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Daily Market Commentary

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Economic Data Hits Record Low

Wed, Dec 31 2008, 00:12 GMT
by Kathy Lien

GFT

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, 00:15 GMT