» Kathy Lien

Written by Kathy Lien, Chief Currency Strategist, DailyFX

US Dollar Hits an All Time Low; It Only Gets Worse The US dollar fell to a new all time low of 1.4154 against the Euro on the back of continued deterioration in the US economy.  Traders and investors are selling dollars as the outlook for consumer spending becomes bleaker with each passing day.  Consumer confidence dropped to a 2 year low in the month of September while sales of existing homes fell to a 5 year low.  We are actually surprised that there wasn’t an even larger drop given the deterioration in the labor markets, tight credit conditions and rising energy prices.  October is the month when subprime adjustable rate mortgage resets will hit a peak of $50 billion.  This is the largest amount on record and suggests that the cycle of major subprime related losses at hedge funds and banks could begin once again. Generally, the increase in mortgage payments will lead to an increase in foreclosures, so now may not be the time to be complacent about taking risk.  The drop in confidence and home sales only reinforces the need for the Federal Reserve to continue lowering interest rates. We expect another 50bp of easing by Christmas followed by another 50bp before the middle of next year.  The next Non-Farm payrolls report is not expected to be pretty either. On top of the layoffs that have already been announced in the financial sector, workers at General Motors held their first nationwide strike in 25 years. 73,000 workers have been displaced and 30,000 are expected to be pushed off the job. If this is not resolved soon, it will have a meaningful impact on non-farm payrolls which will naturally dovetail into further weakness for the US economy.  The question now is will a recession happen; we are discussing this on the DailyFX Forum. Meanwhile the only piece of good news was the Richmond manufacturing index which jumped from 7 to 14 in the month of September to the highest level since April 2006. The manufacturing sector is expected to be one of the biggest beneficiaries of dollar weakness which is why tomorrow’s durable goods may not be as bad as analysts are currently predicting. 

Euro Makes New Record High Despite Sharp Drop in Business Confidence The Euro made a new record high today despite larger than expected drops in German business confidence and import prices.  Economic data out of Europe continues to get worse and if the Euro does not stop rising, the European Central Bank will be forced to verbally intervene in the currency.  Don’t forget that the Euro topped out in late 2004 after Trichet called the moves brutal and he may have to do so again as German business fell to a 19 month low in September.  This is a result of deteriorating credit conditions, a strengthening currency and tight monetary policy.  As an export dependent nation, the Eurozone has a lot to lose if the Euro continues to rise.  The only major benefit of a strengthening currency is lower inflationary pressures.  We are already seeing the initial impact with import prices falling for the first time in nearly 2.5 years.  Less inflationary pressure means less pressure on the ECB to raise interest rates.  If we see a material slowdown in economic data, softer inflation may actually give the central bank the flexibility it needs to begin talking about lowering interest rates. This of course is a few months off at the earliest, but it is a factor that is certainly worth watching.  There is not much on the Eurozone calendar tomorrow, but Switzerland has leading indicators due for release, which is expected to be weaker. 

Bank of Canada Dodge Only Mildly Concerned about CAD Strength Although no Canadian economic data was released today, the markets were eagerly awaiting the comments from Bank of Canada Governor Dodge.  With the CAD at parity with the US dollar, any changes to the central bank’s monetary policy stance could either trigger a sharp recovery in the loonie or further gains.  However instead, Dodge walked a very fine line by saying that interest rates were appropriate but the loonie had strengthened above their assumed trading range and because of that, they need to evaluate its cause.  Meanwhile the Australian dollar continued to rally on the back of higher gold prices and optimistic comments from RBA Governor Battelino. The New Zealand dollar did not fare as well ahead of its August trade balance numbers unfortunately.  Its 5 day rally ended today.

British Pound Hit by News that UK has only GBP 4.4 billion to Cover Bank Deposits With no major economic data released this morning, the British pound came under pressure after the UK Telegraph reported that the Bank of England only has GBP4.4 million to cover UK bank deposits in the case of a failure.  The paper compares this amount to the $49 billion held by the FDIC in the US.  Although these numbers are true, the information is a bit distorting.  The policies in the UK and the US are very different.  The FSCS, which is the UK version of the FDIC holds no funds and only raises those funds in the event of a bank failure.  The US on the other hand does have that money readily available in case of a collapse.  The amount held by the FDIC is still small; it represents only 1.5 percent of total US deposits.  The UK does guarantee less deposit than the US (70k in UK and 100k in the US) and depositors need to wait, which is a problem, but things in the UK are not as bad as the article suggests. 

Tepid Rally in US Stocks Leads to Mixed Performance in Japanese Yen Crosses The Dow rallied by a lackluster 19 points which explains why the Japanese Yen crosses are mixed on the day.  The corporate service price index rose less than expected in the month of August indicating that inflation is not really a problem.  This reinforces the market’s belief that interest rates in Japan will not be increased anytime soon.  The trade balance is due for release tonight, but we do not expect that to be particularly market moving either.  Instead, the Yen crosses will continue to move in lockstep with the Dow. 

 Forex Resources
Additional news, charts, and commentary can be found at DailyFX.com and our forex trading blog.

Source: FXCM

Written by Kathy Lien, Chief Currency Strategist, DailyFX 

• Euro Hits Record High, How Much Further Can it Rise?
• Canadian Dollar Now Even With US Dollar Thanks to $83 Oil
• Can Europe Handle 1.40 Euro?

Euro Hits Record High, How Much Further Can it Rise?
It has been an extremely active day in the forex  market with the US dollar falling to record lows against the Euro and 30 year lows against the Canadian dollar.  For months, the currency market has been obsessed with 1.40 in the Euro and 1.0 in USD/CAD.  Now that these targets have been achieved, the question ahead of us is how much further can the Euro rise.  In the currency markets, trends can last far longer than most traders expect and even though the risk of a top increases with each pip rise, there is no reason to believe that the EUR/USD will top out until the currency pair itself manifests weakness.  Fundamentally, the US dollar has been driven to a record low because of growing concerns about the US economy and the possibility of further interest rate cuts by the Federal Reserve.  Although speculation of Saudi Arabia abandoning its dollar peg triggered the break of 1.40, the country’s later denial of this possibility did not lead to similar relief rally in the US dollar.  Therefore this tells us that there is a lot more than speculation driving the dollar’s weakness.  We have often said that the expectation of where interest rates are headed is the number one driver of currency movements.  The latest bout of dollar weakness is a reflection of not only the larger rate cut delivered by the Federal Reserve earlier this week, but also the expectation of anywhere between 25bp to 50bp of further easing before the end of the year.  Yet, the further the dollar falls, the greater the risk of a reversal.  A weakening currency will not only help to boost exports and revive the economy, but it will also induce inflationary pressures.  So the question in front of us is what will get out of hand first, growth or inflation.  All it takes for the Euro to stop rising is a few pieces of stronger US economic data or any concern about Euro strength by ECB President Trichet.  Unfortunately we have yet to see a meaningful improvement in US data.  Even though the Philly Fed index jumped from 0 to 10.9, it was offset by a larger than expected drop in leading indicators. Fed Chairman Ben Bernanke made no direct comments about the state of the economy or monetary policy.  He simply said that the rate cut was taken to stay ahead of the credit markets.  Meanwhile gold prices hit 28 year highs while oil prices hit a new record high of $83 a barrel.  Read our special report for more on whether it is a Coincidence that the US dollar, Canadian Dollar, Oil and Gold are Breaking Significant Levels at the Same Time.

Canadian Dollar Now Even With US Dollar Thanks to $83 Oil
At the beginning of the year, many people did not believe the Canadian dollar could hit parity with the US dollar, but for the first time in over 30 years, 1 US Dollar is worth 1 Canadian dollar.  Although USD/CAD has rebounded since hitting an intraday low of 0.9993, the possibility of solid retail sales tomorrow could be all it takes to bring the currency pair back below parity.  Canadian wholesale sales were released today and in the past, we have found wholesale sales to be an incredibly accurate leading indicator of retail sales.  Therefore the 2.0 percent rise in wholesale sales suggests that we could see a sharp rise in retail sales tomorrow as well.  Right now the market is expecting flat Canadian retail sales, so it will not take much for the number to surprise to the upside.  The Australian and New Zealand dollars also extended their gains on the back of higher gold prices despite mixed economic data.  Australian new home sales dropped 8.6 percent while the New Zealand trade deficit narrowed from NZD 2.20 billion to NZD 2.91 billion. 

Can Europe Handle 1.40 Euro?
Back in 2005 when the Euro was trading at 1.17, we use to say that the path to a stronger Euro was through a weaker one.  Now, we hold the reverse view, which is that the Euro’s strength will be what triggers a weaker currency.  Since the Eurozone is heavily dependent upon exports a weak currency goes a long way in boosting growth while a strong one will crimp it.  Therefore we expect Eurozone economic data to begin to deteriorate in the months forward as 1.40 Euro begins to have a meaningful impact on the overall economy.  At this point, there is no need for a further interest rate hike from the ECB because even though rising oil prices are stoking inflationary pressures, a rising currency will offset some of that pressure.  Going forward we also expect the corporate sector to loudly complain about the strength of the Euro. The French have been screaming for months and the Germans should soon follow suit.  This may eventually force Trichet to drop his optimistic outlook, which would trigger a top in the Euro. 

For additional commentary, please visit our forex trading blog.

 Source: FXCM

I won’t be there but I hope I will next year :)

FXCM announced that its next Currency Trading Expo will be held on Saturday, September 15th at the Los Angeles Convention Center. FXCM will present a full day of free workshops, welcoming all trading levels from beginner to advanced.

The announcement was made by Drew Niv, CEO of the global foreign exchange broker, who listed some of the experts and workshops that will be featured:

• Guest Speaker Rob Booker, the “Motley Fool of Foreign Exchange” will teach “Survivability” – how to keep the most capital available for the highest probability trades;
• Guest Speaker Dr. John Clayburg, author and developer of Parallel User Function Technology offers his four steps to trading success;
• Kathy Lien, editor-in-chief of www.dailyfx.com and author of Day Trading the Currency Market will share her favorite trading tips and strategies;
• Boris Schlossberg, author of Technical Analysis of the Currency Market, shows how to Trade Global News and Events

The Los Angeles Currency Trading Expo is FXCM’s third major event of the year.

To register for the free FXCM Currency Trading Expo log onto http://www.fxcmexpo.com.