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Dollar Gives Up Gains as US Data Adds to Pain

Kathy Lien, Director of Currency Research, GFT





  06/20 Meeting 08/01 Meeting
NO CHANGE 64.0% 64.0%
CUT TO 0.00% 36.0% 36.0%
CUT TO 0.50% 0.0% 0.0%



Is the U.S. dollar losing its luster? It is no secret that the desire for safety drove investors into the arms of U.S. Treasuries and U.S. dollars throughout the month of May. Better than expected economic data made the dollar appear like a ruby in the rubble that everyone wanted to own. Unfortunately the world’s appetite for dollars changed after Friday’s abysmal non-farm payrolls report. Investors are rethinking their strategy of buying dollars blindly now that they know the U.S. economy faces as much risk as the Eurozone. Less than a month ago, everyone including some Fed Presidents believed that the U.S. central bank would sit on the sidelines and watch the ECB ease but now they will need to spring into action and join in on the move. In fact, there is even a possibility that the Fed could increase asset purchases before the ECB if the Europeans decide to keep policy steady this week.  For the second consecutive trading day, the dollar weakened against the euro as traders adjust their monetary policy expectations.  If the CFTC surveyed speculative EUR/USD positions today, net short positions would have undoubtedly been pared from record levels.  The 0.6 percent decline in U.S. factory orders certainly didn’t help the appetite for dollars. Slower growth in Europe and Asia negatively affected the confidence of businesses and demand for U.S. goods. Non-manufacturing ISM is scheduled for release tomorrow and we expect this report to confirm the slowdown in U.S. growth based on the pullback in labor demand and manufacturing activity. The question now is whether the dollar will still be an attractive safe haven currency.   If Europe’s sovereign debt crisis continues to intensify with no resolution in sight, then the answer will be yes because the EUR/USD will still be punished for being the source of the world’s problems. However if European policymakers announce a plan to shore up finances and confidence in the region, then the need for safe haven currencies will diminish, encouraging investors to move out of U.S. dollars and into riskier currencies. The broad based rally in currencies and the lack of material losses in U.S. equities today suggests that investors are holding out hope for a resolution to the crisis. After weeks of radio silence from European policymakers, investors are latching onto the news that an emergency G7 call will be held tomorrow even if it is a part of regular talks among finance ministers. Regardless, we are hearing enough murmuring to believe that something is brewing in Europe and if that is the case, then the Finance ministers have a lot to discuss, especially if they want to prepare for a broader announcement at the G20 meeting later this month. With U.K. markets closed again on Tuesday and barring any positive or negative surprises, we expect more stability in currencies which could mean more profit taking on short euro, long dollar positions. 


This will be a very busy month in the foreign exchange market due to the sheer number of high profile meetings and European event risk - dealing with Europe's sovereign crisis will be unavoidable. The EUR/USD became deeply oversold in May and the question of whether it stabilizes here or continues lower will largely depend on what the recent radio silence from European policymakers mean. Have they been working around the clock on ways to end the crisis or have they thrown in the towel? Based on various news reports this weekend, it appears that European officials have not given up completely. G20 leaders are meeting at the end of the month and it is largely expected that they will announce greater fiscal consolidation measures. The market wants Eurobonds but a central commission to manage European finances and extended power for the European Commission, European Parliament and European Court of Justice are the most we've heard so far. According to Spiegel, a German newspaper, Finance Minister Schaeuble urged Spain to secure money from the EFSF to recapitalize Spanish banks, a step that Ireland took more than a year ago. Unsurprisingly, Spain rejected the idea and the discussion because they still believe that they can raise money in the capital markets. In light of this, Thursday's Spanish bond auction will be a particularly important test of investor confidence. In the near term, the outlook of the euro will depend on how ready and willing the European Central Bank is to providing stimulus to the European economy. They have made it clear that they want the solution to come from Europe's leaders but the recent deterioration in economic data and slide in asset prices makes easier monetary policy inevitable. As a result, the ECB will be faced with 2 choices this week - continue to turn a blind eye and wait for the Greek elections and G20 meeting, which will be very negative for EUR or hint that help is on its way in the form of an expanded LTRO, rate cut or unsterilized asset purchases. While easier monetary policy is normally negative for the EUR, the prospect of monetary support could actually lift risk appetite. At this point, everyone who wants to short euros are already short which means that the extent of further losses ahead of the ECB meeting could be limited.  Nonetheless, governments around the world are still bracing for the worst. According to China Daily, a state owned paper, the local government is drafting contingency plans if Greece decides to the leave the euro. They do not believe that massive stimulus will be needed but that will depend of course on how Spanish and Italian bond yields react. If they spike above 7 percent on a Greek euro exit, then central banks around the world could opt for coordinated stimulus. If investors look at it as a contained situation and yields hold steady, then a 2008 style global liquidity injection may not be needed. 


The British pound strengthened against the US dollar and Japanese yen but weakened against the euro, Swiss franc, and New Zealand dollar. The London market is quiet today as the country celebrates the Diamond Jubilee and markets will remained closed until Wednesday.  Trading sterling will get more exciting on Thursday when the Bank of England meets and discusses its rate decision.  At the previous BoE meeting only 1 out of 9 Monetary Policy Committee members voted to add to quantitative easing. The poor UK PMI numbers on Friday suggests the economy is still not expanding which may change the policy makers’ outlook for monetary policy. Adam Posen, who voted to leave asset purchases unchanged last month indicated that he may change his views in the next meeting. The IMF also views that the central bank should loosen its policy to aid the UK economy. More policy makers will be keen to change their views to curb the spread of the European crisis and the weakness of the U.K. economy.


The Australian, New Zealand and Canadian dollars traded slightly higher against the greenback ahead of the Reserve Bank of Australia and Bank of Canada’s monetary policy announcements. While these 2 central banks have monetary policy meetings on the same day, they are at completely opposite sides of the spectrum. Last month, the RBA cut interest rates by 50bp and talked about doing more. The Bank of Canada on the other hand talked about raising interest rates. Tonight, the RBA is expected to ease again with economists divided between a 25 and 50bp rate cut. Since the last monetary policy meeting, the Australian economy continued to deteriorate with job growth slowing, retail sales declining and manufacturing, service and construction activity contracting. The pressure on the Australian economy is exacerbated by the decline in the financial markets and slower growth in China. Rates need to come down by at least 50bp but the RBA may opt for a more modest move tonight if they want to see how the market responds to the Greek elections first. The Bank of Canada on the other hand may have to tone down their degree of hawkishness given the pullback in the U.S. economy and the decline in commodity prices. They may not alter their views completely however because consumer spending has increased and job growth remains strong. Aside from the RBA rate decision, Australia service sector PMI and current account numbers are also scheduled for release.


The Japanese yen weakened against all major currencies today. USD/JPY is struggling to hold onto its gains, prompting continued verbal intervention out of Japan.  BoJ Governor Masaaki Shirakawa was the latest policymaker to join in the discussions, saying that the central bank is monitoring the yen as Europe is battling its debt crisis and weak US economic data. The weak data from other countries has boosted demand for the yen but the appreciation the currency poses a major threaten to the export sector. Shirakawa claims that the BoJ will not manually manipulate its monetary policy just to hit its price target. Finance Minister Jun Azumi refused to state on whether authorities have intervened in the markets or is planning to in midst of pledging on June 1st to take decisive action when needed. The last two times the Bank of Japan came into the foreign exchange market and sold Yen was late last year when USD/JPY fell below 76 in November and when it dropped below 77 in August. On Friday, a spike in USD/JPY after non-farm payrolls prompted speculation of intervention but this has been unconfirmed. The Bank of Japan is checking rates, which is a common scare tactic but if the spike was BoJ intervention, we would have seen a 250-300 pip move in USD/JPY, not a 100 pip move. Nonetheless, it is clear that Japan's central bank could come into the market at anytime. The effectiveness is questionable but if the Yen continues to rise, the Ministry of Finance can't sit on the sidelines and do nothing but watch trade imbalances grow, deflation exacerbate and growth slow. With 78 in USD/JPY already tested and taken, the Bank of Japan's line in the sand should be at 77.  Tokyo’s stock exchange, Topix dove to its lowest level since 1983 and entered a bear market after weak US jobs and China services data which provided proof that the global economy was not expanding. No economic data is planned to be released today in Japan.

AUD/USD: Currency in Play for Next 24 Hours

Our currency pair in play for the next 24 hours is AUDUSD. Economic data we expect to be released for Australia tonight is the AiG Performance of Service Index at 19:30 ET / 23:30 GMT followed by Australia Net Exports of GDP and Current Account Balance at 21:30 ET / 1:30 GMT. Tomorrow at 00:30 ET / 4:30 GMT the RBA will meet to decision its monetary policy. At 10:00 ET / 14:00 GMT the US will release its ISM Non-Manufacturing Composite. Also from Australia, scheduled for release is the Australian GDP at 21:30 ET / 1:30 GMT.

AUDUSD is at a downtrend according to our Double Bollinger Bands. The first support will be May 31st’s low of 0.9580. Should that support break the second support will be 0.9386 which is October 3, 2011’s low. On the upside our resistance will be at 0.9748 where the 10 day SMA touches today’s high. Should the resistance break the second resistance will be May 28th’s high or 0.9898.