Daily FX Market Roundup 11-12-12

EUR: Investors Dubious about Progress on Greece
USD: The Clock is Ticking
GBP: The Key is CPI
AUD: Lifted by Stronger Chinese Trade Numbers
CAD: Oil and Gold Prices Unchanged
NZD: Food Prices Fall for Second Straight Month
JPY: Exports Kill Japanese Growth

EUR: Investors Dubious about Progress on Greece

With developments in Greece and Spain posing a continued threat to the euro, the currency remained under pressure. Spanish 10 year bond yields soared to a 1 month high on the lack of renewed willingness to accept a bailout. While the Spanish government is open to hearing about the terms of a potential bailout, they continue to deny the need to restructure their debt. Investors are starting to get impatient and as a result, Spanish 10 year bond yields are slowing creeping back towards 6%. Spain is a serious source of uncertainty for the euro but Greece poses the more immediate risk to the currency. We know that the Greek government will run out of money if it does not receive its next aid payment by the end of the month. They have already gone ahead and approved another round of austerity measures and the 2013 Budget but that failed to provide relief to the euro because up until this point, it is still unclear whether the EU will release bailout funds in time. While everyone knows that the stakes are high and a default by Greece would spell big trouble for the Eurozone as a whole, policymakers are dragging their heels and it is hurting the euro.

There have been a lot of Greece related comments from Eurogroup finance ministers who are currently meeting in Brussels. No decision on Greek aid has been made but everyone agrees that a decision needs to come soon, which could mean an extra Eurogroup meeting this week. Most countries are waiting for the Troika review and according to a draft making the rounds today the Troika sees “very large risks” to the country’s ability to stick to the program. Greece apparently needs to come up with another EUR 20.7 billion worth of savings to meet their goals for next year and if their targets are extended to 2016, they will need an additional EUR 32.6 billion euros. As Austria’s Finance Minister points out, the more time Greece is given, the more money they will need. The ECB’s decision to broaden the types of collateral they are willing to take from Greece also failed to help the EUR. European Union Finance Ministers will be meeting on Tuesday so expect more comments on Greece. If we are lucky, Germany will vote and approve Greek aid next week because if they fail to do so, investors will become even more concerned about what could happen at the end of the month. The ECB is confident that all will go well and Greece will avoid a default. The only piece of Eurozone data expected on Tuesday will be from France – current account and non-farm payrolls are due for release and neither report is expected to have a major impact on the EUR/USD.

USD: The Clock is Ticking

With the U.S. bond market closed for Veteran’s Day, it has been a quiet North American trading session. No economic data was released and U.S. stocks traded slightly lower. The dollar held steady against the euro, Swiss Franc and Japanese Yen, strengthened against the British pound and weakened against the commodity currencies. There are a number of important U.S. economic reports scheduled for release this week but they are not due until Wednesday and Thursday. In the meantime, the focus for the U.S. markets and the dollar is the Fiscal Cliff. With Congress off for Veteran’s Day, the chance of a deal before the Thanksgiving recess on November 19th is next to impossible. Congress will only be meeting 4 days this week before taking off for a 1.5 week recess and the clock is ticking. The price action in the financial market shows that investors are nervous. This is the biggest budget showdown since the 1995/1996 (Clinton years) and a compromise won’t come easy but everyone knows that there is a lot at stake. If they allow the economy to fall off the fiscal cliff – there will be no winners. One side must back off on tax increases for top earners and its still not clear who will give. How FX traders should position for the Fiscal Cliff will depend on their expectations for a resolution by the end of the year. If you believe that Congress can reach compromise to reduce deficit without shocking the economy by December 31st, then you can view the recent strength of the U.S. dollar and Japanese Yen as an opportunity to sell safe haven currencies at higher levels. However if you believe that Democrats and Republicans will continue to play hardball and call each other’s bluff then adding to defensive or safe haven trades may be the way to go. Either way, a resolution won’t come easy and investors will remain nervous over the next weeks as they wait to see how the discussions in Washington play out. If we get a bipartisan deal on the fiscal cliff, we can expect a strong relief rally in the markets that eases safe haven flows out of the dollar and into riskier currencies. Between now and then however, the odds favor more risk aversion and demand for the U.S. dollar.

GBP: The Key is CPI

The British pound dropped to a 2 month low against the U.S. dollar and also weakened against the euro for the second day in a row. While the focus has been very much on the U.S. Fiscal Cliff and Eurozone sovereign debt crisis, this is also a very busy week for the British pound. There is a tremendous amount of data scheduled for release starting with tonight’s RICS house price balance report and tomorrow’s inflation reports. As an inflation fighting central bank, the Bank of England is always sensitive to the level of price pressures. At the last monetary policy meeting, many policymakers expressed concern that inflation would not fall below the central bank’s 2% target this year as they had hoped because of rising energy and food costs. Annualized consumer price growth is currently at 2.2%. While consumer and producer prices are expected to have grown at a slower pace in the month of October, annualized CPI growth is expected to rise to 2.4% from 2.2%. Higher inflationary pressures would make it more difficult for MPC officials to support additional easing even though economic data has taken a turn for the worse. However if CPI growth slows, then there is a very good chance that the Bank of England will go for another round of asset purchases.

AUD: Lifted by Stronger Chinese Trade Numbers

Better than expected Chinese trade numbers drove the Australian, New Zealand and Canadian dollars higher against the greenback. Thanks to an 11.6% increase in exports, China’s trade surplus rose to a 4 year high of $31.99 billion in October, up from a prior surplus of $27.67 billion. This data shows that China has effectively engineered a soft landing and healthier economic activity in the world’s second largest economy will bode well for all of Asia and in particular, Australia. China’s 18th Party Congress is still underway with the country’s new leaders to be announced on Thursday. According to Commerce Minister Chen Deming, export growth between September and October shows that the economy is stabilizing. The head of the country’s National Development and Reform Commission said they are confident that China will achieve at least 7.5% GDP growth this year but part of the optimism was sapped by Chen’s warning of “much grim and severe” prospects for Chinese exports. The government is worried about the challenges posed by the debt turmoil in many countries and sluggish global growth. So while China continues to print better than expected economic data, the government is concerned about the sustainability of the momentum. Last night’s Australian housing market numbers were mixed with home loan growth slowing and investment lending accelerating. Business confidence is due for release this evening.

JPY: Exports Kill Japanese Growth

Today’s price action in the Japanese Yen was a perfect example of how Japan’s economic performance is not always the primary driver of Yen flows. Japan’s economy contracted for the first time since the second quarter of 2011 by 0.9% and yet the Yen rose against the U.S. dollar, euro, British pound and Swiss Franc. The only currencies that the Yen weakened against were the comm. dollars and the lack of consistency in price action indicates that risk aversion is still the most powerful driver of demand for the Japanese Yen. With the 0.9% decline in quarterly GDP growth, Japan’s economy contracted by at an annualized pace of 3.5% and even Japan’s economy Minister Maehara said last night that the “possibility cannot be ruled out that Japan is already in recessionary phase.” Many economic reports for the month of October including machine tool orders, which fell 6.7% last month, have been very weak. As a direct result of weak global demand and a strong Yen, exports, which are the lifeblood of Japan, contracted by 18.7% in the third quarter and this decline in economic activity led to a 12.1% decline in capital expenditures and 1.8% decline in private consumption. These unambiguously weak numbers could force the Bank of Japan to ease monetary policy at their next meeting. Rating agency Moody’s said Japan’s current account deficit is negative for the credit rating but they have not adjusted the rating because they do not believe that it will become a structural deficit. Final Japanese industrial production numbers are due for release this evening and we expect the data to show continued deterioration in the economy.