FX: 5 Most Important Event Risks Next Week

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Daily FX Market Roundup 10-12-12

FX: 5 Most Important Event Risks Next Week
EUR: Don’t Expect Much from EU Leaders Summit
GBP: All Eyes on BoE Minutes
AUD: RBA Minutes and Chinese Data Means Volatility for AUD
CAD: Oil Prices Decline, CAD Resumes Rise Against aUD
NZD: Gold Sees Biggest Weekly Loss in 2 Months
JPY: Downgrades Economic Assessment

FX: 5 Most Important Event Risks Next Week

The main theme in the forex market over the past few days has been consolidation. A bank holiday in the U.S. at the start of the week and the lack of market moving economic reports in the days that followed prevented big moves in currencies. The U.S. dollar ended the week unchanged against most of its peers and investors should enjoy this lower volatility environment for as long as they can because the action could heat up significantly in the week ahead. There are many unanswered questions that could be addressed by next week’s calendar events – we are not talking about Europe’s sovereign debt crisis, which is the main uncertainty crippling the market but clarity on the monetary policy outlook or economic performance of other countries. The 5 most important event risks next week are the following starting in the order of release:

1. US Retail Sales
2. Minutes from Reserve Bank of Australia’s Monetary Policy Meeting
3. Minutes from Bank of England Monetary Policy Meeting
4. Chinese GDP
5. EU Leaders Summit

These are not the only events to watch and further details will be provided in the respective sections below but for the U.S., the focus will be on retail sales and Q3 earnings. We have seen more upside surprises in U.S. data than investors have been prepared for and the fact the average American still feels the economy is stuck in a rut makes it hard to believe the data. Nonetheless, the unemployment rate is below 8%, jobless claims dropped to its lowest level in 4.5 years and according to the University of Michigan, consumer confidence is at its highest level in more than 5 years. The missing ingredient is spending. If spending is strong, then it will be very hard argue against the improvements in the economy especially since economists are looking for retail sales growth to slow. If the data is weak, the bears will rush in to say that disappointing consumer spending confirms that the labor market numbers are distorted. While retail sales is important for the Federal Reserve, the only way that it could affect their monetary policy bias is if retail sales grows by less than 0.2% or more than 1.5%. For the U.S. dollar, it doesn’t take as much to trigger a reaction. Given the recent improvements in U.S. data, the risk is to the downside. If retail sales come in very bad, USD/JPY could extend lower and risk appetite could give way, leading to safe haven demand for dollars. Third quarter earnings will also play a role in risk appetite and there are a lot more companies reporting next week. Aside from retail sales, the Empire State and Philly Fed manufacturing surveys are also scheduled for release along with leading indicators, consumer prices, the Treasury International Capital Flow report, Industrial Production, housing starts, building permits and existing home sales.

EUR: Don’t Expect Much from EU Leaders Summit

The euro may have appreciated against the U.S. dollar today but an intraday reversal left the currency pair well off its highs. Stronger than expected Eurozone industrial production numbers help to support the currency but the reluctance of policymakers to consider additional support for Europe contained the rally. European Central Bank monetary policy member Nowotny said there is no need for more rate cuts right now and even if there was, he opposes the idea of cutting the ECB deposit rate to zero. Spanish bond yields fell sharply today on speculation that Spain could ask for a bailout this weekend. We believe the chance of this happening is slim because of the denials by the government and their reluctance to do anything ahead of next weekend’s regional elections. EU Leaders are meeting in Brussels at the end of next week to discuss Greece, Spain and the sovereign debt crisis in general. Based on the comments out of the European Finance Ministers meeting, there is a good possibility that the next aid payment for Greece will be unlocked but don’t expect any decisions on Spain. If there is no deal for Greece, then the meeting will be nothing other a reminder of how difficult it is to get anything done in Europe. Given the track record of decisions made at these events, the chance of a disappointment is high. The German ZEW survey will also be released next week along with Eurozone trade and current account figures. France and Spain have bond auctions on Thursday and as usual these tests of investor confidence are important.

GBP: All Eyes on BoE Minutes

The currency that we are most interested in this week is the British pound because the minutes from the last Bank of England meeting is scheduled for release and we are eager to find out how close the central bank is to easing again. Economic data out of the U.K. has been far from desirable with manufacturing and service sector activity contracting at a faster pace last month. The housing market has also taken a turn for the worse according to the latest reports that show house prices falling in the month of September. The Federal Reserve, European Central Bank and Bank of Japan have already eased and it would not be a stretch for the Bank of England to follow suit. When the BoE last met, they left the size of their asset purchase program and interest rates unchanged but we suspect that a fair number of policymakers favored more QE. At the other end of the spectrum we know at least 2 (Broadbent and Dale) and possibly 3 (Weale) members of the MPC do not believe that further Quantitative Easing is necessary. The question now is how many members voted in favor of more asset purchases. The Bank of England minutes won’t be the only driver of volatility for sterling. Inflation, employment and consumer spending numbers are also scheduled for release. The outcome of these reports will help shape the central bank’s decision and the market’s expectations for more stimulus in November.

AUD: RBA Minutes and Chinese Data Means Volatility for AUD

The Australian and Canadian dollars ended the day lower against the greenback as the New Zealand dollar held steady. The lack of economic reports for any of the 3 commodity currencies left them at the whim of risk appetite. Oil and gold prices edged lower, adding pressure on the AUD and CAD. The past 6 trading days have been tough for gold bugs as better than expected U.S. data affected demand for the yellow metal. Investors have been buying gold as an inflation hedge but the drop in the unemployment rate, stronger jobless claims report and hotter consumer confidence has led some people to wonder whether the Fed could withdraw stimulus early. The big focus next week for the commodity currencies is China. Trade, inflation, industrial production, retail sales and third quarter GDP numbers are due for release. Annualized GDP growth is expected to slow to 7.4% from 7.6%, which would be the slowest pace of growth in more than 10 years and there’s no question that the Chinese economy is slowing. If the data shows otherwise, everyone will think that China is cooking the books. Weaker data will weigh on commodity currencies and the Australian dollar in particular but at the same time harden the case for more fiscal stimulus from China. We are also looking forward to the Reserve Bank of Australia’s monetary policy meeting minutes. Last time they met, they cut interest rates by 25bp and the minutes will hopefully reveal what broke the camel’s back and pushed them to cut rates. We will also be looking for hints on whether the RBA will ease again.

JPY: Downgrades Economic Assessment

The Japanese Yen strengthened against the greenback, loonie and Aussie and weakened against other major currencies. The Japanese government downgraded its assessment of its economy for the third straight month as the European crisis and China’s slowdown continues to add pressure to the economy. Economics Minister Seiji Maehara said he will bring up the concern of the strong yen to Bernanke and Draghi. Maehara thinks that it’s too soon to evaluate whether Japan may slip into recession. He said, “A further slowdown in global growth and volatility in financial markets may hurt Japan’s economy, which are risks we must be vigilant to.” Japan Finance Minister Koriki Jojima acknowledges the concern of the strong yen and plans to maintain public confidence in the government’s fiscal policy to support the country’s medium and long term growth. Prime Minister Noda told U.S. Treasury Secretary Geithner that the country could miss growth targets because of the strong currency and deteriorating global growth. These grim comments explain why the government downgraded its outlook and warned in their monthly report that the economy continues to be in a mild deflationary phase. Private consumption has been weak and remains almost flat. Although Japan has outperformed most of the G7 countries its weak demand and appreciating yen projects a stall in growth for the rest of the year. Maehara said, “We will continue to call for powerful monetary easing.”

Kathy Lien
Managing Director

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