previous recessions, job cuts have lasted for at least 15 months. So far, we have only seen 12 consecutive months of job losses which mean that non-farm payrolls will not turn positive until the second half of the year.
Big Event Risks for the Upcoming Week
More risks lie ahead for the US dollar in the coming week with retail sales, producer prices, consumer prices, the Treasury International Capital (TIC) flow report, Empire State and the Philadelphia Fed index due for release. Given that more than a million Americans lost their jobs in the last 2 months, consumers should have been more frugal in the month of December. However the contraction in spending may not be as bad as the previous month because it was the holiday shopping season and both SpendingPulse and ICSC reported a slower decline in retail sales. As for inflation, the drop in oil prices and slower global demand will continue to ease price pressures. Inflation is not a priority for any central bank at this point. The one number that we are particularly interested in seeing is the TIC report. Yesterday, we talked about how China could be losing its appetite for US debt. The TIC data will tell us if that is true and whether other central banks and foreign investors in general are following suit.
EUR/USD vs. USD/JPY
However with that in mind, the US dollar may trade very differently against the Euro than the Japanese Yen next week. USD/JPY has had the purest reaction to any US data while the Euro has been impacted by expectations for next Thursday’s ECB interest rate decision. If expectations for a rate cut continue to grow, the EUR/USD could extend its sell-off despite the problems in the US economy. As for the dollar’s performance against the other major currencies, that should depend on the market’s risk appetite.
EUR/USD: WILL THE ECB CUT INTEREST RATES?
With the US non-farm payrolls release behind us, the currency market’s focus will shift to Eurozone and the ECB interest rate decision on Thursday. After cutting interest rates by 150bp last year, the central bank has hinted that they may refrain from easing again in January. As a staunch fighter of inflationary pressures, central bank President Trichet has been deathly afraid of the risks of cutting interest rates too much. In the past, if the central bank is relatively confident about changing interest rates, they would warn the markets weeks in advance. However, they are entering their pre-meeting quiet period where they avoid any public comments without providing any clear direction. Economic data has been weak and even Trichet has acknowledged that there has been a significant deterioration in the real economy. By not cutting interest rates this month, the ECB risks putting themselves even further behind the curve. We believe that they will buckle down and cut interest rates, albeit begrudgingly. Although German and Eurozone retail sales rebounded in November, the annualized pace of consumer spending slowed materially. French and German industrial production also tumbled, reflecting the difficult conditions in the manufacturing sector. In addition to the ECB rate decision, Eurozone consumer prices and the trade balance are due for release next week.
GBP/USD: RECESSION DEEPENS BUT PRICES ARE RISING
The British pound strengthened against the Euro for the fifth consecutive trading day. The market is starting to realize that the ECB will have its hands full with battling an economic crisis when the Bank of England is beginning to reap the benefits of the aggressive fiscal and monetary stimulus. Even if they refrain from lowering rates next week, the ECB will have to reduce interest rates in February. UK economic data was mixed. Industrial production dropped 2.9 percent, matching the largest decline since 2002. The recession in the manufacturing sector and the economy as a whole has deepened as demand slows to a halt. However, price pressures are rebounding. Input and output prices rose in the month of December as lower gasoline prices were offset by higher tobacco and alcohol prices. The recent weakness of the British pound could also be contributing to the higher price pressures. The uptick is not much of a concern for the central bank because they believe that inflation will ease significantly in the coming months. Next week the UK economic calendar is very light with only the trade balance and BRC retail sales due for release.
USD/CAD: CANADIAN UNEMPLOYMENT HITS 3 YEAR HIGH
The double blow of falling oil prices and slowing growth in the US is having its toll on Canada. The labor market has deteriorated significantly with the unemployment rate rising to 6.6 percent, the highest level since January 2006. With more than 34k Canadians losing their jobs last month, the Canadian dollar sold off aggressively. Although this number may seem small compared to the staggering loss in the US, it is important to realize that Canada’s population is one tenth of the US. This should be the beginning of more job losses to come. Canadian officials were out in force today talking about the economy and stimulus measures. Finance Minister Flaherty said that Canadians should expect substantial job losses in the months to come and that the deficit will be huge. Prime Minister Harper promised 3 to 5 years of economic measures which will surely turn the country’s budget surplus into the big deficit mentioned by Flaherty. With that in mind, the Bank of Canada is expected to bring interest rates below 1.00 percent. Canadian trade balance and Australian employment are the most important event risks for the 3 commodity producing countries in the coming week. Interestingly enough, the employment component of service, manufacturing and construction sector PMI all improved in Australia last month.
USD/JPY: YEN CROSSES PLUNGE POST PAYROLLS
Unfortunately, the brief sense of relief initiated by a weakening yen has all but diminished. As we cap up a three-day winning streak for the yen against the dollar, fears have reignited about the ability of the Japanese economy to sustain itself if the dollar weakens further. Japanese equities are feeling the morbid effects of a strong currency, as Japanese equities are off for the second day in a row. This is after a promising seven day rally that brought the Nikkei up more than 8.0%. If the troubling news coming out of the US economy is not quickly offset by something surprising, talks about a BoJ foreign exchange intervention will be reignited. However, such policy actions will probably be used in the worst case scenario, as it is likely that they will have to act alone in devaluing their currency. We were finally privileged to the first piece of economic data in what seems like weeks. As a promising start to the year, the Leading Index came in as expected at 85.2. However when considering the figure fell 3.7 from last month, we are hesitant to call the figure a success. The coincident indicator, a measure of current business conditions, also came in as expected at 94.9. Next week the Japanese economic calendar will be picking up with the Trade Balance, Current Account, Eco Watcher’s Survey, and Machine Orders due for release.
USD/CAD: Currency in Play for Next 24 Hours
The currency in play on Monday will be USD/CAD. This is due to Canada’s release of New House Prices at 13:30 GMT and 8:30 EST and their Business Sales Future Outlook at 15:30GMT or 10:30AM EST.
The pair is currently trading within the Sell Zone, which was determined using our Bollinger Bands. Our current support level is placed around 1.1660, which is a 50% retracement of September low and December high, in addition to 100-day SMA. The pattern will be negated upon the break of resistance, which is placed at the high of the day around 1.1970. The break of resistance will drive the pair away from the sell zone and appreciate past 61.8% retracement of September low and December high.
Published on Thu, Jan 8 2009, 22:51 GMT
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Concerns Mount About NFP and GDP
Thu, Jan 8 2009, 00:55 GMT
by Kathy Lien
Concerns Mount About NFP and GDP
Concerns about the US economy are growing as the Dow Jones Industrial Average erases all of its year to date gains, taking the US dollar down with it. The rally that we have seen in the first few days of trading will be difficult to sustain with all of the weak economic data that we expect in this month. Although the US government has thrown a lot of monetary and fiscal stimulus at the US economy, we may not see the fruits of their labor until the second quarter at the earliest. There is a major risk of a sharp drop in this month’s non-farm payrolls, retail sales and fourth quarter GDP reports and only after we have seen the last of depression like numbers can we begin to see a meaningful recovery in the US dollar.
ADP Signals Big Trouble for NFP
This is a big week in the currency market with non-farm payrolls due for release on Friday. The leading indicators for the pivotal labor market report are coming in and the latest report suggests that in the last 2 months of the year, more than 1 million Americans may have lost their jobs. According to the ADP private sector employment report, 693k jobs were lost in the private sector last month. This was much weaker than the market’s -493k forecast and suggests that non-farm payrolls could have dropped by more than 600k in the month of December. Layoffs also rose 274.5 percent according to the Challenger report with the biggest declines seen in the financial sector. Unfortunately big job losses will probably continue with Alcoa and Intel announcing more layoffs. The only silver lining is the rebound in the employment component of the service sector ISM report, which tends to have a very strong correlation with the non-farm payrolls report. With that in mind, we believe that job losses last month will be closer to 500k than 700k. Either way, both numbers spell big trouble for the US labor market. Q4 will be one of the worst quarters for non-farm payrolls that this generation has ever seen which is why the US dollar is weak and may remain weak going into the NFP report.
Forecasts for GDP, Unemployment and Deficit
Adding pressure to the dollar today were the forecasts for GDP and the budget deficit from the Chamber of Commerce and the Congressional Budget Office (CBO). Last week we warned that fourth quarter GDP could be very weak given the sharp decline in the retail sales and the increase in the trade deficit. The Chamber of Commerce predicts that GDP could fall by as much as 5 percent in the last quarter of 2008 and by another 3 percent in the first quarter of 2009. They also expect the unemployment rate to top 8.5 percent. We also believe that GDP will confirm the recessionary conditions in the US economy and that unemployment will rise sharply, which is why non-farm payrolls may only compound the problems that the US dollar faces this month. As for the budget, the CBO expects the deficit to hit $1.186 trillion this fiscal year. For sovereign wealth funds in particular, the deteriorating US balance sheet will be another reason why a run on the dollar remains a risk in 2009.
GBP/USD: 50BP RATE CUT EXPECTED
The Bank of England is expected to cut interest rates by 50bp on Thursday to 1.50 percent, an all time record low, yet the British pound is rallying. This bizarre price action stems from the fact that pound traders are looking beyond the rate cut and onto the BoE’s aggressive efforts to revive the struggling economy. Furthermore a recent uptick in economic data suggests that a 50bp rate cut may not be the only option for the central bank. The BoE could also entertain the notion of a smaller quarter point rate cut following the improvements in retail sales, manufacturing and service sector PMI. Inflation also remains above the central bank’s target even though they believe that price pressures will fall sharply in the coming months. Since 2008, the BoE has already cut interest rates by 350bp. As long as the central bank does not surprise the market with a 75bp rate cut, regardless of how much they ease, the British pound will remain the fifth lowest yielding currency in the developed world. Although interest rates have never fallen below 2 percent in the history of the BoE, they will be forced to make this historic move as there is no convincing evidence that a rebound is near. The undeniable willingness of the BoE to respond diligently to market troubles leads us to assume that a rate cut is all but certain. Expect a lot of volatility following the BoE rate decision especially since the monetary policy statement could provide clues to how much further the central bank may lower interest rates. Given that Chancellor Darling warned that the recession was from over, we could see UK interest rates hit 1.00 percent.
EUR/USD: TRICHET WORRIED ABOUT THE EZ ECONOMY
After selling off for 3 straight trading days, the Euro rebounded against the US dollar despite weaker economic data. German unemployment rose 18k last month, the first increase since February 2006. Germany has not been immune to the global slowdown and we are finally seeing the downturn that has long been expected. Retail sales have already declined and we expect the job losses to weigh on consumer spending going forward. Producer prices plunged for the Eurozone as a whole which is not surprising given the sharp drop in oil prices. It seems that Trichet is finally acknowledging the problems in the Eurozone economy. In a magazine interview he said that "It's clear that we have had a significant deterioration of the real economy. The ECB and the national central banks' staff projections mention a range of zero to minus one per cent as the average for growth next year." However with that in mind, he still believes that anchoring inflation expectations should be their top priority especially since deflation is not a threat. The case for a January rate cut is growing but based upon Trichet’s comments, it is not a done deal.
USD/CAD: OIL PRICES SEE LARGEST DROP IN 7 YEARS
The only currencies that managed to weaken more than the US dollar are the Canadian, Australian and New Zealand dollars. Their sell-off is tied directly to the move in oil and gold prices. Oil dropped more than 12 percent today, the largest decline in 7 years. The sharp plunge was driven by a report showing a higher than expected increase in supplies. Oil had been able to stage strong rallies for the last few weeks after hitting a low of $35 a barrel. Gold is extending its declines again, falling 2.5 percent. The move in the yellow metal overshadowed the improvement in Australian retail sales. Consumer spending rose 0.4 percent in the month December thanks to higher food consumption. The Australian construction sector PMI, trade deficit and building approvals are due for release this evening. The improvement in the New Zealand trade balance yesterday suggests the potential for similar improvement in Australia. Finally Canada will be releasing the IVEY PMI report tomorrow. Given the drop in leading indicators, we do not expect Canada to report a rebound in manufacturing conditions.
USD/JPY: RALLY COMES TO A SCREECHING HALT
The yen is a net winner amid concerns for the US economy and tumbling energy prices. As a country that imports almost all of its oil needs, lower oil prices is a positive for the economy. The sharpest gains were seen against the Australian and New Zealand dollars. Although the recent strength of the Japanese Yen could cause Japan to be one of the worst performing countries in 2009, the Yen may still rally if US equities continue to slip. Furthermore, 2008 has been a brutal year for investors across the globe. Japanese carry traders have been hit particularly hard and for that reason we could see more repatriation by the Japanese heading into their fiscal year end which is in March. The Japanese government is also taking steps that may lead to more Yen strength. Earlier this week, they announced plans to scrap capital gains taxes for foreigners who take stakes in Japanese companies through investment funds. If approved, more foreign investment could lead to more yen strength.
EUR/USD: Currency in Play for Next 24 Hours
EUR/USD will be the currency pair in play for tomorrow. The Euro-zone is set to release a variety of important economic indicators. On schedule for tomorrow is the German Trade Balance and Current Account at 2:00 am ET or 7:00 GMT and Euro-Zone GDP and Unemployment rate at 5:00 am ET or 10:00 GMT.
The EUR/USD currently resides in the Bollinger band range-trading zone. The 1.3500 area seems highly significant as support for a number of factors. Besides the psychological nature of the level, there is the one-standard-deviation, and 50.0% retracement from December 12th highs to yesterdays is lying slightly above. Yesterday’s price action failed after extending 280 pips below the support. Early retreats today were thwarted once again, and served as the base of a technical move higher. Resistance seems best defined by the 20-period exponential moving average. Prices failed today after advancing slightly above this 1.3700 resistance. The level is further defined since the 38.2% retracement from the aforementioned Fibonacci levels is lying slightly above. This is also where prices gapped lower on October 6th. A break of the several resistance levels lying above, could see the pair pushing beyond where the previous rally left off.
Published on Thu, Jan 8 2009, 00:55 GMT
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The FED Fears The Worst
Tue, Jan 6 2009, 22:56 GMT
by Kathy Lien
The FED Fears The Worst
Trading in equities very closely mirrored yesterday’s volatile session. It is clear that investors are still uncertain, as direction in the Dow has been largely range-bound. Equities have swerved between two extremes, at one time positive by more than a hundred points. Even though the excitement and enthusiasm behind the newly proposed relief program has managed to give equities a new leg, we are still undeniable seeing the levels of concern that have pervaded the markets for most of last year. This level of fear was a big factor that led to the original implosion of the equities market. Trading in the dollar has been likewise mixed, with strength against the euro and yen, but weakness against the pound and commodity currencies.
The Minutes Reiterate the Obvious
“The economic outlook will remain weak for a time and the downside risks to economic activity will be substantial”. In one sentence the FOMC Minutes managed to convey the board’s pessimism for the coming economic year. The minutes noted problems ranging the gamut from deflation, weak consumer and business spending, slowing exports, strained credit markets, and a severely depressed manufacturing sector. The list goes on, giving the Fed reason to sharply revise their economic outlook to the downside. However, these developments are expected. After all, in a decision that brought the target rate down to a “range” between 0% and 0.25%, things would have to be dire. A few optimistic points came up, notably an improving Commercial Paper market and the potential for a return to modest growth by 2010. Luckily, the Fed seems committed to taking any and all possible actions to restore such sustainable economic growth.
Expectations for the next interest rate decision will see a complete shift to balance sheet issues. Obviously, at this point further rate cuts are off the table. We are merely awaiting the next initiatives to be announced that will officially put us on the quantitative easing road. The Fed is still expressing concerns, like that of the BoE and BoC, of which interest rate cuts have not yet trickled down to the masses of individual and business borrowers. It is likely that further initiatives will be focused on improving this disparity. The minutes informed us that, “participants discussed the merits of purchasing large quantities of longer-term securities”. The key idea of which is to lower yields so as to indirectly reduce borrowing costs. However, as we have seen, one does not always translate to the other. At this point, it seems almost blatantly obvious that the Fed will expand its purchasing of such long-term Treasuries. In effect, the market moving implications for the meeting will exist entirely in the unexpected. Possibilities of just such an occurrence could be the implementation of inflation or even a balance sheet target to further direct monetary policy.
Are We Pulling Off of Record Lows?
For once, the bevy of economic data that we are subject to has given the economy a small and temporary portion of breathing room. As indicators for such a conclusion we have seen that all reports issued today are either above last month’s figures or better than economists’ expectations. The Non-Manufacturing ISM was reported at 40.6, both higher than forecasts and prior figures. The strength of the services sector was a crucial component to offset the weakness in last week’s manufacturing ISM. However, this number is still the second worst on record. Factory Orders fell more than expected, posting a loss of 4.6%. Even though this figure was better than last month, we are in the mists of the worst consecutive two-month report on record. Pending Home Sales also offered a bit of optimism, showing an improvement over prior figures. However, once again the number was still far worse than expectations. Pending sales in the Northeast were the worst portion of the report. We have come to a point that economic data will likely be relieved off of some November lows; however the information still casts doubt onto the success of a market turnaround. Expected for tomorrow will be Challenger Job Cuts and ADP Employment, both important leading indicators for the strength of Friday’s employment situation.
EUR/USD: INFLATION BELOW DESIRED RANGE MAY WARRANT A LARGE RATE CUT
The euro is pounded by another round of troubling economic data. It is arguable that the Euro-zone is facing the brunt of the worst of the financial conditions that are circulating thus far this year. This is not to say that the US and UK are reporting stellar news, it is just that the lack of such significant interest rate cuts make the region a bit more vulnerable. This weakness is on display in today’s trading as the euro retreats across the board. The worst of the economic data is in the Consumer Price index, which fell to a new two year low at 1.6%. The significance of this report is that inflation has officially fallen below the ECB’s target range of acceptable price levels (the ECB’s official inflation rate target is slightly less than 2.0%). This single-handedly presents an overwhelming opportunity for the ECB to make another all-out attempt at a 75-100bp cut. Whether or not this seems reasonable, the ECB is still largely hesitant to make another drastic move as per a series of hawkish comments made by ECB President Jean-Claude Trichet. Among other reports, the services component of the PMI does not seem to be under the same amount of pressure as manufacturing. PMI Services showed positive surprises in the entire EZ region, except for France. Although the much anticipated rate decision is still more than a week away, we are still looking at this week’s data as a telling indication of the extent of an almost definite rate cut. Tomorrow, we will receive the German Unemployment Rate and Wholesale Price Index, along with the EZ Producer Price Index. Again, the inflationary reports will be a part of the key metrics behind next week’s decision.
GBP/USD: BoE IS EXPECTED TO BRING INTEREST RATES DOWN TO HISTORIC LOWS
The pound will likely take center-stage for the remainder of the week because the BoE is the first major central bank to make the rate decision this month. This makes today’s economic reports of key sensitivity to a rate cut prediction. The much expected 50bp rate cut would see rates at their lowest level in the central bank’s three hundred year history. A day of mixed data has shown Services PMI at 40.2, coming slightly off of its all-time low level. However, Nationwide Consumer Confidence fell to a new five-year low at 47, while House prices fell a staggering 15.9% to a more than 15-year low. Despite the harsh criticism inflicted by struggling economic data, the pound is off to a strong winning streak this year, particularly against the euro. The story of EUR/GBP has been one of the most impressive rallies last year, but the fundamental story has changed. Originally, the main factor behind the rally was the apparent hesitation of the ECB to lower rates, while the BoE was making cuts of monumental sizes. The story has changed in that many speculate that the aggressive UK monetary action may start to stabilize the economy this year. However, many are expecting that a deteriorating European economy will force the ECB to take some new drastic steps. The pound has since reaped the benefits, running on a two-day consecutive rally, seeing gains total as much as 500 pips. From here, the main event risk for the rest of the week for pound traders will be dependent on the BoE decision. There are no relevant data expected until the decision has been made.
USD/CAD: DEFLATION REARS ITS UGLY HEAD
Commodity currencies maintain their resounding strength. However, the carry trades are seeing much more progressed rallies than USD pairs. This is particularly due to the weak yen as opposed to any fundamental surprises from the high-yielders. Crude oil was pressing higher this morning once again, only to succumb to a pause in an otherwise strong rally. Gold turns around after earlier losses to finish the day higher by 1.0%. Once again, the economic situation in Canada is losing some of its appeal. For one, Raw Materials and Industrial Product prices both saw a new record decline. The deflationary virus seems to be taking its first steps throughout the globe. Concerns for the inability to acquire financing are being addressed today by Finance Minister Jim Flaherty. Although the Canadian situation does not seem as dire as that from the UK, US, and Japan, it is still being addressed by a task force to secure that lending does not become any more restricted. AUD/USD price action is reaching highs not seen since the middle of October. Continued market moving events will rest on the shoulders of tonight’s New Zealand Trade Balance and tomorrow’s Australian Retail Sales.
USD/JPY: THE FALLING YEN IS MUSIC TO THE BoJ’s EARS
The weakness of the yen continues for another day, tallying a sixth straight day advance in USD/JPY. This development is like music to the BoJ’s ears. The falling yen has single-handedly boosted morale among stock and bond traders alike. As we have all come to learn, the export-dependent country is severely disabled when the currency strengthens, producing reduced international demand. The destruction in international economies in addition to the flight to the safe haven for the yen has served as a double edged sword for the Japanese economy. Of course, before we can call an end to their struggles, it seems fitting to require more long-term stabilized yen depreciation. As of now, we can make no assumption that these rallies will continue to reverse the negative course of the last year. As a result of these developments, the Nikkei 225 is experiencing its longest winning streak for about a year and a half; the index is up more than thirty-five points in today’s trading. With the scarcity of Japanese data, it is possible that this rally will continue until the round of rate decisions offer a market moving stimulus.
EUR/USD: Currency in Play for Next 24 Hours
The currency in play for the upcoming 24 hours will be EUR/USD. This is due to German’s Employment Change which is set to be released at 8:55 GMT or 3:55 AM EST and Euro zone’s PPI which scheduled to be released around 10:00 GMT or 5:00 AM EST.
Since the beginning of the year EUR/USD experienced a drastic sell-off which has eradicated most of the gains established in the latter half of 2008. As a result the pair pierced through the first standard deviation of the Bollinger Bands, yet the pair retraced and is currently within the Trade Range Zone. Support is placed at 1.3320, which proved to be efficient as it was a low for this day. Further, the level is a 38.2% retracement of September high and October low of last year. Resistance is originating at 1.3800 which is a 20-day SMA. With volatility remaining above average there is a strong probability that either of the levels could be tested.
Published on Tue, Jan 6 2009, 22:56 GMT
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Volatility Returns To The Currency Markets
Mon, Jan 5 2009, 22:12 GMT
by Kathy Lien
Volatility Returns To The Currency Markets
The resonance of the New Year is starting to show its true colors at the start of the first full trading-week this year. The Dow finished a volatile day lower, in some ways ruining the sense of stability that pervaded in last week’s market. Volatility in equity prices was complemented by some extreme moves in the fx markets. Looking at today’s biggest percentage movers we can see the sheer magnitude of price action today, with some moves extending to more than 3.0%. The dollar in particular was heavily mixed across the board. We have seen some substantial gains against the euro and yen, in conjunction with weakness against the pound and commodity currencies. Today’s trading was a truly unorganized and unpredictable force.
A Bipartisan Effort for Economic Relief
Originally, a moniker that can be associated with 2008, among others, is the year of the fiscal stimulus plans. However, it does not appear to be an isolated occurrence. In fact, talks from the Euro-zone, UK, and US present a new high of speculation. As of this point, the potential for an Obama Stimulus plan has been a majoring lifting factor for the dollar and risk appetite. Today, even though equity declines are unfazed, we learned of some of the more telling details behind the $775B package. As the Obama administration is planning, $300B which will be set aside for various tax-cuts for business and low to middle class workers. The main goal here is to have an immediate and lasting impact on the economy. The inclusion of a massive tax break seems a necessary component of the plan to ensure bipartisan support. However, inevitably, there are elements that Republicans are in disagreement. It is important to note that the tax-break does not include cuts in capital gains or the corporate marginal tax rate. Furthermore, Republicans are eagerly awaiting the income level at which these benefits will be capped.
The components of President-elect Barack Obama’s tax plan can be divided into two parts. The first and largest initiative will be an overall reduction in payroll taxes for low to middle income workers. The second half of the plan will be reserved for struggling business. Among other factors, the main focus is to provide business with tax-related incentives that will produce increased business investment, a larger effort to hire new workers, as well as a postponement of planned layoffs. Businesses will also be allowed the privilege to write-off large amounts of 2008 related losses.
Some Unexpected Results
Today can be summed up as economic data that is undeniably terrible, but consistently better than market forecasts. Among today’s example is Construction Spending that was not nearly bad as expected, declining 0.6% versus a consensus of -1.4%. It was shown that spending on commercial and government construction was enough to partially offset the usual declines in the residential housing market. However, it is important to note that the figure was still weaker on a month-over-month basis. The other similar story of the day was that General Motors showed December sales were actually up from a month earlier, apparently as the result from its government loans. However, overall yearly sales have reached a level not seen since the middle of the twentieth century. Sales for Chrysler on the other hand were down more than 50% for December alone.
Only time shall tell if these economic surprises continue. The first test for this revised sense of optimism is in tomorrow’s Pending Home Sales, Non-Manufacturing ISM, and the FOMC Meeting Minutes. Of the most relevant information will be the minutes. However, we can no longer sort through it hoping for some intentional hints for continued rate cuts. That possibility is currently off the table. The more predictive value will come from possibilities regarding Quantitative Easing policies that the Fed is expected to pursue in their continued monetary measures.
EUR/USD: STIMULUS PLAN SPECULATION ERUPTS IN EUROPE
In the intensified round of new fiscal stimulus speculation, Germany is yet another trying desperately to induce political cooperation. There have been talks of a new €50B German package, its second attempt during the financial crisis, which will involve mostly infrastructure investment and reduced Social Security contributions. However, the intensifying political deliberations will most likely stall the plan, and inherently limit its effectiveness. Among primary quarrels, the issue of taxation has taken center stage. As a temporary agreement, the German government has modestly increased the tax free allowance. In another round of sensitive economic information, we learned that Sentix Investor Confidence is off at least a temporary low. The measure increases for the first time in seven months, rising from -42.3 to -34.4. Even though sentiment is still dwindling, as per the recession warrants, it is a reassuring figure that shows some immediate satisfaction from the ECB’s 75bp rate cut last month. Other figures are not as promising. Italy, the Euro-zone’s third largest economy, is facing a deflationary assault with prices dropping to fourteen month lows. It is likely that this development will resonate to other EZ countries, forcing the ECB to respond with rate cuts of equal or more aggressive pressure. As a further gage of ECB actions, Germany’s PMI Services and EZ CPI Estimate will be released tomorrow. If Italy’s inflation serves as a predicting force, it is expected that ECB measures will be confined to a dovish stance in limiting the potential for deflation.
GBP/USD: BoE CONTINUES ATTEMPTS TO REIGNITE LENDING
The BoE’s rate decision is quickly approaching, and will be officially released on January 8th. It is no longer the large rate cuts or dovish rhetoric that will make news, rather the potential for Fed-like measures. Expectations are calling for an array of possibilities, all of which aimed at making financial institutions more willing to take the risk of lending once again. A much speculated measure may call for an enlarged Special Liquidity Scheme, which would allow banks to temporarily swap their high-quality asset-backed securities in return for UK Treasury Bills. This liquidity injecting plan will be able to relieve some strains off of the balance sheets of the banking industry. Hopefully, as the BoE is expected to cut an additional 50bp, they will be able to transfer their historically low target rate to the borrowers who are unable to finance their activities. As a result, the pound is a broad winner against even the euro, of which is finally coming off a record-setting string of successive record highs. An enhanced sense of the overwhelming obligation for the BoE to continue cutting rates is that PMI Construction fell by the fastest rate in about ten-years. Tomorrow, the UK is scheduled to announce PMI Services, Nationwide House Prices, and Official Reserves. It is unlikely that the momentum behind a rate cut Thursday will be altered by any unexpected strength in these indicators.
USD/CAD: CRUDE OIL PUSHES FOR SUBSTANTIAL CAD RALLIES
The Canadian dollar makes some impressive advances against the dollar and yen. The rally in crude oil is particularly boosting the pair, as it approaches a three week high. Oil is pushing higher on heightening Middle-eastern conflicts along with the potential for additional OPEC production cuts, such geopolitical factors may spell the end for historically cheap gas prices. USD/CAD is down more than 150 pips and CAD/JPY is up more than 200 pips. Gold on the other hand is losing strength, off more than 3.0% on the day. The oil story is still enough to improve risk appetite to foster impressive commodity currency rallies. The aussie and kiwi are also up on the day. However, fundamental data is sparse for all commodity currencies. The only relevant data ready to be released is tomorrow’s New Zealand Trade Balance. Aside from this, any market moving information will rely completely on altering investor confidence and sentiment.
USD/JPY: THE YEN WEAKENS ONCE AGAIN ON IMPROVED RISK APPETITE
USD/JPY is off to another strong rally, even as US equities are struggling. The return of some levels of risk tolerance seems most apparent in the strong rallies imposed by yen crosses. Once again, in the face of a sheer lack of Japanese data, the yen is weakening substantially, to the delight of the Bank of Japan. This may be one of the reasons why the bank has been quiet as of late. The anticipated measures of quantitative easing have been temporarily postponed as a result. However, the factors affecting the economy will not be offset by a few weeks of yen weakness. As another boost to morale, the Nikkei index is reaching its highest levels since mid-November. The US indices are apparently not the only ones to respond favorably to the onset of a new year, as most Asian indices are currently on a winning streak. Aside from the Monetary Base being released this evening, there will be no significant data on the schedule for tomorrow.
GBP/USD: Currency in Play for Next 24 Hours
GBP/USD will be the currency in play over the next 24 hours on some key UK data that is poised to influence the sizeable rate cut expected on Thursday. First, the UK will be reporting Nationwide House Prices at 2:00 am ET or 7:00 GMT. Scheduled for later in the day are PMI services and Official Reserves, both expected at 4:30 am ET or 9:30 GMT. On the US side, we will see Pending Home Sales and on-Manufacturing ISM at 10:00 am ET or 15:00 GMT, and the FOMC Meeting Minutes at 2:00 pm ET or 19:00 GMT.
Trading in GBP/USD continues to isolate itself within a significant consolidation range, resulting in a Bollinger band range trading zone. A significant catalyst will be needed to remove the pair from the confines of this pattern. The most immediate support is low at 1.4350. However, more significantly is the 1.4000 level, both a low extending back to 2001 and a psychological level. To the upside, the pair faces 1.5535 which coincides fairly accurately with two previous highs and a low from October. Once again, this consolidation phase that has been tested for the last two months is unlikely to face any pressure until the BoE decision coming up later this week. A break of 1.4000 could result in another continuous downward spiral.
Published on Mon, Jan 5 2009, 22:12 GMT
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An Unfounded Rally To Start the New Year
Sun, Jan 4 2009, 22:13 GMT
by Kathy Lien
An Unfounded Rally To Start the New Year
Today’s trading comes across as mostly a denial of facts. Perhaps it is the jubilation that comes with the start of a New Year, or the low volume at the end of a holiday week, but today’s numbers certainly cast a concerning picture on an already weakened economy. Price action in the dollar is also equally perplexing, as the currency posts broad gains in today’s market. However, we warn that the facts in the marketplace will inevitably catch up with those who are once again convinced that the economy has hit the bottom.
ISM is A Record Breaking Figure
There is no doubt that today’s ISM report was a truly record breaking event, unfortunately not in the direction the markets wanted. Included in today’s feats is a drop recorded as the most severe in 28 years, a manufacturing slowdown that has reached its lowest level since 1980, new orders are at a record low, and prices fell to levels not seen since 1949. The slowdown in manufacturing has clearly been evidenced by this report; however the spirit of the holidays is unfazed. The rationale is that many expect that once president-elect Barack Obama takes office, he will enact a very sizeable fiscal stimulus package that will be extended toward job creation and the development of infrastructure. It seems that the worse the economy gets, the greater the probability such policies will be implemented, so theoretically many feel relief is within the not too distant future. We have already seen evidence of such possibilities in the continued cash injections into General Motors.
A Big Week Lies Ahead
Trading for the past few days has been spurred on little economic data as we were in the midst’s of the holiday season. Now that it is back to business as usual, there will definitely be a multitude of reports that will iron out the true trend of equities and currencies. By Tuesday, we will have the FOMC Meeting Minutes, and then Wednesday we expect the ADP Employment change. However, one of the most important events to start the year will be the Non-Farm Payrolls report. After losing more than a half-million jobs last year, it is possible that we see a surprise bounce in payroll numbers. However, as we have noted previously, it is the usual recessionary trend to see an unexpectedly large fall in jobs followed by a decent rebound. Once the rebound occurs a more incessant period of job losses extends throughout the recessionary period. We have so far embarked on only a third of this pattern.
EUR/USD: THE NEW YEAR BRINGS NEW FEAR
Unfortunately, the New Year does not hold any relief for struggling European manufacturers. The EZ Purchasing Managers index plummets to a record low since the survey began in 1998, falling to 33.9 from 34.5. The report notes severe dislocations in exports, staffing, and price levels. German and French PMI was similarly weak, while Italian PMI had some surprising strength. The seventh consecutive month of manufacturing contraction makes things difficult for the ECB once again. The decision, which is still two weeks away, will truly test the willingness of the ECB to respond to growth-related concerns. Trichet, for one, has widely expressed his opinion that rate cuts will come to a halt, giving time for the 75bp cut of last meeting to circulate through the economy. Unfortunately, the severity of the situation may result in additional rate cut of a smaller amount. EUR/USD weakens substantially as a result, posting a loss of about 150 pips on the day. The probabilities for a potential rate cut will definitely be affected by news to come. Monday will present German Retail Sales and Sentix Investor Confidence, Tuesday has German Services PMI and EZ CPI, Wednesday will have PPI and German Unemployment, and for Thursday there is GDP and German Trade Balance, and Retail Sales for Friday. The never-ending list of news and releases will more easily confirm the bias of policy makers.
GBP/USD: THE INEXISTENCE OF CREDIT MAKES RATE CUTS UNRELIABLE
GBP/USD falls substantially in today’s trading, shedding more than 250 pips. The UK is by no means unscathed from the seemingly limitless amounts of crippling economic news. First, we learned that Mortgage Approvals fell to another historical low. Perhaps not surprisingly, lending institutions have announced their continued reluctance to accepting new loans will become more stringent into the New Year. Clearly if the BoE cannot alter the ease at which individuals can obtain credit, their rate cuts will have a largely distant effect on any economic improvement. In addition, as a direct result of the sheer inexistence of credit, home prices, tracked by the HBOS House Price report, fell by the most since the records inception nearly 25 years ago. Prices fell by an additional 16.2% this month, but were surprisingly better than the consensus of a fall of 16.6%. Adding a particular level of irony to today’s numbers, UK manufacturing PMI was better than expectations, coming in at 34.9. However a level under 50 still shows extreme contraction. Once again, the Monetary Meeting season is fast approaching, with the BoE starting the frenzy early next Thursday. It is largely expected that because of the continued tension in the credit market, the BoE will continue their sizable rate cuts. Since the BoE leads similar decisions by the Fed and ECB, we will receive some insight into the level of urgency that the central banks will exhibit. Among this major event risk for next week, there will be Consumer Confidence on Wednesday and PPI on Friday.
USD/CAD: CRUDE STAGES STRONG RALLY LIFTING THE CANADIAN DOLLAR
The Canadian dollar is a big mover against the dollar in today’s trading, largely as the result of some big moves in energy prices. After hitting a low on December 23rd, crude prices have since rebounded with force, and are rallying more than 3.25% in today’s trading. Canadian data will be sparse until next Thursday with the release of the Ivey PMI, with the Employment change to follow on Friday. Strength is not limited to the Loonie as all commodity currencies are up today in response to an unexpected revival of risk tolerance. Unfortunately, the reasoning behind this is largely unfounded in the fundamentals, and is more probably the result of the psychological effects of an entrance into a new, and hopefully promising, year. Australia released their RBA Commodity index which failed to reach expectations. Otherwise the most important data is in store for next week, including Wage Agreements for Sunday and Retail Sales for Wednesday. The same goes for the kiwi, which will report the Trade Balance on Tuesday.
USD/JPY: VOLATILTIY LEVELS EASE SUBSTANTIALLY
The yen is a broad loser today, falling as of the result of some renewed levels of risk appetite. USD/JPY has reached a significant high today, reaching levels not seen since mid-November. Although the accomplishment seems insignificant, it might be one of the first signs of stability. This premonition is further emphasized as volatility (as measured by the VIX index) has fallen to levels not seen since the beginning of October. The commodity crosses, including AUD/JPY, NZD/JPY, and CAD/JPY, are all higher in today’s trading. The relative quietness in Japanese reports has allowed these rallies to continue without any interference. After last week’s big blowout of many economic reports, the Japanese schedule is understandable empty for most of next week. The only exceptions worth noting are the Monetary Base on Monday and the Leading Index on Friday. We can surmise that the only genuine market moving events for next week would be a surprising announcement of some new policy initiatives the BoJ will implement in the coming months.
EUR/USD: Currency in Play for Next 24 Hours
The currency in play for the upcoming Monday will be EUR/USD. On Monday the Euro zone is set to release German retail sales at 2:00AM EST or 7:00GMT. Further along in the day, United States is set to release Construction Spending at 10:00AM EST or 15:00GMT.
After depreciating for 3 consecutive days, the pair is currently in the range trading zone which is derived through our Bollinger Bands. The pair is on the verge of breaking a triangle formation which formed throughout the month of December. Current support is placed at 1.3750 which is a 38.2% retracement of July high and October low. Further, the support is close to the 20-day EMA. The resistance is placed at 1.4190 which is a first standard deviation of the Bollinger Bands as well as 50% retracement from July high and October low.
Published on Sun, Jan 4 2009, 22:13 GMT
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2009 Currency Market Outlook
Thu, Jan 1 2009, 23:41 GMT
by Kathy Lien
2009 Currency Market Outlook
How Did the Dollar Trade in 2008? It has been an exceptionally active year in the foreign exchange market as currency volatilities hit record highs. In the first half of the year, everyone was worried about how much further the dollar would fall but in the second half of the year the concern became how much further the dollar would rise. After hitting a record low against the Euro in the second quarter, in the beginning of the fourth quarter, the US dollar actually surged to a 2 year high. From trough to peak, the dollar index rose more than 23 percent in 2008.
3 Themes for 2009 The US economy and the dollar’s fate in the years ahead could be determined by what happens in 2009. We are focusing on 3 big themes that will impact the US dollar and each of these themes encompasses a lot.
1. Will there be a U or L Shaped Recovery? The US is in recession and the slowdown is expected to deepen in 2009. Before a recovery is even possible, the economy has to work through more weakness and negative surprises. Non-farm payrolls declined by 533k in November, sending the unemployment rate to a 15 year high of 6.7 percent. With many US corporations forced to tighten their belts, the unemployment rate could rise as high as 8 percent in 2009. We expect this to happen because over the past 50 years on average, recessions have boosted the unemployment rate by 2.8 percent. When the current recession started in December, the unemployment rate was 5.0 percent. If you tack on 2.8 percent to that level that would put the unemployment rate at least 7.8 percent.
Non-farm payrolls could double dip, just as it has in past recessions. In this case, we would expect a rebound followed by another sharp loss that rivals November’s job cuts. A rise in unemployment spreads into incomes, spending and then usually leads to more layoffs. We need to see this toxic cycle end before we can see a recovery. Consumer spending has already been very weak and the trade deficit is widening as the dollar strengthens. As the 2 primary inputs into GDP, we expect fourth quarter growth to be very weak. The strength of the US dollar in Q3 and for most of Q4 will also take a big bite out of corporate earnings, leading to disappointments for the stock market. This is why we expect more weakness in the US dollar and the US economy in the first quarter of 2009. However towards the middle of the second quarter, we may begin to see the US economy stabilize as it starts to reap the benefits of Quantitative Easing and President Barack Obama’s fiscal stimulus plan. New Administrations usually hit the ground running and as such we fully expect the rest of the TARP funds to be tapped shortly after his inauguration. The shape of the US recovery will have a big impact on the price action of the US dollar but there is no question that the path to a stronger dollar will be through a weaker one.
The following chart illustrates how non-farm payrolls double-dipped during the 2001 recession.
Although we expect the US economy to start its slow recovery in the second half of 2009, GDP growth next year will still be negative. Retail sales and non-farm payrolls will be particularly ugly in the first quarter, but we are optimistic that monetary policy and fiscal stimulus will begin to help the economy. The record decline in mortgage rates should also help to stabilize the housing market in 2009. Something between a L and U shaped recovery is likely.
2. What Matters More to the Dollar - Safety or Yield? The dollar’s rally in the second half of 2008 has been largely driven by risk aversion, deleveraging and repatriation. In other words, despite the next to nothing yield offered by dollar denominated investments, a flight safety into US dollars and government bonds has kept the greenback from collapsing against other currencies like the British pound, Canadian and Australian dollars. The concern for safety was so high that investors were willing to take negative yields just to park their money with the US government. A bubble is brewing in the Treasury market and any improvement in risk appetite will take the market’s focus away from safety and back to return on money at which time ultra low interest rates could become a detriment for the US dollar. The dollar’s performance against other currencies would be contingent upon growth in the rest of the world. For example, if the UK economy is in the process of recovering, demand for yield and the prospect of return could send the GBP/USD higher, but if there is a prolonged recession in the Eurozone, then the Euro may no longer be the flavor of the month.
3. Compression in Interest Rates and Volatility: Volatility in the currency market also hit a record high in 2008 but in 2009 we expect the volatility to compress as interest rates around the world converge. Much of the volatility this past year has been spurred by speculation about how much various central banks would cut interest rates. As they run out of room to ease, we may stop seeing monetary policy surprises which can eventually lead to stabilization for carry trades. Don’t expect this to happen in the first quarter however as many central banks are still expected to cut interest rates. The Fed’s rate cuts have long been a big driver of market volatility and now that risk is off the table. When the monetary and fiscal stimulus start to impact the US economy, the market may actually start talking about a rate hike in the US. Interest rates cannot remain at zero forever, especially if inflation starts creeping higher in the second half of the year.
Is there a Risk of Deflation?
Deflation is much more of a problem for the US economy than inflation. Since oil prices are more than 75 percent off their highs. As a result, we have seen either flat or negative consumer price growth every month between August and November. The December numbers have yet to be release, but there is no reason to expect CPI to turn positive. Since the beginning of the year annualized consumer price growth has fallen from 2.1 to 1.1 percent. The US economy has not officially hit deflationary conditions, but with commodity prices continuing to fall and consumer demand slumping, deflation will become a greater risk than inflation in the first half of 2009. However this may change in the second half as Quantitative Easing, fiscal stimulus and hopefully a weaker currency boosts inflation.
Time for Quantitative Easing
US interest rates have fallen 400bp from 4.25 percent to 0.25 percent in 2008. For most people, interest rates at 0.25 percent are as unattractive as zero interest rates. With US rates pretty much at zero, the Federal Reserve has informally adopted its own version of Quantitative Easing. Some people may even argue that the Fed has been pursuing this strategy for months now. In conjunction with the Treasury department, the Fed has doubled their balance sheet in the past 3 months to more than $2 trillion. They have done this by purchasing direct equity investments in banks, easing standards on commercial paper purchases, made efforts to relieve institutions of their toxic asset-backed securities and are now considering buying Treasury bonds and agency debt. By buying these assets, they are adding money into the financial system. Like the Yen, Quantitative Easing exposes the US dollar to significant downside risks because the Federal Reserve is basically printing money and using that money to flood the market with liquidity, eroding the value of the dollar in the process. However it is a step that the central bank needs to take to stabilize the US economy and to prevent a deflationary spiral. The central bank will not be worried about a weak currency and will in fact welcome one because they know that a weaker currency is like an interest rate cut in many ways because it helps to support and stimulate the economy.
Technical Outlook for the Dollar Index
As indicated in the following chart, the US dollar rallied significantly in the second half of the year. Between June and November, the dollar index rose more than 25 percent. However the rally hit a brick wall in the month of December, when it plunged 12 percent. Since then it has recovered modestly, but it is hovering below stiff resistance. Not only is there the 38.2 percent Fibonacci retracement above current levels, but that also coincides with the 100-day Simple Moving Average. If the dollar index breaks above 81.70, there is scope for a much sharper gain, but the combination of a head and shoulders pattern in formation, Fibonacci and Moving Average resistance suggests that the odds are skewed towards more losses than gains in the beginning of 2009.
Euro 2009 Forecast
How Did the Euro Trade in 2008?
Exactly one year ago, the Euro was trading at approximately 1.47 against the US dollar, 5 percent higher than current levels. In 2008, this type of move is considered mild especially when compared to the Euro’s 20 percent rally against the British pound and New Zealand dollar and 27 percent decline against the Japanese Yen. However the mild year over year change in the EUR/USD masks a tremendous amount of volatility during the year. In the first half of 2008, the EUR/USD soared to a record high above 1.60. After that, it fell 22 percent to a 2 year low but recovered more than half of those losses in the month of December.
Eurozone’s to Underperform in 2009, Expect a Prolonged Recession
It is no secret that 2009 will be a tough year for many countries, but things will be particularly difficult in the Eurozone. Every major central bank has cut interest aggressively, driving their currencies significantly lower in 2008. The ECB on the other hand has been reluctant to follow suit, leaving the Euro only marginally lower for the year. Although the Eurozone is in a recession, growth has not been nearly as weak as the US. Annualized GDP growth in the Eurozone during the third quarter was +0.6 percent, compared to -0.5 percent in the US. The Eurozone’s outperformance in 2008 however could be short-lived as the central bank forecasts a 1 percent contraction in growth next year. As an export dependent region, the strength of the Euro will make a recovery difficult. German companies have already scaled back production as global demand eases. Looking ahead, unemployment is expected to rise, slowing consumer spending and forcing the ECB to continue to cut interest rates. If German unemployment hits 9 percent, we could easily see Eurozone rates hit 1 percent.
ECB Could Become One of the Most Aggressive Central Banks in 2009
Next to the Bank of Japan, the ECB has been the least aggressive central bank in 2008, having cut interest rates by only 150bp to 2.5 percent (counting the 25bp rate hike, their total easing is 175bp YTD). Compared to the 400bp rate cut from the Federal Reserve and the 350bp rate cut from the Bank of England, the ECB’s nimble move singlehandedly prevented the Euro from collapsing alongside the British pound, New Zealand and Australian dollars. However in face of slowing growth, it will be difficult for the ECB to hold onto their conservative monetary policy stance – they are expected to cut interest rates by 100bp in 2009. The ECB was behind the curve in 2008 and the biggest risk for the Euro in 2009 is whether the central bank’s sluggish policies catch up to them. In December, the EUR/USD soared on speculation that the ECB may refrain from cutting interest rates in January. At a time when everyone who still has room to cut interest rates are cutting them, a pause by the ECB could spur a EUR/USD rally above 1.45. However, with that in mind the ECB first hinted about pausing when the EUR/USD was trading at 1.25. The 13 percent rally in the currency pair since then increases the chance of a rate cut because a stronger currency hurts the economy. But a pause does not mean an end to the easing cycle. Beyond January, we still believe that significantly slower growth will force the ECB to cut interest rates by another 100bp. More importantly, the ECB will be cutting interest rates at a time when the Federal Reserve and the Bank of England are done easing. If the Eurozone underperforms the US economy in the second half of the year and the ECB is still cutting interest rates, a prolonged recession and prolonged easing could lead to a major reversal in the EUR/USD in 2009. Only if the economy proves to be resilient or if another major shock hits the US economy can we see a new high in the Euro.
Inflation Could Remain above ECB’s Target in 2009
One of the primary reasons why the ECB has been reluctant to ease rates aggressively in 2008 is inflation. The central bank has a 2 percent inflation target and consumer prices remained above the target throughout the year. In fact, the ECB became so alarmed in July when annualized CPI soared to a high of 4 percent that they raised interest rates by 25bp. Although the fall in oil prices has driven inflation lower by the largest amount in 20 years, CPI is still expected to remain above the ECB’s target in 2009.
Be Careful of a Run on the Dollar
Another major risk next year is a run on the US dollar. The global slowdown has forced many central banks around the world to become internally focused. This means that any excess money will be spent on spurring growth domestically instead of funding the US deficit. With next to zero yield, a deteriorating balance sheet and the risk of a weaker dollar eroding the notional value of any US investments, there are almost no reasons for foreign investors to load up on US debt. Having been burned badly by investments in Fannie and Freddie Mac, sovereign wealth funds like China have become skeptical of buying more US paper. According to an editorial in the state owned newspaper, China Daily, "China's increased purchase of U.S. Treasury securities should not be interpreted as an endorsement of the assumption that the U.S. can borrow its way out of the current financial crisis." If dollar demand continues to wane, it is another factor that could drive the dollar lower in the first half of 2009.
Political Risk
There will be 2 elections in Europe in next year– the election for the new Chancellor of Germany and elections for European Parliament. In Germany, Chancellor Angela Merkel is expected to take on her foreign minister Frank Walter Steinmeier. With an economy in turmoil, it is difficult to tell who will win but if it is another close election like one in 2005, we could see the Euro come under selling pressure. When both Merkel and Schroeder declared a victory in September 2005, the EUR/USD plunged as political uncertainty hit the currency. The European Parliament elections in June will be the largest transnational democratic election in history with over 700 members set to be voted in by 515 million EU citizens. For the currency market, the only implication is the possibility of legislative activity coming to a standstill in the spring as the European Parliament prepares for the election.
Technical Outlook for the EUR/USD
It is probably not a coincidence that the rally in the EUR/USD in December stopped right at the 50-week Simple Moving Average, which is hovering above the 61.8 percent Fibonacci retracement of the 1.60 to 1.23 bear wave. According to our Bollinger Bands, the EUR/USD is now within the Range Trading Zone. As long as it holds above 1.3760, the 38.2% Fibonacci support level, we could see a rally back towards 1.42. However, a break of 1.4685 is needed for the currency pair to have any chance of retesting its record highs. On the downside, a break of 1.30 would resurrect the downtrend.
British Pound 2009 Forecast
How Did the British Pound Trade in 2008?
The British pound was one of the worst performing currencies in 2008. It fell to a 6 year low against the US dollar and record low against the Euro in addition to selling off against every other G10 currency. The overwhelming weakness in the currency is a direct reflection of the impact that the credit crisis had on the UK economy. In the month of December, many currencies recovered against the US dollar, but unfortunately the British pound was not one of them. Although the pound could continue to weaken in the first quarter, the government’s aggressive fiscal and monetary stimulus should help the country recover towards the end of 2009.
Official Recession in 2009
Without two consecutive quarters of negative GDP growth, the UK economy is not technically in a recession but that should change in the first quarter of 2009, when the 2008 Q4 GDP numbers are released. Growth has been slowing materially and the weakness is reflected in the British pound. GDP growth fell by 0.6 percent in the third quarter, the largest decline in 18 years. The housing market and the financial sector have been the engine of growth in UK for the past few years and both blew up in 2008. Unfortunately the worst is probably not over for the 2 key components of the UK economy, particularly following the Bernie Madoff’s Ponzi scheme. In addition to losses suffered from the subprime mortgage crisis, many large hedge funds and European banks invested with Madoff’s. In 2009, they will be forced to write down those losses and deal with what could be pretty severe consequences for the financial sector as a whole. With the financial and housing market sectors expected to remain weak in the first half of 2009 and layoffs predicted to rise, GDP growth could fall as much as 2 percent next year. Although we believe that the country could be one of the first to recovery from the global economic downturn, this will not before more pain is felt in the UK economy. The severity of the UK recession will be largely dependent upon how quickly the credit markets are restored in 2009.
Inflation to Fall Back to 2%
Even though falling oil prices has driven inflation lower in the UK, the annualized pace of consumer price growth is still well above the central bank’s 2 percent target and even higher than their 3 percent upper limit. The latest data is for the month of October and according to that report, consumer prices rose 4.1 percent yoy. Despite the high level of inflation, the central bank has pretty much abandoned the inflation target and shifted their focus back to growth because they believe that the slowdown in the economy will naturally drive inflation lower. They believe inflation could fall back to 2 percent as early as the first quarter.
More Rate Cuts in First Half of 2009
Next to the Federal Reserve, the Bank of England has been the most aggressive central bank in 2008, having cut interest rates by 350bp to 2 percent, the lowest level in 57 years. Despite the massive interest rate cuts, tax cuts and other fiscal stimulus, the Bank of England remains committed to doing all that it takes to prevent a recession from sparking deflation. Central Bank Governor King believes that the economy will contract in 2009 and given his pledge UK interest rates could fall by another 100bp in the first half of the year. Although zero interest rates are not expected in the UK, interest rates will fall below 2 percent and until the Bank of England is done easing, the British pound may remain weak.
EUR/GBP at Parity
The sell-off of the British pound in the first few months of the year could drive EUR/GBP to parity. If that happens, it would be the first time ever that one Euro would be worth more than one British pound. This could not come at a better time than 2009, when the Euro celebrates its 10-year anniversary. In this past decade, the currency has risen from ashes to become more valuable than the 2 primary reserve currencies in the world. Although many Britons may be alarmed at the weakness of their exchange rate, the Bank of England will probably not step in to stop it from falling. Instead, the BoE will revel in the stimulative effects of a weak currency. There are already reports of Europeans from the Eurozone flocking to the UK for their holidays. The weakness of the British pound against both the US dollar and the Euro are key ingredients for an economic recovery.
Keep an Eye Out for a Recovery
Although the UK economy still faces many risks in 2009, there is hope. Consumer spending has been pretty resilient with November retail sales rising for the first time in 3 months. If the global economy begins to recover, we expect the UK economy to outperform its peers thanks to the Bank of England’s proactiveness. The currency has sold off significantly, providing additional stimulus for the battered economy. Even if there is no full-blown recovery, the UK economy is much further long in their slowdown than the Eurozone. Therefore if we see sharply weaker growth in the Eurozone economy in 2009, expectations for more aggressive ECB interest rate cuts may be all that the British pound needs to recover against the Euro. As for the US dollar, the recovery could come sooner if the quantitative easing forces the greenback lower. When the UK economy begins to recover, so will its currency.
Technical Outlook for the GBP/USD
The British pound experienced a drastic sell-off throughout the year as the price tumbled to a level not seen since 2002. The pair lost roughly 5000 pips as the BOE reduced the interest rates far more aggressively than other central banks. Currently, the pair is well below the 200-week and 50-week SMA reflecting in the change of the trend from an upward to a downward bias. Nevertheless, the pair seems to be oversold for the time being, needing a major retracement if it will continue to depreciate further. The pair still remains in the sell zone that is established using the Bollinger Bands, and until the price closes above the 1st Standard Deviation we could experience a further downtrend. Although the pair is destined to retrace at some point during the following year, the price still remains within reach of breaking further establishing a prolonged downward trend. Near term resistance is at 1.5723, the December high. The currency pair could hold above 1.45, but if it breaks that level, the next meaningful support is not until 1.40, which served support from 2000 to 2001.
Japanese Yen 2009 Forecast
How Did the Japanese Yen Trade in 2008?
The global economic turmoil and the subsequent unwinding of carry trades made the Japanese Yen, the best performing currency of 2008. The Yen rose more than 35 percent against the British pound, Australian and New Zealand dollars and hit a 13-year high against the US dollar. Unlike some of the other currencies, which may have seen wild swings throughout 2008, the Yen consistently strength throughout the year. Unfortunately the remarkable rally in the Yen will also be a big reason why Japan could underperform, its peers next year.
Japan Could be the Worst Performing Country in 2009
Of all the countries in the developed world, Japan will probably have the toughest time in 2009 because of the strength of its currency. As an export dependent nation, Japan typically runs a trade surplus but this year we have seen the country report trade deficits, which is extremely rare. Toyota, the world’s largest carmaker is the highest profile casualty of Yen strength. The automaker reported their first lost in 70 years as sales plummeted and the Yen soared. The toxic combination of a weak economy and a 16 percent rise in the yen against the US dollar has been disastrous for the automaker. Although Toyota is probably the most high profile, they are certainly not the only major Japanese corporation to be hit by the double whammy of a slowing global economy and a strong currency. Business sentiment across the country has already fallen to a 7 year low as exports decline by a record amount. Unless the Yen’s strength is suddenly reversed, we expect Japanese corporations to report more losses in the months to come. As of the third quarter of 2008, Japan is in a recession with growth shrinking by an annualized pace of 1.8 percent. Next year, GDP growth is expected to fall by 2.5 to 4 percent as weak domestic and international demand hits the economy. However it is important for currency traders to realize that the Japanese Yen does not always trade off economic fundamentals. The outlook for Japan has been bleak for months now, yet the currency is rallying because risk appetite has been the dominant driver of the currency’s price action. If the market is very nervous about the global economy, the Yen could still rise even if Japan’s economy continues to deteriorate.
Inflation: Consumer Prices Could Turn Negative in 2009
Like the rest of the world, inflation is slowing in Japan, but consumer prices still remain in positive territory. Nationwide, the latest data we have is from the month of November. During that month, annualized CPI growth slowed from 1.7 to 1.0 percent. However the combination of a strong currency and the continual decline in commodity prices could drive consumer prices into negative territory next year. A strong currency moderates inflationary pressures while a weak currency boosts it.
No More Room to Cut Interest Rates
With interest rates already at 0.5 percent in January 2008, we were surprised to see two obscurely sized rate cuts by the Bank of Japan that took interest rates down to 0.1 percent, within a whisker of zero. Although the BoJ Governor denies it, the rate cuts combined with plans to buy commercial paper and increase purchases of government debt essentially returns the country to quantitative easing. The only reason why the BoJ did not take interest rates to zero is because they do not want kill the repo market or give the public the perception that they have run out of ammunition. Looking ahead, we have probably seen the last of BoJ rate cuts and the central bank will need to rely on fiscal policy and a further expansion of the balance sheet to stabilize the economy.
Will Carry Trades Recover?
Between 2001 and 2006, one of the most lucrative strategies in the currency market was carry trades. However anyone long carry in 2008 was burned badly - GBP/JPY for example fell 41 percent to a 13 year low while NZD/JPY fell 39 percent to a 7 year low. Record volatility, massive deleveraging and global interest rate cuts created a toxic combination for carry trades. In order for carry trades to recover, central banks need to stop cutting interest rates, volatility needs to decline significantly and the global economy needs to recover enough for investors to be willing to start taking on risk. This could happen in 2009 but not until the second half of the year at the earliest.
Risk of BoJ Intervention
In the face of a deepening recession, a strong currency and little room to move on interest rates, everyone is wondering whether the Bank of Japan will physically intervene to weaken its currency. The problem is that the only type of intervention that has ever really worked is coordinated intervention and the BoJ will have a very tough time convincing the Americans and Europeans to take any steps that would strengthen their currencies. Since the problem is not unique Japan and stems from the West, the Japanese needs to stand aside and allow the US and Eurozone governments to work on spurring their own growth. If they weaken their currency and strengthen the dollar for their own short-term relief, it could actually be counterproductive. However with that in mind, as the economy worsens and the central bank runs out of options, intervention risk will grow.
Technical Outlook for USD/JPY
As you can see from the weekly chart of USD/JPY, the sell-off in the currency pair has been severe. Currently, the price is well below the 200-week and 50-week SMA and at the level not experienced since 1995. This puts USD/JPY in the Bollinger Band sell zone and even though a retracement could imminent, it could be an opportunity to sell rallies than buy on dips. The closest level of support is at the 161.8% Fibonacci extension of a low established in late 2007 and the high for the 2008 at 86.50. Resistance is at 94, the 10 week SMA.
Canadian Dollar 2009 Forecast
How Did the Canadian Dollar Trade in 2008?
It is almost hard to believe that a little more than 1 year ago, one Canadian dollar was worth more than one US dollar. The USD/CAD exchange fell to a record low of 90 cents in November 2007, prompting the Canadian edition of Time Magazine to name the Loonie the Newsmaker of the Year. However since then, it has fallen hard. In 2008, the Canadian dollar dropped to a 2 year low against the US dollar, a 9 year low against the Euro and an 8 year low against the Japanese Yen. However CAD weakness was not universal. Currencies that also lost value against the Loonie include the British pound, New Zealand and Australian dollars. Looking ahead, the odds are still skewed towards further losses for the Canadian dollar.
Canada: Recession Only Beginning
The recession in Canada is only beginning. According to Statistics Canada, the Canadian economy slipped into recession in the beginning of the fourth quarter. Contrast that with the US, which has been in a recession since December 2007. It is not a surprise to see Canada trail behind the US because up until this summer, soaring oil prices kept part of the economy well supported. However, a lot has changed since the Summer of ’08 and now Canada is faced with the double blow of slowing US growth and significantly lower oil prices. In the third quarter, Canadian GDP rose 1.3 percent, but more recent data for October indicates that growth contracted by 0.1 percent, on slowing shipments of cars and lumber to the US. We are only beginning to see the weakness manifested in consumer spending and the labor market. In the month of October, retail sales contracted by 0.9 percent, the largest drop in 8 months and for the same period employment fell by the largest amount in 26 years. Still, the Canadian economy is not expected to contract as much some of its international counterparts. Finance Minister Flaherty predicts that GDP will shrink by 0.4 percent next year, which is nominal compared to a 1 percent decline expected for the US and the 2.5 to 4 percent decline expected in Japan.
Slowdown in the East and West
The Canadian economy is heavily dependent upon energy production and manufacturing. In the past, the slowdown in one sector could be masked by a boom in the other. This was case for most of 2007 and the first half of 2008. Soaring oil prices helped the 3 energy rich western provinces of Canada (British Columbia, Alberta, and Saskatchewan) carry the economy. However in the second half of 2008, oil prices came crashing down, falling more than 75 percent in a matter of months. This dealt a strong blow to the Western Part of Canada at a time when the central and eastern parts of the country were already floundering. The automobile industry has been hit hard by the credit crisis and unfortunately for Canada, the auto sector is their largest manufacturing industry. Ontario, houses plants for major American and Japanese automakers and they have been dragged down by their US counterparts. The automobile industry is in such bad shape that Prime Minister Harper announced a CAD3.3 billion rescue plan for the US automakers in Ontario. Seventy percent of Canada’s trade is with the US so as long as the US economy continues to slow and oil prices remain below $45 a barrel, the Canadian dollar will have a tough time recovering.
Core Inflation is Actually Accelerating
Interestingly enough, Canada is one of the few countries to report higher inflation. In the month of November, core prices rose 0.7 percent, pushing the annualized pace of growth from 1.7 to 2.4 percent. Headline prices, which includes the impact of oil eased, but not by nearly as much as the market had expected. The annualized growth of headline CPI is still above 2 percent. The weakness of the Canadian dollar contributed to a sharp rise in food prices, which increased 7.4 percent yoy that month, the fastest pace of growth in 22 years. From the beginning of October to the end of November, the Canadian dollar fell more than 20 percent against the US dollar. Currency impacts can have a lagged effect on prices which may be a reason why we are only seeing the impact now. Stronger inflationary pressures will make it more difficult for the Bank of Canada to cut interest rates aggressively.
Bank of Canada Will Continue to Cut Interest Rates, But Not to US Levels
Since the beginning of 2008, the Bank of Canada has cut interest rates by 275bp to 1.5 percent, the lowest level since 1958. Even though they have been fairly aggressive, more interest rate cuts will be needed to deal with what could be one of the worst years ever for the Canadian economy. The Canadian government has already pledged more monetary and fiscal stimulus therefore it should just be a matter of time before the BoC takes interest rates below 1 percent. Although the idea of zero interest rates have been floated around, the weakness of the currency should continue to keep inflation around the central bank’s 2 percent target and for that reason we do not expect them to take rates down to US levels. The Canadian economy is only beginning to slow and the prospect of more interest rate cuts will make the Canadian dollar vulnerable in the beginning of 2009.
Things to Watch Out For: Foreign Investment, Current Account Deficit and Political Risk
If falling oil prices and slower US growth aren’t enough of a burden on the Canadian economy, falling bond yields have made Canadian investments increasingly unattractive. Over the past few years, soaring oil prices added to the allure of Canadian dollar investments, but now that 2 year bond yields are less than 50bp and oil prices are no longer supporting the economy, we could see foreign investment dwindle. This in combination with lower weaker exports should lead to Canada’s first current account deficit in 10 years. Prime Minister Harper has received a lot of criticism in 2008 and there is a strong chance that more political infighting could force his minority government could to fall. Harper has already suspended Parliament until the end of January in order to avoid a no-confidence vote. In the currency market, political risk can add downward pressure to the currency. Although most arguments favor more weakness in the Canadian dollar next year, it would only take a recovery in the US economy or a sudden rally in oil prices to turn things around.
Technical Outlook for USD/CAD
After breaking parity for the first time ever late last year, USD/CAD experienced a rally throughout 2008. Despite numerous tests, the pair failed to break the 1.3000 level and instead formed what could be a triple top. This triggered a reversal in the currency pair that took it back below 1.20. USD/CAD is still trading well above the 50-week and 200-week SMA which means that the uptrend may still be intact. The price retraced 23.6% from a low established in 2007 and a high of 2008 and may be forming a cup-and-handle pattern. A break back above the first standard deviation Bollinger Band at 1.25 will be needed to officially reinstate the uptrend in the currency pair. If it fails to break that level and instead falls below 1.20, then we could see a move to 1.15, which is the Fibonacci support of the same move that was mentioned earlier. 
Australian Dollar 2009 Forecast
How Did the Australian Dollar Trade in 2008?
Back in July 2008, everyone was talking about how the Australian dollar could reach parity with the US dollar. At the time, the currency pair was trading at 0.9845 a 20 year high. However what rises quickly can also fall quickly because when commodity prices peaked in July the Australian dollar came crashing down. The currency fell close to 40 percent against the US dollar to a 5 year low before finding support above 60 cents. The move was even more dramatic against the Japanese Yen. AUD/JPY traded as high as 104 this year before it dropped close to 50 percent to a record low. Despite the dramatic moves, the Australian dollar’s weakness was not universal. Since the beginning of the year, the currency actually strengthened marginally against the British pound and New Zealand dollars. Looking ahead, the sharp weakness of the Aussie dollar could help the country recover in 2009.
Will Australia Avoid Recession?Weak Australian Dollar Will Lead to Upward Revisions for Corporate Earnings
The global economy is slowing but there is a decent chance that we could see Australian corporations report an improvement in earnings. Since the beginning of the year, the Australian dollar has fallen 25 percent against the US dollar, 35 percent against the Chinese Yuan and 50 percent against the Japanese Yen. These currency fluctuations are particularly important because Japan, China and the US are the largest export destinations for Australia. Since a weaker currency reduces the costs for exports, leading Australian companies like Qantas, Billabong and Fosters have revised up their earnings on the expectation that a weak currency will boost foreign demand for their products. Stronger earnings will help to pull the country out of any recession and hopefully engineer the second half recovery that many economists are looking for.
Slowdown in China Will Hurt Inflation to Ease, But Not By Much
The latest consumer prices for Australia are from the third quarter and in Q3, the annualized pace of consume price growth accelerated to 5 percent, the fastest since 2001. According to the monthly TD Inflation index, price pressures have eased significantly since then. However with that in mind, the RBA still expects inflation in the 12 months through June to be at 2.5 percent, which is well within the Reserve Bank’s 2 to 3 percent inflation target.
Dramatic Rate Cuts to Come to an End
The Reserve Bank of Australia has been extremely aggressive in 2008, cutting 300bp in just 4 months. The last rate cut they made was in December when they slashed interest rates by a full percent. According to the RBA, monetary policy is now “expansionary” which suggests that they are almost done with cutting interest rates. The central bank has been extremely proactive and their efforts will be vital in helping to restore the Australian economy. Like many of their international counterparts, Australia has combined monetary with fiscal stimulus. At most, we expect another 100bp of easing from the RBA next year. This will probably be in the first half of the year, which is when the economy could fall into recession. After that, watch out for a quick recovery for Australia in the second half of the year.
Technical Outlook for the AUD/USD
Although many countries across the globe have fallen into recessions, Australia has avoided one. The economy has expanded every quarter since 2000 albeit at an increasingly sluggish pace. In the third quarter of 2008, growth was a paltry 0.1 percent, the weakest in 8 years. There is a decent chance that growth in the fourth quarter was negative and if so it would put Australia at risk of falling into a recession for the first time in 17 years. It may be difficult for Australia to avoid a recession, but any recession in the country should be shallow. Consumer spending has been neutral to positive every month this year thanks to a steady labor market as the unemployment rate has only ticked up marginally from 4.1 to 4.4 percent. Domestic demand and Chinese demand has made the Australian economy much better equipped to deal with the global slowdown than its peers. Many economists are looking for 2009 GDP growth to be in excess of 1 percent. Although this would be the weakest growth since the recession in the 1990s, we are certain that Australians are grateful that their economy is growing at all. The only significant risk for Australia is a major slowdown in China. China has been the engine of global growth for the past 10 years and unfortunately for world and Australia in particular, that engine has begun to slow. For the past few years, China has enjoyed double digit growth rates and in 2008, growth is expected to fall to 9.8 percent and in 2009, growth is expected to fall below 7 percent. China has not been immune to the global financial and credit crisis and even though the government has deep pockets, the prospect of more weakness in the real estate market and the pain of sharp losses in the stock market could lead to a further slowdown in consumer spending. Until the global recession is over, many people China could become more conservative with their spending which will undoubtedly have a negative impact on the Australian economy.
In the first half of 2008, the Australian dollar soared within a whisker of parity with the US dollar. However as the prices of commodities plunged, so did the AUD/USD. Having hit a 5 year low of 0.60 in October, the currency pair has been quietly consolidating. It December, it rose out of the Bollinger Band sell zone. Prices are also in the process of breaking the 23.6 percent Fibonacci retracement of the 0.9850-0.60 sell-off. The next level of resistance is at 0.7200, the 20 week SMA and the October / December high. The turn in AUD/USD remains intact as long as the currency pair remains above 65 cents.
New Zealand Dollar 2009 Forecast
How Did the New Zealand Dollar Trade in 2008?
In 2008, the New Zealand dollar lost value against every single major currency except for the British pound. Although the most pronounced weakness for the currency was against the Japanese Yen, the kiwi also fell to a 5 year low against the US dollar and a 7 year low against the Australian dollar. The collapse of the carry trade weighed heavily on all of the major currencies but the New Zealand dollar was one of the first to peak in 2008 and the downtrend that ensued lasted for most of the year. The early weakness in the currency stemmed from the fact New Zealand was one of the first countries to fall into recession. However looking ahead, the strong sell-off in the New Zealand dollar will also be the key ingredient to stabilizing the economy in 2009.
Will the Recession Come to an End in 2009?
New Zealand is a tiny country that is particularly sensitive to the ebbs and tides of the global economy. In 2008, growth contracted every quarter as the recession deepened. New Zealand has been hit hard by rising credit costs, slowing exports and a drought that crimped production. In the third quarter, GDP growth contracted by 0.4 percent and growth is likely to have fallen in the fourth quarter as well. The recession has forced companies to cut production and fire workers, driving the unemployment rate to a 5 year high in Q3. This triggered a sharp contraction in consumer spending - retail sales fell 1.3 percent in the month of October, the largest decline since 2004. The jury is still out on whether the recession in New Zealand will come to an end in 2009. Central Bank Governor Bollard is optimistic – he thinks the recession may already be over and believes fourth quarter growth could be positive. However economists beg to differ – they expect GDP growth be negative in 2009. We think that any further contraction in the New Zealand economy will be concentrated in the first half of the year. The Reserve Bank has cut interest rates significantly, increased spending and lowered the income tax rate. Combined with the weakness of the currency, this stimulus will contribute to a second half recovery.
Inflation to Ease but Off Very High Levels
Like Australia, the latest consumer prices are from the third quarter and in Q3, the annualized pace of consumer price growth accelerated 5.1 percent, the largest increase in 18 years. The weakness of the New Zealand dollar has played a large role in contributing to higher inflation pressures. Therefore even though inflation will ease in 2009, it may not ease much because the New Zealand dollar is still weak and inflation is coming off of very elevated levels. With that in mind, the Reserve Bank of New Zealand may not care about the elevated level of inflation, as they remain committed to using monetary policy to stimulate the economy.
Dramatic Rate Cuts to Come to an End
The Reserve Bank of New Zealand has also been very aggressive with easing monetary policy this year, having cut interest rates by 325bp since July. The last rate cut of 150bp was the largest ever for the Reserve Bank. Such aggressive measures would lead one to believe that the RBNZ is looking to draw an end to their easing cycle as soon as possible. This is true but not before interest rates is cut by another 100 to 150bp. After the last rate cut in December, Bollard said that he believes rate cuts will come to an end in the middle of next year. When the RBNZ signals that they are done cutting interest rates, we could see a sharp recovery in the New Zealand dollar as the fiscal and monetary stimulus hits the economy. The drought that hung over the country in the first half of the year is finally over, offering some additional relief for New Zealand’s agriculture, dairy and beef industries.
New Zealand Needs Australia to Recovery
In 2009, New Zealand dollar traders also need to keep an eye on Australia, the country’s largest trading partner. If New Zealand wants to have any chance of recovering, we need to see the Australian economy stabilize first. Demand has not been increasing, while the weakness of the New Zealand dollar has been boosting the cost of exports. The end result is a widening current account deficit. For any country, a wider current account deficit is bearish for the currency. Therefore if the Australian economy stabilizes and exports increase, then the deficit may narrow, helping to reverse the downtrend in the New Zealand dollar. Thankfully this turn of events may actually happen in 2009 as the downturn in Australia is expected to be shallow.
Technical Outlook for the NZD/USD
The downtrend in the NZD/USD has lasted for most of the year. According to the following chart, the currency pair remained within our Bollinger Band sell zone from June to the end of November. However the trend began to change in December, after the currency hit a 5 year low against the US dollar. It is now trading out of the Bollinger Band sell zone which suggests that a turn may be in place. The closest level of resistance for the currency pair is 0.6085, which is December high and the 20-week Simple Moving Average. If it manages to clear that level, we could see a move up to 0.6345, the 38.2 percent Fibonacci retracement of this year’s entire sell-off. On the flip side, if the NZD/USD breaks the first standard deviation Bollinger Band on the downside at 0.55, we could see a resumption of the year long downtrend. 
Swiss Franc 2009 Forecast
How Did the Swiss Franc Trade in 2008?
2008 was the revenge of the low yielders. The Swiss Franc and the Japanese Yen were the best performing currencies of the year, followed by the US dollar, which only became the second lowest yielding currency in March. The fact that the Japanese Yen was the only currency to appreciate against the Swiss Franc indicates how much of an impact interest rates had on the currency’s performance. When the markets were nervous and economic climate is as uncertain as it was last year, investors rush out of high yielding currencies, which typically have more risk into lower yielding ones, which typically have less risk. This helps to explain the Franc’s 25 percent appreciation against the British pound, New Zealand and Australian dollars. Looking ahead, we could see more gains in the Swiss Franc, but that will be largely dependent upon the market’s risk appetite.
Recession Expected in 2009
Like Australia, the global recession has yet to hit Switzerland, but in 2009, it may be difficult for the country to avoid one. GDP growth in the third quarter was flat and it may be only a matter of time before we start seeing a contraction. The annualized pace of GDP growth has already fallen materially from more than 3 percent in Q1 to 1.6 percent in the Q3. Although Switzerland has proven to be more economically resilient than its Eurozone counterparts, they are not immune to the global economic crisis. The country is heavily dependent upon its financial services industry or foreign investment and unfortunately the sector has been hit hard by the credit crisis. UBS, Switzerland’s largest bank has already report billions in write-downs and is planning to split its investment banking and wealth management businesses. After cutting interest rates in December, Swiss National Bank President Roth predicted that 2009 will be a year of recession. They expect GDP to growth to contract between 0.5 to 1 percent in 2009. The UBS Consumption hit a 3.5 year low in the month of November while the KoF leading indicators report fell to a 5 year low in December. This confirms that more weakness is ahead for the retail sector and the economy as a whole. However with that in mind, like the Japanese Yen, the Franc does not always move on Swiss fundamentals. Instead, it usually moves on the market’s risk appetite.
Inflation: Big Nose Dive Expected to Continue
Inflation is declining rapidly in Switzerland. The latest consumer price figures were for the month of November and based upon the report, inflation dropped the most in 15 years. On a monthly basis, CPI declined by 0.7 percent. This dragged the annualized pace of CPI growth down from 2.6 to 1.5 percent. Although the franc rose against the Euro for most of the year, its early sell off against the US dollar limited the impact of foreign exchange fluctuation on price pressures. Falling oil prices therefore drove inflation lower. Price pressures are expected to slow further in the 2009. The Swiss government expects inflation to average 0.7 percent next year which is next to nothing. Softer inflation pressures increases the central bank’s flexibility to leave monetary policy easy.
Zero Interest Rates for Switzerland?
The Swiss National Bank has been full of surprises this year. They delivered a series of intermeeting rate cuts that took interest rates to the lowest level in 4 years. Over the course of 2 months the SNB cut interest rates by 225bp to 0.5 percent and even though interest rates are very low, after their December rate cut, the SNB suggested that they are open to taking interest rates to zero. The slowdown in the global economy has taken a big toll on Swiss economy and if economic conditions worsen, the central bank is ready to take further action if needed. With interest rates at ultra low levels, the Swiss central bank may need to start thinking about unconventional options like Quantitative Easing. Of course they would not be alone because it is a road that the Federal Reserve and the Bank of Japan have already taken. There is also talk of currency intervention, but we do not think that it is likely. The SNB has been very proactive this year and they will continue to do all that they can to support the economy in 2009. However as the third lowest yielding currency developed, as long there is uncertainty in the financial markets and the global recession deepens in the first few months of year, the Swiss Franc may still appreciate despite the dismal outlook for the economy.
Technical Outlook for EUR/CHF
It has been a rollercoaster ride for EUR/CHF this year. After retracing 61.8 percent of the October 2007 to October 2008 sell-off, the currency pair reversed violently. It is now trading back within our Bollinger Band sell zone and as a result the downtrend has resumed. As long as the currency pair holds below 1.51, the 50 percent Fibonacci retracement of the latest rally, we could see a further move back towards 1.4725, the October low. If the currency pair breaks above 1.50, which is a psychological and Fibonacci resistance level, the downtrend will be broken.
Published on Thu, Jan 1 2009, 23:41 GMT
1
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Economic Data Hits Record Low
Wed, Dec 31 2008, 00:12 GMT
by Kathy Lien
Economic Data Hits Record Low
The US dollar sold off modestly today on stronger European economic data and weaker US data. The dollar’s weakness was seen against every major currency except for the Canadian dollar which followed oil prices lower. Trading remains extremely quiet in the foreign exchange market and any moves that we have seen thus far are still nominal. The only currency pair that is really moving is the EUR/USD, but thin liquidity could be exacerbating the pair’s trading ranges.
Consumer Confidence and House Prices Hit Record Lows
Despite an improvement in the University of Michigan consumer confidence report, the Conference Board’s survey indicates that consumer sentiment fell to a record low in the month of December. The inconsistency between the 2 reports is not surprising since the only thing that consumers can be happy about is the fall in gasoline prices. Other than that, job security is a big concern. Close to 2 million Americans have lost their jobs and those fortunate enough to retain their jobs are looking at smaller bonuses and salary cuts. If people are worried about having job, they will spend less. This is one of the first years that forgoing holiday gifts for adults have become a norm. Depending on who you ask, lower gas prices may not be enough to warrant an improvement in consumer confidence. House prices also dropped to a record low in October according to the CaseShiller report. Earlier this month, the existing and new home sales data for November reported a similar decline in prices. In this sluggish real estate market, discounting has been only way to drive sales.
Speculators are Not in the Markets
The thin liquidity and lack of participants in the foreign exchange market is further confirmed by the latest report of non-commercial or speculative positioning from the CFTC. Positioning is close to zero for many of the major currencies, indicating that going into the year end, there is no significant skew to the long or short side. For most people, 2008 has been a worst year in the financial markets that they can remember. Banks that been around for 100 years have disappeared and major losses have been reported across the board. Protecting capital became the biggest priority of the year and therefore it is not surprising to see such a significant squaring up of positions at the end of the year. The $50B Bernie Madoff Ponzi scheme only adds salt to the wound by forcing hedge funds that may have been profitable up until then to raise cash. Tomorrow is New Years Eve which means that trading should grind to a halt by noontime in NY.
EUR: RETAIL PMI EDGES LOWER, CONSUMER PRICES RISE
The Euro is back above 1.40 thanks to an improvement in retail PMI and a rise in consumer prices. However before getting too excited, both reports still contain underlying weakness. Retail PMI for example has remained in contractionary territory for the seventh consecutive month. This means that retail sales is actually falling, albeit at a slower pace. Also the rebound in the month of December comes off of 5 year lows and is likely tied to holiday spending. Overall, consumer demand is still weak and we may have just seen a seasonal blip. German consumer prices rose 0.3 percent in December, but the annualized pace of CPI growth fell from 1.4 to 1.1 percent. Still, the European Central Bank has not decided whether to cut interest rates in January. As recently as 2 weeks ago, ECB President Trichet hinted that a rate cut at the next meeting is not a done deal and that is the primary reason the Euro is outperforming the US dollar.
GBP: INCHING TOWARDS PARITY WITH THE EURO
The British pound is virtually unchanged against the US dollar but continues to weaken against the Euro. There is a decent chance that we could see the exchange rate of EUR/GBP rise to 1.0 in the near future. If that happens, it would be the first time ever that one Euro would be worth more than one British pound. This could not come at a better time than 2009, when the Euro celebrates its 10-year anniversary. In the past decade, the currency has risen from ashes to become more valuable than the 2 primary reserve currencies in the world. Although many Britons may be alarmed at the weakness of their exchange rate, the Bank of England will not step in and do anything about it. In fact, the BoE will revel in the stimulative effects of a weak currency. There are already reports of Europeans from the Eurozone flocking to the UK for their holidays. The weakness of the British pound against both the US dollar and the Euro are key ingredients for an economic recovery in the UK.
CAD: CANADIAN ECONOMY TO SLOW FURTHER IN 2009
The Australian and New Zealand dollars edged higher against the greenback but the Canadian dollar continued to slip. There have been no major economic data from any of the 3 commodity producing countries but oil and gold prices are slightly lower. The reason why the Canadian dollar has underperformed the other 2 currencies is because of the comparatively dire outlook for the Canadian economy. As long as the US economy continues to slow and oil prices remain below $45 a barrel, the Canadian dollar will have a tough time rallying. The recession in Canada is only beginning. According to Statistics Canada, the Canadian economy slipped into recession in the beginning of the fourth quarter. Contrast that with the US, which has been in a recession since December 2007. It is not a surprise to see Canada trail behind the US because up until the summer, soaring oil prices kept part of the economy well supported. However, a lot has changed since the Summer of ’08 and now Canada is faced with the double blow of slowing US growth and significantly lower oil prices. In the third quarter, Canadian GDP actually rose 1.3 percent, but more recent data for October indicates that growth contracted by 0.1 percent, on slowing shipments to the US of cars and lumber. We are only beginning to see the weakness manifested in consumer spending and the labor market. In the month of October, retail sales contracted by 0.9 percent, the largest drop in 8 months and for the same period employment fell by the largest amount in 26 years. Still, the Canadian economy is not expected to contract as much some of its international counterparts. Finance Minister Flaherty predicts that GDP will shrink by 0.4 percent next year, which is nominal compared to a 1 percent decline expected for the US and the 2.5 to 4 percent decline expected in Japan.
JPY: CAN CARRY TRADES RECOVER IN 2009?
Between 2001 and 2006, one of the most lucrative strategies in the currency market was carry trades. However anyone long carry in 2008 was burned badly - GBP/JPY for example fell 40 percent to a 13 year low while NZD/JPY fell 39 percent to a 7 year low. Record volatility in the currency market, massive deleveraging and global interest rate cuts created a toxic combination for carry trades. In order for carry trades to recover, central banks need to stop cutting interest rates, volatility needs to decline significantly and the global economy needs to recover enough for investors to be willing to start taking on risk. This could happen in 2009 but probably not until the second half of the year.
USD/JPY: Currency in Play for Next 24 Hours
The currency in play for the upcoming 24 hours is USD/JPY. With a New Year around the corner, there is a lack of economic data to be released. Nevertheless, U.S. will release Initial Jobless Claims for December around 8:30AM EST or 13:30GMT. After a major sell-off the pair rebounded, currently lingering in the range trading zone which was derived by our Bollinger Bands. Currently resistance is placed at 91.00, the level that the pair failed to break for five consecutive days. There is no wonder why the level remains to be tested, 20 day SMA is hovering right above the price. Furthermore, the resistance is a 23.6% Fibonacci retracement of the swing high for October and the low establish in December. Further, the price presents a swing bottom which was established in late October. As for the support, the current level to be tested is placed at the 1st Standard Deviation of the Bollinger Bands around 89.50. It is also important to note that the pair constructed an inside day while trying to test the 91.00, generally signaling a reverse in trend.
Published on Wed, Dec 31 2008, 00:12 GMT
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US Dollar: Run on The Dollar?
Mon, Dec 29 2008, 23:06 GMT
by Kathy Lien
Run on The Dollar?
With no US economic data on the calendar today, the dollar weakened against every major currency except for the British pound. Trading continues to be very thin with commodities being the only products that are really moving. The tensions in the Middle East have driven oil and gold prices higher. US stocks also gave back Friday’s gains and remained contained within its weeklong trading range.
Housing, Manufacturing and Consumer Confidence
Hopefully trading will get a little bit more interesting on Tuesday, when we have the CaseShiller house price index, Chicago PMI report and consumer confidence number due for release. Weaker economic is not a given. Although house prices are expected to continue to fall as homeowners and builders offer discounts to drive sales, we could see an improvement in the Chicago PMI report and consumer confidence. Manufacturing conditions in the Philadelphia region rebounded this month, which suggests the potential for a similar improvement in Chicago. Lower gasoline prices have also helped consumer confidence recover according to the University of Michigan’s report last week - the Conference Board’s report should reflect a similar shift in sentiment.
2009 Risk: Run on the Dollar
One of the biggest risks facing the US dollar in 2009 is a run on the currency. The global slowdown has forced many central banks around the world to become internally focused. This means that any money that they have will be spent on spurring growth domestically instead of funding US spending. With next to zero yield, a deteriorating balance sheet and the risk of a weaker dollar eroding the notional value of any US investments, there are almost no reasons for foreign investors to load up on US debt. Having been burned badly by investments in Fannie and Freddie Mac, sovereign wealth funds like China have become skeptical of buying more US paper. According to an editorial in the state owned newspaper, China Daily, "China's increased purchase of U.S. Treasury securities should not be interpreted as an endorsement of the assumption that the U.S. can borrow its way out of the current financial crisis." If dollar demand continues to wane, we have yet another reason to expect the dollar to weaken in the first half of next years.
Quiet and thin trading conditions in the foreign exchange market can occasionally lead to wild swings. This happened in the EUR/USD today, as the currency pair fluctuated within a 400 pip trading range. At the European open, the EUR/USD raced to a high of 1.4363 on stronger economic data and EUR/GBP buying. Consumer prices out of Saxony rose 0.3 percent in the month of December, raising the concern the concern that we may see a countrywide uptick in inflationary pressures. The annualized pace of growth still slowed, but higher prices were also reported for vacation packages, food, clothing and non-alcoholic beverages. France is one of the few countries within the Eurozone to not fall into a recession in 2008. Growth in France was unrevised at 0.1 percent in the third quarter. However the gains in the EUR/USD were short-lived as the currency pair spent the rest of the European and US trading sessions giving back all of its gains to end the day lower. Retail PMI numbers are due for release tomorrow from Germany, France and the Eurozone as a whole. Weaker consumer confidence and deterioration in the labor market suggests soft consumer spending in the month of December.
BRITISH POUND SELL-OFF CONTINUES
The British pound has been one of the worst performing currencies this year, having depreciated against every single G10 currency. The most significant weakest was against the Japanese Yen with GBP/JPY falling 68 percent year to date. Not a day goes by without growing concerns about the UK economy. Housing market withdrawal in the third quarter was greater than the market expected, reflecting the strain on UK households. The UK Telegraph also reports that banks could face up to GBP70B in losses on commercial property loans. More problems in the financial sector will mean more problems for the country as a whole. There are no major UK economic releases until Friday. Between now and then, we could see continued weakness in the British pound. The currency hit a new record low of 0.98 against the Euro today.
RALLY IN OIL DRIVES CAD HIGHER
A rebound in commodity prices has driven the Canadian, Australian and New Zealand dollars higher. There are no major economic releases from the 3 commodity producing countries this week, which leaves the currencies vulnerable to US dollar and commodity market fluctuations. The violence in Gaza and worries about threats to crude supplies has pushed oil prices up 5.89 percent, within a whisker of $40 a barrel. Despite the recovery in the Canadian dollar, the double blow of lower oil prices and weaker demand for automobiles will weigh on Canada’s economy throughout 2009. More rate cuts are expected from the Bank of Canada as well more fiscal stimulus from the Canadian government. Australia and New Zealand are also expected to continue to cut interest rates, but they are not as sensitive to US growth as Canada and therefore are expected to recover before the US’ northern neighbor.
The weakness of US equities has driven the Japanese Yen higher against the Euro, British pound and US dollar. Like many countries around the world, no Japanese economic data was released today. Japan has been hit hard by a strong currency and weaker global growth. While the British pound has sold off against every major G10 currency, the Japanese Yen has strengthened against all of the same currencies. In fact, since the beginning of the year, the Yen has appreciated more than 20 percent against 8 out of the 10 G10 currencies. The strength of the Yen is the main reason why Japan reported a trade deficit this year and Toyota, Japan’s largest car company reported its first loss in 70 years. Companies across Japan are forced to think of more creative ways to survive which is why 3 Japanese non-life insurance companies are considering a merger. Despite the bleak outlook for growth, Japan has denied any need for additional fiscal stimulus. They first want to see how the monetary and fiscal stimulus doled out so far impacts the economy and only then will they consider further stimulus.
EUR/USD: Currency in Play for Next 24 Hours
The currency in play for the next 24 hours will be the EUR/USD. The Euro zone is scheduled to release Retail Purchasing Index at 9:00 GMT or 4:00AM EST. While the United States will release Consumer Confidence numbers at 15:00 GMT or 10:00AM EST. After appreciating for the first half of the day, EUR/USD experienced a drastic reversal to end the day with an inverted doji/hammer formation. This has taken the currency out of the Buy Zone, which we determine using Bollinger Bands and into the Range Trading zone. The EUR/USD has also broken the 10 day SMA, leaving the next level of support at 1.3800, the 38.2% Fibonacci of the October to December rally. Resistance is at 1.4150, the 23.6% Fibo level. An increase in the volatility which was experienced by the pair throughout last couple of month could easily lead the price to break any of the aforementioned levels.
Published on Mon, Dec 29 2008, 23:06 GMT
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US Dollar 2009 Forecast
Sun, Dec 28 2008, 23:14 GMT
by Kathy Lien
US Dollar 2009 Forecast
2008 Price Action: It has been an exceptionally active year in the foreign exchange market as currency volatilities hit record highs. In the first half of the year, everyone was worried about how much further the dollar would fall but in the second half of the year the concern became how much further the dollar would rise. More specifically, after hitting a record low against the Euro in the second quarter, the US dollar surged to a 2 year high against the currency in the beginning of the fourth quarter. From trough to peak, the dollar index rose more than 23 percent in 2008.
3 Themes for 2009: The US economy and the dollar’s fate in the years ahead could be determined by what happens in 2009. We are focusing on 3 big themes that will impact the US dollar and each of these themes encompasses a lot.
1. U or L Shaped Recovery: The US is in recession and the slowdown is expected to deepen in 2009. Before a recovery is even possible, the economy has to work through more weakness and negative surprises. Non-farm payrolls declined by 533k in November, sending the unemployment rate to a 15 year high of 6.7 percent. With many US corporations forced to tighten their belts, the unemployment rate could rise as high as 8 percent. We expect this to happen because over the past 50 years on average, recessions have boosted the unemployment rate by 2.8 percent. When the current recession started in December, the unemployment rate was 5.0 percent. If you tack on 2.8 percent, that would drive the unemployment rate to at least 7.8 percent.
Therefore non-farm payrolls could double dip, just as it has in past recessions. In this case, we would expect a rebound followed by another sharp loss that rivals November’s job cuts. A rise in unemployment spreads into incomes, spending and then usually leads to more layoffs. We need to see this toxic cycle end before we can see a recovery. Consumer spending has already been very weak and the trade deficit is widening as the dollar strengthens. As the 2 primary inputs into GDP, we expect fourth quarter growth to be very weak. The strength of the US dollar in Q3 and for most of Q4 will also take a big bite out of corporate earnings, leading to disappointments for the stock market. This is why we expect more weakness in the US dollar and the US economy in the first quarter of 2009. However towards the middle of the second quarter, we may begin to see the US economy stabilize as it starts to reap the benefits of Quantitative Easing and President Barack Obama’s fiscal stimulus plan. New Administrations usually hit the ground running and as such we fully expect the rest of the TARP funds to be tapped shortly after his inauguration. The shape of the US recovery will have a big impact on the price action of the US dollar and the path to a stronger dollar will be through a weaker one.
The following chart illustrates the double-dip trend of non-farm payrolls during the 2001 recession.
2. Safety vs. Yield: The dollar’s rally in the second half of 2008 has been largely driven by risk aversion, deleveraging and repatriation. In other words, despite the next to nothing yield offered by dollar denominated investments, a flight safety into US dollars and government bonds has kept the US dollar from collapsing against currencies like the British pound, Canadian and Australian dollars. The concern for safety was so high that investors were willing to take negative yields just to park their money with the US government. A bubble is brewing in the Treasury market and any improvement in risk appetite will take the market’s focus away from safety and back to return on money at which time ultra low interest rates could become a detriment for the US dollar. The dollar’s performance against other currencies would be contingent upon growth in the rest of the world. For example, if the UK economy is in the process of recovering, demand for yield and the prospect of return could send the GBP/USD higher, but if the recession in the Eurozone deepens, then the Euro may no longer be the flavor of the month.
3. Compression in Interest Rates and Volatility: Volatility in the currency market hit a record high in 2008 but in 2009 we expect the volatility to compress as interest rates around the world converge. Much of the volatility this past year has been spurred by speculation about how much various central banks would cut interest rates. As they run out of room to ease, we may stop seeing monetary policy surprises which can eventually lead to stabilization for carry trades. Don’t expect this to happen in the first quarter however as many central banks are still expected to cut interest rates. The Fed’s rate cuts have long been a big driver of market volatility and now that risk is off the table. When the monetary and fiscal stimulus start to impact the US economy, the market may actually start talking about a rate hike in the US. Interest rates cannot remain at zero forever, especially if inflation starts creeping higher in the second half of the year.
Growth: Although we expect the US economy to start its slow recovery in the second half of 2009, GDP growth next year will still be negative. Retail sales and non-farm payrolls will be particularly ugly in the first quarter, but we are optimistic that monetary policy and fiscal stimulus will begin to help the economy. The record decline in mortgage rates should also help to stabilize the housing market in 2009. Something between a L and U shaped recovery is likely.
Inflation: Deflation is much more of a problem for the US economy than inflation. Oil prices are more than 75 percent off their highs. As a result, we have seen either flat or negative consumer price growth every month between August and November. The December numbers have yet to be release, but there is no reason to expect CPI to be positive. Since the beginning of the year annualized consumer price growth has fallen from 2.1 percent to 1.1 percent. The US economy has not officially hit deflation, but with commodity prices continuing to fall and consumer demand slumping, deflation will become a greater risk than inflation in the first half of 2009. However this may change in the second half as Quantitative Easing, fiscal stimulus and hopefully a weaker currency boosts inflation.
Monetary Policy: US interest rates have fallen 400bp from 4.25 percent to 0.25 percent in 2008. For most people, interest rates at 0.25 percent are as unattractive as zero interest rates. With US rates pretty much at zero, the Federal Reserve has informally adopted its own version of Quantitative Easing. Some people may even argue that the Fed has been pursuing this strategy for months now. In conjunction with the Treasury department, the Fed has doubled their balance sheet in the past 3 months to more than $2 trillion. They have done this by purchasing direct equity investments in banks, easing standards on commercial paper purchases, made efforts to relieve institutions of their toxic asset-backed securities and are now considering buying Treasury bonds and agency debt. By buying these assets, they are adding money into the financial system. Like the Yen, Quantitative Easing exposes the US dollar to significant downside risks because the Federal Reserve is basically printing money and using that money to flood the market with liquidity, eroding the value of the dollar in the process. However it is a step that the central bank needs to take to stabilize the US economy and to prevent a deflationary spiral. The central bank will not be worried about a weak currency and will in fact welcome one because they know that a weaker currency is like an interest rate cut in many ways because it helps to support and stimulate the economy.
Technical Outlook: As indicated in the following chart, the US dollar rallied significantly in the second half of the year. Between June and November, the dollar index rose more than 25 percent. However the rally hit a brick wall in the month of December, when it plunged 12 percent. Since then it has recovered modestly, but it is hovering below stiff resistance. Not only is there the 38.2 percent Fibonacci retracement above current levels, but that also coincides with the 100-day Simple Moving Average. If the dollar index breaks above 81.70, there is scope for a much sharper gain, but the combination of the fact that a head and shoulders pattern could be in formation and there is Fibo as well as Moving Average resistance suggests that the odds are skewed towards more losses than gains in the beginning of 2009.
Source: Bloomberg
Published on Sun, Dec 28 2008, 23:14 GMT
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US Dollar 2009 Forecast
Wed, Dec 24 2008, 23:53 GMT
by Kathy Lien
US Dollar 2009 Forecast
2008 Price Action:
It has been an exceptionally active year in the foreign exchange market as currency volatilities hit record highs. In the first half of the year, everyone was worried about how much further the dollar would fall but in the second half of the year the concern became how much further the dollar would rise. More specifically, after hitting a record low against the Euro in the second quarter, the US dollar surged to a 2 year high against the currency in the beginning of the fourth quarter. From trough to peak, the dollar index rose more than 23 percent in 2008.
3 Themes for 2009:
The US economy and the dollar’s fate in the years ahead could be determined by what happens in 2009. We are focusing on 3 big themes that will impact the US dollar and each of these themes encompasses a lot.
1. U or L Shaped Recovery: The US is in recession and the slowdown is expected to deepen in 2009. Before a recovery is even possible, the economy has to work through more weakness and negative surprises. Non-farm payrolls declined by 533k in November, sending the unemployment rate to a 15 year high of 6.7 percent. With many US corporations forced to tighten their belts, the unemployment rate could rise as high as 8 percent. We expect this to happen because over the past 50 years on average, recessions have boosted the unemployment rate by 2.8 percent. When the current recession started in December, the unemployment rate was 5.0 percent. If you tack on 2.8 percent, that would drive the unemployment rate to at least 7.8 percent. Therefore non-farm payrolls could double dip, just as it has in past recessions. In this case, we would expect a rebound followed by another sharp loss that rivals November’s job cuts. A rise in unemployment spreads into incomes, spending and then usually leads to more layoffs. We need to see this toxic cycle end before we can see a recovery. Consumer spending has already been very weak and the trade deficit is widening as the dollar strengthens. As the 2 primary inputs into GDP, we expect fourth quarter growth to be very weak. The strength of the US dollar in Q3 and for most of Q4 will also take a big bite out of corporate earnings, leading to disappointments for the stock market. This is why we expect more weakness in the US dollar and the US economy in the first quarter of 2009. However towards the middle of the second quarter, we may begin to see the US economy stabilize as it starts to reap the benefits of Quantitative Easing and President Barack Obama’s fiscal stimulus plan. New Administrations usually hit the ground running and as such we fully expect the rest of the TARP funds to be tapped shortly after his inauguration. The shape of the US recovery will have a big impact on the price action of the US dollar and the path to a stronger dollar will be through a weaker one. The following chart illustrates the double-dip trend of non-farm payrolls during the 2001 recession.
2. Safety vs. Yield: The dollar’s rally in the second half of 2008 has been largely driven by risk aversion, deleveraging and repatriation. In other words, despite the next to nothing yield offered by dollar denominated investments, a flight safety into US dollars and government bonds has kept the US dollar from collapsing against currencies like the British pound, Canadian and Australian dollars. The concern for safety was so high that investors were willing to take negative yields just to park their money with the US government. A bubble is brewing in the Treasury market and any improvement in risk appetite will take the market’s focus away from safety and back to return on money at which time ultra low interest rates could become a detriment for the US dollar. The dollar’s performance against other currencies would be contingent upon growth in the rest of the world. For example, if the UK economy is in the process of recovering, demand for yield and the prospect of return could send the GBP/USD higher, but if the recession in the Eurozone deepens, then the Euro may no longer be the flavor of the month.
3. Compression in Interest Rates and Volatility: Volatility in the currency market hit a record high in 2008 but in 2009 we expect the volatility to compress as interest rates around the world converge. Much of the volatility this past year has been spurred by speculation about how much various central banks would cut interest rates. As they run out of room to ease, we may stop seeing monetary policy surprises which can eventually lead to stabilization for carry trades. Don’t expect this to happen in the first quarter however as many central banks are still expected to cut interest rates. The Fed’s rate cuts have long been a big driver of market volatility and now that risk is off the table. When the monetary and fiscal stimulus start to impact the US economy, the market may actually start talking about a rate hike in the US. Interest rates cannot remain at zero forever, especially if inflation starts creeping higher in the second half of the year.
Growth: Although we expect the US economy to start its slow recovery in the second half of 2009, GDP growth next year will still be negative. Retail sales and non-farm payrolls will be particularly ugly in the first quarter, but we are optimistic that monetary policy and fiscal stimulus will begin to help the economy. The record decline in mortgage rates should also help to stabilize the housing market in 2009. Something between a L and U shaped recovery is likely.
Inflation: Deflation is much more of a problem for the US economy than inflation. Oil prices are more than 75 percent off their highs. As a result, we have seen either flat or negative consumer price growth every month between August and November. The December numbers have yet to be release, but there is no reason to expect CPI to be positive. Since the beginning of the year annualized consumer price growth has fallen from 2.1 percent to 1.1 percent. The US economy has not officially hit deflation, but with commodity prices continuing to fall and consumer demand slumping, deflation will become a greater risk than inflation in the first half of 2009. However this may change in the second half as Quantitative Easing, fiscal stimulus and hopefully a weaker currency boosts inflation.
Monetary Policy: US interest rates have fallen 400bp from 4.25 percent to 0.25 percent in 2008. For most people, interest rates at 0.25 percent are as unattractive as zero interest rates. With US rates pretty much at zero, the Federal Reserve has informally adopted its own version of Quantitative Easing. Some people may even argue that the Fed has been pursuing this strategy for months now. In conjunction with the Treasury department, the Fed has doubled their balance sheet in the past 3 months to more than $2 trillion. They have done this by purchasing direct equity investments in banks, easing standards on commercial paper purchases, made efforts to relieve institutions of their toxic asset-backed securities and are now considering buying Treasury bonds and agency debt. By buying these assets, they are adding money into the financial system. Like the Yen, Quantitative Easing exposes the US dollar to significant downside risks because the Federal Reserve is basically printing money and using that money to flood the market with liquidity, eroding the value of the dollar in the process. However it is a step that the central bank needs to take to stabilize the US economy and to prevent a deflationary spiral. The central bank will not be worried about a weak currency and will in fact welcome one because they know that a weaker currency is like an interest rate cut in many ways because it helps to support and stimulate the economy.
Technical Outlook: As indicated in the following chart, the US dollar rallied significantly in the second half of the year. Between June and November, the dollar index rose more than 25 percent. However the rally hit a brick wall in the month of December, when it plunged 12 percent. Since then it has recovered modestly, but it is hovering below stiff resistance. Not only is there the 38.2 percent Fibonacci retracement above current levels, but that also coincides with the 100-day Simple Moving Average. If the dollar index breaks above 81.70, there is scope for a much sharper gain, but the combination of the fact that a head and shoulders pattern could be in formation and there is Fibo as well as Moving Average resistance suggests that the odds are skewed towards more losses than gains in the beginning of 2009.
Published on Wed, Dec 24 2008, 23:53 GMT
0
0
US Dollar: Unfazed By Economic Data
Tue, Dec 23 2008, 22:41 GMT
by Kathy Lien
US Dollar: Unfazed By Economic Data
The US dollar appears to be unfazed by this morning’s mixed economic reports. Thin trading conditions continue to dominate in the currency market, leading to inconsistent trading for the US dollar. The greenback strengthened against the Japanese Yen and British pound but weakened against the Euro. The latest reports on the US economy were weak but not as weak as the market had expected. There was the potential for really bad numbers and the fact that they did not materialize has actually helped the dollar.
Consumer Confidence Improves, Home Sales Remain Weak
Third quarter GDP remained unrevised at -0.5 percent even though personal consumption slipped and core prices eased. The global recession and the stronger dollar could take a big bite out corporate earnings and growth which may translate into weaker fourth quarter earnings. Investors are far more worried about the Q4 numbers than e Q3. The housing market also remains weak with new home sales falling for the fourth consecutive month and existing home sales falling by the largest amount on record. Sharp discounts on new homes have been helping to slow the falling pace of demand. The one piece of good news that we did see this morning was consumer confidence which was revised upwards in the month of December. Given that almost everyone knows someone that has been laid off, the price of gasoline is the only reason to cheer this holiday season. Prices at the pump have fallen close to 60 percent from its summer highs. For drivers, lower gas prices is like a tax cut. At a time when salaries are being frozen and bonuses are being reduced, a tax cut in the form of lower gasoline prices has made consumers less pessimistic
Durable Goods, Personal Income and Spending
The rest of the US economic data that is due out this week will all be released on Wednesday. This includes durable goods, personal income, personal spending, the PCE deflator and jobless claims. Like today’s data, these reports are expected to mostly reflect the weakness of the US economy. The manufacturing sector has been struggling and will probably continue to struggle with the recent strength of the US dollar. We expect this to be reflected in fourth quarter earnings. However, with that in mind trading will be particularly light tomorrow since it is Christmas Eve. The NYSE closes at 1pm while most products on the CME close at noon. The foreign exchange markets close at 3:00pm ET and then all of the financial markets are closed on Christmas Day.
EUR/USD: COMMENTS FROM TRICHET KEEPS EURO BID
The Euro was one of the few currencies to strengthen against the US dollar thanks to comments from European Central Bank President Trichet. This month, the Euro’s rally has been driven primarily by speculation that the ECB may leave interest rates on hold in January after cutting 175bp. However the 13 percent rally in the EUR/USD since the beginning of the month has pared back the speculation significantly since the currency’s appreciation acts like a rate hike for the Eurozone economy. This afternoon, Trichet’s comments suggest that a rate cut in January is still not a done deal. More specifically he needs to see how the 175bp of easing has impacted the economy. Economic data was also stronger than the market expected with French consumer spending, Italian retail sales and the Eurozone current account surprising to the upside. As we indicated in yesterday’s Daily Currency Focus, the improvement in the trade balance suggests stronger a current account number. We also said that the Euro’s uptrend remains intact and this will continue to be the case until the currency breaks 1.3750. There are no Eurozone reports due for release for the rest of the week which means that there is nothing to threaten the current trend in the EUR/USD.
The British pound has now weakened for the fifth consecutive day in a row against the US dollar. The only currency that the pound seems to be doing well against is the Japanese Yen and even then, the rally is nominal considering the fact that the currency pair has fallen 1300 pips this month. UK economic data was mixed. Third quarter GDP was revised down from 0.5 to 0.6 percent while the current deficit widened to GBP 7.7B. The largest contraction in growth in 18 years drove the British pound lower against both the US dollar and the Euro. Even though the current account deficit surprised to the upside, trade is still deteriorating. Home loans also fell to the lowest level since 1994, representing a 60 percent decline from 2007. With the UK recession deeper than the market had expected, we expect the Bank of England to continue to cut interest rates to at least 1.50 percent, matching Canadian levels.
The commodity pairs were mixed throughout the day. The New Zealand Dollar and Australian Dollar depreciated against the U.S. Dollar as commodity prices continued their downtrend. The Australian Conference Leading Index, which forecasts short to medium term outlook for the economy, came in at -0.5% reflecting a slowdown in the economy. We reported yesterday that GDP contracted for the third consecutive quarter in New Zealand. Meanwhile the Canadian dollar actually advanced against the greenback ahead of GDP, which is scheduled for release tomorrow. This may be partly due to the stimulus measures taken by the Canadian government who plan on buying back commercial paper to provide liquidity for their financial markets and counteract the credit crunch. Prime Minister Stephen Harper is also preparing to propose a stimulus plan in the amount of $20.5 Billion, in order to limit the recession which is scheduled to persist throughout 2009. A sharp drop in retail sales and trade should trigger a contraction in GDP.
USD/JPY: TOYOTA IS A CASUALTY OF YEN STRENGTH
The Japanese Yen weakened against nearly all of the major currencies as the Dow Jones Industrial Average tumbled 100 points. Toyota, the world’s largest car maker has been a casualty of Yen strength. They reported their first lost in 70 years as sales plummeted and the Yen soared. The toxic combination of a weak economy and a 16 percent rise in the currency against the US dollar has been disastrous for the automaker. Although Toyota is probably the most high profile, they are certainly not the only major Japanese corporation to be hit by the double whammy. Expect more losses to be reported in the coming months. As a result, there continues to be talk of currency intervention, which would be the first in 4 years for the Bank of Japan. We continue to believe that physical intervention will be the BoJ’s last option, but as the economy weakens and Japanese companies suffer, that option may become more likely. This evening, Japan is set to announce its Trade Balance which is projected to be weak. Japanese exports have fallen, largely due to the increase of Yen as well as global recession. Further, the BSI is set to be released, which will confirm a dull outlook on the large industry output.
USD/CAD: Currency in Play for Next 24 Hours
The currency in play for the next 24 hours will be the USD/CAD. Canada is set to release its GDP at 8:30AM EST or 13:30GMT. While, the United States is scheduled to release its Durable Goods Order along with Personal Consumption at the same time. USD/CAD is currently in the Range Trading Zone which is established through the Bollinger Bands. With holidays looming around the corner, the liquidity should dwindle, resulting in relatively stable moves. Resistance is originating at 1.2400, which is 50% retracement of October high and December low that proved to be effective on December 19. Furthermore, the price is a psychological level, in addition to 20-day SMA. Short term resistance is placed at the 1.2260, which is the 78.6% retracement of October high and December low, along with the high on the day. The support is placed at the 1.1980, which is first standard deviation of the Bollinger Bands. The break of support will place the pair in the Bollinger Band Sell Zone and negate the upward momentum.
Published on Tue, Dec 23 2008, 22:41 GMT
5
0
What to Expect Before New Years
Mon, Dec 22 2008, 23:25 GMT
by Kathy Lien
What to Expect Before New Years
It is the first trading day of what is typically the least liquid period in the financial markets. As a result, there was no consistent trading pattern in the US dollar today. The greenback weakened against the Euro but gained strength against the British pound and Japanese Yen. We still believe that the US dollar has hit a top and could be at the cusp of a major reversal. The EUR/USD’s resilience to the US stock market sell-off indicates that we are finally seeing the weak outlook for the US economy reflected in the weakness of the US dollar. In 2009, the greenback may no longer be the market’s safe haven currency of choice as yields on Treasury bills sit at zero to negative levels.
How the EUR/USD Could Trade Over the Next 2 Weeks
Christmas and New Years week is a time when traders are more focused on seeing family than making profits. It is probably truer this year than most because of the sharp volatility in the financial markets and the deep losses endured by most investors. Taking a look back at how the EUR/USD traded between Christmas and New Yearsin 2003 and 2007, there was only one year where we saw a breakout move in the EUR/USD and that was in 2007. Besides that, we do not typically see a more than 200 pip range in the currency pair during the holidays. A barrage of weak US economic data and speculation of more aggressive interest rate cuts by the Federal Reserve drove the longest decline in the dollar since October 2006. This time around, bad US economic news has pretty much been baked into the markets which means that any of the reports being released over the next 2 weeks should not deliver much of a surprise.
Final GDP, Housing Market Data
With that in mind, we have the final figures for third quarter GDP, the University of Michigan consumer confidence report, new and existing home sales due for release on Tuesday. In 2007, the sharp sell-off in the US dollar was triggered by new home sales report, which dropped to a 12 month low. Although the housing market data should continue to disappoint, the market already expects this. Instead, the only potentially market moving number is the final figures for GDP. If there is a sharp revision, we could see a reaction in the EUR/USD but it is important to mention that even though retail sales were weak, the trade deficit narrowed in the third quarter. The odds for a major revision are low. Meanwhile oil prices continue to fall, which has driven the average cost for gallon of gasoline nationwide down to $1.65, close to 60 percent off its high. Airlines around the world are beginning to cut their fuel surcharges which are an example of the stimulative effect of lower gas prices.
Despite the sharp reversal in the EUR/USD towards the end of last week, the currency pair’s uptrend remains intact. By now, it should be clear that 1.2329 is the bottom in the EUR/USD. The much higher yield offered by the Euro has shielded the currency from weaker economic data. German import prices fell 3.5 percent last month and even though consumer confidence held steady, the October data was revised downward. Eurozone new industrial orders also plunged 4.7 percent in October, reflecting the overall weakness of the region’s manufacturing sector. Ireland has also announced a bailout plan for their 3 largest banks. The trouble across the economy is one that the European Central Bank will have to come face to face with in 2009. Although we believe that the EUR/USD is headed higher in the first quarter that is primarily based upon our bearishness towards the dollar and not bullishness towards the Euro. Current account figures are due for release tomorrow and that could help keep the uptrend in the EUR/USD intact as we have already seen improvements in the trade data for the same month.
GBP/USD: FALLS FOR FOURTH CONSECUTIVE TRADING DAY
In contrast to the Euro, the British pound remains very weak. The currency pair has fallen against the US dollar for the fourth straight trading day. There was no UK economic data released today, which means the currency’s price action is a complete reflection market’s sentiment towards the British pound. The final figures for third quarter GDP and the current account numbers are due for release tomorrow. UK consumer spending has held up much better than everyone had anticipated but the trade deficit increased which makes it difficult to tell whether GDP will surprise to the up or downside. However from a broader perspective, the UK economy is weak and it may be a few more months before we start seeing a recovery. The Bank of England is still expected to cut interest rates, widening the Euro’s interest rate premium over the British pound. As a result, the EUR/GBP has continued to hover near its record high.
NZD/USD: 3 QUARTERS OF NEGATIVE GDP
The New Zealand and Canadian dollars weakened against the greenback today as oil prices fall $2.5 to $39.85 a barrel. New Zealand economic data was weak with the current account deficit widening from NZD 3.910B to NZD 5.994B. Higher fuel prices and the weakening currency drove a 2.4 percent increase in imports. According to Statistics New Zealand, import prices saw their largest increase in 24 years during the third quarter; exports also rose. Meanwhile New Zealand’s recession deepened as Q3 GDP dropped for the third consecutive quarter. The economy contracted 0.3 percent in Q1, 0.2 percent in Q2 and now it has contracted 0.4 percent in Q3. A weak labor market and a soft housing market have pushed the country into its first recession in 10 years. The Reserve Bank of New Zealand is expected to respond with further interest rate cuts, but it is important not to forget that despite the weak data, the country’s Prime Minister expects the recession to be shallow thanks to the central bank’s aggressive interest rate cuts and the weak currency. The Australian dollar on the other hand strengthened against the greenback despite weaker motor vehicle sales. The currency’s rally may be tied to the $10 rise in gold.
USD/JPY: JAPAN HIT HARD BY YEN STRENGTH
USD/JPY has been moving to the upside today on some rather bleak and depressing news coming out from the Bank of Japan. In an assessment of the overall economy, many economists are relating current conditions to that of earlier this decade, when Japan first entered the zero percent interest rate zone. The Japanese government has lowered its outlook for economic growth for the third straight month, a feat not experienced since 2003. One particular concern, reemphasized by the largest drop in Merchandise Trade on record, is the dwindling level of exports. The Japanese economy has been hit hard by Yen strength and global economic weakness. Statements made by BoJ Governor Masaaki Shirakawa may be another effort in the way of quantitative easing. The governor is reevaluating efforts to freeing up credit markets and their efforts to relieve banks of their credit risk. One of the most potent lifting factors in USD/JPY right now was similar comments suggesting that the severe appreciation in the Japanese currency was becoming a detriment to the economy. Of course this implies the possibility of further verbal intervention.
GBP/USD: Currency in Play for Next 24 Hours
GBP/USD will be the currency in play for the next 24 hours. Tomorrow’s schedule is filled with important releases because of the upcoming holidays. The UK will be releasing GDP and Current Account at 4:30 am ET or 9:30 GMT. The US will also report GDP at 8:30 am ET or 13:30 GMT, and New and Pending Home Sales at 10:00 am ET or 15:00 GMT.
Technically, GBP/USD is in no rush to redefine a new or existing trend, and is lingering in the Bollinger band range trading zone. On the way down, the pair will be facing a few areas of support. Right now, price action seems hesitant to break below the lower one-standard deviation Bollinger band. Below this lies the major support of 1.4467, a low that extends back to 2001. For resistance, we are using the 1.5526 level, which closely combines two recent highs with a low placed in mid-October. Above all, it is important to stress that a break of the 1.4467 level would leave a large amount of room to fall, simultaneously extending the previous downtrend to reach decade lows.
Published on Mon, Dec 22 2008, 23:25 GMT
1
0
What to Expect Before New Years
Sun, Dec 21 2008, 22:45 GMT
by Kathy Lien
What to Expect Before New Years
It is the first trading day of what is typically the least liquid period in the financial markets. As a result, there was no consistent trading pattern in the US dollar today. The greenback weakened against the Euro but gained strength against the British pound and Japanese Yen. We still believe that the US dollar has hit a top and could be at the cusp of a major reversal. The EUR/USD’s resilience to the US stock market sell-off indicates that we are finally seeing the weak outlook for the US economy reflected in the weakness of the US dollar. In 2009, the greenback may no longer be the market’s safe haven currency of choice as yields on Treasury bills sit at zero to negative levels.
How the EUR/USD Could Trade Over the Next 2 Weeks
Christmas and New Years week is a time when traders are more focused on seeing family than making profits. It is probably truer this year than most because of the sharp volatility in the financial markets and the deep losses endured by most investors. Taking a look back at how the EUR/USD traded between Christmas and New Yearsin 2003 and 2007, there was only one year where we saw a breakout move in the EUR/USD and that was in 2007. Besides that, we do not typically see a more than 200 pip range in the currency pair during the holidays. A barrage of weak US economic data and speculation of more aggressive interest rate cuts by the Federal Reserve drove the longest decline in the dollar since October 2006. This time around, bad US economic news has pretty much been baked into the markets which means that any of the reports being released over the next 2 weeks should not deliver much of a surprise.
Final GDP, Housing Market Data
With that in mind, we have the final figures for third quarter GDP, the University of Michigan consumer confidence report, new and existing home sales due for release on Tuesday. In 2007, the sharp sell-off in the US dollar was triggered by new home sales report, which dropped to a 12 month low. Although the housing market data should continue to disappoint, the market already expects this. Instead, the only potentially market moving number is the final figures for GDP. If there is a sharp revision, we could see a reaction in the EUR/USD but it is important to mention that even though retail sales were weak, the trade deficit narrowed in the third quarter. The odds for a major revision are low. Meanwhile oil prices continue to fall, which has driven the average cost for gallon of gasoline nationwide down to $1.65, close to 60 percent off its high. Airlines around the world are beginning to cut their fuel surcharges which are an example of the stimulative effect of lower gas prices.
Despite the sharp reversal in the EUR/USD towards the end of last week, the currency pair’s uptrend remains intact. By now, it should be clear that 1.2329 is the bottom in the EUR/USD. The much higher yield offered by the Euro has shielded the currency from weaker economic data. German import prices fell 3.5 percent last month and even though consumer confidence held steady, the October data was revised downward. Eurozone new industrial orders also plunged 4.7 percent in October, reflecting the overall weakness of the region’s manufacturing sector. Ireland has also announced a bailout plan for their 3 largest banks. The trouble across the economy is one that the European Central Bank will have to come face to face with in 2009. Although we believe that the EUR/USD is headed higher in the first quarter that is primarily based upon our bearishness towards the dollar and not bullishness towards the Euro. Current account figures are due for release tomorrow and that could help keep the uptrend in the EUR/USD intact as we have already seen improvements in the trade data for the same month.
GBP/USD: FALLS FOR FOURTH CONSECUTIVE TRADING DAY
In contrast to the Euro, the British pound remains very weak. The currency pair has fallen against the US dollar for the fourth straight trading day. There was no UK economic data released today, which means the currency’s price action is a complete reflection market’s sentiment towards the British pound. The final figures for third quarter GDP and the current account numbers are due for release tomorrow. UK consumer spending has held up much better than everyone had anticipated but the trade deficit increased which makes it difficult to tell whether GDP will surprise to the up or downside. However from a broader perspective, the UK economy is weak and it may be a few more months before we start seeing a recovery. The Bank of England is still expected to cut interest rates, widening the Euro’s interest rate premium over the British pound. As a result, the EUR/GBP has continued to hover near its record high.
NZD/USD: 3 QUARTERS OF NEGATIVE GDP
The New Zealand and Canadian dollars weakened against the greenback today as oil prices fall $2.5 to $39.85 a barrel. New Zealand economic data was weak with the current account deficit widening from NZD 3.910B to NZD 5.994B. Higher fuel prices and the weakening currency drove a 2.4 percent increase in imports. According to Statistics New Zealand, import prices saw their largest increase in 24 years during the third quarter; exports also rose. Meanwhile New Zealand’s recession deepened as Q3 GDP dropped for the third consecutive quarter. The economy contracted 0.3 percent in Q1, 0.2 percent in Q2 and now it has contracted 0.4 percent in Q3. A weak labor market and a soft housing market have pushed the country into its first recession in 10 years. The Reserve Bank of New Zealand is expected to respond with further interest rate cuts, but it is important not to forget that despite the weak data, the country’s Prime Minister expects the recession to be shallow thanks to the central bank’s aggressive interest rate cuts and the weak currency. The Australian dollar on the other hand strengthened against the greenback despite weaker motor vehicle sales. The currency’s rally may be tied to the $10 rise in gold.
USD/JPY: JAPAN HIT HARD BY YEN STRENGTH
USD/JPY has been moving to the upside today on some rather bleak and depressing news coming out from the Bank of Japan. In an assessment of the overall economy, many economists are relating current conditions to that of earlier this decade, when Japan first entered the zero percent interest rate zone. The Japanese government has lowered its outlook for economic growth for the third straight month, a feat not experienced since 2003. One particular concern, reemphasized by the largest drop in Merchandise Trade on record, is the dwindling level of exports. The Japanese economy has been hit hard by Yen strength and global economic weakness. Statements made by BoJ Governor Masaaki Shirakawa may be another effort in the way of quantitative easing. The governor is reevaluating efforts to freeing up credit markets and their efforts to relieve banks of their credit risk. One of the most potent lifting factors in USD/JPY right now was similar comments suggesting that the severe appreciation in the Japanese currency was becoming a detriment to the economy. Of course this implies the possibility of further verbal intervention.
GBP/USD: Currency in Play for Next 24 Hours
GBP/USD will be the currency in play for the next 24 hours. Tomorrow’s schedule is filled with important releases because of the upcoming holidays. The UK will be releasing GDP and Current Account at 4:30 am ET or 9:30 GMT. The US will also report GDP at 8:30 am ET or 13:30 GMT, and New and Pending Home Sales at 10:00 am ET or 15:00 GMT.
Technically, GBP/USD is in no rush to redefine a new or existing trend, and is lingering in the Bollinger band range trading zone. On the way down, the pair will be facing a few areas of support. Right now, price action seems hesitant to break below the lower one-standard deviation Bollinger band. Below this lies the major support of 1.4467, a low that extends back to 2001. For resistance, we are using the 1.5526 level, which closely combines two recent highs with a low placed in mid-October. Above all, it is important to stress that a break of the 1.4467 level would leave a large amount of room to fall, simultaneously extending the previous downtrend to reach decade lows.
Published on Sun, Dec 21 2008, 22:45 GMT
8
0
What Is Behind The Dollar Recovery?
Thu, Dec 18 2008, 22:42 GMT
by Kathy Lien
What Is Behind The Dollar Recovery?
After seeing the US dollar sell off for 5 straight days against the Euro and Japanese Yen, we were not entirely surprised to see today’s recovery, especially on the heels of better than expected economic data. The market has become accustomed to disappointments so good news was a welcome change. The European Central Bank has also reduced the interest rate that it offers to banks that deposit with them in order to encourage lending. The 15 percent rally in the Euro has led many to people to believe that the ECB may reconsider their plan to hold interest rates steady in January and the deposit rate cut was seen as a step in that direction. Thin market conditions near the holidays have exacerbated the volatility in the currency market. However even though the greenback is higher today, we had both positive and negative news impacting the dollar.
The Good News: Better Data, Oil at $36, More Stimulus on the Way
The Philly Fed index and jobless claims were better than expected, but the improvements still masked underlying weakness. New orders singlehandedly drove the Philly Fed index higher as sharp deteriorations were seen in the other 8 subcomponents. Even though the number of people claiming unemployment benefits still rose by more than 500k last week, the rise was less than the previous period, which suggests that the hemorrhaging in the labor market is slowing. However that has not stopped weekly claims from hitting a new high. There was also news that Obama’s economic team is looking to push through a stimulus package worth up $775B over the next two years. This package should play a big role in helping to turn the US economy around. Oil prices have also fallen to a 4 year low of $36 a barrel, which represents a 75 percent decline from its record high. In may not be long before we see gasoline prices at $1.50 a gallon. Lower oil prices acts as a tax cut for consumers and should help to improve consumer spending.
The Bad News: GE AAA Rating at Risk, Pessimistic Comments from Fed Official
Aside from the fact that the good news masked underlying weakness, more worrisome reports have hit the corporate sector. Leading indicators fell to the lowest level in 4 years on the back of a sharp rise in jobless claims and decline in US equities. Standard & Poor’s revised General Electric’s rating outlook from stable to negative, which suggests that GE’s AAA credit rating may be at risk. A company’s credit rating is directly tied to their cost of borrowing and their overall health. GE’s problems center on their financial unit which was hit hard by the credit crisis. All Big 3 automakers have also announced that they will idle a number of their plants over the next month, reflecting the severity of their financial situation. Despite the recent rate cut, Fed officials remain very pessimistic about the outlook for the US economy. Fed President Fisher expects the US economy to continue to contract in 2009, driving the unemployment rate past 8%. Having leaned towards hawkishness in the past, Fisher’s dovish comments are particularly alarming. However Greenspan expects the economy to rebound in 6 to 12 months, but of course he is no longer involved in US monetary policy.
In Wednesday’s Daily Currency Focus, we talked about the consequences of the Euro rally. More specifically, we argued that the Euro’s rally over the past 2 weeks was driven by the possibility that the ECB may leave interest rates unchanged in January but now that the Euro has appreciated more than 14 percent, they may reconsider holding interest rates. The surprise announcement by the ECB today fueled the dramatic reversal in the Euro as it suggests that the central bank may indeed be toning down their recent hawkishness. The central bank cut the deposit rate that they offer to commercial banks who stash their cash at the central bank while at the same timing increasing the interest rate on emergency loans. These tactics are aimed at getting banks to lend and suggests that they are still very worried about the credit markets. They should also be worried about the economy as German business confidence plunges to the lowest level in more than 25 years. Overall, the Eurozone economy is still very weak and the strength of the Euro will only shave growth further. If the exchange rate remains above 1.40 going into next month’s rate decision, then the ECB may have to cut interest rates again. Meanwhile German producer prices are due for release on Friday. Given the sharp drop in wholesale prices, we continue to expect inflationary pressures to ease.
GBP/USD: SHARP REVERSAL DESPITE STRONGER SPENDING
The British pound plunged against the both US dollar and Euro today. The worst performing currency pair was the GBP/USD which fell more than 3 percent or close to 500 pips. Having rallied for 9 consecutive trading sessions, EUR/GBP continued to hit new a record high. Interestingly enough, the weakness in the currency came despite the fact that retail sales rose for the first time in 3 months. The market had expected consumer spending to contract, but instead it rose by 0.3 percent thanks to demand for food and discount goods. The retail sales numbers can be volatile – we would need to see at least 2 consecutive months of positive retail sales to believe that positive consumer spending is here to stay. Meanwhile, the Times of London has reported that UK Chancellor Darling may announce a major stimulus package for the banking sector next month. The UK government has been at the forefront of monetary and fiscal stimulus and because of that, we would not be surprised to see new measures aimed at thawing the UK credit markets.
USD/CAD: LARGEST DECLINE IN RETAIL SALES SINCE SEPT 2006
The Canadian, Australian and New Zealand dollars plummeted as the dollar rises and commodity prices fall. Oil and gold prices are down sharply with the former falling to the lowest level in 4 years. Canadian economic data was weak with leading indicators falling for the third month in a row and by the largest amount since 1991. Retail sales also dropped 0.9 percent, which was the largest contraction in consumer spending since September 2006. Earlier this week, Bank of Canada Governor Carney said that the country has entered its first recession since 1992 and today’s data certainly confirms that. The only good news was that foreign investment into Canada rebounded in the month of October after falling for 3 consecutive months. Demand was particularly strong for government bonds. Prime Minister Jim Flaherty also stated that he is intending to cut taxes further in the upcoming fiscal year, along with increasing pressure on banks to lend more credit. Consumer prices are due for release tomorrow and given the sharp decline in industrial and raw material prices, inflation should ease as well. Meanwhile Australia reported a weak Westpac Survey of Industrial trends suggesting that manufacturing sector is feeling the pressure of a global recession. New Zealand’s government along with the central bank announced an agreement to keep the goals of lifting incomes and living standards in place. In order to achieve the goal, the central bank is setting an objective to keep the inflation between 1% and 3% annually. Business Sentiment in New Zealand has also continued to weaken reflecting current state of the economy.
USD/JPY: MARKET DIVIDED ON RATE CUT OR INTERVENTION
It has been a while since so much attention has been paid to the Japanese Yen. With the Bank of Japan monetary policy announcement due this evening, the market is divided on whether the BoJ will cut interest rates and if they will physically intervene in their currency. There is about a 50/50 chance of a rate cut from the BoJ. Interest rates are already very low, but the strength of the Yen and the weakness of the economy may encourage them to take the drastic measure of cutting interest rates to 0.15 or 0 percent. Physical intervention is only a minor possibility because it would counterproductive to global efforts. Japan’s problems are not something that they can fix by simply weakening the Yen. US demand for Japanese exports will not recover until the US economy recovers. For the Japanese to artificially weaken the Yen and strengthen the dollar may hurt the US and Japanese economy more than it helps. They are beginning to try verbal intervention, but so far it hasn’t seen strong results. Therefore cutting rates could be a way to weaken the Yen without resorting to physical intervention.
USD/CAD: Currency in Play for Next 24 Hours
The currency in play for the upcoming 24 hours is USD/CAD. Consumer prices are due for release from Canada at 7:00AM or 12:00GMT. After a drastic sell-off from triple top, the pair still remains within the Sell Zone of the Bollinger Bands. Current support level is forming at the bottom of previous day’s close which is around 1.1820. The resistance is placed between 1.2200 and 1.2245, which are 2nd Standard Deviation of the Bollinger Band and 50-day SMA, respectively. Further, the resistance is a 50% retracement of October high and November low. With a bias to the downside, a break of key resistance level will negate the downtrend, and possibly reverse the pair. While a break of the support will generate a further deterioration in the price.
Published on Thu, Dec 18 2008, 22:42 GMT
6
1
How Much Further Can the US Dollar Fall?
Wed, Dec 17 2008, 22:46 GMT
by Kathy Lien
How Much Further Can the US Dollar Fall?
With dollar denominated assets yielding next to nothing, we have continued to see money flow out of the US dollar. The greenback fell to the lowest level against the Euro since September and dropped to a new 13 year low against the Japanese Yen. The losses have been even more staggering since the beginning of the month. The dollar has fallen 14 percent against the Euro and 8 percent against the Japanese Yen. This significant sell off begs the question How Much Further Can the Dollar Fall? If you watched the price action in the currency market this past year, you will know that trends dominate. With only 2 weeks until the end of the year, we could be stepping into a longer phase of dollar weakness.
5 Factors that Could Drive the US Dollar Lower in 2009
There are 5 factors that could drive the dollar lower in the first quarter of 2009:
1. Weaker Economic Data
2. Disappointing Corporate Earnings
3. Quantitative Easing
4. Fiscal Stimulus
5. Investor Outflow
With more Americans losing their jobs or having their salaries frozen, there is no question that the US recession will deepen in the first quarter of the New Year. Therefore not only do we expect fourth quarter GDP to be particularly weak, but we also expect a larger decline in retail sales and non-farm payrolls. In combination with the strength of the US dollar in the third and fourth quarters and the losses sustained in the Madoff Ponzi scheme, there is a strong chance that Q4 corporate earnings will be very weak for both financial and non-financial companies. Disappointing data could raise fears that the recession will turn into a depression, which could fuel further losses in the US dollar. In addition, quantitative easing and fiscal stimulus will pick up next year. Quantitative easing is akin to printing money, which dilutes the value of the dollar. More fiscal stimulus means more spending by the US government, which is also dollar bearish. These reasons along with the ultra low level of US rates are why investors could stay out of US dollars in the first quarter of 2009.
Does it Matter if Other Central Banks are Cutting Interest Rates?
One question that we have been asked multiple times today is whether it will matter if other central banks are still cutting interest rates at a time when the Fed has run out of room to reduce interest rates. The Euro currently has a 225bp interest rate premium over the US dollar. The ECB would have to cut interest rates by a lot in order to bring them anywhere close to US levels. Therefore, money will still flow into the higher yielding currencies, particularly the ones where the central bank is considering not cutting interest rates at their next monetary policy meeting (EUR and AUD). We do expect the trend of dollar weakness to eventually reverse as Quantitative Easing and Fiscal Stimulus finally helps the US economy, but that may not be until the second half of 2009 at the earliest. The only thing that could turn the dollar around would be if all of sudden the ECB cuts interest rates by another 75bp at their next meeting.
USD/JPY: What Happens When the Interest Rate Spread Goes Negative?
This is not the first time in recent history that US interest rates have fallen below Japanese levels. It has happened 5 times in the past 40 years - the most recent was in 1993. The following chart illustrates how USD/JPY performs whenever the interest rate spread between the US and Japan dips below zero. As you can see, it almost always precedes a sharp drop in USD/JPY that lasts can last for months.
EUR/USD: CONSEQUENCES OF THE EURO RALLY
The Euro had its strongest intraday rally today since its debut in 1999. The move is a testament to the impact of interest rates on currencies. We have long said that this is the number one driver of currency trends and the decline in liquidity near the end of the year has only exacerbated the rally. Although the latest move in the Euro has some bank analysts revising up their EUR/USD 2009 forecasts to 1.60 and above, we want everyone to realize that the higher the EUR/USD rises, the more strain it will put on the Eurozone economy and the more reason it gives to the European Central Bank to cut interest rates. When the ECB first started to talk about pausing in January, the EUR/USD was trading around 1.26 and it has now appreciated 14 percent. Even though we also believe that the EUR/USD will continue to rise, we think that it may have a difficult time cracking above 1.48 and eventually, the trend will change. France’s largest bank BNP Paribas has been hit hard by the Madoff scandal. This is an example of the troubles plaguing European corporations. Consumer prices declined 0.5 percent last month, giving the central bank plenty of flexibility to cut interest rates if necessary.
GBP/USD: UNEMPLOYMENT RATE HITS DECADE HIGHS
The title of our GBP/USD commentary yesterday was “Be Cautious of the Rally” and therefore it should be no surprise to our readers that the British pound was the only currency pair to sell off against the US dollar today. The labor market numbers were very weak with the number of people claiming benefits rising 75.7k last month, the largest since 1991. This drove the unemployment rate to 6 percent, the highest level since July 1999. The minutes from the most recent monetary policy meeting reveal that the committee voted 9-0 to cut interest rates by 100bp to 2 percent. The only reason why they held back on cutting interest rates even more was because they did not want to trigger an excessive drop in the British pound. More rate cuts are expected and part of the reason why the GBP/USD underperformed today. BoE Governor King openly warned that inflation will be completely out of their control for the next 2 years and in his letter to Chancellor Darling, he said that they are abandoning their efforts to meet the 2 percent target. Looking ahead, retail sales are due for release tomorrow. Given the sharp decline in unemployment and the drop in BRC retail sales, consumer spending should have been very weak. Meanwhile the Euro continues to charge ahead against the pound, driving the EUR/GBP currency pair to a new record high of 0.9326.
USD/CAD: CANADA IS ALREADY IN A RECESSION
All of the commodity currencies continued to strengthen against the US dollar today. Mark Carney, the Governor of the Bank of Canada announced that Canada is already in recession and as a result he plans to be more assertive with monetary policy. He hinted at a new macro-prudential approach which “assesses current risks by looking at the broad economic and financial conditions that can contribute to the buildup of risks to the financial system and the economy as a whole.” Meanwhile oil prices dropped 3.10 despite the fact that OPEC announced a larger production cut. More easing is expected from the BoC, which could weigh on the Canadian dollar going forward. Wholesale sales were very weak, suggesting that we could see a sharp decline in retail sales tomorrow. Weak economic data has not prevented the AUD/USD from rally. Both skilled vacancies and leading indicators deteriorated from the prior month. Tomorrow, Australia will report the Westpac Survey for Industrial Trends, while New Zealand is scheduled to produce its NBNZ Business Confidence report.
USD/JPY: BOJ POISED TO FOLLOW FED’S LEAD?
The Bank of Japan will be making a monetary policy announcement tomorrow. Although interest rates are already very low, there is a growing chance that the BoJ could actually cut interest rates. A consensus has indicated that there is more than a 50/50 chance of a rate cut tomorrow. Now that the Fed has brought rates below that of Japan for the first time since 1993, the BoJ may be willing to follow by example. After a disastrous period of harsh economic growth spurred by zero-bound interest rates earlier this decade, it seems inconceivable that the country would want to embark down these roads once more. However, in the midst of yet another recession, political pressure is mounting, credit markets are seizing-up and exports have come to a complete halt; there may be a chance that the BoJ will make one more last-ditch effort to restore some levels of confidence. We still believe that they won’t. On a longer-term basis, the central bank will most likely join the US in quantitative easing to further inhibit liquidity expansion.
EUR/GBP: Currency in Play for Next 24 Hours
EUR/GBP will be the currency in play for the next 24 hours. For the euro, we will see the release of the German IFO at 4:00 am ET or 9:00 GMT, which includes important economic measures such as the Business Climate, Current Assessment, and Expectations. For the UK, we are expecting Retail Sales and Public Sector Net Borrowing at 4:30 am ET or 9:30 GMT.
EUR/GBP is definitely within the Bollinger band buy zone. In fact, it is becoming difficult to come up with resistance levels, as each move higher is another record. Using Fibonacci extensions we can see that price action has already broken the 161.8% extension, of course we will still need to see a close above the level to confirm it has been broken. Any further resistance is probably better suited for psychological levels, like 0.9500. Support could be seen as the 0.9000 level, another psychological level that has also supported today’s low and previous highs. Obviously, such a situation is difficult to predict technically, but it is clear that further price action is biased to the upside.
Published on Wed, Dec 17 2008, 22:46 GMT
6
1
How Much Further Can the US Dollar Fall?
Tue, Dec 16 2008, 22:39 GMT
by Kathy Lien
How Much Further Can the US Dollar Fall?
With dollar denominated assets yielding next to nothing, we have continued to see money flow out of the US dollar. The greenback fell to the lowest level against the Euro since September and dropped to a new 13 year low against the Japanese Yen. The losses have been even more staggering since the beginning of the month. The dollar has fallen 14 percent against the Euro and 8 percent against the Japanese Yen. This significant sell off begs the question How Much Further Can the Dollar Fall? If you watched the price action in the currency market this past year, you will know that trends dominate. With only 2 weeks until the end of the year, we could be stepping into a longer phase of dollar weakness.
5 Factors that Could Drive the US Dollar Lower in 2009
There are 5 factors that could drive the dollar lower in the first quarter of 2009:
1. Weaker Economic Data
2. Disappointing Corporate Earnings
3. Quantitative Easing
4. Fiscal Stimulus
5. Investor Outflow
With more Americans losing their jobs or having their salaries frozen, there is no question that the US recession will deepen in the first quarter of the New Year. Therefore not only do we expect fourth quarter GDP to be particularly weak, but we also expect a larger decline in retail sales and non-farm payrolls. In combination with the strength of the US dollar in the third and fourth quarters and the losses sustained in the Madoff Ponzi scheme, there is a strong chance that Q4 corporate earnings will be very weak for both financial and non-financial companies. Disappointing data could raise fears that the recession will turn into a depression, which could fuel further losses in the US dollar. In addition, quantitative easing and fiscal stimulus will pick up next year. Quantitative easing is akin to printing money, which dilutes the value of the dollar. More fiscal stimulus means more spending by the US government, which is also dollar bearish. These reasons along with the ultra low level of US rates are why investors could stay out of US dollars in the first quarter of 2009.
Does it Matter if Other Central Banks are Cutting Interest Rates?
One question that we have been asked multiple times today is whether it will matter if other central banks are still cutting interest rates at a time when the Fed has run out of room to reduce interest rates. The Euro currently has a 225bp interest rate premium over the US dollar. The ECB would have to cut interest rates by a lot in order to bring them anywhere close to US levels. Therefore, money will still flow into the higher yielding currencies, particularly the ones where the central bank is considering not cutting interest rates at their next monetary policy meeting (EUR and AUD). We do expect the trend of dollar weakness to eventually reverse as Quantitative Easing and Fiscal Stimulus finally helps the US economy, but that may not be until the second half of 2009 at the earliest. The only thing that could turn the dollar around would be if all of sudden the ECB cuts interest rates by another 75bp at their next meeting.
USD/JPY: What Happens When the Interest Rate Spread Goes Negative?
This is not the first time in recent history that US interest rates have fallen below Japanese levels. It has happened 5 times in the past 40 years - the most recent was in 1993. The following chart illustrates how USD/JPY performs whenever the interest rate spread between the US and Japan dips below zero. As you can see, it almost always precedes a sharp drop in USD/JPY that lasts can last for months.
EUR/USD: CONSEQUENCES OF THE EURO RALLY
The Euro had its strongest intraday rally today since its debut in 1999. The move is a testament to the impact of interest rates on currencies. We have long said that this is the number one driver of currency trends and the decline in liquidity near the end of the year has only exacerbated the rally. Although the latest move in the Euro has some bank analysts revising up their EUR/USD 2009 forecasts to 1.60 and above, we want everyone to realize that the higher the EUR/USD rises, the more strain it will put on the Eurozone economy and the more reason it gives to the European Central Bank to cut interest rates. When the ECB first started to talk about pausing in January, the EUR/USD was trading around 1.26 and it has now appreciated 14 percent. Even though we also believe that the EUR/USD will continue to rise, we think that it may have a difficult time cracking above 1.48 and eventually, the trend will change. France’s largest bank BNP Paribas has been hit hard by the Madoff scandal. This is an example of the troubles plaguing European corporations. Consumer prices declined 0.5 percent last month, giving the central bank plenty of flexibility to cut interest rates if necessary.
GBP/USD: UNEMPLOYMENT RATE HITS DECADE HIGHS
The title of our GBP/USD commentary yesterday was “Be Cautious of the Rally” and therefore it should be no surprise to our readers that the British pound was the only currency pair to sell off against the US dollar today. The labor market numbers were very weak with the number of people claiming benefits rising 75.7k last month, the largest since 1991. This drove the unemployment rate to 6 percent, the highest level since July 1999. The minutes from the most recent monetary policy meeting reveal that the committee voted 9-0 to cut interest rates by 100bp to 2 percent. The only reason why they held back on cutting interest rates even more was because they did not want to trigger an excessive drop in the British pound. More rate cuts are expected and part of the reason why the GBP/USD underperformed today. BoE Governor King openly warned that inflation will be completely out of their control for the next 2 years and in his letter to Chancellor Darling, he said that they are abandoning their efforts to meet the 2 percent target. Looking ahead, retail sales are due for release tomorrow. Given the sharp decline in unemployment and the drop in BRC retail sales, consumer spending should have been very weak. Meanwhile the Euro continues to charge ahead against the pound, driving the EUR/GBP currency pair to a new record high of 0.9326.
USD/CAD: CANADA IS ALREADY IN A RECESSION
All of the commodity currencies continued to strengthen against the US dollar today. Mark Carney, the Governor of the Bank of Canada announced that Canada is already in recession and as a result he plans to be more assertive with monetary policy. He hinted at a new macro-prudential approach which “assesses current risks by looking at the broad economic and financial conditions that can contribute to the buildup of risks to the financial system and the economy as a whole.” Meanwhile oil prices dropped 3.10 despite the fact that OPEC announced a larger production cut. More easing is expected from the BoC, which could weigh on the Canadian dollar going forward. Wholesale sales were very weak, suggesting that we could see a sharp decline in retail sales tomorrow. Weak economic data has not prevented the AUD/USD from rally. Both skilled vacancies and leading indicators deteriorated from the prior month. Tomorrow, Australia will report the Westpac Survey for Industrial Trends, while New Zealand is scheduled to produce its NBNZ Business Confidence report.
USD/JPY: BOJ POISED TO FOLLOW FED’S LEAD?
The Bank of Japan will be making a monetary policy announcement tomorrow. Although interest rates are already very low, there is a growing chance that the BoJ could actually cut interest rates. A consensus has indicated that there is more than a 50/50 chance of a rate cut tomorrow. Now that the Fed has brought rates below that of Japan for the first time since 1993, the BoJ may be willing to follow by example. After a disastrous period of harsh economic growth spurred by zero-bound interest rates earlier this decade, it seems inconceivable that the country would want to embark down these roads once more. However, in the midst of yet another recession, political pressure is mounting, credit markets are seizing-up and exports have come to a complete halt; there may be a chance that the BoJ will make one more last-ditch effort to restore some levels of confidence. We still believe that they won’t. On a longer-term basis, the central bank will most likely join the US in quantitative easing to further inhibit liquidity expansion.
EUR/GBP: Currency in Play for Next 24 Hours
EUR/GBP will be the currency in play for the next 24 hours. For the euro, we will see the release of the German IFO at 4:00 am ET or 9:00 GMT, which includes important economic measures such as the Business Climate, Current Assessment, and Expectations. For the UK, we are expecting Retail Sales and Public Sector Net Borrowing at 4:30 am ET or 9:30 GMT.
EUR/GBP is definitely within the Bollinger band buy zone. In fact, it is becoming difficult to come up with resistance levels, as each move higher is another record. Using Fibonacci extensions we can see that price action has already broken the 161.8% extension, of course we will still need to see a close above the level to confirm it has been broken. Any further resistance is probably better suited for psychological levels, like 0.9500. Support could be seen as the 0.9000 level, another psychological level that has also supported today’s low and previous highs. Obviously, such a situation is difficult to predict technically, but it is clear that further price action is biased to the upside.
Published on Tue, Dec 16 2008, 22:39 GMT
3
0
FOMC Rate Decision Could Add Pressure on Dollar
Mon, Dec 15 2008, 22:58 GMT
by Kathy Lien
FOMC Rate Decision Could Add Pressure on Dollar
In Friday’s Daily Currency Focus, we argued that going into the FOMC rate decision, the US dollar could continue to weaken. The sheer reality is that by Tuesday afternoon, the US dollar will be either the lowest or second lowest yielding G10 currency is driving the dollar lower against all of the major currencies today. Although the Empire State manufacturing survey and industrial production numbers beat expectations, they still reflected deterioration from the prior month. Foreign demand for US securities plunged in the month of October, serving as a double whammy for the US dollar. Tuesday’s FOMC meeting will be remembered for decades to come as the Federal Reserve brings interest rates down to the lowest level this generation has ever seen. With 2 realistic options on the table and economist and traders divided on how much the Fed will cut interest rates, the only certain outcome is significant volatility for the currency market. No matter how you look at it, an interest rate of 0.50 percent is just as unattractive as an interest rate of 0.25 percent.
Federal Reserve: 50bp vs. 75bpThe decision of cutting interest rates by 50 or 75bp is really a decision of how quickly the Federal Reserve wants to formally move to Plan B, or Quantitative Easing. If rates are not taken to 0.25 percent tomorrow, then we could see that level reached in the first quarter of 2009. Fed funds contracts are currently trading at 0.15 percent, which means that any rate cut by the Fed will only be symbolic. The futures contracts are pricing in a 68 percent chance of a 75bp rate cut and a 32 percent chance of a 50bp cut, but only 11 out of the 95 economists surveyed by Bloomberg expect interest rates to be cut by more than 50bp. Either way, someone will be proved wrong tomorrow and that could trigger a big move in the US dollar. Economic data has deteriorated significantly since the last monetary policy meeting and in our opinion, the right thing for the Fed to do is to cut interest rates by 75bp tomorrow and not delay the inevitable. With the US economy falling into a deeper recession, rationing monetary policy stimulus now could be counterproductive. However, the Federal Reserve may not want to back themselves into a corner by taking interest rates down to 0.25 percent so quickly and therefore many economists argue that a 50bp rate cut is the most likely scenario. Another reason why the dollar is selling off is because if the Fed eases by only 50bp, they could still signal that interest rates are headed to zero, which would be negative for the US dollar. The only reason why the dollar could rally following the rate decision would be if the Fed signals to the market that zero interest rates is not a possibility. Unlike Japan, deflation has yet to hit the US and zero interest rates could intensify problems that the repo market and money market funds are already facing. Demand is waning in the repo market as the return is insufficient to cover the risk of failure. For more on the FOMC Meeting and what the statement could entail, read our FOMC Preview.
What the TIC Data Signals about Foreign DemandThe surprisingly weak Treasury International Capital flow report did not put a dent into the US dollar. However, that does not draw away from the fact that foreign demand for dollar denominated securities has decreased significantly. In the month of October, demand for long term US securities rose a measly $1.5 billion, the weakest in more than one year. A closer look at the data indicates that foreigners sold stocks, corporate bonds and Fannie and Freddie debt. The rise in foreign demand for short term securities represents a dramatic shift in investor appetite. With US bonds yielding next to nothing and the Dow Jones Industrial Average plunging close to 30 percent since the beginning of the third quarter, there is no wonder that foreigners are looking elsewhere for yield. As our colleague Boris Schlossberg said in his note this morning, the Madoff affair could deal an even bigger blow to foreign demand for dollars as Mr. Madoff may have tipped the balance of power back to European assets irrespective of the problems in the continent. In addition to the FOMC rate decision tomorrow, we are also expecting the release of consumer prices, housing starts and building permits. Softer producer prices and overall weakness in the US housing market should lead to more dollar bearish numbers.
EUR/USD: BREAKS 1.35, ON ITS WAY TO 1.40?
The strongest currency in the foreign exchange market today was the Euro, which surged 330 pips or close to 2.5 percent against the US dollar. Unlike other currencies which rallied on nothing more than US dollar weakness, members of the European Central Bank continued to suggest to the market that an interest rate cut in January is not a done deal. This morning, Ordonez confirmed that ECB President Trichet has been very clear that their options are wide open next month. This includes leaving rates unchanged or cutting by any amount depending upon inflation. The advance numbers for service and manufacturing PMI are due for release tomorrow – the price component of these reports could help the ECB with their decision. After slashing interest rates by 75bp at their last meeting, Trichet was quick to point out that future cuts would not be as sharp. However, we are beginning to see a pretty cohesive shift in the comments from ECB officials. In the past, the ECB has always tried to prepare the market for any major changes to monetary policy with the hope that when the actual announcement is made, it would lead to the least amount of volatility possible. The ECB hates surprises and certainly does not play any games when it comes to sending messages to the market. Therefore their recent comments suggest that they are seriously considering leaving rates unchanged in January. At a time when the market expects a historically significant rate cut from the US Federal Reserve that would take interest rates to a cyclical low, the not so dovish comments from the ECB has sent the EUR/USD soaring above 1.35 and back towards 1.40.
BRITISH POUND: NEW LOW AGAINST EURO
Despite the British pound’s recovery against the US dollar today, it fell to a new record low against the euro. The currency pair finally took out 90 cents but failed to hold that level as the British pound’s rebound against the US dollar gained momentum. On Friday, we talked about how we expect the aggressive interest rate cuts by the Bank of England and the weakness of the currency to drive a recovery in the UK economy in 2009. In contrast, the more restrictive monetary policy in the Eurozone and the strength of the Euro against the British pound could hurt the Eurozone economy going forward. UK consumer prices are due for release tomorrow. Given the fact that PPI numbers were mixed and the British pound has weakened materially, we may not see a large decline in consumer prices.
AUD/USD: CAUTIOUS RALLY AHEAD OF RBA MINUTES
US dollar weakness drove the Canadian, Australian and New Zealand dollars higher today. Commodity prices were mixed with oil giving back its earlier gains and gold prices rising $18 an ounce. Like shorting the US dollar, long gold has been a pretty clear trade going into Tuesday’s FOMC rate decision. The Australian dollar’s rally has been the least impressive ahead of the release of the RBA minutes. At their last interest rate meeting, the Reserve Bank of Australia cut interest rates by 100bp to 4.25 percent. This move was larger than the market expected and represents 275bp of easing since the beginning of the year. The minutes will shed more light on why the central bank felt compelled to make the larger move and whether they plan on cutting interest rates again. The Australian dollar’s rally was also held back by the country’s forecast that commodity exports could fall 10 percent next year. Meanwhile of the 3 commodity currencies, the New Zealand saw the most material rally thanks to the rebound in manufacturing activity in the third quarter. There was no economic data from Canada but oil prices reversed after OPEC said they may not be able to counteract the drop in prices.
USD/JPY: TANKAN TANKS, JAPAN ANNOUNCES NEW STIMULUS
With interest rates near zero, Japanese policy makers and central bankers are forced to contrive new efforts in fighting their economic woes. In the face of weak business confidence, Japan announced a new fiscal stimulus plan, totaling ¥23 trillion. Although the expansionary policy will boost government spending dramatically, and directly widen the budget deficit, it will most likely have a negligible impact on growth as slower global growth offsets the plan. In addition to this announcement, the government is also taking steps to start purchasing commercial paper and providing direct capital injections into the banks. Benefits from stimulus packages can be short-lived and have so-far been a disappointment to market participants. This may be part of the reason why the Tankan index of business confidence suffered its sharpest decline in 30 years. The report, which fell from -4 to -36 this month, has been a very consistent indicator of economic activity and monetary policy. However, its effectiveness will no longer be in predicting rate cuts, but stimulus-related plans like what we received today. Tonight, Japan will release the tertiary Index, a key indicator of the strength of Japan’s domestic markets.
EUR/USD: Currency in Play for Next 24 Hours
The EUR/USD will be the currency in play for the next 24 hours. Of course, the major headline for the US, and perhaps the most significant market moving event of the month, will be the Federal Reserve rate cut announcement at 2:15 pm ET or 19:15 GMT. The US will also release Consumer Prices and Housing Starts at 8:30 am ET or 13:30 GMT. The Euro-zone will have Manufacturing and Services PMI at 4:00 am ET or 9:00 GMT. The EUR/USD is continuing its remarkable rally today, having seen gains for the last six consecutive trading days. You would have to go back to a rally in October of 2007 to see a similar feat. However, as always, resistance is close by. This one in particular is the 38.2% retracement from July highs to October lows at 1.3745, which also coincides with a gap down and several highs placed during the consolidation period in October. A possible support exists at 1.3300, or the high of October 30th. The breaking of the 38.2% level will be crucial in justifying the validity of this strong advance.
Published on Mon, Dec 15 2008, 22:58 GMT
11
0
US Dollar: Further Weakness Ahead?
Sun, Dec 14 2008, 22:25 GMT
by Kathy Lien
US Dollar: Further Weakness Ahead?
The automaker bailout drama has exerted its toll on the financial markets. Last night, news that the bailout deal fell apart in the Senate drove the US dollar to a 13 year low against the Japanese Yen. Almost immediately, the dollar rebounded and its recovery accelerated after reports that the White House may provide assistance to the automakers by tapping the TARP funds. Stocks have rebounded from negative territory, but the unconvincing rally in both the currency and equity markets suggest that traders do not know what to make of the automaker bailout saga, which is sure to drag out into the New Year. With the Federal Reserve expected to cut interest rates on Tuesday, the US dollar could remain weak going into the rate decision.
Retail Sales and Producer Prices = Recession and Deflation
Even though US retail sales and producer prices were basically in line with expectations, the data was very weak and confirms that the Federal Reserve will need to cut interest rates again on Tuesday. Consumer spending fell for the fifth month in a row while producer prices dropped for the second straight month pointing to recessionary and deflationary conditions in US. The two biggest inputs into GDP are retail sales and trade. Consumers cut back spending more aggressively in October and November which suggests that GDP growth could take a big dive in the fourth quarter, especially with the widening trade deficit. The biggest drop in consumer spending came from gasoline station receipts. Prices at the pump have fallen more than 50 percent since the summer and gas stations have suffered as a result. The only silver lining in the retail sales report is the fact that not every sector saw slower sales. Electronics and sporting goods were in demand but the rebound after 4 consecutive months of softer spending is likely related to Black Friday sales. Consumer confidence for the month of December improved, which was a bit surprising but it is important to remember that the index remains near 1980 levels.
Federal Reserve: 50bp vs. 75bp
Although we are putting our confidence in the Federal Reserve and hope that they will be proactive in cutting rates by 75bp on Tuesday, a smaller 50bp rate cut is still on the table. The majority of economists are still calling only a half point rate cut, but as of Friday afternoon, Fed fund futures are pricing in a 70 percent chance of a 75bp rate cut. Taking interest rates to zero is all but inevitable but it is not clear how quickly the Federal Reserve wants to make that move. If the Fed cuts by 75bp on Tuesday, then zero interest rates will probably be reached at the March meeting but if they cut by 50bp instead, then we may not see rates at zero until late April. The Federal Reserve has extended their meeting to 2 days to explore all options but the bottom line is that they have to decide whether to deliver more stimulus now or postpone it for later. Both economists and Fed fund futures have incorrectly forecasted the Fed’s move in the past and this time around one of them will be wrong.
Implications of the Fed’s Rate Decision on Currencies
The weakness of the US dollar against the Japanese Yen reflects the market’s expectation that after Tuesday, the US dollar will yield less than the Japanese Yen. If that comes to reality, we could see further weakness in the US dollar against all of the major currency pairs but if it doesn’t and the Fed only cuts by 50bp, there could be a violent recovery in the US dollar. Either way, currency traders need to know that there could be a lot of volatility following the interest rate decision. The FOMC statement will also be heavily scrutinized for any indication of what the Federal Reserve will do next and because of that, traders need to be particularly careful with their positions going into the rate decision. The outcome could set the tone for trading until the end of the year. In addition to the FOMC meeting, consumer prices, the current account balance, housing and manufacturing data are due for release in the coming week.
EUR/USD: JANUARY RATE CUT NOT A DONE DEAL
Of all the high yielding currencies, the Euro was the only one to appreciate against the US dollar today. The move was certainly not spurred by economic data, which continued to disappoint, but instead by the market’s realization that the Euro will remain the third highest yielding currency for some time. Industrial production dropped 1.2 percent in October while French business confidence plunged. Labor costs rose 4 percent, which may be a bit worrisome for the ECB, who is obsessed with inflation pressures. Higher labor markets could be yet another reason why they may want to refrain from cutting interest rates as aggressively as their peers. Yesterday, ECB member Weber said that a January rate cut is not a done deal. Comments today from Mersch and Constancio confirm that the central bank have not made up their minds yet. Both ECB members said there is still room for maneuver but everything is data dependent and they may not have much new information before February or March. Although there are a lot of important economic data due for release next week, the ECB may be alluding to the fact they want to see how the 75bp rate cut impacts the financial markets and the economy. Eurozone purchasing manager indices are due for release on Tuesday, consumer prices on Wednesday, German IFO index on Thursday and German producer prices on Friday.
It has been a tough week for the British pound, which fell to a record low against the Euro. In the past, the big action in the pound was against the US dollar and the Japanese Yen, while EUR/GBP would range trade away. However over the past few months, there has been a huge divergence between growth and monetary policy in the UK and growth in the Eurozone. The Eurozone economy has held up better than the UK but more importantly, the BoE has cut interest rates aggressively while the ECB has not. This has led to a dramatic run in EUR/GBP. Not only has the currency pair appreciated more than 16 percent in the past 2 months, but it rallied every single day this week. The strength of the Euro and the weakness of the British pound should be the factors that engineer a reversal in the currency pair next year. The weakness of the British pound and the aggressive interest rate cuts by the BoE will help to turn economy around in the second half of the year. The comparably restrictive monetary policy in the Eurozone and the strength of the Euro could crimp growth and delay a recovery. The price action in the EUR/GBP today suggests that some investors may already be realizing this notion. It will be a very busy week in the UK with consumer prices, the BoE minutes, employment data and retail sales due for release.
AUD/USD: RISK AVERSION HITS THE COMMODITY CURRENCIES
Commodity currencies are largely under pressure as new apprehensions have erupted in the face of the failure of the US auto bailout. Once again, risk aversion takes hold of the market. Concerns about the recession-prone Canadian economy have reignited today as Capacity Utilization falls to a record low. The figure, established in 1987, will prove to be a certain hindrance on growth as any level of corporate investment spending has been relinquished. New Motor Vehicle Sales fell -0.9%, after posting a gain of 2.4% last month. The signs that consumer and business spending will face renewed pressure should present an intensifying headache for the Bank of Canada. Thursday’s Retail Sales and Friday’s Consumer Price report will give more color on the state of the Canadian economy. The Reserve Bank of New Zealand has boosted its efforts in restoring liquidity for lending institutions by broadening its acceptance of investment vehicles to corporate bonds. The bank will now purchase investment grade dollar denominated corporate bonds in their open market operations. Next week’s most important Australian economic figures will be the RBA minutes and Westpac Leading Index on Tuesday, New Home Sales on Wednesday, and Quarterly Wage Agreements on Friday. For New Zealand, we expect Business Confidence on Thursday.
USD/JPY: WILL THE BOJ INTERVENE?
The Japanese Yen surged to a 13 year high against the US dollar after news that the bailout plan for automakers has failed to pass the Senate. Although USD/JPY rebounded almost instantly after hitting a low of 88.22, the weakness of the currency leads many traders to wonder if and when the Bank of Japan will intervene. In our opinion, BoJ intervention will not happen anytime soon. As an export dependent nation, a strong currency is not in Japan’s best interest. However unlike the past where the BoJ has intervened when USD/JPY fell below 105 and 100, we may not see any action by the Japanese government this time around. Since the problems are inherent in the US and the Eurozone, intervening at this time may be counterproductive for the Japanese. The only type of intervention that has ever worked is coordinated intervention. The BoJ will have a very tough time convincing Americans to take any steps that would lead to further strength in the US dollar. The Japanese government needs to stand aside and allow the US and Eurozone governments to take their own steps to spur growth. The Bank of Japan has an interest rate decision scheduled next week - no moves are expected from the central bank.
USD/JPY: Currency in Play for Next 24 Hours
The currency in play on Monday will be USD/JPY. Japan is set to release Tankan Surveys on Sunday at 6:50PM EST or 23:50GMT. The U.S. is set to release its Empire Manufacturing survey along with TIC flow at 8:30AM EST or 13:30GMT and 9:00AM EST or 14:00GMT on Monday, respectively. After hitting a 13 year low, USD/JPY retraced on the day forming a textbook example of candlestick hammer. The pair remains in the Sell-Zone that was derived using the Bollinger Bands. Although today’s drastic recovery may signal a reversal for the currency pair, a close above 92.50 would be needed for the downtrend to be negated. Nevertheless, it is important to be cautious as volatility expanded drastically. Short term support is at the 2nd Standard Deviation of the Bollinger Bands at 90.60. Below that is today’s 13-year low of 88.30. Resistance is placed at 92.50 which is the 1st Standard Deviation of the Bollinger Bands as well as 10-day SMA. The Tankan survey will contribute to the increase in volatility, for which, support and resistance may be tested.
Published on Sun, Dec 14 2008, 22:25 GMT
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US Dollar Takes a Hit on Weaker Economic Data
Thu, Dec 11 2008, 22:43 GMT
by Kathy Lien
US Dollar Takes a Hit on Weaker Economic Data
The US dollar took a beating today as weak economic data raises the risk of a 75bp rate cut by the Federal Reserve on Tuesday. Jobless claims rose by the largest amount since November 1982 with continuing claims hitting the highest level in 26 years. The current recession is the worst that we have seen since the 1980s and the latest jobless claims report only confirms that. However the labor data was not the only piece of bad news pressuring the dollar today, the trade deficit widened unexpectedly, household wealth plunged 11 percent in the third quarter compared to a year ago and the $14B bailout for automakers is having a very difficult time passing the Senate. In the past, the US dollar has actually rallied on weaker economic data because of its low interest rate and flight to safety but it was only a matter of time before investors realized that the US economy is in such bad shape that the dollar may not be safest place to hide.
Revisiting the 1980s
We have previously pointed out that non-farm payrolls tend to double-dip during recessions, meaning that we first see a large drop in employment by the hundreds of thousands, followed by a retracement and then another month of major job losses that is comparable to previous decline. In this case, that would mean another month of job losses that comes close to or exceeds the -533k jobs that were lost in the month of November. This was what happened in 1981. The first time jobless claims printed above 500k in the 1980s was in October 1981. Non-farm payrolls had started declining in August and in January of 1982, non-farm payrolls dropped by 327k. It then rebounded significantly the next month (-6k), but that was only a precursor to another 10 consecutive months of job losses with non-farm payrolls revisiting the -300k levels in July (NFP in July 1982 was -343k). We expect the same thing to happen again in 2009 especially after Bank of America announced this afternoon that they will be cutting 35,000 jobs over the next 3 years. The weekly jobless claims number will add pressure on the Federal Reserve to cut interest rates by 75bp next Tuesday. Fed Fund futures are already pricing in a 75bp rate cut from the Federal Reserve next week. This would take US rates to 0.25%, making the US dollar the lowest yielding currency in the developed world. If the Fed takes interest rates to zero, we could see USD/JPY fall to 13 years lows and the Euro to return to 1.35.
Trade Deficit Data Signals to Big Dive in GDP
The two biggest inputs into GDP are consumer spending and trade. Therefore the 2.8 percent decline in retail sales and the surprise widening of the trade deficit in the month of October suggests that GDP growth could take a big dive in the fourth quarter. Word on the street is that some economists are calling for GDP to decline as much as 4 to 6 percent in Q4, which would be the largest contraction in growth since the 1980s. In the first quarter of 1982, GDP fell -6.4 percent. A 4 to 6 percent drop in GDP would not be out of the ordinary given the current conditions in the US economy. In the fourth quarter of 1990, GDP contracted by 3 percent and in the first quarter of 1991, it contracted by 2 percent. If you agree that the current recession is worse than the one in the 1990s, then it would be logical to expect a contraction in growth exceeding 3 percent.
Don’t Expect Retail Sales and Producer Prices to Help
Retail sales and producer prices for the month of November are due for release tomorrow. Another large decline in consumer spending will only support our thesis that GDP will see a big contraction in the fourth quarter. All of the leading indicators for retail sales that we follow point to very weak consumer spending last month despite stronger Black Friday sales. SpendingPulse, the retail data service of MasterCard Inc. reported that retail sales excluding autos dropped by the largest amount in 5 years. Chain store sales as measured by the International Council of Shopping Centers also dropped by 2.7 percent last month, the largest decline in at least 8 years. Don’t forget that November was also the month that non-farm payrolls fell 533k. Americans were more worried about keeping their jobs last month than spending liberally. The Treasury market is already pricing in the possibility of deflation and depression with yields in zero to negative territory for the first time since the Great Depression. Although we don’t think that the US will fall into a depression, the data certainly supports tougher times ahead for the US economy.
EUR/USD: SURGES TOWARDS 1.35, SNB CUTS RATES TO 0.5%
The Euro completely decoupled from equities today on the back of higher oil prices and not so dovish comments from the European Central Bank. Weak US economic data is making it increasingly clear that the gap between US and Eurozone interest rates will not narrow anytime soon. There was no Eurozone economic data released today, but ECB member Weber said a January rate cut is not a done deal. He pointed out that the ECB has never taken interest rates below 2 percent and that the central bank doesn’t have enough information to decide whether to cut interest rates again in January. Market tensions are expected to ease next year and he really wants to avoid negative real interest rates. More importantly, Weber added that when the economy recovers, the ECB will need to raise interest rates promptly. In terms of monetary easing, the ECB has been one of the least aggressive central banks this year. They have only cut interest rates by 150bp, compared to the 325bp by the BoE. This is why EUR/GBP has continued to press higher. With the Fed cutting interest rates next week, the latest comments from the ECB could fuel further gains in the EUR/USD going into the US rate decision - there is nothing standing in the way of currency pair hitting 1.35. Meanwhile the Swiss National Bank cut their target interest rate range by 50bp to 0.0 – 1.0 percent, making the Swiss Franc, the second lowest yielding currency in the developed world for the time being. This SNB has materially revised down their inflation forecast and they expect GDP to contract between 0.5 to 1 percent next year. Although they did not talk about zero interest rates specifically, they did say that they will implement further measures should the situation so require. There is a strong chance that we will see further gains in EUR/CHF.
The British pound is trading back above the 1.50 level against the US dollar, albeit only marginally. Although the CBI Industrial Trends survey improved in the month of December, the export index fell to the lowest level since 2003 while the output expectations component fell to the lowest level since 1980. The CBI number reports the conditions in the manufacturing sector and can be used as a leading indicator for manufacturing PMI. The data tells us that the manufacturing sector remains in bad shape which is in line with the overall trend in the UK economy. Even though the British pound has rallied against the greenback, it continued to press lower against the Euro. Central bank officials around the world have been under extreme stress and Bank of England’s Blanchflower is the first one to cave. He announced plans to step down in May after pushing for interest rate cuts every month since October 2007. He called for a recession in the UK economy in November 2007, before any other member of the committee. His sharp ability to analyze the UK economy will be a big loss for the Bank of England.
AUD/USD: UNEMPLOYMENT RATE HITS 1 YR HIGH
The Australian, New Zealand and Canadian dollars rallied today on the combination of US dollar weakness and strength in commodity prices. Oil rose 10 percent on the expectation that OPEC will cut its production at next week’s meeting by as much as 2 million barrels a day. Australian employment dropped by 15k last month, driving the unemployment rate to the highest level in 1 year. Although the number was weak, compared to the rest of the US, it is enviable. New Zealand retail sales fell 1.3 percent in the month of October, the largest decline in 4 years. The contraction in consumer spending was due almost entirely to weaker demand for autos as spending ex autos rose 0.8 percent in the same month. Meanwhile the Canadian trade surplus narrowed in October, but not by as much as the market had expected; house prices fell 0.4 percent. Capacity utilization and new vehicle sales are due for release tomorrow. These are not very market moving numbers for the Canadian dollar.
The US dollar fell to a seven week low against the Japanese Yen as the Dow tumbled 196 pips. Although dollar weakness dominated trading today, USD/JPY has been in a strong downtrend since August. The currency pair has become grossly oversold which is why the dollar’s weakness today was more predominant against higher yielding currencies such as the Euro, British pound, Australian and New Zealand dollars. The rally in the EUR/USD and GBP/USD was so significant that it kept EUR/JPY and GBP/JPY in positive territory despite the 196 point decline in the Dow. Foreign buying of Japanese stocks and bonds has plunged in the past week while Japanese buying of foreign stocks and bonds have surged. Industrial production is due for release this evening along with consumer confidence. Both figures should confirm the recessionary conditions in Japan.
EUR/USD: Currency in Play for Next 24 Hours
The currency in play for the upcoming 24 hours is EUR/USD. There is plenty of influential economic data that is set to be released starting with Euro-zone Industrial production at 5:00AM EST or 10:00GMT and followed by the US Retail Sales and PPI reports at 8:30AM EST or 13:30GMT. Further in the day, the University of Michigan Consumer Confidence survey is expected to be released at 10:00AM EST or 15:00GMT.
The EUR/USD has seen drastic gains as the pair broke uprising triangle and Bollinger Bands, continuing the momentum to the upside. The overall pair is slightly overbought, although it is showing a definite reversal from the bottom which was established in the middle of October. The first resistance is placed at the 1.3500 which is a psychological barrier for traders. Followed by the 1.3600, which is a 50% retracement from the September high and October low. Current support is placed at the level of 1.3200 which is the second standard deviation of the Bollinger Bands along with a 23.6% retracement of July high and October low. With increased volatility and influential data released in the United States, either levels are in reach for the pair. While the EUR/USD is clearly reversing for the bottom, any positive data from the U.S could lead the pair slightly lower.
Published on Thu, Dec 11 2008, 22:43 GMT
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Has FX Volatility Peaked?
Wed, Dec 10 2008, 22:42 GMT
by Kathy Lien
Has FX Volatility Peaked?
On a quiet day devoid of any major US economic data, the saga surrounding Automakers continue to dominate the headlines. We are inching closer to a formal bailout plan for the Big 3 and as we have previously suggested, regardless of the final outcome, the markets will cheer an end to the drawn out drama. The rally in equities today has driven currencies higher against the US dollar and the Japanese Yen, but it remains to be seen whether the improvement in investor sentiment will last. US lawmakers have agreed to bailout the automakers only in principle but the $15 billion package may have a tough time passing the Senate in its current form. We are walking into a lot of potentially weak economic data on Thursday and Friday that could serve as a harsh reminder of the problems that the US economy faces. The US budget deficit swelled to a record $164.4 billion while wholesale inventories drop the most in 7 years. The only one spending right now is the US government and the latest budget deficit numbers reflect their new stakes in banks.
Fear of Deflation and Depression
The Treasury market is already pricing in the possibility of deflation and depression with yields in zero to negative territory for the first time since the Great Depression. Although year-end seasonality is certainly playing a role in the price action of Treasuries, it says a lot that investors are willing to park their money with the US government for zero return. The US trade balance numbers are due for release tomorrow and given the contraction in manufacturing ISM, we expect exports to falter. Producer prices and retail sales figures on Friday could also resurrect concerns that deflation and depression will hit the US economy. Fed Fund futures are pricing in a 75bp rate cut from the Federal Reserve next week. This would take US rates to 0.25%, making the US dollar the lowest yielding currency in the developed world. Although the greenback has remained weak against the Japanese Yen, if the Fed takes interest rates to zero, we could see more weakness in USD/JPY.
Has Volatility in the Currency Market Peaked?
On Tuesday, we talked about how volatility in the forex market has exploded in 2008. Although trading ranges expanded significantly in October and November, volatility has contracted since the beginning of the month. The following chart from Bloomberg illustrates how far 3 month volatility for the EUR/USD has fallen since hitting a record high in late October. Anyone that follows the currency market on a regular basis can attest to its recent range trading behavior. There are good reasons for the compression in volatility as the year is winding is coming to a close and new positioning becomes one of the last things on the minds of currency traders. It has been a tough year and many funds are closing their books early to lock in remaining profits. If volatility does continue to fall, it would help carry trades recover. However it may be premature to say that volatility in the currency market has peaked because December 16th will be a historic moment for the US Federal Reserve. Not only are they expected to take interest rates to the lowest level this generation has ever seen but they have to figure out how to effectively signal their intentions of taking US interest rates to zero without completely spooking the markets. Thin trading going into the holidays can also exacerbate moves in the currency markets. We remember how the EUR/USD increased 300 pips between Christmas and New Years in 2007 and did the same in the first 3 trading days of the year.
EUR/USD: ABOVE 1.30, SNB EXPECTED TO CUT RATES 50BP
The EUR/USD finally had a meaningful move above 1.30 today but the psychological level is still proving to be a level of contention. The price action of the currency pair is not in sync with the trend of Eurozone economic data and that may be the reason why the EUR/USD is having such a difficult time keeping its head above 1.30. Wholesale prices dropped more than expected in Germany, while industrial production plunged in both France and Italy. The recession in Italy was also confirmed by today’s third quarter GDP data which reported the second consecutive quarter of negative growth. The European Central Bank will be releasing their monthly bulletin tomorrow and there is no reason to expect anything other than a clearly pessimistic tone from the central bank. With that in mind however, Eurozone interest rates are still higher than many other major currency pairs and that may be a strong force behind the EUR/USD’s strength. Meanwhile the Swiss National Bank will be making a monetary policy decision on Thursday. They are expected to cut interest rates by 50bp to 0.5 percent. Even though they have been very aggressive this year with intermeeting rates cuts, the SNB will beat the Federal Reserve in taking interest rates below 1 percent. It will be interesting to hear what they say about monetary policy going forward and whether they will talk about the possibility of zero interest rates.
GBP: WILL THE UK ECONOMY GROW IN 2009?
The British pound continued to sink against the Euro as UK economic data and comments from government officials give traders even more cause for concern. The NIESR estimates GDP growth for the month of November to be -1.0 percent, this was revised from a prior forecast of -0.8 percent. There is no question that UK growth is slowing materially which is why the Bank of England is expected to continue to ease interest rates. UK Chancellor Darling said that he will leave it to the Bank of England to decide whether Quantitative Easing is necessary, but he encouraged the central bank to discuss all options. Interest rate still has a far ways to go before they hit zero but if the BoE considers QE, this suggests that they may be open to taking interest rates to zero. Darling also expects the country to start growing again in the second half of 2009. This is certainly feasible since the BoE has been especially aggressive with fiscal and monetary stimulus. Combined with the benefits of a weak currency, we would not be surprised to see a second half recovery in the UK.
AUD/USD SLIPS AHEAD OF EMPLOYMENT NUMBERS
While the stock market survived a relatively subdued session, oil and gold staged rallies totaling 3.8% and 4.3%, respectively. Such moves, however, have been unsuccessful in boosting the commodity currencies. Even though the stock market is holding onto positive territory, many are still hesitant to put their money behind these ailing currencies. This is a good indication of the still prevalent uncertainty and fear expressed by market participants. An example of this is the nearly 180 pip range in USD/CAD, which ended the day unchanged. There have been few market moving releases today. CAD Labor Productivity was unchanged. Australia showed some signs of strength as Westpac Consumer Confidence increased 7.5% from last month. Home Loans also showed surprising strength. New Zealand will announce later the level of Manufacturing Performance - it is likely to be weak as we are in a manufacturing recession. Tomorrow we will be met with a few important Australian indicators, including Employment Change, Consumer Inflation Expectations, and the Unemployment Rate. The Australian dollar has sold off across the board ahead of the employment numbers. The drop in the employment component of manufacturing, service and construction sector PMI suggests that the labor market numbers will be weak.
USD/JPY: LACKLUSTER TRADING DAY
USD/JPY lacks any conviction in its movement, as the pair remains in a consolidation mode. This range has been spurred by the indirection of the markets today. In response of the condensed volatility, crosses remain practically unchanged. A possible notion that has erupted in response is the hope of normal volatility and perhaps the bottom in USD/JPY and the world stock markets. Though it would be a stretch to make this prediction given the US event risks next week, it is true that we have not seen the moves that characterized the sharp volatility of earlier months. Unfortunately, economic data has not yet warranted the compression in volatility and the idealized bottom. It is possible that once we experience all of the rate changes over the next few weeks, we will have a better indication of where a new move will take place. Later today, we can expect JPY Foreign Buying Japan Stock and Japan Buying Foreign Stocks. These numbers should have no impact on the Japanese Yen.
AUD/USD: Currency in Play for the Next 24 Hours
AUD/USD will be our currency in play for the next 24 hours. We have a ton of economic data this evening. The Employment Change and Unemployment Rate is due for release at 7:30 pm ET or 00:30 GMT while the US will provide us with the Trade Balance and Import Price Index at 8:30 am ET or 13:30 GMT.
The AUD/USD is on the verge of crossing back into the Bollinger band buy zone, but has since lost some momentum. There are several strong resistance levels near current levels. Most notably, there is a strong trendline extending from highs placed on October 14th to highs on December 8th. If this first zone of resistance should fail, the next most immediate level can be found at the recent high at 0.6701, which coincides with the 50-day SMA. This level also failed on its attempts to break-through the trendline. The first level of support is at 0.6293, the most recent swing low from December 5th. A more significant level lies further down at about 0.6079, a very significant low. If this level is broken, we may see a downtrend extending toward lows placed in the early 2000’s.
Published on Wed, Dec 10 2008, 22:42 GMT
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More Weakness May be in Store for Currencies
Wed, Dec 10 2008, 01:57 GMT
by Kathy Lien
More Weakness May be in Store for Currencies
In Monday’s Daily Currency Focus, we posed the question, Can the Recovery in Currencies Last.At the time, we argued that the rally could be fleeting since it was driven by nothing more than hope and relief. Hope came from President Elect Barack Obama who provided further details on his economic recovery plan while relief came from the lack of any meaningful US economic data until Thursday.However the reality is that the US economy has not improved and the layoff announcements continue to pour in.Despite the possibility that a deal for the automakers will be announced tomorrow, the move in the currency market today suggests that reality may finally be setting in as US companies continue to reduce their profit forecasts.
Dollar Strength Will Hurt Q4 Earnings
Slowing global demand has made life very difficult for US corporations in the third quarter and unfortunately it may get even worse in the fourth quarter.In the first half of the year, multinational corporations benefitted from the weakness of the US dollar.Positive currency translations have helped companies such as Google who earns a substantial portion of their revenue abroad. However it is these same companies that will also suffer significantly from the dollar’s recent strength if they do not hedge completely.In the third quarter, Google said that if the dollar strengthens, revenues invoiced in other currencies become less when translated back into US dollars.Since the beginning of the fourth quarter, the US dollar has appreciated by another 10 percent, which means that for companies that haven’t hedged like Google, their earnings could take a big hit.If you tack on the impact that the strong dollar can have on export demand, the strength of the US dollar is a double blow for many US corporations.
4 Week US Treasury Bills Yield Zero, Negative 3M T-bill Rates
Although currency and stock traders can’t figure out whether this is a bottom or a pause before more losses, the sentiment in the bond market is very negative.For the first time since the US Treasury started selling 4 week T-bills in 2001, the yield hit zero.In other words, bond market investors are willing to buy T-bills at a negative real yield, which means that it earns less than cash.This drove the rates on 3 month bills to negative 0.01 percent, reflecting the market’s hunger for safety.The only reason why anyone would buy Treasury bills at negative real return is if they believe that recession will deepen, driving bond prices higher and yields further below zero. From our experience, the bond markets tend to have it right which suggests that we may see further losses in the currency and equity markets this week.The only thing that they could help would be decision on a bailout for the automakers and even then, the positive impact on investor sentiment may be limited.
Explosion in Forex Trading Ranges
Forex trading ranges have exploded over the past few months. The daily average trading range has doubled for all of the actively traded currency pairs in 2008, with some currency pairs even seeing a 200% rise in their average daily range. However the biggest explosion in volatility has actually happened in the past 9 weeks. EUR/GBP, USD/CAD and the AUD/USD have seen the largest increases to their average daily range, but the range for the EUR/USD and GBP/USD has also increased materially. More specifically, in 2007, the EUR/USD had an average daily range of 84 pips. Since October, its average daily range has been 267 pips, a more than 300 point rise. Understanding trading ranges is very important because it plays a big role in developing effective money management tactics. EUR/GBP which use to be known as one the few range trading currency pairs saw its average daily trading range increase from 36 pips in 2007 to 142 pips since October, a whopping 400 percent rise.
USD/CAD: BANK OF CANADA TAKES INTEREST RATES TO 50 YEAR LOW
The Bank of Canada took interest rates to a 50 year low this morning of 1.5 percent and signaled that further monetary stimulus may be needed. Their next rate decision is on January 20th and there is a strong chance that the central bank will take interest rates down to 1 percent. According to the Bank of Canada’s monetary policy statement, global growth deteriorated significantly, inflation has slowed more than forecast and spending is decreasing on both the corporate and consumer level. The weakness of the Canadian dollar is helping but not enough to make the central bank feel confident that their 250bp of easing year to date will be sufficient to stabilize the economy. The BoC is telling us that more needs to done. The automobile and commodity industries in Canada have been hit hard by slowing US growth and falling oil prices.Meanwhile The weakness in the US equity market drove the Australian and New Zealand dollars lower.Australian business confidence hit a new record low in the month of November.We expect this evening’s consumer confidence and housing market numbers to be weak as well.
EUR/USD: BACKS OFF 1.30
The EUR/USD hit 1.30 today but backed off almost immediately.The rapid ascent and descent from that level suggests that the move was driven by nothing more than flow.Eurozone economic data was surprisingly better than expected with the German ZEW survey of analyst sentiment rebounding and the German trade and current account surpluses increasing.Exports fell less than expected but imports declined more than expected.The weakness of the Euro is probably helping to support external demand while at the same time keeping German demand domestic.As for the ZEW, although analysts are less pessimistic about the outlook for the Eurozone economy, they have grown more pessimistic about the current situation.ECB officials were out in force applauding the improvement in the ZEW survey while at the same time warning that monetary policy has its limits.The ECB is still expected to cut interest rates but not by the degree of easing that we saw earlier this month.
BRITISH POUND: HITS NEW LOWS AGAINST EURO
The British pound hit new record lows against the Euro on increasing evidence of deeper troubles in the UK. The trade deficit was larger than the market expected while activity in the manufacturing sector contracted for the eighth consecutive month, the longest streak in 28 years. Economists have grossly underestimated the weakness of the manufacturing sector with factory orders plunging by 3 times more than the consensus forecast. Despite having lowered interest rates to the lowest level in 57 years, the Bank of England’s work is not done. Interest rates will fall to 1 percent before the BoE draws an end to their easing cycle. Contrast that with the European Central Bank who will probably only take interest rates down to 1.75 percent and you can understand why EUR/GBP has pushed to new highs. Eurozone data was also betterthan expected with the German trade surplus increasing thanks to a smaller decline in exports and the ZEW survey of economic sentiment reporting an unexpected improvement.
USD/JPY: BAD NEWS FAILS TO HURT THE YEN
The sell-off in US equities drove the Japanese Yen higher against all of the major currencies despite weaker economic data.Not only is Japan in a recession, but the annualized pace of third quarter GDP growth was revised down significantly to 1.8 percent.Leading indicators also dropped from 89.2 to 85 in the month of October, reflecting the dismal outlook for the Japanese economy.Meanwhile machine tool orders came in at -62.2% indicating that the businesses are reluctant to start new projects while confidence is continuing to plummet. With a lack of credit in the market and businesses reluctant to spend, Japan’s economy will deteriorate further. Sony stated that they are cutting as much as 16,000 while Nomura Holdings plans to cut more than 100 jobs.This evening, we are expecting the CGPI index which will shed more light on the inflationary or deflationary situation in Japan.
USD/JPY: Currency in Play for the Next 24 Hours
The currency pair in play for the next 24 hours will be USD/JPY. This is due to a Machine Orders and Domestic Corporate Goods Price Index released from Japan today at 7:50Pm EST or 23:50GMT. Tomorrow, we expect Monthly Budget Statement from United States around 4:00PM EST or 19:00GMT.
The USD/JPY still trading in the selling zone which we have derived using the Bollinger Bands. The Yen continued to appreciate against the major currencies and disregarding deteriorating conditions in the economy. Current Support for the USD/JPY stands at the second Bollinger Band which is also an intermediate low at 91.50. With a lack of market moving indicators for the upcoming 24 hours, the pair is set to test the support as investors are pricing in additional interest rate cuts by the Fed which is due December 16th. The downtrend will be negated upon the break of resistance which resonates at the first standard deviation and close to 10-day SMA at price of 93.40.
Published on Wed, Dec 10 2008, 01:57 GMT
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Can the Recovery in Currencies Last?
Mon, Dec 8 2008, 23:11 GMT
by Kathy Lien
Can the Recovery in Currencies Last?
For the second trading day in a row, we have seen an improvement in investor sentiment as equities and currencies stage another impressive rally. After a week of brutally painful news for the US economy, this is potentially a week for rest and recovery. There are no major US economic releases until Thursday and Friday, when we have the trade balance, producer prices and retail sales being released. Between now and then, investors are reveling in optimism that the new Administration is already making the economy their top priority and in the hope that a rescue package for the automakers will be announced soon. Investors are slowly taking their money out of the low yielding US dollar and cautiously dipping their toes back into the higher yielding currencies such as the Euro, Australian and New Zealand dollars.
No News is Good News
No news is good news when it comes to the currency market. The US economic calendar was devoid of any meaningful data today. Pending home sales and the IBD economic optimism index are the only pieces of US data on the calendar tomorrow and they are not usually market moving. The market’s immunity to bad news suggests that everyone is tired of hearing the obvious, which is that the US economy is in bad shape and will worsen before it improves. It appears that all of the weakness in the first half of the 2009 is priced in and instead investors are latching onto the stimulus plans for hope that they will help to trigger recovery in the second half of 2009. This weekend, President-elect Barack Obama laid out his plan to create or preserve 2.5 million jobs. His focus is on infrastructure - upgrading public buildings to make them more energy efficient, building roads and highways and modernizing school buildings. He is hitting the ground running and is expected to announce a $500B to $700B stimulus plan in the first days of his administration.
A Decision on the Big 3
At a time when uncertainty about the US economy is at elevated levels, the prospect of a major stimulus package and a decision on aid for the Big 3 automakers is helping to improve investor sentiment. The Big 3 automakers have dominated the headlines for the past few weeks and regardless of whether GM and Chrysler will be forced into bankruptcy, the markets will be relieved that there is a resolution.
Things to Worry About
There are still plenty of reasons to be skeptical about the rally in currencies and equities however. The layoffs keep on coming as Dow Chemical announces an 11 percent reduction in their workforce, which translates into 5000 jobs. InBev will be cutting 1400 jobs from the US operations of Anheuser-Busch. Bonus cuts, salary freezes and warnings about earnings have also become the norm. Watch out for fourth quarter results as the dollar’s strength will most certainly weigh on profitability. Equities and currencies have become extremely oversold in the past few months and the lack of any major US economic data until Thursday is helping to fuel the recovery. If we are witnessing another bear market rally, then the rally in the US dollar and Japanese Yen is not over.
USD/CAD: 50BP OR 75BP RATE CUT?
The Bank of Canada will be making an interest rate decision tomorrow and the market is torn between a 50bp or 75bp rate cut. Economists expect a half point cut but Canadian interest rate futures are pricing in a 50 percent chance that the central bank may elect the larger move. Economic data has taken a turn for the worse with the IVEY PMI and employment numbers falling short of expectations. Employment decreased by more than 70K jobs last month, the largest decline in more than a quarter of a century. In addition, IVEY PMI, an influential measure of business sentiment and expected growth, also made a sharp decline off of prior months. Price pressures have eased even further since their October meeting and even though GDP expanded by 1.3 percent in the third quarter, it is a lagging indicator. The slowdown in the US economy and the drop in oil prices is a double blow for Canada. More weakness and belt tightening are expected for the automobile and commodity industries. If the BoC only cuts by 50bp tomorrow, we expect them to signal that more rate cuts may be necessary. Meanwhile the Australian and New Zealand dollars are also up strongly today despite weaker economic data. Australia’s ANZ job advertisements and New Zealand’s manpower survey signal more trouble to come for the labor markets in both countries.