Daily FX Market Roundup 12-18-12
3 Reasons Why EUR Hit 7 Month High
USD: Back and Forth on Fiscal Cliff Leaves Investors Optimistic
GBP: BoE Minutes on Tap
NZD: Current Account Deficit Widens Significantly
AUD: RBA Minutes Show Rate Cut a Close Call
CAD: Loses Value Despite Rise in Oil Prices
JPY: How Aggressive Will the BoJ Be?
3 Reasons Why EUR Hit 7 Month High
EUR/USD was on a tear today, breaking above 1.3200 and rising to its highest level in 7 months. There are 3 main factors behind the EUR/USD’s rise:
1) Stocks Soar – U.S. and European stocks performed extremely well today with the DAX hitting its highest level in nearly 5 years and the Dow at its strongest in nearly 2 months. With concerns about Europe’s sovereign debt troubles fading, European assets are back in demand and this has been extremely positive for the EUR. In addition to the rise in equities, the noose around Spain and Italy’s necks have loosed with 10 year bond yields moving lower once again. As a high beta currency, EUR/USD benefitted significantly from the improvement in risk appetite. If stocks continue to rise, the EUR/USD could take aim at its February high of 1.3485.
2) Not Worried About U.S. Fiscal Cliff – The rally in European and U.S. equities was kicked off by an important concession from President Obama that showed politicians getting serious about reaching a deal before the end of the year. We discuss this further in the dollar portion of our commentary but today’s price action shows that the EUR/USD is very sensitive to the back and forth on the Fiscal Cliff and therefore stands to benefit significantly from a positive resolution. We can never underestimate the power of sentiment because as much as economists and central bankers may be worried about the consequences of the Fiscal Cliff, investors are not.
3) Greece Gets Upgraded! – That was quick! The rally in the EUR/USD gained additional momentum after Standard & Poor’s upgraded Greece’s sovereign debt rating by a whopping 6 notches to B- with a stable outlook from Selective Default. It felt like only yesterday that a Grexit was one of the greatest risks the market faces. Receiving its third aid payment has gone a long way in eradicating concerns about Greece leaving the euro and restoring investor confidence in all European assets.
Looking ahead, the EUR/USD is poised for further gains as long as U.S. politicians don’t throw up their hands and give up on Fiscal Cliff talks. Eurozone current account and German IFO numbers are also scheduled for release. While the German government has warned of slower growth in the fourth quarter, the rise in stocks and decline in bond yields also gives German businesses reason for optimism.
USD: Back and Forth on Fiscal Cliff Leaves Investors Optimistic
It was a mixed day for the U.S. dollar, which traded lower against all of the European currencies but higher against the Japanese Yen and comm dollars. While the price action in the FX market may be conflicting the decline in U.S. bond prices and rise in equities suggests there’s a general sense of optimism in the financial markets. With President Obama putting a new deal on the table that would keep Bush era tax cuts in place for households earning less than $400,000, investors believe that progress is being made on Fiscal Cliff talks. However with House Speaker Boehner coming back with a Plan B option that would extend tax cuts to all households earning less than $1 million and leave in place spending cuts, we are not sure if they have really movd closer to reaching a deal. In fact, Senator Bob Corker from Tennessee confirmed on CNBC this morning that they are “not close to a deal.” Nonetheless, investors are still looking at the back and forth between Republicans and Democrats as progress and hope that a deal will be made by the end of the year. If they are right and politicians magically come to an agreement at the 11th hour, we can expect a huge end to beginning of the year relief rally in the forex market that would involve significant losses in the U.S. dollar and Japanese Yen. If they are wrong and politicians let the U.S. fall off the cliff then the gains enjoyed today could fade quickly. Housing starts and building permits are due for release tomorrow. Low interest rates are expected to provide continued support to the sector.
GBP: BoE Minutes on Tap
All of the European currencies performed well today including the British pound, which rose to its highest level in 2 months. U.K. inflation numbers were released this morning and according to the producer and consumer price reports, inflation increased slightly in the month of November. CPI rose 0.2% on a monthly basis and remained unchanged at 2.7% on an annualized basis. On the producer level, input prices increased 0.1% while output prices fell 0.2%. The risk of higher inflation is one of the main reasons why many policymakers have been fighting against more stimulus. While weak global demand could keep price growth subdued, four out of the big six energy firms have announced price hikes, posing an upside risk to CPI. Higher food prices and university tuition fees may also put upside pressure on prices in the coming year. As a result, we don’t expect tomorrow’s Bank of England minutes to show a strong willingness to ease. If we are correct, the British pound should sustain its gains but if we are wrong and the Monetary Policy members felt that they should join their peers by increasing stimulus in the near future, the GBP/USD could pare its rally.
NZD: Current Account Deficit Widens Significantly
Commodity currencies performed terribly today despite the strong rally in equities. Having experienced some of the strongest gains over the past month, NZD lost the most value against the USD today. New Zealand’s current account deficit increased in the third quarter to -4.418B from -1.797B. This deterioration wasn’t a huge surprise considering the weakness in trade activity. GDP numbers are due for release tomorrow and between softer retail sales and a larger trade deficit, GDP growth should have slowed in the third quarter. While the RBNZ is comfortable with the current level of monetary policy, economic data disappointments suggest that the NZD may not deserve its lofty valuations. The Australian dollar also sold off despite an uptick in leading indicators and RBA minutes that revealed a close call in this month’s monetary policy decision. The RBA cut interest rates by 25bp earlier this month and according to the minutes, central bank members considered waiting for the GDP and employment numbers that were due later that week before cutting rates. Obviously they chose to move forward but had they waited, their decision may have been different. While GDP growth slowed from 3.8% to 3.1% in Q3, job growth accelerated, pushing the unemployment rate down to 5.2%. The market is currently pricing in a 50% chance of another rate cut by the RBA in February and these expectations could be driving the weakness in the AUD. Speculation that China could be targeting a lower growth rate has also weighed on commodity currencies. No economic data was released from Canada but house prices and wholesale sales are due tomorrow. Like the AUD and NZD, the CAD lost value despite the rally in equities and the rise in oil prices.
JPY: How Aggressive Will the BoJ Be?
The Japanese Yen resumed its slide against all of the major currencies but the sell-off in the Yen was most significant against the euro and British pound. EUR/JPY rose for the seventh consecutive trading day to its highest level in 13 months while GBP/JPY rose to its highest in more than 1.5 years. The combination of stronger risk appetite, LDP win and expectations for easier monetary policy kept the Yen under pressure while gains in the EUR and GBP compounded the rallies in EUR/JPY and GBP/JPY. Shinzo Abe met with Bank of Japan Governor Shirakawa last night and while Shirakawa said monetary policy was not discussed, it is hard to believe that Abe would not have brought up the issue of a 2% inflation target. The Bank of Japan begins its 2 day monetary policy meeting this evening and based on the weakness of the Japanese Yen, investors are positioning for easier monetary policy. The central bank is expected to increase their asset purchase program by another 5 to 10 trillion yen but some economists believe that they could be even more aggressive. The BoJ could shift to an open-ended asset purchase program like the U.S. and Europe or they could acquiesce and raise their inflation target from 1% to 2%. Both of these options would be extremely bearish for the Yen. Trade numbers are due for release this evening and a wider deficit would support the need for more stimulus. Japan lives and breathes on exports and yet the country has run a trade deficit for the past 19 months – reversing this trend will be the LDP’s top priority.
