Currencies are Rolling Over

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Daily FX Market Roundup 08-15-12

Currencies are Rolling Over
EUR: Are the Swiss Selling Euros?
GBP: Lifted by Stronger Employment
AUD: Consumer Confidence Hits 5 Month Lows
CAD: Zero Growth in Existing Home Sales in July
NZD: Gold and Oil Prices Edge Higher
JPY: Quiet in Japan

Currencies are Rolling Over

The lack of inspiring results from this morning’s U.S. economic reports left the dollar mixed against all of the major currencies. The greenback strengthened against the euro, Swiss Franc and Japanese Yen but weakened against the British pound, Canadian, Australian and New Zealand dollars. Equity traders were also unfazed by the latest economic reports with the S&P500 ending the day unchanged. As we discussed in Tuesday’s note, while this week’s economics are important, they won’t be game changers for the Federal Reserve. Disappointments in the consumer price index and the Empire State manufacturing survey simply offset some of the positive sentiment created by yesterday’s stronger retail sales report. In general, the rally in currencies and equities at the start of the month is beginning to lose momentum with many currency pairs making lower highs and lower lows. Central banks have put off any major decisions to the fall, leaving traders with nothing to do but enjoy their summer vacations.

According to the latest economic reports, consumer price growth stalled in the month July. Headline CPI has held steady for 3 out of the past 4 months and if we exclude the change in food and energy prices, CPI still grew a mere 0.1%. With annualized consumer price growth slowing from 1.7% to 1.4%, inflation is not a concern for the central bank. Based on CPI alone, the Fed could ease if they wanted to but as we wrote in yesterday’s note, there is no immediate economic and market risk and therefore no immediate need for another round of Quantitative Easing. Manufacturing activity on the other hand was a big disappointment. The Empire State Manufacturing survey dropped from 7.39 to -5.85 in August to its weakest level since October 2011. While this index can be exceptionally volatile, it raises a red flag that may become a bigger problem if a similar pullback in manufacturing is also seen in the Philadelphia or Chicago regions. The larger than expected increase in industrial production last month suggests that the sector as a whole may not be performing as poorly as the Empire State.

Meanwhile the housing market is showing signs of life with the NAHB Builder Confidence index rising to 37 from 35. Builder confidence hit its highest level in 5 years as record low mortgage rates, stabilization in the stock market, rebound in job growth and fewer foreclosures brighten the outlook for the housing market. As for the Treasury International Capital flow report, foreigners were net buyers of US. dollars in June but their demand slowed significantly as total net TIC flows increased by only $16.7B compared to a rise of $121.3B the previous month. Considering that the U.S. dollar rose significantly in May and then stabilized or gave up part of its gains (depending which pair you look at) in June, the pullback in demand clearly reflects pause in dollar accumulation. The Philly Fed index, jobless claims, housing starts and building permits are scheduled for release Thursday.

EUR: Are the Swiss Selling Euros?

The euro traded lower against the U.S. dollar but most of the action happened in the very early hours of North America between 5:30am and 6:30am ET. In the hours before and after the sharp sell-off that took the EUR/USD down approximately 60 pips in 30 minutes, the currency pair traded in a relatively tight range. Between 6:30am and 5:00pm ET for example, 90% of the price action in the EUR/USD was between 1.2290 and 1.2270. With no economic data on the calendar, there were few explanations for the sharp and quick sell-off. Some traders blamed the dive on selling by the Swiss National Bank but with EUR/CHF stuck in a 15 pip trading range for the past week, we don’t believe that the SNB is behind the move. USD/CHF weakened around the same time, which means that if the SNB was in EUR/CHF it was to buy and not sell the currency pair. According to a report by Bloomberg citing dealers at a bank, the SNB sold euros against the British pound. It is a known fact that the SNB has accumulated a large amount of euros and reducing their exposure is a task that they will have to conduct carefully. We have long been big believers that the SNB is diversifying out of euros and into other currencies and if the SNB was in the market today, the main reason would be reserve diversification.

The big story out of Europe today is related to Greece and their possible request for a 2 year extension to their austerity program. The Greek Prime Minister is scheduled to meet with German Chancellor Merkel, French President Hollande and Eurogroup Chief Juncker next week. He is expected to provide a proposal that would buy the country additional time to find another EUR11.5 billion in spending cuts. Missing their deficit target means that Greece would need more money but they are hoping to raise the funds through bill issuance and loans from the IMF. Yesterday’s bill auction was a big success and based on comments from German Foreign Minister Westerwelle who said they have to deal with lost time from the Greek elections, there could be willingness amongst Europe’s key players to grant Greece the extension.

GBP: Lifted by Stronger Employment

The British pound traded higher against all of the major currencies following stronger than expected labor market numbers. Jobless claims fell unexpectedly in July as the Olympics created jobs in the city of London. Jobless claims fell 5.9K against a forecast for a gain of 6K. The number of workers increased by 201K totaling to 29.5 million. The statistics office said that without cuts to lone parent benefits, which pushed more women onto jobless roll, the claimant count would have declined even more in July. The claimant count rate remained unchanged at 4.9% and unemployment rate dropped to 8% from 8.1%. Although creating jobs in a decelerating economy may be a good thing, economists think it will be unsustainable and employment will return to its decelerating phase. The Bank of England also released minutes from its August meeting, which showed policy makers unanimously voting to keep the bond purchasing target unchanged and bank rate maintained at 0.5%. Britain’s economy shrank 0.7% since June and the BoE expects the economy to contract about 0.2% this year. GDP growth remained restrained and weaker world growth pulled export growth down but with the recent stimulus there may be a gradual recovery in GDP by the fourth quarter. In regards to Funding for Lending Scheme, “a number of banks had announced reductions in the rates on certain mortgages and small-business loans.” The Eurozone is still a concern and “even if a disorderly outcome were avoided, it was probable that the continuing threat of such an event would weigh on domestic activity for some time to come.” There was no discussion of cutting rates mentioned in the minutes. The retail sales report is due for release tomorrow and is expected to decline by 0.1%.

AUD: Consumer Confidence Hits 5 Month Lows

The Canadian, Australian and New Zealand dollars strengthened against the greenback. Australia’s Westpac consumer confidence index unexpectedly declined from 3.7% to -2.5% as consumer confidence fell by the most in five months. There have been a number of positive data economic reports since the last survey including a decline in the jobless rate to 5.2%. The unemployment rate has remained at a range of 5% to 5.3% for the past 15 months and for the past five months the economy added jobs. The wage cost index for the second quarter also performed better than expected with a 1.0% quarterly increase and yet consumer confidence still declined. This mixed data causes concerns for the central bank as they ponder on whether to keep rates steady for the rest of the year. The Reserve Bank of Australia has already lowered rates by 1.25% from November to June to 3.5%. There is a relatively good chance the RBA will leaves rates unchanged at its next meeting. The RBA has indicated that wages need to remain contained and productivity needs to recover to ensure inflation stays within its target of 2% to 3%. Data expected for tonight includes average weekly wages and consumer inflation expectations from Australia and ANZ NZ job ads and business NZ performance of manufacturing index from New Zealand. Canada will release its manufacturing sales report along with data on foreign purchases of Canadian dollars.

JPY: Quiet in Japan

Like the U.S. dollar, it was a mixed day for the Japanese Yen which traded lower against the U.S. dollar, British pound, Aussie, kiwi and loonie and higher against the euro and Swiss Franc. It has been a quiet in Japan with no economic data on the calendar. Japanese stocks fell with the Topix Index falling for the first time in three days after the Eurozone GDP missed expected marks. Japanese bonds declined with rates rising to a six week high. The 10 year bonds rose by three basis points to 0.82%.

Kathy Lien
Managing Director

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