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FX Blog - FX Markets Hit By Weak Data, Pressur Grows on Fed to Cut Interest Rates

FX Markets Hit By Weak Data, Pressur Grows on Fed to Cut Interest Rates Last Updated 10/15/2008 5:37:08 PM EST (GMT +5)

TODAY’S BIGGEST PERCENTAGE MOVERS

AUD/JPY ( -569 pips or -7.96%)

AUD/USD ( -408 pips or -5.83%)

NZD/JPY ( -366 pips or -5.79%)

THE STORIES IN THE CURRENCY MARKET

  • USD: FX MARKET HIT BY WEAK DATA, PRESSURE GROWS ON FED TO CUT INTEREST RATES
  • EUR: EU WAIVES BUDGET DEFICIT LIMITATIONS
  • GBP: UK UNEMPLOYMENT HITS 8 YEAR HIGH
  • JPY: SELLOFF IN EQUITIES RESUME, JAPANESE YEN CONTINUES TO BENEFIT
  • CAD: OIL FALLS BELOW $75 FOR THE FIRST TIME SINCE SEPT 2007
  • AUD: FALLS 7.9% AGAINST THE DOLLAR
  • NZD: BALTIC DRY INDEX HITS FIVE-YEAR LOW

 

EXPECTATIONS FOR UPCOMING FED MEETINGS

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

FX MARKET HIT BY WEAK DATA, PRESSURE GROWS ON FED TO CUT INTEREST RATES

 

The currency and equity markets were hit by another wave of liquidation as weak economic data and a pessimistic Beige Book report highlighted the need for further interest rate cuts by the Federal Reserve. The biggest beneficiaries of the sell-off in equities continue to be the two lowest yielding G7 currencies which are the US dollar and Japanese Yen. Low yielding currencies tend to do well in times of slowing growth and volatility while high yielding currencies perform terribly. The equity market is having a very difficult time rallying as investors shift their focus from one problem to the next. Last week, it was the frozen credit markets and now that credit is thawing, the focus has turned to the potential severity of the US recession.

Expect Third Quarter GDP to Turn Negative

The definition of a recession is two consecutive quarters of negative GDP growth and so far we have only seen one quarter of negative growth which was then followed by a 2.8 percent increase in GDP in the second quarter. However the recent trend of consumer spending, which constitutes 70 percent of GDP suggests that there is a strong chance third quarter growth will be negative, putting the US halfway to qualifying for the technical definition of a recession. Retail sales fell by the largest amount since August 2005 as consumers cut spending on cars, furniture, electronics, clothing and sporting goods. Americans are eating out less and only spending on the necessities like health care and gas. Consumer spending has now declined every single month in the third quarter. The Empire State manufacturing survey fell to the lowest level since July 2001 while business inventories grew by a tepid 0.3 percent. According to the Beige Book report, all 12 Fed Districts saw slower growth last month with consumers cutting back and capital spending plans put on hold in light of the economic uncertainty. As for inflation, core producer prices increased but headline prices declined. The headline numbers have become just as important as the core numbers which means that the data today will pressure the Federal Reserve to continue cutting interest rates.

Bernanke: Signaling More Rate Cuts?

 

In a prepared speech to the Economic Club of New York, Fed Chairman Ben Bernanke said that the credit markets will take time to freeze and that an economic recovery will not happen immediately. He also indicated that the turmoil in the financial markets pose significant threats to growth. He has pledged to continue fighting the crisis and indicated that the TARP is not a “total solution.” Bernanke may be hinting to us that further rate cuts are needed, making 1 percent interest rates a growing possibility. Fed fund futures are pricing in an 85 percent chance that interest rates will be slashed to 1 percent before the end of the year.

DJIA: Does the Panic of 1907 Offer Hope?

After the horrid US data released this morning, there are plenty of reasons to believe that the equity markets including the Dow Jones Industrial Average are headed lower. However in every battle there are reasons for hope. According to a very interesting study published by Barclays Capital this morning, the current equity market movements are strikingly similar to that of the “Panic of 1907.” Back then, there were 5 waves in the equity market sell-off; a decline of 17%, followed by a 13% rise, another 22% decline, a 12% recovery and then the final push lower that drove equities down 37 percent between the second and fourth quarter of 1907. Taking a look back at the Dow’s move between 2007 to present, the numbers are eerily similar. Starting in Oct 2007, the Dow first slipped 18%, then rallied 13%, declined another 18%, recovered 10% and the latest decline from the August high to of 11,867 to the October low of 7,882 has been approximately 34%. This suggests that there could be one final push lower below 8000 before a long term bottom. When the rally does happen, it could be as much as 20 percent and after that, expect a long phase of consolidation. Back in 1907, there was a 15 year consolidation before the stock market picked up once again taking us into the Roaring 20s.

Consumer Prices, Jobless Claim, TIC, Industrial Production and Philly Fed

The US economic calendar continues to be very busy tomorrow with consumer prices, jobless claims, industrial production, the Treasury’s International Capital flow report and the Philly Fed Index are due for release. We expect most of the data to be dollar negative, but the one that we are most interested in is the TIC report. Although the data is for the month of August, which was before the meltdown in stocks, it will be interesting to see if there has massive repatriation of assets by foreign investors as the credit crisis escalates.

EU WAIVES BUDGET DEFICIT LIMITATIONS

The weakness in US equities has helped low yielding currencies like the US dollar at the expense of higher yielding currencies such as the Euro. Eurozone consumer prices came in slightly hotter than expected at 0.2, compared to 0.1 estimates. Given that slower growth is expected to ease inflation, we continue to believe that ECB monetary policy will be focused almost exclusively on growth for the foreseeable future. In addition, we can expect that the latest decline in oil prices will help to keep inflation from continuing much higher. Despite the sell-off in the EUR/USD today, trading remains range-bound, as the currency pair continues to linger within 400 points. There have been no major breaks in the EUR/USD because the recent moves have shown that the ECB and Fed are prepared to move in lockstep. Until we find one country experiencing a turn-around before the other, the volatility in the EUR/USD should trail behind that of the other major currencies. It is also interesting to point out that the EU has waived the budget deficit limit of 3 percent of GDP in, due to the “exceptional circumstances” in the financial markets.

UK UNEMPLOYMENT HITS 8 YEAR HIGH

UK unemployment rose to an eight year high of 5.7%. The recent job report looks grim with jobless claims also reaching multi-year highs, but compared to the rest of the world these numbers were not much of a surprise. The US and EZ unemployment rates are at 7.5% and 6.1%, respectively. Due to the latest UK economic conditions, such numbers are in line with what seems to be a US-like epidemic. Additional job market weakness is expected. Unsurprisingly, today’s price action has been volatile. At one point in the day GBP/USD was up 200 points, as of now the pair has lost all gains, while shedding an additional 150 points. Although no influential economic reports are expected for the rest of the week, it is obvious that the UK economy will continue to be weak. It will take months to years before the recent policy changes the UK has taken will be felt, leaving an uncomfortable period for things to worsen.

OIL FALLS BELOW $75 FOR THE FIRST TIME SINCE SEPT 2007

Unsurprisingly, the Canadian, Australian and New Zealand dollars came under severe selling pressure on the heels of the weakness in the equity market. USD/CAD is up more than 250 pips and appears headed for its 3 year high. Oil prices fell below $75 a barrel for the first time since 2007 on fears that there may be a meaningful slowdown in demand for energy. The fall in oil prices is the one silver lining in the crazy price action that we have seen across the financial markets over the past few weeks. The lower oil prices fall, the greater the benefit to the consumer. Despite the fact that gold prices are higher, the Australian dollar continues to be the biggest market mover, falling 5.5 percent against the dollar and 7.5 percent against the Japanese Yen. Leading indicators dipped into negative territory in the month of August. Meanwhile, the Baltic Dry Index, which is barometer for commodity demand fell to a 5 year low today. This confirms that demand for commodities is indeed slowing. New Zealand Business PMI and Canadian manufacturing shipments are due for release over the next 24 hours. We expect both numbers to be weak.

SELLOFF IN EQUITIES RESUME, JAPANESE YEN CONTINUES TO BENEFIT

Volatility is back in force as the DJIA falls by another 733 points, bringing USD/JPY down with it. The biggest losers continue to be the 2 currency pairs with the fattest interest rate spreads – AUD/JPY and NZD/JPY. The Yen crosses have been particularly sensitive to the volatility in the financial markets. Both the trade and current account balances came out softer than expected. The Japanese Trade Balance is a very important economic indicator for the economy as exports represent a large percentage of GDP. Weakness in emerging markets, and global markets as a whole, will likely hurt trade even further. Tomorrow we are expecting the Tertiary Industry Index which can give some clues into the health of the domestic Japanese economic situation, which will need to be healthy in order to offset a potentially paralyzing trade deficit.

EUR/USD: Currency in Play Over the Next 24 Hours

An abundance of US economic data that is due for release tomorrow makes the EUR/USD the currency in play over the next 24-hours. The primary releases are the Consumer Price Index, expected at 8:30 am ET or 12:30 GMT, and the Philadelphia Fed Manufacturing Survey, expected at 10:00 am ET or 14:00 GMT.

Despite continued range-bound trading, EUR/USD remains in our Bollinger Band sell zone. There is an important retracement level at the 1.3323 level, or the 61.8% retracement from November 2005 lows to July’s highs. The level has already been touched and penetrated by a previous low but has held as price action retreated. Resistance will be determined as range between previous highs and the 50% retracement from the aforementioned Fibonacci levels. Any rally in the pair would have to be preceded by a convincing break out of the current trading range, otherwise we headed for a retest of the lows.

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 upon as a substitute for extensive independent research before making your investment decisions. Global Forex Trading is merely providing this column for your general information. This forum and its information does not take into account any particular individual’s investment objectives, financial situation, or needs. All investors should obtain advice based on their unique situation before making any investment decision based upon this forum or any information contained within. 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 such advice is sought, or other expert assistance is required, the services of a competent professional should be sought.



 

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