EUR Sinks to Fresh Lows, Hit From Both Sides

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Daily FX Market Roundup 02-21-13

EUR Sinks to Fresh Lows, Hit From Both Sides
USD: Driven Higher by Comments from FOMC Voter
GBP: Rebounds on Stronger Data
CAD: Hit By Drop in Oil, All Eyes on Retail
AUD: Slips to 4 Month Lows
NZD: Driven Lower By Dollar Strength
JPY: How the Weak Yen is Hurting Japan’s Trade Balance

EUR Sinks to Fresh Lows, Hit From Both Sides

Between this morning’s weaker Eurozone PMI numbers and the Fed’s discussions about tapering down asset purchases, the EUR/USD was hit from both sides today. The currency pair fell to a 1 month low and appears poised for a move down to its 100-day SMA at 1.3120. Back in December and January, the primary catalyst for the EUR/USD rally were the improvements in European data and the ECB’s quiet consolidation of their balance sheet through LTRO repayments. Now, economic data has taken a turn for the worse and the Fed is thinking about slowing the growth of their asset purchases and maybe even shrinking its balance sheet by the end of the year. While we can chalk up the contraction in fourth quarter EZ GDP growth to stale data, but the PMI numbers released today provide the most current assessment of Eurozone growth. The deeper contraction in the region’s manufacturing and service sector activity is worrisome particularly since new orders declined. German economic activity is still expanding but the pace slowed in the month of February. If tomorrow’s German IFO shows a similar decline in business confidence, the EUR/USD will extend its losses. However the IFO is not only risk for the euro tomorrow – the European Commission will also be releasing its latest economic forecasts.

One of the most important comments last week came from the head of European Sovereign Ratings at S&P. Moritz Kraemer warned that Spain, France, Italy and Portugal are at risk of being downgraded this year. If the European Commission’s growth forecasts are lowered, the risk would increase, sending the EUR/USD tumbling. The decline in Eurozone GDP growth in the fourth quarter raised concerns that the complete lack of growth last year and the prospect of a flat first quarter will make budget deficits in the region even more unsustainable. Therefore the European Commission’s growth, unemployment and deficit forecasts will be extremely important. While its possible that the EC will look beyond the contraction last year and focus on the signs of growth in the coming year, there could still be concerns about deficits and the currency, especially after today’s weak PMI numbers. Aside from the potential changes to their growth estimates, we will also be looking to see if budget deficit forecasts are increased. If Spain’s budget deficit is expected to exceed 8%, it could also raise the risk of a downgrade for the Eurozone’s fourth largest economy. If the forecasts remain largely unchanged however, it would lend support to the euro.

USD: Driven Higher by Comments from FOMC Voter

A number of U.S. economic reports were released today but the primary driver of dollar flows continues to be the prospect of changes to the Fed’s QE program. The central bank is getting more serious about phasing out asset purchases and this led many traders to reverse their short dollar positions over the past 36 hours. Today, FOMC voter Bullard said he was willing to consider altering monthly QE buying by $10B to $15B even though he believes that interest rates should not increase until June 2014. This view contrasts sharply with those of Fed President Williams who believes that bond buying needs to continue well beyond this year, but Williams is not a voting member of the FOMC in 2013 like Bullard. Yet while the greenback extended higher against the euro today, it gave up some gains against the British pound and Japanese Yen. This lack of follow through in other pairs may reflect some skepticism about timing. According to the FOMC minutes, the central bank will reevaluate its asset purchases next month but they may not choose to taper their purchases until later in the year. The slow pace of recovery in the U.S. economy and lack of significant inflationary pressures gives the Fed the flexibility to keep monetary policy easy if they so desired. This morning’s CPI report showed consumer prices stagnating in the month of January and growing a mere 0.3% ex food and energy, driving annualized CPI growth down to its lowest level in 6 months. Jobless claims rebounded to 362k from 341k and while the data is still being distorted by estimates, it is nonetheless consistent with a slow recovery in the labor market. Existing home sales rebounded slightly last month while leading indicators growth slowed and the Philly Fed survey plunged. Unlike the manufacturing sector in the NY region, which rebounded sharply in the month of February, manufacturing activity in Philadelphia contracted at its fastest pace since June 2012. The lack of consistent improvements in the U.S. economy is one of the main reasons why we are skeptical about how quickly the Fed will start to pare down asset purchases. They focus now is Bernanke’s speech next week – investors will be looking for the head of the Fed to affirm the central bank’s new bias.

GBP: Rebounds on Stronger Data

After dropping to a fresh 2 year high against the U.S. dollar, the British pound rebounded to end the day slightly higher against all of the major currencies except for the Japanese Yen. The pound has been performing very poorly as of late due to weak economic data, the dovishness of the Bank of England and Chancellor George Osborne struggles to meet the deficit target. UK public finances improved last month with public sector net borrowing dropping by -9.9B and public finances at -35.6B. January is normally a net repayment month because it is when the bulk of self-assessment income tax payments are made. This month’s reading was higher than normal thanks to a special payment from the BoE’s Asset Purchase Facility. The Confederation of British Industry’s industrial new orders report also showed improvement in the manufacturing sector. The CBI index rose from -20 to 14 in the month of February on the back of stronger export orders. Anna Leach, CBI’s head of economic analysis, said, “The rebound in manufacturing orders and expectations for output growth provide some further signs of improvement in the outlook for the UK economy.” UK 10-year government bonds dropped the most this year as speculation that the BOE will increase its asset-purchase program rise but today, 10-year gilt yields fell 0.09% to 2.11%.

CAD: Hit By Drop in Oil, All Eyes on Retail

The Canadian, Australian and New Zealand dollars extended their losses against the greenback with the AUD hitting 4 month lows today. No economic data was released from the 3 commodity producing countries but the more than 2.25% drop in oil prices hit the Canadian dollar hard. The correlation between the CAD and crude prices may have weakened in recent months but Western Canada Select oil prices have also fallen, providing justification for the slide in the loonie. Canadian consumer prices and retail sales are due for release tomorrow and there’s scope for losses in the CAD if the data surprises to the downside. Based on the decline in wholesales sales, the odds favor weaker consumer consumption. CPI on the other hand is expected to rebound after dropping 0.6% the previous month. The Bank of Canada recently toned down its degree of hawkishness and we doubt they would have done so if data improved. RBA Governor Glenn Stevens will also be delivering his semi-annual testimony on the economy this afternoon where he could talk about whether the current level of monetary policy is appropriate. If he hints that a rate cut is possible, we expect further losses in the AUD/USD. If he downplays the need for more easing, the AUD/USD could rebound back up to 1.03. With no data or speeches on the calendar for New Zealand, there’s scope for a recovery in the NZD.

JPY: Abe to Announce BoJ Governor Nominee Next Week

So it is official, Prime Minister Abe won’t be announcing his nominee for Bank of Japan Governor until he returns from his 4 day trip to the U.S. Abe left on Thursday and will likely be back in Japan by Monday. This may only be a few days away, but the prospect of no nomination this week has led to profit taking on short Yen positions. According to Prime Minister Abe, who spoke about the nomination prior to leaving on his trip “Experience at the Ministry of Finance will not hurt any of the candidates” – this comment may be directed at Kuroda and Muto who were former members of the Finance Ministry. According to Yomiuri, a Japanese paper, Toshiro Muto may be out of the race because he was rejected as a candidate in 2008. Four years ago, the opposition party was uncomfortable with the MoF’s affiliation with the government and feared that it would undermine the BoJ’s credibility. Clearly, regardless of which candidate is chosen, they will be in the back pockets of the government. Abe also said that foreign bond purchases weren’t necessary which would help Japan abide by its pledge to avoid competitive devaluation of exchange rates at this month’s G20 meeting. BoJ candidate Iwata reiterated his commitment to easing monetary policy if selected as a BoJ Governor. He said the central bank has not eased enough in 2013 and should buy more long-term bonds. He also supported changing the law to make the central bank formally liable for reaching the inflation target. No Japanese economic reports are scheduled for release this evening.

Kathy Lien
Managing Director

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