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Daily Currency Market Focus

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Has the US Dollar Hit a Top or is this a Mirage?

Fri, Nov 14 2008, 08:15 GMT
by Kathy Lien

GFT

n every major bear market, there are relief rallies and that is what we have seen today. The Dow Jones Industrial Average dropped more than 300 points during the US trading session before reversing violently to end the day up more than 550 points. The major turnaround in equities has forced the US dollar to give back its gains. However as much as we would love to see the global unwind come to an end, the continued weakness in US economic data suggests that this could be more of mirage than a bottom for currencies and equities.

Sharp Rise in Jobless Claims Points to Major Decline in Non-Farm Payrolls

When the labor market is in trouble, the US economy is in trouble because a rise in jobless claims has a direct correlation with consumer spending. Jobless claims rose 516k last week to the highest level since September 2001. The number of claims for unemployment benefits was only surpassed in the 2.5 weeks following 9/11. Extrapolating the jobless claims data to non-farm payrolls report and we see that non-farm payrolls could top 300k before the end of the year. In September 2001, the last time jobless claims were at current levels, non-farm payrolls dropped 244k. The next month it hit that recession cycle's low of -300k. Retail sales dropped 1.8 percent in September 2001, not far from the market’s expectations for retail sales in October. Although the NBER has yet to admit the US economy is in a full blown recession, the jobless claims data is already beyond at recessionary levels. The latest economic report from the US confirms the seismic challenges facing the US economy.

Retail Sales and G20 Meeting

Jobless claims rose 516k last week to the highest level since September 2001 and it has a direct correlation with consumer spending. Retail sales are expected to contract for the fourth consecutive month. The recent bankruptcies and profit warnings confirms that US retailers are already struggling. Both ISCS and SpendingPulse reported a sharp decline in sales while various independent studies across the nation report that consumers are cutting back. The recent drop in oil prices means that gasoline receipts will fall as well. The average price of a gallon of gasoline has fallen close to 50 percent from its summer highs. We don’t expect consumer spending to recover until well after the holiday shopping season. Just ask your neighbor and he will probably tell you that he is cutting back spending. World leaders will be gathering in Washington tomorrow for the G20 Emergency Economic Summit. Unfortunately we are skeptical of any groundbreaking announcements. Even though Gordon Brown, Prime Minister of the UK will want to push for reforms, President Bush may not want to commit Barack Obama to anything.

No V Shaped Recovery

Expectations for a V shaped recovery or sharp turnaround is unrealistic because there is still a very tough road ahead for the US economy. Nouriel Roubini, a NYU Professor who was one of the first people to forecast the recession now believes that the downturn could last well into 2009 and expects the unemployment rate to hit 9 percent. George Soros the infamous speculator that broke the Bank of England in 1992 takes things one step further by saying that we may even see a depression. Both men believe that when the US economy hits a bottom, it could stay there for some time which means that we could have more of a U or L shaped recovery. In this troubling market environment we continue to expect the US dollar and Japanese Yen to outperform, but with expectations skewed strongly in favor of disappointments from retail sales and the G20 meeting, the risk certainly lies to the upside.

EUR/USD: RECESSION IN GERMANY

The Euro rallied 2.5 percent even though Germany has become the second major developed country to fall into a technical recession. The price action in the Euro today is the classic behavior of the anti-dollar, which frequently bucks its own economic data to trade base upon the market’s appetite for US dollars. Nonetheless, the 0.5 percent contraction in growth during the third quarter spells big trouble for the Eurozone GDP report that is due for release on Friday. Growth for the region as a whole is expected to contract by 0.1 percent, which would put the Eurozone in a technical recession. Yet ECB officials continue to deny reality. Central bank governing council member Constancio said today that a recession has not been confirmed. The weak numbers should still add pressure on the European Central Bank to loosen their monetary policy. Another half point rate cut in the month of December has already been priced into the markets, but so far, the ECB has not shown the same aggressiveness that we have seen from the Bank of England. In addition to the GDP report, Eurozone consumer prices are due for release tomorrow. The decline in French CPI as well as the overall downtrend in commodity prices should drive inflation lower.

GBP/USD: WILL THE UK STEP IN TO SUPPORT THE POUND?

The British pound was one of the few currencies to weaken against the US dollar today. Since the beginning of the month, the pound has fallen close to 10 percent against both the US dollar and the Euro. It has become increasingly clear that next to New Zealand and Germany, the UK will be the next country to fall into an official recession and the Bank of England will have no choice but to respond with more interest rate cuts. On an intraday basis, the GBP/USD fell to a low of 1.4560, the weakest level since June 2006. There was no UK economic data on the calendar, which means that the price action in the pound was driven entirely by liquidation. With the risk of interest rates falling to the US’ levels of 1 percent, no one wants to be long British pounds at this time. As the currency continues to slide, the burning question on everyone’s mind is whether or not the Bank of England will step in to buy the British pound. We believe that they will not because the UK government knows that the weakness of the currency helps to support the economy.

Published on  Fri, Nov 14 2008, 08:17 GMT