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

Has the US Dollar Hit a Top or is this a Mirage? Last Updated 11/13/2008 5:21:52 PM EST (GMT +5)

TODAY’S BIGGEST PERCENTAGE MOVERS

 AUD/JPY (  +430 pips or +7.05%)

EUR/JPY ( +625 pips or +5.26%)

CAD/JPY ( +390 pips or +5.07%)

THE STORIES IN THE CURRENCY MARKET  

  • USD: Has the US Dollar Hit a Top or is this a Mirage?
  • EUR: Recession in Germany
  • GBP: Will the UK Step in to Support the Pound?
  • CAD: Trade Surplus Shrinks
  • AUD: Rises 7 Percent Against the Japanese Yen
  • NZD: Recovers as Risk Appetite Improves
  • JPY: Yen Crosses Soar as Dow Sees 900 Point Intraday Recovery

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

HAS THE US DOLLAR HIT A TOP OR IS THIS A MIRAGE?

 In 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

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.

AUSTRALIAN, NEW ZEALAND AND CANADIAN DOLLARS SEE SHARP RECOVERY

The Australian, New Zealand and Canadian dollars staged a strong recovery as the Dow soared 550 points in the last few hours of trading. Given that these 3 currencies have suffered the most from global liquidation, we are not too surprised to see the AUD/USD rally 4 percent against the US dollar and close to 7 percent against the Japanese Yen. Commodity prices have also rebounded, adding fuel to the currency rally. Economic data was mixed with Australian wages increasing, but consumer inflation expectations easing. The Canadian merchandise trade surplus decreased but that was hardly surprising given the drop in IVEY PMI. The rally in the New Zealand dollar was the weakest of the 3 as the currency was held back by weaker economic data. Retail sales grew less than expected while business PMI fell deeper into contractionary territory. Canadian manufacturing shipments and new vehicle sales are due for release on Friday.

YEN CROSSES SOAR AS DOW SEES 900 POINT INTRADAY RECOVERY

The 900 point intraday recovery in the Dow has driven all of the Japanese Yen crosses higher. AUD/JPY which has consistently been on our list of biggest market movers has seen the most dramatic recovery. Although the rally today has been overwhelmingly positive for risk, the large intraday swing signals high volatility and carry trades never thrive well in overly active environments. Inflation is easing in Japan as well with CGPI falling 1.6 percent in the month of October. According to Bank of Japan’s Nakamura, the economy should continue to deteriorate. Despite all of the negative sentiment, the Nikkei should respond positively to the rally in the Dow. There is no Japanese Economic data on the calendar this evening.

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

 The currency in play for the upcoming 24 hours will be EUR/USD. Tomorrow, we expect large amount of data to be released in the Euro zone, starting with German CPI at 2:00 am EST or 7:00 am GMT, and Euro-zone GDP and CPI at 5:00 am EST or 10:00 am GMT. The US will be releasing Retail Sales at 13:30 EST and Michigan Confidence Report at 15:00 EST. It is also important to note that Federal Reserve Chairman Bernanke and European Central Bank President Jean-Claude Trichet will speak in Frankfurt around 13:30 GMT.

The Euro posted a magnificent gain against the dollar on Thursday, bouncing back into a range trading zone after a week of heavy selling mostly due to short covering. EUR/USD came short of testing the support level which lies at 1.2325. Not only is the currency pair trading within the range zone that we established using Bollinger Bands, but a clear triangle is also in formation. Tomorrow’s data coming from United States and Euro zone will undoubtedly influence the price. The 20-SMA and the triangle formation which lies at the level of 1.2855 is a key resistance level. If the EUR/USD manages to break that point, the next resistance is not at 1.3070 which is the 1st Standard Deviation of the Bollinger Bands and the 38.2% Fibonacci retracement of the 2000 to 2008 rally. For the downtrend to resume, we would need to see the EUR/USD fall back below 1.2550.

 

 

By Kathy Lien, Director of Currency Research at GFT

 

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 Test 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 Test 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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