EUR: Uh Oh! Protests in Spain Turn Violent

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Daily FX Market Roundup 09-25-12

EUR: Uh Oh! Protests in Spain Turn Violent
USD: A Round of Stronger US Data Fails to Lift Sentiment
GBP: FLS Details Released
CAD: Stronger Retail Sales
AUD: Financial Stability Review Shows Cautious Optimism
NZD: Trade Balance on Tap
JPY: Political Change Cuts Chance of Yen Intervention

EUR: Uh Oh! Protests in Spain Turn Violent

For the euro this week, it is all about Spain. As the images of protesters clashing with police in Spain’s capital flashed across the television screens on trading floors, the euro fell quickly against the U.S. dollar. Throughout the European trading session, the EUR/USD quietly edged higher but when the media showed how much tension has been created by the plans for further austerity, investors realized that the economic crisis could also create a broader social and political crisis for Spain. Tens of thousands of protestors clashed with police in Madrid today, tearing down barriers blocking access to Parliament and prompting the firing of rubber bullets. There’s no easy way out of this mess and this social unrest will only make the tough decisions even tougher. On the one hand, the financial community won’t let up on Spain until they succumb to a sovereign bailout and on the other the Spanish government is struggling to contain this unrest that has included calls for the government to resign. While there have been a number of clashes between protestors and police that have involved firing of rubber bullets and beatings with batons, this latest violence is occurring days before Spain is expected to announce a new round of unpopular reform measures on Thursday in the draft of the 2013 budget. Considering that this will be the Prime Minister’s fourth round of belt tightening in 9 months, we can’t blame the people of Spain for being very angry. If Spain were to ask for a sovereign bailout, it would come at a cost of even more austerity.

Aside from a new reform package and the 2013 budget due on Thursday, the details of the banking sector’s stress tests will be released on Friday. This final report will tell us how much additional capital Spanish banks need to maintain an adequate buffer of reserves. The current estimate is EUR62 billion, if the sum exceeds that, the euro will be in trouble. The bid to cover ratio for Spain’s bill auction and Italy’s bond auction was also lower than the last auction, which is sign that investors are nervous about the Spanish economy and their need for further financial assistance. Concerns about growth prompted S&P to cut its economic forecasts for the Eurozone. They now expect Eurozone GDP to shrink by 0.8% in 2012 and 0.3% in 2013. Rating agency Moody’s is set to finish its review of Spain by the end of September. If they decide to slash the country’s ratings, we could see recent gains in the EUR/USD evaporate quickly especially if the country doesn’t react immediately with a bailout request. ECB President Draghi agrees that the Eurozone crisis is not over and urged European politicians to take advantage of this calmer period to make big decisions. He also urged the Germans to remember how much they have benefitted from the euro and how much they stand to benefit going forward. While we hope that his recommendations won’t fall on deaf ears, we are not optimistic since politicians have been blinded by nationalist priorities. German Finance Minister Schaeuble for example said Spain doesn’t need a new program they need to fix their problem of communication and regain market confidence. German consumer prices are scheduled for release tomorrow.

USD: A Round of Stronger US Data Fails to Lift Sentiment

The reversal in U.S. stocks drove the U.S. dollar higher against all of the major currencies. Despite better than expected U.S. economic data, the uncertainty in Europe made investors nervous and caused a broad based sell-off in the financial markets. This week’s economic reports from the U.S. are mostly second tier, which means they will only have a limited impact on the U.S. dollar. Instead, risk appetite and developments in Europe will determine whether the dollar rallies on a flight to quality or weakens on optimism. Federal Reserve President Plosser expressed skepticism about the need for the latest round of stimulus by saying point blank that it probably won’t be effective in boosting employment. Plosser is traditionally one of the more hawkish members of the FOMC so his skepticism is not unusual and we take his views with a grain of salt since he is not a voting member of the monetary policy committee this year. Treasury Secretary Geithner expressed his own concerns about the uncertainty in Europe, the lack of U.S. growth and the level of political paralysis in the U.S. Yet amidst all of caution, there have been bright spots in U.S. data including today’s economic reports but don’t be mistaken – the rally in the U.S. dollar is not caused by the positive economic reports because if that was true, stocks would have also closed higher. Consumers are more optimistic this month compared to the last according to the Conference Board whose index rose from 63.1 to 70.3 in September. While job growth has been anemic and some high profile companies are laying off workers again, the rise in the stock market gave consumers a more positive outlook for the U.S. economy. The Conference Board’s findings are consistent with what we have seen from the University of Michigan and Investors Business Daily. Manufacturing conditions in the Richmond region also turned positive in September which is a nice surprise considering that economists were looking for the fourth consecutive month of contraction. House prices continued to increase in July but at a slower pace than June according to both the S&P/CaseShiller Home Price Index and FHFA House Price Index. New Home sales are due for release on Wednesday and low interest rates should continue to lend support to the housing market.

GBP: FLS Details Released

The British pound ended the day slightly lower against the U.S. dollar and unchanged against the euro. The only piece of U.K. data released today was the number of loans for house purchases from the British Banking Authority. According to their report, loans increased substantially in the month of August thanks to ultra-easy monetary policy. The Bank of England also released participation details for their Funding for Lending Scheme (FLS). A total of 13 banks signed up including all of its largest lenders with the exception of HSBC. However lending levels was smaller than most economists had anticipated. Nonetheless the central bank remains committed in their belief that the FLS program will keep rates low and increase the volume of transactions. The success of the FLS is important because it plays a critical role in determining whether another round of Quantitative Easing will be needed. No major U.K. economic reports are scheduled for release on Wednesday.

CAD: Stronger Retail Sales

Risk aversion in the financial markets drove the Canadian, Australian and New Zealand dollars lower against the greenback despite hotter retail sales numbers from Canada. Consumer demand up North rose 0.7% in the month of July compared to forecasted growth of 0.2%. After falling 0.3% the previous month, spending rebounded strongly but part of the improvement can be attributed to the volatility in auto demand. Retail sales less autos rose only 0.4% as Canadians spent more money on furniture and home furnishings and less on electronics. While the uptick did not drive the Canadian dollar higher, it supports the Bank of Canada’s persistent call for higher interest rates. The commodity currencies would have been probably been hit harder by the slide in stocks if not for the data from Canada or a more upbeat report on the economy from the Reserve Bank of Australia. In the RBA’s twice yearly Financial Stability Review, the central bank said Australian banks are in a relatively strong position and households are taking a prudent approach to debt. They continue to prefer saving and paying down their debt more quickly than required. More importantly, they are confident that modest employment growth will continue. With the RBA feeling cautiously optimistic, the Australian dollar has managed to avoid steeper losses. New Zealand trade numbers are due for release this evening and unfortunately the surplus is expected to turn into a large deficit as exports fall and imports rise.

JPY: Political Change Cuts Chance of Yen Intervention

The Japanese Yen traded higher against all of the major currencies including the U.S. dollar. The big story this week was the resignation of Finance Minister Azumi. While Azumi stepped down to take a larger position in the ruling party as the Deputy Secretary General of the Democratic Party of Japan, the leadership change comes at a time when the Japanese Yen is trading at dangerously high levels. The decision of intervention rests with the Ministry of Finance and not the Bank of Japan. Even though Azumi said this change would not affect currency policy, until a successor is picked, the chance of intervention in the Yen has decreased significantly. While the Japanese government has not intervened this year, they have not been shy to do under Azumi’s watch in 2011. All eyes are now on who will be the new Finance Minister and that person’s stance on currency policy. Currently, there’s word that Deputy Prime Minister Okada is being considered for the post along with Policy Chief Seiji Maehara whose appointment would be interesting because he has been a vocal proponent of taking more active measures to weaken the Yen.

Kathy Lien
Managing Director

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