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THE STORIES IN THE CURRENCY MARKET
* US DOLLAR: HOW TO TRADE NON-FARM PAYROLLS
* EUR/USD: ECB CUTS 50BP, HINTS AT QUANTITATIVE EASING
* GBP/USD: EXTENDS FINAL RATE CUT
* USD/CAD: REBOUNDS DESPITE HIGHER IVEY PMI
* NZD/USD: RISK OF CREDIT DOWNGRADE?
* AUD/USD: HIT BY WEAKER ECONOMIC DATA
* YEN CROSSES UNDER ASSAULT
EXPECTATIONS FOR UPCOMING FED MEETINGS
| CURRENT US INTEREST RATE: 0.25% | Rates are Expected to Remain Unchanged in March and April | ||||
| 3/17 Meeting | 4/29 Meeting | ||||
| NO CHANGE | 96.0% | 86.8% | |||
| Cut to 0.00% | 0.0% | 0.0% | |||
| Increase to 0.50% | 4.0% | 9.6% | |||
| CUT TO 75BP | 0.0% | 0.0% | |||
US DOLLAR: HOW TO TRADE NON-FARM PAYROLLS
As we have promised, trading currencies have become more interesting following the interest rate decisions in Europe. The next 24 hours should prove to be just as exciting for forex traders with the February non-farm payrolls report due for release. The US dollar has rallied significantly ahead of the payrolls report, which is traditionally the single most market moving economic data for the EUR/USD. The cohesive rally in the US dollar and the price of gold along with the sell-off in US equities indicate that risk aversion is the main theme of the day. This also provides a clue on how the dollar could trade following Friday’s non-farm payrolls report (February Non-Farm Payrolls Preview).
How to Trade Non-Farm Payrolls
The best way to trade non-farm payrolls is to avoid it because of the significant volatility surrounding the release. Not only will the market react to the headline number, but also to the revisions and unemployment rate. Yet despite our warnings, many traders feel that volatility equals opportunity and for these people, USD/JPY should be the best currency pair to trade because it should have the most logical reaction to the data. This means that if payrolls beat expectations, USD/JPY should rise and if it misses, USD/JPY should fall. The current forecast is for February payrolls to drop by -650k. We actually believe that non-farm payrolls could surprise to the upside. If payrolls fall less than -598k like we expect, the dollar should rally against the Yen but could fall against other major currencies such as the Euro and British pound. Over the past several months, safe haven flows have pushed the dollar higher and therefore a stronger number could ease risk aversion and lead to a relief rally in the higher yielding currencies such as the Euro and British pound. In contrast, should non-farm payrolls fall by more than -700k, we could see fresh losses in the EUR/USD and GBP/USD.
Stocks Fall to Fresh 12 Year Lows on Chinese Disappointment
The majority of today’s losses in the currency and equity markets today can be attributed to the disappointment from China. As you may recall, yesterday’s rally stemmed primary from speculation that China will announce a fresh stimulus package to support their economy and by extension, the global economy. Unfortunately Premier Wen Jiabao failed to deliver. He said that 8 percent growth is still possible, but without following the forecast up with fiscal stimulus, he risks being overly optimistic. The Dow Jones Industrial Average and the S&P 500 fell to fresh 12 year lows. There is no question that we are in a bear market and therefore good news like a stronger non-farm payrolls report may only have a limited impact on the financial markets. Job losses in excess of 500k are very negative even if it is better than the market’s forecast. There are plenty of reasons to remain concerned about the outlook for the US economy. Bankruptcy filings increased 31 percent last year while 48 percent of homeowners who have a subprime adjustable rate mortgage are either behind on their payments or in foreclosure - that’s 12 percent of all American homeowners. Therefore be careful any rally tomorrow could be short-lived.
EUR/USD: ECB CUTS 50BP, HINTS AT QUANTITATIVE EASING
As expected, the European Central Bank cut interest rates by 50bp to 1.50 percent. After initially selling off, the Euro actually recovered some of its losses despite the fact that ECB President Trichet indicated he is open to both further rate cuts and quantitative easing. Economic data was weak with annualized GDP falling slightly more than expected and German retail sales falling 0.6 percent. For the third quarter in a row, the Eurozone saw negative GDP growth. The region’s economy shrank by the most in at least 13 years and unfortunately ECB President Trichet warned that growth will be significantly reduced in 2009 and 2010. The central bank head also admitted that the ECB is studying non-standard measures which include quantitative easing. However, Trichet prefers to use the Fed’s label of credit easing over quantitative easing. The mere possibility that the ECB could consider Quantitative Easing was enough to drive the EUR/USD below 1.25. With the third highest interest rate of the G10 nations, further interest rate cuts are still possible. By saying that they have not made a decision about whether 1.5 percent is the lowest level for interest rates makes 1 percent a real possibility. In fact, Trichet may opt for another rate cut before credit easing. For the US dollar, British pound and Japanese Yen, no surprises are expected from future rate decisions. However for the Euro, the prospect of lower interest rates and the uncertainty of when the ECB will adopt credit easing should keep the EUR/USD under pressure.
GBP/USD: EXTENDS FINAL RATE CUT
This morning, the Bank of England delivered what will most likely be their final interest rate cut. The BoE took interest rates down to 0.5 percent from 1.00 percent, the lowest level ever for the central bank. Even though there is still another 50bp of room to ease, the Bank of England has always been concerned about the profitability of banks. To be clear, their interest is not in helping banks turn a profit but making sure interest rates are at levels where banks can still turn a profit because otherwise there is no incentive for them to lend. In an interview after the rate decision, BoE Governor King said that it is very unlikely that interest rates will go any lower and instead they will be focusing on injecting money directly into the economy. Along with the rate cut, they have unveiled a Quantitative easing program that involves purchasing up to £100bn in Gilts and £50bn in private sector assets (syndicated loans and ABS). These purchases will be front loaded, which means they will buy £75bn in the first 3 months. Although Quantitative Easing is bearish for the British pound, if the BoE is done cutting interest rates, further weakness may be limited. Producer prices are due for release tomorrow. The weakness of the British pound and the rise in shop prices suggest that there may be a mild uptick in inflation pressures.
USD/CAD: REBOUNDS DESPITE HIGHER IVEY PMI
The renewal of risk aversion weighed heavily on the commodity currencies with the Canadian and New Zealand Dollars approaching multi-year lows. Probability remains high that the 1.30 level could be tested in USD/CAD if risk aversion remains in the markets, while NZD/USD will likely remain below 50 cents for the same reasons. The Australian economy which earlier this week opted-out from reducing interest rates is also seeing aggressive selling pressure. The trade surplus increased but not as much as the market had hoped while building approvals plummeted. Meanwhile the Canadian dollar sold off despite stronger than expected IVEY PMI. The index has been in contractionary territory for the fourth straight month so even though it rebounded from record lows, Canadian dollar traders were not impressed. On Thursday, the New Zealand dollar fell to a 6 year low against the US dollar. Standard & Poor's warned that the country could face a downgrade if fiscal imbalances are not addressed in near term. To do so would mean spending cuts or higher taxes, neither of which New Zealand cannot afford at this time.
YEN CROSSES UNDER ASSAULT
The yen crosses retreated across the board as the Dow Jones plunged to the lowest level in over 12 years. Meanwhile, Japanese corporations cut spending at the fastest pace in decades as profits tumbled by over 64% from the previous year, representing the biggest margin in 35 years. Comments on the severity of the recession with “no bottom in sight” from Prime Minister Taro Aso added to the pessimism. The Bank of Japan is set to revise GDP figures that were released for the last quarter of 2008. Although China outlined a barrage of construction, increased subsidies and economic measures aimed at continuing the nation’s modernization, Premier Wen failed to commit any new spending money to combat the global economic and financial crisis. He still expects the economy to expand by 8 percent this year, which many analysts believe is overly optimistic. It will be difficult for the Asian Giant to attain this growth without further fiscal stimulus and perhaps Wen is simply waiting for the most opportune time to announce more support for his economy.
USD/JPY: Currency in Play for Next 24 Hours
The currency in play for the upcoming 24 hours is USD/JPY. One of the most market moving indicators for U.S., Non-Farm Payrolls, is set to be released tomorrow at 13:30GMT or 8:30AM EST. USD/JPY rallied significantly over the past month. The rally still remains in its upward trajectory currently trading within Buy Zone determined through our Bollinger Bands. Current resistance is place at an important psychological level of 100.00 which hovers slightly below the 200-day SMA at 100.15. The Buy Zone will be negated upon the break of support which is placed at the first Standard Deviation of the Bollinger Bands around 97.50.
