THE STORIES IN THE CURRENCY MARKET
* US DOLLAR: KEY PLAYERS NOT OPTIMISTIC ENOUGH
* EUR/USD: ECB THINKING ABOUT QUANTITATIVE EASING?
* GBP/USD: ONE STEP CLOSER TO QUANTITATIVE EASING
* USD/CAD: BANK OF CANADA CUTS 50BP
* NZD/USD: GOLD PRICES SHARPLY LOWER
* AUD/USD: RBA LEAVES RATES UNCHANGED
* USD/JPY RALLY RESUMES
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 | 98.0% | 90.3% | |||
| Cut to 0.00% | 0.0% | 0.0% | |||
| Increase to 0.50% | 2.0% | 7.9% | |||
| Increase to 0.75% | 0.0% | 0.0% | |||
US DOLLAR: KEY PLAYERS NOT OPTIMISTIC ENOUGH
The US dollar extended its gains against the Euro, British pound and Japanese Yen as the key players in the recovery story disappoints the market. Overall the price action in the currency market has been muted and the dollar lost ground against other major currencies such as the Australian and New Zealand dollars. US economic data was weak but the dollar rally continued as traders focused on external rate decisions. The central bank of Australia left rates unchanged while Canada cut theirs by 50bp; next up are the Eurozone and UK rate decisions, both of which are expected to lower interest rates.
Obama, Bernanke and Geithner Fails to Deliver
With a light US economic calendar, the focus today was on the barrage of speeches from US government officials. Unfortunately, Obama, Bernanke and Geithner have failed to enliven the financial markets. Investors were looking for reassuring words from these key players and even though Obama said that it may now be a good time to buy stocks, he warned of more pain this quarter. Bernanke was even more pessimistic as he acknowledged that he should have been more aggressive in fighting the financial crisis because now “significant stresses persists in many markets” and “clearly” the banking system has not stabilized. Geithner was slightly more optimistic as he backed Obama’s fiscal stimulus package but he believes that the US recession is deepening and it will take “some time to fix.” Without government aid, the US economy will not turn around, which is why the Obama Administration continued to press ahead with the different components of their fiscal stimulus package. Today, they launched a new $200B program aimed at spurring lending for consumers through auto, education and credit cards loans. Through this program, the Fed would become a buyer of securitized debt containing these assets which would hopefully free up the balance sheets of banks and get them to start lending once again. All of these programs will take time which is why the reaction in the financial markets has been so limited.
Leading Indicators for Non-Farm Payrolls
In the meantime, traders will begin to shift their focus to Friday’s non-farm payrolls report as the first set of leading indicators for non-farm payrolls are released on Wednesday. If you thought that the -598K job losses were severe in January, the market currently expects non-farm payrolls to have fallen by -650k in February. Deutsche Bank and HSBC are far more pessimistic, forecasting a -750k decline; UBS and Merrill Lynch are calling for -700k. Tomorrow’s service sector ISM, Challenger layoff and ADP employment change reports will shed more light on the degree of job losses last month. The employment component of service sector ISM has a very strong correlation with non-farm payrolls. The Fed’s Beige Book report is also due for release and unfortunately we expect the various Fed districts to confirm that the US economy remains in tough shape. Pending home sales plunged 7.7 percent in January, the steepest decline since August 2007. Pending home sales are very volatile but the latest report is in line with the overall weakness in the US housing market. It is important to keep in mind that even if US data is soft, the dollar may continue to rally as currency traders position themselves ahead of the European Central Bank and Bank of England rate decisions on Thursday.
EUR/USD: ECB THINKING ABOUT QUANTITATIVE EASING?
The lack of Eurozone economic data has kept the EUR/USD near its 11 week lows. All eyes remain on the European Central Bank’s interest rate decision this week. Final figures for service sector PMI are due for release tomorrow and no surprises are expected. The market is currently looking for a 50bp rate cut from the European Central Bank on Thursday, but there is now talk that they could also be considering unconventional monetary policy measures such as Quantitative Easing (QE). With the Federal Reserve and the Bank of Japan already implementing QE, the ECB would not be alone. In fact, many central banks are resorting to this option, eliminating the stigma of printing money and taking interest rates pretty much to zero. What is the most interesting about the possibility of the ECB adopting Quantitative Easing is the fact that the central bank still has plenty of room to cut interest rates. With a 50bp rate cut this week, Eurozone rates would still be at 1.50 percent. Yet speculation about QE was spurred by ECB member Noyer who openly admitted that the central bank is studying the pros and cons of adopting unconventional monetary policies. The ECB is deathly afraid of inflation pressures and perhaps they are looking into varying their ways of stimulating the economy by drawing up plans to purchase commercial paper or corporate securities. Either way, this is bearish for the Euro and could keep the currency under pressure going into Thursday’s ECB rate decision.
GBP/USD: ONE STEP CLOSER TO QUANTITATIVE EASING
Quantitative Easing are the buzz words in the financial markets this week. With prospects of a deepening recession, Finance Minister Alistair Darling is likely to grant the Bank of England the power to print money and buy gilts to revive the struggling economy. The move will come alongside the high probability of the central bank reducing the interest rates 50 basis point in the upcoming meeting. The quantitative easing program will be allocated approximately £100 to £200 Billion Pounds or roughly $143 to $243 Billion Dollars. The size of the QE program is almost more important than how much the BoE cuts interest rates on Thursday. If the amount exceeds £200 Billion the results will be negative for the Pound and if QE is not approved, expect a strong rally. Meanwhile, the economic data continued to show signs of the recession intensifying as construction PMI figures suggest that the sector is contracting at the fastest pace in at least 12 years. If the economic data continues to be negative throughout the week, the Pound could easily test 13-year lows ahead of the scheduled March 5th policy meeting. Service sector PMI is due for release tomorrow.
USD/CAD: BANK OF CANADA CUTS 50BP
USD/CAD hit an 11 week high following the Bank of Canada's decision to cut interest rates by 50bp to a record low of 0.5 percent. Although the half point cut was widely expected from the central bank, the Bank of Canada added salt to the wound by talking about Quantitative Easing AND further rate cuts. If they talked about QE or further rate cuts and not both, we may not see such a strong sell-off in the Canadian dollar. According to the BoC, more monetary stimulus may be needed and interest rates will stay low or "lower" until there are signs of growth. They will be studying Quantitative Easing if required and will announce in April how they would implement it if they decide to do so. This indicates that the BoC is open to taking interest rates to zero. Meanwhile the Reserve of Australia left interest rates unchanged at 3.25 percent. In Monday’s Daily Currency Focus, we argued that this is a realistic and not remote possibility for the RBA. The central bank did not completely close to door to further rate cuts as RBA Governor Stevens say that the situation will be reviewed next month. In the meantime, the central bank wants to give the Australian economy the time to absorb the aggressive fiscal and monetary stimulus. Fourth quarter GDP and service sector PMI are due for release from Australia this evening.
USD/JPY RALLY RESUMES
USD/JPY has rebounded confirming our belief that Monday’s sell-off represented only temporary weakness for the currency pair. Overall, the Japanese Yen continued to sell off as investors reconsider the safe haven appeal of the currency. The Japanese government is planning on tapping into foreign reserves to supply liquidity to companies operating abroad who have seen their credit become scarce. Meanwhile welfare applications skyrocketed 62% from the previous year as businesses continuing to scale down employment in the midst of a deepening recession. The lack of demand for imports which plagued corporations for some time is resonating on the manufacturing industry. Toyota Motors, which is expected to turn its first annual loss in six decades, is asking for a loan of approximately 200 billion yen or $2 billion Dollars from state operating banks. As a direct result of the faltering economy, the Nikkei Index plummeted to nearly quarter century low, simultaneously bringing the Yen lower. Tomorrow, Japan is set to release figures for Capital Spending which is projected to decline as credit remains tight.
GBP/USD: Currency in Play for Next 24 Hours
The currency in play for the upcoming 24 hours is GBP/USD. The UK is set out to release its figures for PMI Services along with Official Reserves at 9:30GMT or 4:30AM EST. Thereafter, the US will release its data for ADP Employment Change at 13:15GMT or 8:15AM EST, following by ISM Non-Manufacturing Composite at 15:00GMT or 10:00AM EST. Since late October the GBP/USD pair followed a strict downward sloping resistance line, currently settling in the Sell Zone of our Bollinger Bands. As long as the GBP/USD remains below the steep resistance, the pair could continue to drift lower. Current resistance is originating along the line structured at 1.4570, while the next level of support is unclear until the low for the year around 1.3500.
