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Wednesday November 19, 2008 - 22:18:06 GMT
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Forex Research - Dollar Soars as S&P500 Hits 5 Year Lows

Dollar Soars as S&P500 Hits 5 Year Lows Last Updated 11/19/2008 4:57:00 PM EST (GMT +5)

TODAY’S BIGGEST PERCENTAGE MOVERS

AUD/JPY ( -215 pips or -3.40%)

CAD/JPY ( -230 pips or -2.93%)

NZD/JPY ( -155 pips or -2.87%)

THE STORIES IN THE CURRENCY MARKET

  • USD: Dollar Soars as S&P500 Hits 5 Year Lows
  • GBP: BoE Will Not Stop the Pound from Falling
  • EUR: European Car makers also asking for money
  • CAD: BoC Carney Signals Further Rate Cuts
  • AUD: RBA Stevens Defends Economy
  • NZD: Closing in on 5 Year Low
  • JPY: No Rate Cut Expected from BoJ

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

US DOLLAR: Soars as S&P 500 Hits 5 Year Low

Tuesday’s rebound in risk appetite was short-lived as the FOMC minutes revealed that the contraction in the US economy could last well into the summer of 2009. In light of the 400 point drop in the Dow, the US dollar and Japanese Yen regained strength as repatriation and risk aversion continues to drive demand for the low yielders. The greenback’s recent strength can be most clearly seen in USD/CHF, which hit a fresh 14 month high today. As we predicted, the FOMC minutes was the trigger for a major move in the currency market. However the moves that we have seen today need to be sustained before we can see a more meaningful breakout of the recent consolidations across the currency market. Something more powerful such as a decision on bailing out the automakers, next week’s GDP report or another surprising abysmal loss in the corporate or financial sector may be needed before we see new trends develop.

FOMC Minutes Confirms that More Rate Cuts Needed

The tone in the FOMC minutes, like the tone of Bernanke’s testimony yesterday was unmistakably dovish. The members of the monetary policy committee lowered their growth and inflation forecasts, talked about the downside risks to growth and how the contraction in the US economy will not temper until the middle 2009, at the earliest. Some members of the committee even openly discussed the need for further rate cuts, which confirms that rates will be lowered again in December. The Fed feels frustrated that interest rates are closing in on zero and acknowledged that it leaves them with little room to maneuver. Fed fund futures are pricing in a 50bp rate cut with a minor chance of a 75bp cut to 0.25 percent. If the Fed cuts interest rates by 50bp and the US economy fails to recover, their credibility will go out the window as the market questions their ability to tap other tools to stimulate the economy.

Inflation and Housing Data Continue to Disappoint

Inflation is also slowing, which will make it easier for the Fed to continue cutting interest rates. US consumer prices dropped 1 percent last month, taking the annualized pace of growth to 3.7 percent, which is the lowest level since October 2007. Falling oil prices takes the credit for lower inflationary pressures with gasoline prices tracking the 50 percent decline in crude. As indicated by the chart below, there is a very strong correlation between CPI and oil, with oil leading consumer prices. Gas station receipts fell a whopping 14 percent and commodity prices have fallen in general, which has helped to push down transportation costs. Although the core PPI numbers accelerated, core CPI dropped 0.1 percent and we expect it to head even lower. Meanwhile the housing market continues to be one of the weakest links in the US economy. Housing starts fell to a record low while building permits dropped to the lowest level in close to 50 years. When you have an environment where foreclosures are rising at a very rapid pace, builders have no desire to break new ground.

Automakers, Philly Fed and Leading Indicators

The Big 3 Automakers (General Motors, Ford and Chrysler) were on Capitol Hill today pleading for a bailout. Although a bailout of the automobile industry is inevitable in our opinion, it remains to be seen whether lawmakers will act quickly. The longer this drags out, the more pain it will cause for US equities. As we hold our breath for a decision, the Philadelphia Fed survey of manufacturing conditions and leading indicators are due for release tomorrow. The Empire State manufacturing survey held steady, which suggests the same for the Philadelphia Fed index. However we still believe that the manufacturing sector is suffering significantly from the global slowdown which means that the odds are skewed towards weaker numbers. There is no question that leading indicators will be weak with stocks, supplier deliveries and jobless claims all printing poorly in the month of October.

GBP/USD: BOE WILL NOT STOP POUND FROM FALLING

The British pound is on a tear even though the minutes from the most recent monetary policy meeting indicates that the Bank of England toyed with the idea of cutting interest rates more than 150bp earlier this month. According to the minutes, they only limited the rate cut to 150bp and not 200 or 250bp because they were afraid of shocking the markets. As I recall, 150bp at that time was quite a surprise. The decision was unanimous with all 9 members of the monetary policy committee backing the 150bp rate cut that took interest rates down to 3 percent. The markets are ecstatic about the Bank of England’s proactiveness even if it means that UK interest rates are headed lower. Given the tone of the BoE minutes, we expect another 100bp rate cut at the next central bank meeting. The BoE is on a roll right now and anything short of another 100bp cut could be a big disappointment. At the moment, the BoE is the most aggressive G7 central bank. However once the excitement dies down, we expect the pound to resume its weakness against the US dollar and Euro as the pound narrows its interest rate differential with the US dollar and the Euro. The MPC minutes also indicated that the BoE will not stand in the way of further weakness in the British pound. They only want to gradually ease interest rates to limit the sell-off in the pound, so that the weakness of the pound does not cause a sharp run up in inflation. The BoE has no qualms about the 25 percent depreciation in the British pound against the US dollar and they are probably comfortable with further weakness in the currency as long as it is gradual.

EUR/USD: EUROPEAN CAR MAKERS ALSO ASKING FOR MONEY

The Euro gave back all of its earlier gains as risk aversion swept through the markets. Like the US, European car companies are asking for a EUR40B loan from the European Investment Bank, the European Union’s long term lending institution. The entire automobile industry is struggling, but hopefully the drop in commodity prices will help demand recover. Deutsche Bank, Germany’s largest bank, announced its intention to cut 900 employees from its workforce. The magnitude of this announcement represents a global concern since the German bank will primarily be cutting jobs from its New York and London offices. Of course the layoffs will be concentrated on the exotic structured instruments units, those that are largely blamed for increasing the bank’s exposure to risky assets. The bank has already shed about 10%, or 1500 jobs, of its entire workforce. In response to the news, European indices fell by more than 4% today. The deterioration was also reinforced by a selloff in other global markets. ECB’s Jean-Claude Trichet reaffirmed his belief that the current financial crisis has been the worst experienced in at least a half-century. Like European statements made during the G-20 meeting in Washington last week, Trichet is pushing for more global cooperation in fighting their recession. He even made the assertion that many complexities would be resolved if the UK would adopt the euro has its currency. We wonder why he asks the UK to engage in such a dramatic change when he has been stubbornly holding back on further rate cuts. Construction Output falls by -1.3% from 0.4%. Tomorrow, we will see German Producer Prices, which are likely to show a decrease as global inflation has subsided substantially.

CANADIAN, AUSTRALIAN AND NEW ZEALAND DOLLARS EXTEND LOSSES

The Canadian, Australia and New Zealand dollars sold off aggressively on the combination of falling commodity prices, risk aversion and dovish comments from central bank officials. Bank of Canada Governor Mark Carney expressed his concerns that the economy may worsen. Hurt by weakening commodity prices and a deteriorating global market, the statements made by Mr. Carney makes further rate cuts all but certain. In fact, the BoC has been slow to follow the example of worldwide central banks, by cutting by only 25bp at the last meeting. It appears that since conditions have worsened, many officials might believe that they did not act aggressively enough in the in the face of a recession. Canada also faces possible trauma, as many US auto workers are located in plants based in Ontario. Even though Carney says that he does not believe that a bankrupt GM or Ford will have large scales effects, it can only worsen things further. In reinforcement of these fears, the Leading Index is reported worse than expected. RBA Governor Stevens also announced his concerns today. His statements took on a different nature than those made by Carney. Stevens suggests that the Australian economy is in a much stronger place than economists worldwide have predicted. He fears that the county might be talked into a recession. Stevens notes that the country has an abundance of monetary easing at their disposal, along with a dedication to boost borrowing in the face of worsening conditions. Aussie New Motor Vehicle Sales are weaker than expected at -0.5%. While New Zealand did not have much to report today, Visitor Arrivals and Credit Card Spending are expected tomorrow.

USD/JPY: NO RATE CUTS EXPECTED FROM THE BOJ

Unsurprisingly, the 400 point drop in the Dow has dragged all of the Japanese Yen crosses lower. Although a breakout has yet to happen in the Yen crosses, it is certainly becoming more imminent. The sharp sell in US equities should lead to weakness in the Asian indices, which may lead to further selling. Toyota warned last night that US sales may have dropped for the first time in more than a decade. This announcement reconfirms the fact that the largest Japanese companies, and the economy as a whole, will struggle as long as international demand remains weak. Later today, we will be informed how much these developments have shifted the Japanese Merchandise Trade Balance. In addition to this evening’s report will be indication on the amount of foreign purchases of Japanese securities, and the amount of international securities purchases by the Japanese. One of the moist important events for yen traders this month will be tomorrow’s Bank of Japan monetary policy decision. As we have discussed in commentary earlier this week, BoJ officials must weigh the potential implications of a recession without monetary easing with cutting interest rates to zero. After last month’s 20bp of easing, leaving rates at only .30%, officials are running out of room for much more easing. It is most likely that the meeting will result in unchanged rates in hopes that continued international rate cuts will be enough to once again stimulate international demand for Japanese goods. Once this happens, the country should be able to rebound rather quickly. However, the hopes of a turnaround may be postponed until next year.

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

EUR/USD will be our currency in play for the next 24 hours on some very influential reports expected from the Euro-zone and US. Germany will release its Producer Price Index at 2:00 am ET or 7:00 GMT. From the US, we are expecting the Philadelphia Fed Survey at 10:00 am ET or 15:00 GMT.

Technically speaking, the pair has reentered the Bollinger band sell zone today. An earlier rally of nearly 150 pips has been completely reversed to the downside. We have been waiting several weeks for price action to make some convincing break out of this consolidation zone, but it seems that today’s trading proves that the market is still uncertain as to the future path of the currency pair. Support is in place as a range of 1.2387 to 1.2328 from lows placed on November 13th and October 28th. Resistance could be in the form of any of the recent highs that have occurred in the consolidation pattern. The most significant one is met with the 23.6% retracement from September 22nd highs to October 28th lows at 1.2927. A significant break from the trading range that has been in place for at least two to three weeks can be substantial. It is likely that such a break could be the start of a new extended trend.

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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