Foreign Nations Feel the Sting of Dollar Weakness

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Daily FX Market Roundup 07.24.14

Foreign Nations Feel the Sting of Dollar Weakness

EUR: Stronger PMIs Soften the Blow of Tougher EU Sanctions

GBP/USD: Clocks in 7 Days Without a Rally

NZD: RBNZ Pauses after Raising Rates 4x in a Row

AUD: Shrugs Off Strong Chinese PMI

CAD: Oil and Gold Prices Decline

JPY: Japanese Data Takes a Turn for the Worse

Foreign Nations Feel the Sting of Dollar Weakness

Rising U.S. yields drove the greenback higher against most of the major currencies today but in many cases, its gains were not driven exclusively by the market’s demand for dollars. Instead countries around the world are beginning to feel the sting of a weaker dollar. Over the past year, the dollar fell 10% in value versus the British pound, 8% versus the New Zealand dollar and between 2 to 3% versus the euro, Australian dollar and Swiss Franc. Central banks around the world have tried various ways to talk down their currencies. Last night for example, the Reserve Bank of New Zealand described the high level of NZD as unjustified and unsustainable. While they didn’t say it outright, the currency’s strength most likely played a role in their decision to pause after today’s rate hike. When sterling climbed to a 5.5 year high this month, the Bank of England toned down its calls to raise interest rates sooner rather than later. The Reserve Bank of Australia has also tried to jawbone their currencies repeatedly in the past few months. A large part of the dollar’s weakness has been driven by lower U.S. yields but hopefully today’s rebound will mark the bottom for yields and help restore demand for the greenback. The sharp improvement in jobless claims today overshadowed the unexpected slowdown in manufacturing activity and the larger than expected decline in new home sales. Weekly claims fell to an 8 year low of 284k in the week ended July 19th. While the BLS was quick to say that the data this time of the year can be volatile because of auto plant shutdowns, there was nothing unusual in a report that would have been even healthier without the recent layoff announcements from Microsoft. There is no question that the labor market is strengthening but the pace of improvement is still falling short of the Fed’s expectations. Meanwhile the housing market remains an area of concern with new home sales falling 8.1% in the month compared to a forecast of -5.8%. Durable goods orders are scheduled for release tomorrow and this generally volatile report is not expected to have a significant impact on the dollar.

EUR: Stronger PMIs Soften the Blow of Tougher EU Sanctions

Thanks to healthier Eurozone data, the euro ended the day unchanged against the U.S. dollar. Unfortunately the rally has been modest which suggests that investors are still wary about the overall outlook for the Eurozone. At the same time, the rise in U.S. Treasury yields prevented EUR/USD from enjoying a stronger recovery. The German IFO report is scheduled for release on Friday and even though economic activity was not affected by geopolitical uncertainties and concerns about slower growth, business confidence may not be as resilient. Even if there is an uptick in the IFO report, investors will need to see a series of positive surprises before adjusting their expectations for ECB easing. Nonetheless economic activity in the Eurozone expanded at a faster pace in the month of July according to the Eurozone’s composite PMI index which rose to 54 from 52.8 on the back of stronger manufacturing and service sector activity. Both Germany and France reported improvements in their economy but unsurprisingly there continues to be pockets of weakness in France, who experienced slower manufacturing activity. Investors could also be worried about tougher sanctions on Russia. The European Commission distributed a 10-page memo to national capital outlining the different options for broadening sanctions on Russia. They include restrictions on European investment into new the debt or shares of Russian banks owned 50% or more by the government, blocking Russian banks from listing on European exchanges and preventing them from raising funds through U.K. and EU stock markets. If approved, these sanctions would be more extensive than the measures announced by the U.S. last week. Considering that Russian banks raised almost 50% of their capital needs in EU markets last year, these steps would have a significant impact on Russia’s economy. However it remains unclear which economic options EU leaders will adopt, if any at all. So far we do not know whether a special summit will be held to discuss these possibilities or if countries would approve them in writing individually.

GBP/USD: Clocks in 7 Days Without a Rally

Seven trading days have past without a rally in GBP/USD. The currency pair peaked at 1.7191 on July 15th and has been in a one-way downtrend since then. Although consumer prices ticked higher in the month of June and the unemployment rate declined, slow wage growth and weak spending confirmed what sterling bulls feared all along which is that the Bank of England is not serious about raising interest rates this year. According to the BoE minutes and a speech from Mark Carney this week, the central bank is in no rush to raise rates. Having loaded up on long sterling positions over the past few months, the lack of hawkishness and the shift in tone drove speculators to offload some of their exposure. As more traders question the BoE’s intentions we could see a further adjustment in both market expectations and a continued unwind of long positions. GBP/USD broke below 1.70 today, leaving 1.69 as the next support level. Today’s sell-off was driven by slower than expected consumer spending. Retail sales rose 0.1% in the month of June versus expectations of 0.3%. Excluding auto sales, spending dropped 0.1%. Tomorrow’s second quarter GDP report will decide whether sterling ends week without one day of gains. The economy is expected to maintain the same pace of growth in Q2 as in Q1 but given the deterioration in trade activity and lackluster spending, the risk is to the downside. Meanwhile it is also worth noting that in reaction to the possibility of deeper sanctions, Russians are beginning to move money out of London, which could hurt the U.K. economy and their financial markets.

NZD: RBNZ Pauses after Raising Rates 4x in a Row

The Reserve Bank of New Zealand raised interest rates by 25bp to 3.5% last night but the most important takeaway from their monetary policy announcement was their plans to keep rates steady in September. Having raised interest rates four times in a row this year, the RBNZ said “it is prudent that there now be a period of assessment before interest rates adjust further towards a more neutral level.” In yesterday’s RBNZ preview, we showed how past rate hikes slowed the housing market and economic activity. With dairy prices falling further, it made very little sense for New Zealand’s central bank to continue tightening given overall data flow. The decision to pause sent the New Zealand dollar to its lowest level in nearly 6 weeks versus the U.S. dollar. While NZD/USD could test 85 cents, it is important to remember that their eventual plan is to take rates to a more neutral level, which has been defined previously as 4.25%. The RBNZ also believes that there is potential for a significant decline in the value of the currency given its “unjustified and unsustainable” level but they stopped short of threatening to intervene and instead suggests that the currency would adjust to lower commodity prices. The market is now pricing in no additional tightening this year and only 25bp by March 2015 – we believe that these expectations are conservative, which is why we believe that the decline in the NZD/USD will be limited to another 1 to 2 cents max. Meanwhile stronger manufacturing activity in China failed to lend support to the Australian and Canadian dollars. Chinese manufacturing activity grew at its fastest pace in 18 months. New Zealand business confidence is the only piece of data expected from the commodity producing countries over the next 24 hours.

JPY: Japanese Data Takes a Turn for the Worse

The Japanese Yen traded lower against most of the major currencies today after the latest economic reports from Japan took a turn for the worse. The country’s trade deficit narrowed less than expected in the month of June. Economists had been looking for the deficit to shrink to -642.9 billion yen from -910.8 billion yen but instead it dropped a mere 88 billion yen to -Y822.2B. The problem centered on exports which declined unexpectedly by 2% in the month of June. Imports were in line with expectations. External demand weakened all around but the biggest drop was in semi-conductor shipments. While shipments to China and the European Union increased, demand within Asia and the U.S. fell. According to Bank of Japan Deputy Governor Nakaso who spoke before the trade data, the “sluggish exports mostly due to overseas economies,” which are growing slowly but the competitiveness of Japanese firms have also eroded. The slide in the PMI index in the month of July confirms that manufacturing activity slowed. Tonight, consumer prices are scheduled for release and in contrast to past months, economists are looking for annualized CPI growth. If Japanese data continues to deteriorate, talk of additional stimulus could gain momentum, putting downside pressure on the Yen.

Kathy Lien
Managing Director

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