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Monday November 24, 2008 - 23:56:35 GMT
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Forex Research - Stocks Soar But Watch Out for GDP Risk

Stocks Soar But Watch Out for GDP Risk Last Updated 11/24/2008 4:07:27 PM EST (GMT +5)

TODAY’S BIGGEST PERCENTAGE MOVERS

AUD/JPY ( +250 pips or +4.11%)

CAD/JPY ( +280 pips or +3.71%)

EUR/JPY ( +445 pips or +3.70%)

THE STORIES IN THE CURRENCY MARKET

  • USD: Stocks Soar But Watch Out for GDP Risk
  • EUR: Breaks Higher Despite Sharp Drop in Business Confidence
  • GBP: Soars on Tax Cut and Stimulus Package
  • CAD: Flaherty Warns of Recession in 2009
  • AUD: Gold Prices Rise $21
  • NZD: Inflation Expectation Data on Tap
  • JPY: Carry Trades Soar on Equity Rally

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: STOCKS SOAR BUT WATCH OUT FOR GDP RISK

Another impressive rally in stocks has resurrected the talk of a bottom in the US equity markets. Although the sell-off last week may have hit value points, the risk of more turbulent times ahead keeps us skeptical of a long term recovery. It is difficult to believe that the worst is behind us with countries like the UK warning that they expect at least 4 quarters of negative GDP growth lasting from Q3 of 2008 to Q2 of 2009. With third quarter US GDP numbers due for release tomorrow, hope needs to supersede reality in order for this rally to last.

The Hope: President-Elect Barack Obama

With his slogan for Change, President-elect Barack Obama was one of the few people that could have restored confidence in the financial markets through the appointment of Cabinet members that everyone trusts and a clearer plan of action for tackling the economic crisis and he is delivering on both. Obama has confirmed Timothy Geithner as Treasury Secretary and Larry Summers as the head of the National Economic Council. Both Summers and Geithner were in consideration for the job as the Treasury Secretary The 2 other members of the team include Christina Romer, an expert on the Great Depression and the recovery that follows and Melody Barnes who will be focusing on the healthcare reform. The expertise and experience of Obama’s Economic Team reflects on his determination to make the economy his number one priority. Over the weekend, Obama also outlined his Economic Recovery Plan to create 2.5 million jobs by 2011 in infrastructure, education and alternative energy. According to the Washington Post, Obama’s plan could cost as much as $700B or 5% of GDP. By warning that “we do not have a minute to waste,” a plan should be ready for Obama to sign shortly after he takes on office on January 20th. The new President pledges to hit the ground running and the hope that his plans will be successful is driving the move in equities.

The Reality: Q3 GDP Could Fall as Much as 1%

However the reality is that tomorrow’s US GDP report should confirm that the economy is in a technical recession. Although negative third quarter growth is widely expected not many people realize how deep the contraction could be. The market currently expects GDP growth to fall by 0.5 percent, which is slightly worse than the 0.3 percent contraction in the second quarter. However there is a decent chance that GDP could fall by more than 1 percent. A drop of this magnitude is peanuts compared to the contraction in GDP that we have seen in prior recessions. In 2001, GDP contracted by 1.4 percent in the third quarter. In 1990, GDP fell by 3 percent in the fourth quarter and in the first quarter of 1982 GDP dropped a whopping 6.5 percent. Many people believe that the current downturn is the worst since the Great Depression and if that is true, we could easily see GDP fall by 4 or 5 percent in one quarter. If that didn’t happen in Q3, it could happen in Q4.

Markets Cheer as Citigroup Gets Bailout

Going into the weekend, Citigroup was another major uncertainty that made the markets nervous, but that is no longer the case. The US government has announced that Citi will be receiving $20B in cash from the Treasury and $306B of asset guarantees. In return, the US government will receive preferred shares in the bank. This step indicates that the Bush Administration believes that the financial system could not afford another big bank failure which is probably right. In the last 8 weeks of his term, President Bush has said that that he is prepared for more financial rescues.

Existing Home Sales Drop 3.1%, Consumer Confidence

It is no secret that the housing market is in trouble and the latest existing home sales numbers confirm the fundamental problems in the US economy. Resales dropped 3.1% to a 4.98 million rate, which is the lowest since June 2008. The big story however is the drop in house prices, which was the largest on record. The combination of a slowing economy and tight credit markets has prevented real estate from recovering and with the recent layoff announcements, demand should slow even further. We do not expect much of a recovery in consumer confidence tomorrow but there are 2 things that consumers can be happy about – lower oil prices and a new President.

EUR/USD: BREAKS HIGHER DESPITE SHARP DROP IN BUSINESS CONFIDENCE

After consolidating since the beginning of the month, we have finally seen a breakout in the EUR/USD. The break was to the upside thanks to the sharp rally in US equities. The currency pair managed to rise 2.5 percent or 300 pips despite a sharp drop in business confidence. The German IFO report hit a 16 year low but in the end, the report was not bad enough to offset dollar bullishness. Based on a survey of 7000 business executives, the index fell from 90.2 to 85.8 in the month of November. The expectations and current assessment part of the IFO survey also showed considerable weakness suggesting that not only are German businesses feeling slower activity now, but they are bracing for tougher times ahead. The most important forecasting implication of this report is the increased likelihood of a sizeable rate cut during the December’s ECB meeting. Since the central bank resisted a BoE-like cut earlier this month, some economists are putting bets on a cut 75bp. Another round of highly sensitive economic data is expected in tomorrow’s German GDP and the French Business Confidence Indicator. Even though France has been the most resilient of the European countries, it is unlikely that any business confidence reports will show unexpected strength. However, the market impact of such reports exists only in its implications for the size of a rate cut, barring any unforeseen developments.

GBP/USD: SOARS ON TAX CUT AND STIMULUS PACKAGE

No country has been as aggressive and as innovative as the UK in stimulating their economy. They have been at the forefront of bank bailouts and large interest rate cuts and today, they announced both a tax cut and fiscal stimulus package. Although the latest announcements came with the warning that the economy will shrink in the first 2 quarters of next year, these aggressive measures by the UK government could engineer a V shaped recovery. Chancellor Darling expects the economy to contract by 0.75 to 1.25 percent in 2009, which is why he has introduced a GBP 25.6 billion economic stimulus package that involves reducing the VAT tax rate by 2.5 percent points to 15 percent. The UK acknowledges the fact that such cuts would result in a severe widening of their already inflated budget deficit so to help pay for the plan, taxes will be increased from 40 to 45 percent for anyone making more than GBP150k (the higher taxes don’t take effect until April 2011). Another factor acting to relieve global angst is reports by Barclays stating that they will not succumb to a government bailout. The second largest British bank received broad stockholder support in selling more than $10B of new equity offerings to middle-eastern funds in Qatar and Abu Dhabi. The ability to resist temptations for government intervention will likely result in a stronger and more agile institution once the recession ends. The impact of these announcements will have time to sink in since the next round of economic releases are not expected until Wednesday.

USD/CAD: RECOVERY IN COMMODITY PRICES DRIVES CAD, AUD AND NZD HIGHER

The Canadian, Australian and New Zealand dollars recovered strongly today thanks to the 350 point rally in the Dow and the rebound in oil and gold prices. After topping out just shy of 1.30, USD/CAD has sold off close to 700 pips in the past 2 trading sessions. These losses could be sustained if Canadian retail sales beat expectations on Tuesday. Even though Canada has been hurt by the slowdown in the US, the latest wholesale sales report has been particularly strong. We have also been impressed by the labor market, which saw positive job growth for the last 3 months. However, Canadian Finance Minister Flaherty believes that tougher times are ahead. While the economy is not currently in a recession, he believes that Canada could fall into a technical recession in 2009 and therefore he plans on cutting taxes to boost the economy. The Australian and New Zealand dollars also benefitted from the euphoria spurred by the Citigroup bailout but there was no economic data released overnight. The next economic figure to be released will be in tomorrow’s RBNZ two-year Inflation Expectation report.

USD/JPY: CARRY TRADES SOAR ON EQUITY RALLY

The Japanese yen is trading on little more than a reversal in global economic sentiment. The currency is down broadly against all of the major currencies, despite a Japanese bank holiday. The level of optimism can be seen in the fact that volatility has eased for the second straight day, an event not seen for almost a month. We will not see any economic news from the area until tomorrow’s Bank of Japan Monthly report, which should reveal some sort of bias in the bank’s planned action. The markets will lend attention any time a central bank reveals its thoughts on the current economic state. Even though a rate cut is largely unexpected from the BoJ, we expect that they will resort to other measures of improving liquidity and restoring the credit markets. Some sort of indication of new initiatives can be a market mover.

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

USD/CAD will be our currency in play over the next 24 hours on some important economic news releases. Canada will report Retail Sales at 8:30 am ET or 13:30 GMT and at the same time the US will be announcing third quarter GDP.

USD/CAD has been the victim of some strong moves related to today’s renewed levels of risk tolerance. Prices have officially reentered the Bollinger band range trading zone. Support has already been tested today as the low of today’s selloff hit 1.2240. This level has additional implications as it is the 50% retracement of the late-October to early-November lows. On the chart, we can of one of the most important technical reversal patterns, the double top. Such a development could be the first step toward the development of a new trend. Drawing a Fibonacci level from January 2002 highs to 2007 lows yields a level around which prices fail to make a new high, in effect forming the pattern. This will constitute our resistance level at 1.2622. The historical strength of the double top pattern leads us to believe that if the 1.2240 support is broken, we can expect some significant moves to the downside, perhaps extending to the one-standard deviation Bollinger Band at 1.1850.

 

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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12:30 US- Housing Starts & Permits
14:30 US- EIA Crude
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