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Forex Blog - GOLD CHALLENGES THE US DOLLAR AS CURRENCY OF CHOICE

GOLD CHALLENGES THE US DOLLAR AS CURRENCY OF CHOICE Last Updated 9/17/2008 5:47:04 PM EST (GMT +5)

 

DAILY CURRENCY MARKET FOCUS 09.17.08

 

 


TODAY’S BIGGEST PERCENTAGE MOVERS

 

EUR/AUD          +390 pips or +2.18%)

 


GBP/USD   (       +365 pips or +2.06%)

 

USD/CHF   (        -216 pips or -1.91%) 

 

THE STORIES IN THE CURRENCY MARKET

 

§  USD:  GOLD CHALLENGES THE US DOLLAR AS CURRENCY OF CHOICE

§  EUR:  INTEREST RATE EXPANSION COULD MEAN A BOTTOM

§  JPY:   PLUNGES AS DOW FALLS 450 POINTS

§  GBP:  RALLIES DESPITE WEAK ECONOMIC DATA

§  CAD:  OIL PRICES RECOVER

§  AUD:  GOLD PRICES SURGES 10 PERCENT

§  NZD:  BENEFITS FROM DOLLAR WEAKNESS

 

EXPECTATIONS FOR UPCOMING FED MEETINGS (NEW FORMAT)

 

 

** PERCENTAGES MAY NOT ADD UP TO 100% BECAUSE OF THE PROBABILITY OF LARGER OR SMALLER MOVES BEYOND THOSE SHOWN ON THIS TABLE

GOLD CHALLENGES THE US DOLLAR AS CURRENCY OF CHOICE

 

The biggest stories in the financial markets today was the government bailout of AIG, the 450 point drop in the Dow and the 10 percent rise in gold prices (+$80), which the largest since September 1999.  As we have been warning in prior reports, if global fears persist, there would come a point where repatriation of US dollars would be overshadowed by foreign investors liquidating their dollar denominated investments.  We saw that in today’s price action with the greenback selling off across the board as gold, the ultimate form of safe haven becomes the currency of choice.  In the eyes of Sovereign Wealth Funds and central banks, commodities including oil may be the safest bet.  Supply and demand dynamics for oil have not changed dramatically so $95 oil may be seen as a bargain.  Amidst all of the volatility in the financial markets, the one overriding theme is risk aversion.  For that reason, we continue to believe that USD/JPY is the clearest trade in the currency market as continued uncertainty drags the currency pair lower.

 

Government Pulls Out All the Stops, No One is Convinced that it is Enough

 

The US government has pulled out all of the stops but the market is not convinced that the storm has passed. The price action in everything from stocks, bonds, the US dollar and gold indicates that every new rescue is having less of an impact.  In addition to spending $85B to bailout AIG, the SEC has also issued new short selling rules that prohibit naked short selling in all US equities.  Their goal is to reduce volatility and based upon today’s price action, it hasn't worked. 

 

Investors from around the world are nervous and not willing to take on counterparty risk as trust becomes a commodity these days. LIBOR rates increased by the most in 9 years indicating that banks have become extremely cautious about lending.  The rates of US Treasury 3 month bills fell to the lowest amount in 54 years, while the 2 year swap rate hit a record high.  Gold prices surged more than $85 an ounce.  The TED spread, which is the difference between what banks and the Treasury pay to borrow ballooned to a wider level than Black Monday in October 1987.  The degree of these moves proves that there is still a significant amount of risk aversion in the markets which is bearish for USD/JPY.   

 

Here's some info that illustrates the significance of today’s moves:

 

 

 

 

Weak Housing Data Doesn’t Help Either

 

Adding further uncertainty to the outlook for the US economy is the current account and housing market data.  The deficit widened from $175B to $183B in the second quarter, while housing starts fell 6.2 percent to a 17 year low.  Building permits, which is frequently perceived as a leading indicator for the housing market dropped more than 8 percent.  With the number of layoffs expected to rise, this holiday shopping season could be particularly grim for retailers.  Looking ahead, jobless claims, the Philadelphia Fed index and leading indicators are scheduled for release.  Even though we expect dollar bearish numbers, economic data have become nothing more than an afterthought these days. 

 

EUR/USD: INTEREST RATE EXPANSION COULD MEAN A BOTTOM

 

Since last Friday, the Euro has rallied close to 500 pips, leading many people to wonder whether this a real bottom for the EUR/USD.  In order to answer this question, we have to first look at what drove the EUR/USD down 10 percent in 2 months, which was oil, interest rates and flight to quality.  Between the middle of July and the first week in September, oil prices dropped close to 40 percent, a possible rate hike by the Federal Reserve was the talk of town and the US dollar benefitted significantly from safe haven flows.  However now the market is pricing in a 100 percent chance of a quarter point rate cut at the October FOMC meeting (see table of Fed interest rate expectations), oil prices have hit a bottom and are trending higher while the US dollar is no longer a safe haven play.  If the Federal Reserve cuts interest rates over the next 2 months while the ECB refuses to follow suit, interest rate compression will be replaced by interest rate expansion in the Euro’s favor.  For these reasons, this could be a true bottom in the EUR/USD at least until slower global growth forces a more aggressive hand by the ECB.  However this does not mean that we expect the EUR/USD to surge to 1.50.  Instead, range trading is the more likely course for the currency pair.  The offsetting factors of US investors liquidating their foreign holdings to raise cash and foreign investors dumping their US investments in lieu of safer assets should keep the EUR/USD and GBP/USD range bound.   Meanwhile the Swiss National Bank will be making a monetary policy announcement tomorrow. Interest rates are expected to remain unchanged and any comments from the SNB should lean towards easier monetary policy.

 

BRITISH POUND: UP 400 PIPS DESPITE EXCEEDINGLY WEAK ECONOMIC DATA

 

The British pound surged 400 pips or more than 2% against the US dollar. The strength was actually universal with big moves also seen against the Euro, Japanese Yen and Swiss Franc.  Interestingly enough, UK economic data was very weak.  The CBI Industrial Trends survey plunged in the month of September, reflecting difficult manufacturing conditions while the number of people of claiming unemployment benefits hit a 6 year high.  The Bank of England minutes was also dovish with 1 member voting for a 50bp rate cut.  However it seems that possible consolidation in the banking sector has kept the British pound bid.  Lloyds TSB is expected to buy HBOS for GBP14 billion, rescuing them from a Lehman style failure.  Retail sales are due for release tomorrow.  We expect consumer spending to slow, but economic data may be overshadowed by macro drivers.

 

USD/JPY PLUNGES AS DOW HITS LOWEST LEVEL SINCE OCT 2005 – THIS IS A DOLLAR NOT CARRY TRADE STORY

 

The sharp sell-off in the US equity market has led to more weakness for USD/JPY and some of the Japanese Yen crosses.  As we have mentioned in the dollar portion of this report, the only clear trade these days is short USD/JPY as risk aversion drives the currency pair lower.  In fact, it is interesting to point out that not all of the carry trades or Yen crosses sold off despite the 450 point drop in the Dow.  EUR/JPY or GBP/JPY for example are materially higher.  This suggests that the move is out of dollars and not carry trades because the rally in the EUR/USD and GBP/USD was more significant than the sell-off in USD/JPY.  

 

AUSTRALIAN DOLLAR: CONTENDS WITH GOLD RALLY AND RISK AVERSION

 

The big moves in the financial markets have led to significant volatility in the Australian, New Zealand and Canadian dollars.  Despite the $85 rise in gold prices, there has not been a meaningful rally in the Australian dollar.  The currency hit an intraday high of 0.8075, but risk aversion was so dominant that the Australian dollar actually ended the day weaker against the greenback.  Of the 3 commodity producing countries, Canada is the only one with data – leading indicators and wholesale sales are due for release.

 

 

 

 

USD/JPY:  CURRENCY PAIR IN PLAY OVER THE NEXT 24 HOURS

 

With the Dow falling 450 pips in the US trading session to the lowest level since October 2005, USD/JPY will be the currency pair to watch.  Even though the Philadelphia Fed Index and leading indicators are both due for release at 10:00 AM ET or 14:00 GMT, macro factors and market sentiment will be the primary driver of USD/JPY. 

 

The currency pair remains within our sell-zone, which is established by Bollinger Bands.  The 106.25-50 level is important because the confluence of Bollinger Band (1st standard deviation), Fibonacci levels, the 10, 100 and 200-day SMA creates stiff resistance.  If the currency pair manages to close above 106.25, the downtrend will be broken but as long as it remains below that level, we expect USD/JPY to continue to trickle lower towards its not support at 102.35, the 23.6% Fibo.

 

 

 

 

By Kathy Lien, Director of Currency Research at GFT

 

About The Author

Lien has extensive knowledge within the interbank market, particularly in trading spot FX and options. She has written for numerous publications, is frequently quoted on financial media outlets, and is the author of several books, including Millionaire Traders. Read more

DISCLAIMER: This forum and the information provided here should not be relied on as a substitute for extensive independent research before making your investment decisions. Global Forex Trading is merely providing this column for your general information. The views of the author are not necessarily those of Global Forex Trading, its owners, officers, agents or employees. In addition, any projections or views of the market provided by the author may not prove to be accurate. Global Forex Trading and Kathy Lien will not be responsible for any losses incurred on investments made by readers and clients as a result of any information contained in this column. Global Forex Trading and Kathy Lien do not render investment, legal, accounting, tax, or other professional advice. If investment, legal, tax, or other expert assistance is required, the services of a competent professional should be sought.



 

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