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What to Expect Before New Years

Mon, Dec 22 2008, 23:25 GMT
by Kathy Lien

GFT

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.  

EUR/USD: UPTREND STILL INTACT

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