EUR: Why Weak Data Failed to Translate to New Lows

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Daily FX Market Roundup 08.28.14

EUR: Why Weak Data Failed to Translate to New Lows

Dollar: US Recovery Reinforced by String of Positive Data

USD/CAD: Time for Q2 GDP

AUD: Driven Higher by Private Capital Expenditures

NZD: Building Permits and Biz Confidence Next

Good Data Keeps Sterling Well Supported

JPY: Busy Night for Japan

EUR: Why Weak Data Failed to Translate to New Lows

Between weaker Eurozone data, stronger U.S. economic reports, a further Russian incursion into Ukraine, and a negative Eonia rate, the euro should be trading at fresh yearly lows against the U.S. dollar. However even with a mild decline, EUR/USD appears to be stabilizing above 1.3150. Yesterday we warned our readers against buying the euro at these levels and while we continue to believe that the stabilization is a pause and not a bottom it is important to understand why the euro failed to drop to new lows on the back of today’s reports. First and foremost, the currency pair is deeply oversold and investors have grown to expect weaker Eurozone data but the real question for the market is whether the ECB will signal plans to increase stimulus next week. Unfortunately none of today’s reports provide much clarity even as they reinforce the need for support eventually. The drop in confidence was not a big surprise and while German unemployment increased when it was expected to decline, weaker labor market conditions was offset by a rise in money supply. Credit growth may be expanding but the improvements were in mortgage lending and not consumer or business lending which means the report still gives the ECB reasons to be concerned. Consumer prices in Germany stagnated in August after growing 0.3% in July but the big focus is on Friday’s EZ CPI estimate (German retail sales are also scheduled for release). Many investors are skeptical about the central bank’s willingness to increase stimulus before seeing the impact of the September TLTRO rollout but if CPI growth slows more than expected, it would validate the ECB’s concerns about falling inflation expectations and could lead to further EUR/USD weakness. We do not expect the central bank to introduce new measures next week but we are looking for Draghi to signal that another program is coming in a firmer tone than past months when he simply said they are ready to act if needed. Some argue that this could rally the euro because it would fall short of expectations for QE, but we will view that as an opportunity to sell euros at a higher level.

Dollar: US Recovery Reinforced by String of Positive Data

Most of today’s U.S. economic reports surprised to the upside but the data did not create consistent performance for the U.S. dollar. The greenback traded higher versus the euro but edged lower against the Japanese Yen, Canadian and Australian dollars and for the rest, it was unchanged. Although stocks failed to extend their gains, they held near record highs. The most interesting move was in Treasuries. Ten-year yields dropped to their lowest level in 14 months on an intraday basis as demand for Treasuries continue to grow. Investors still prefer U.S. assets and for the most part, we expect demand to remain in place until there is a significant downside surprise in U.S. data. In the meantime, today’s economic reports only reinforce the dominance of the U.S. economy and Fed policy. Second quarter GDP growth was expected to be revised lower but thanks to higher prices and stronger business investment, it was revised up to 4.2% from 4%. Jobless claims also dropped to 298k from 299k. Although the decline was small, this marked the third out of four weeks with claims below 300k, which has historically been consistent with payroll gains of over 200k. Pending home sales also rose 3.3% which was significantly stronger than the market’s 0.5% forecast. Aside from the decline in new home sales, improvements were seen in all other housing market reports. The only miss was in the Kansas City manufacturing activity index but this report is not closely watched. In a nutshell, these reports confirm that the U.S. economy is improving and supports the case for a less dovish monetary policy bias next month. On Friday, personal income, personal spending, revisions to the University of Michigan Consumer sentiment report and Chicago PMI are scheduled for release.

USD/CAD: Time for Q2 GDP

After selling off sharply on Wednesday, the decline in USD/CAD stalled despite better stronger Canadian data. The country’s current account deficit narrowed to -$11.9B from -$12.0B which was slightly less than anticipated but still very good when taking the Q1 upward revision into consideration. What should have been positive for the Canadian dollar was the 3.3% rise in average weekly earnings. Wage growth is a problem for many countries around the world but in Canada, wages grew at its fastest pace since March 2011. The increase was relatively widespread with real estate, wholesale trade, retail trade, mining, logging and utilities seeing the strongest gains. The Canadian dollar will remain in focus over the next 24 hours with Q2 GDP numbers scheduled for release. Economists expect the Canadian economy to expand at a slower pace but based upon the improvements in spending and trade activity between April and June, the risk is to the upside for the report. Meanwhile the Australian dollar extended its gains today thanks to stronger than expected private capital expenditures. The data shows that the Australia’s economy is benefitting from Chinese stabilization. The New Zealand dollar on the other hand ended the day unchanged. Building permits and business confidence numbers are scheduled for release this evening.

Good Data Keeps Sterling Well Supported

Thanks to stronger than expected consumer spending numbers the British pound held steady against the U.S. dollar and strengthened versus the euro and Swiss Franc today. According to the Confederation of British Industry, retail sales volume hit a 6-month high with the CBI reported sales index rising to 37 from 21 in the month of August. On top of that the expectations component of the report hit its highest level in 12 years, fueling expectations for a stronger recovery over the next 3 months. In response, the British Chambers of Commerce upgraded their forecasts for U.K. growth. They now expected the economy to grow by 3.2% this year instead of 3.1%. While the increase is small, it represents a brighter outlook for the U.K. economy that is motivated by a stronger labor market and expectations for healthier growth in the second half of the year. Don’t forget that the BoE also raised its 2014 growth forecast from 3.4% to 3.5% when they released their Quarterly Inflation Report earlier this month. As we noted throughout the week, sterling is due for a recovery particularly against non-dollar currencies. This may be the first piece of promising news for the U.K. economy and if next week’s PMI numbers also surprise to the upside, we could see a broader recovery that should drive the GBP/USD towards 1.67.

JPY: Busy Night for Japan

The pullback in global equities drove the Japanese Yen higher against most of the major currencies. The Ministry of Finance’s weekly portfolio flow report was the sole piece of Japanese data released overnight and according to the report, Japanese investors were big sellers of foreign bonds during the week ended August 22nd. They sold the largest amount of bonds since June 27th, which would be worrisome if they had not bought foreign stocks for the 10th week in a row. Foreigners on the other hand continued to buy Japanese stocks and bonds, keeping the Nikkei well supported. Tonight is a very busy one in Japan with a number of important economic reports scheduled for release. This includes the jobless rate, overall household spending, consumer prices, retail sales and industrial production. The recent loss of momentum in Japan’s recovery raised the possibility of additional easing and investors will be looking at tonight’s reports to confirm or refute that.

Kathy Lien
Managing Director

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