EUR – Are Ongoing Doubts about EZ Growth Misplaced?

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Daily FX Market Roundup 07-22-13

EUR – Are Ongoing Doubts about EZ Growth Misplaced?
USD – Surprise Decline in Existing Home Sales
GBP – Extends Gains Despite Lack of Data
NZD and Potential Implication of Latest Earthquake
AUD – Lifted by 3% Rally in Gold
CAD – Retail Sales on Tap
JPY – LDP Victory Paves Way for Third Arrow of Abenomics

EUR – Are Ongoing Doubts about EZ Growth Misplaced?

Of all the major currencies, the euro will be in center focus this week. With manufacturing and service sector PMI reports scheduled for release along with the German IFO index, all eyes are on the performance of the Eurozone economy. When we last heard from the European Central Bank earlier this month, they were concerned about the outlook for the region. ECB President Draghi said that monetary policy will remain accommodative as long as needed because there are downside risk to their economic outlook. He even talked about how they are “technically ready” for negative rates. Most of the economic reports that we have received have so far validated Draghi’s concerns but this week, economists are looking for an improvement in economic activity and German business confidence. So the question is whether the ECB’s doubts about Eurozone growth are misplaced because economists are looking for stronger activity. We believe that the risk is to the downside for Eurozone data because industrial production, factory orders and investor confidence have weakened and unemployment in the region remains very high. At the same time, despite his dovish comments Bernanke confirmed last week that the Federal Reserve is looking to taper and the prospect of higher U.S. yields should cap gains in the EUR/USD.

Meanwhile Portugal’s coalition parties and main opposition party failed to reach an agreement but according to President Silva, the current government has enough majority to avoid early elections. Holding elections before 2015 would have created renewed political uncertainty for the country, the region and its currency so this was an ideal scenario for Portugal and the euro. No Eurozone economic reports were released today. Tomorrow should be quiet as well with only French business confidence and production indicators on the calendar.

USD – Surprise Decline in Existing Home Sales

The U.S. dollar ended the North American trading session lower against all of the major currencies. Compared to last week, this should be a much quieter one for the forex market with no major U.S. economic reports on the calendar. All of the data scheduled for release this week are secondary numbers that shouldn’t a significant impact on the dollar. This includes today’s existing home sales report, which showed sales dropping 1.2% in the month of June from 5.14 million to 5.08 million. The decline caught investors by surprise because sales of previously owned homes were expected to slow but not decline, especially after the Fed’s Beige Book report talked about stronger housing activity. June was still the second strongest month for existing home sales since a home buyer tax credit started being was offered approximately 3.5 years ago. As such, the data is still indicative of a recovery in the housing market that will most likely be confirmed by tomorrow’s House Price Index. The Richmond Fed manufacturing index is also scheduled for release but not expected to be a big market mover. Profit taking has contributed to the slide in the greenback during this quiet week but the prospect of higher yields should keep the overall dollar rally intact.

GBP – Extends Gains Despite Lack of Data

The British pound extended its gains against the U.S. dollar, moving higher for the fifth consecutive trading day. While no U.K. economic reports released this morning the currency continued to benefit from last week’s Bank of England minutes where all 9 policymakers voted to leave the size of their asset purchase program and interest rates unchanged. Of course this is a precursor to a potentially larger change in MPC strategy. According to Prime Minister Cameron who spoke this weekend, while the Conservatives cannot guarantee that taxes will not be raised after the next election, if the economy improves, he wants to consider a reduction in taxes. The British Bankers Association is set to release its monthly report on House Purchases tomorrow. The number of homes sold has been climbing gradually since March and is expected to increase further in June. Low interest rates have been extremely supportive of the U.K. housing market. Sterling is also performing well against the euro.

NZD and Potential Implication of Latest Earthquake

The Australian, New Zealand and Canadian dollars traded higher against the U.S. dollar. No economic data was released from any of the 3 commodity producing countries but gold prices jumped nearly 3% to trade back above $1300 an ounce. Oil prices moved lower but that did not stop the CAD from extending higher as the currency catches up to the prior rally in oil. The Reserve Bank of New Zealand meets this week and despite the rally in NZD today, a powerful earthquake that damaged buildings in its capital of Wellington raises the risk of a rate cut. Thankfully while the 6.5 magnitude tremor was stronger than the 6.3 magnitude earthquake in Christchurch in February 2011, no casualties were reported. After the earthquake initially hit in 2011, the New Zealand dollar sold off aggressively but bottomed in the month that followed after the RBNZ cut interest rates by 50bp. It then went on to hit a record high against the U.S. dollar in August of the same year as rebuilding efforts contributed positively to the economy. The latest earthquake could alter the landscape for the Reserve Bank of New Zealand, who meets later this week. With slower Chinese and Australian growth, we had been looking for the RBNZ to be dovish but they could consider lowering rates again if they feel that economic activity will be negatively effect in a meaningful way. Right now, investors are deeming quake damage to be minimal which explains the rally in NZD. Canadian retail sales numbers are scheduled for release tomorrow morning and given the sharp rise in wholesale sales, retail sales are expected to have increased in the month of May.

JPY – LDP Victory Paves Way for Third Arrow of Abenomics

The Japanese Yen traded higher against all of the major currencies today after the Liberal Democratic Party of Japan earned a sweeping victory in Sunday’s Upper House Elections. The LDP secured enough seats to match the record number that it won under Japan’s longest serving Prime Minister Koizumi in 2001. This gives the LDP majority in both houses of Parliament, a first since 2007. The victory will make it easier for Prime Minister Abe to move forward with his growth strategy, known as the Third Arrow of Abenomics. The first 2 arrows involved monetary and fiscal spending. The third arrow will include policies removing trade and investment barriers wherever possible in Japan, comprehensive regulatory reform, deregulation, tax reforms and the creation of National Strategic Special Zones where the distance between home and work is short. The Yen rallied because a LDP win will facilitate the approval and implementation of economic policies that will be beneficial for Japan in the long run. However in the medium term, once the initial excitement settles, investors could start to realize that some of these growth measures could require additional monetary commitment that will be partially paid for by a higher consumption tax. According to Taro Kono, a LDP member in Japan’s lower house of Parliament, “We just won another landslide in the upper house. We have a two-thirds majority in the lower house. This is probably the best time to talk about raising the consumption tax. If we cannot do that now I don’t think we could do it ever.” The country’s consumption tax is expected to increase from 5% to 8% in April 2014 and in the fall of this year, the government will need to decide whether this timing is appropriate.

Kathy Lien
Managing Director

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