FX: Any Help from Central Banks Next Week?

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Daily FX Market Roundup 09-28-12

FX: Any Help from Central Banks Next Week?
USD: All About NFPs – Non-Farm Payrolls
GBP: Shrugs Off Hotter Data, Fitch Warns of Possible Downgrade
AUD: China Releases Key Data During Golden Week
CAD: Mixed GDP Numbers
NZD: Weaker Business Confidence
JPY: Busy Night for Japan

FX: Any Help from Central Banks Next Week?

Aside from German economic reports and the Spanish budget it has been a light week in terms of market moving data. That should change however in the coming week as the U.S. economic calendar kicks off into high gear with manufacturing and non-manufacturing ISM numbers scheduled for release along with non-farm payrolls. Four major central banks will also be making monetary policy announcements and this includes high profile players such as the Reserve Bank of Australia, European Central Bank, Bank of England and Bank of Japan. Having just increased monetary stimulus in September, no additional action is expected from the ECB and the BoJ. However central bankers won’t be happy with the market’s response to their latest measures and it will be interesting to see what they have to say. If the ECB and the BoJ focus on damage control and talk about how it takes time for the stimulus to filter down to the economy, investors will interpret this to mean that they aren’t ready to do more which could hurt risk appetite. However if they express concern and reiterate that they haven’t run out of options and their powers are unlimited, then their attitude of being all in should lift the euro. The Bank of England is getting close to increasing their own asset purchase program but we don’t expect them to pull trigger in October. The same is true for the Reserve Bank of Australia, there’s not enough reason for them to rush into monetary easing. If Spain was downgraded by Moody’s triggering widespread volatility in the financial markets, it would be a completely different story. There’s no question that central banks are frustrated but in light of the vulnerability in risk and general sense of uncertainty, we expect the ECB President to reassure the markets.

For Spain, the bank stress tests were in line with expectations and now it all comes down to a game of waiting. We are waiting for Moody’s to make a decision on Spain’s rating and waiting for Spain to request for a bailout. The fact that Moody’s has put off an announcement to the 11th hour and beyond tells us that deep down, they want to downgrade Spain to junk status but are wary of the impact that it will have on the markets. They don’t want to be responsible for forcing Spain to accept a bailout because that will most likely be the case if they slashed the country’s rating. While some may argue that the Spanish government over-delivered in their Budget, the market has a one-track mind right now and all it is thinking about is a bailout. Since October is a huge month for bond redemptions, there’s a good chance that the government could buckle down and ask for help over the next 2 to 3 weeks. Until that happens, expect more choppiness and risk aversion in the financial markets that should translate into further euro weakness.

USD: All About NFPs – Non-Farm Payrolls

For the U.S. dollar, next week will be all about non-farm payrolls. Job growth dropped below 100k last month and if payrolls fail to exceed this mark again, the investment community will be talking about the failure of the Federal Reserve and QE infinity. Judging from the leading indicators for non-farm payrolls that we have seen so far including jobless claims and consumer confidence, it’s a tough call. Overall, consumers grew more optimistic this month, thanks in large part to the rally in U.S. stocks but jobless claims have also increased and many parts of the U.S. economy reported weaker manufacturing conditions. This morning for example, we learned that manufacturing activity in the Chicago region dropped to its lowest level since September 2009, shrinking for the first time in 3 years. While there was a nice improvement in jobless claims this week, the 4-week moving average edged higher. Had there been no improvement in jobless claims, we would be in trouble. Now however, we are looking for payrolls to be somewhere around last month’s levels. In general, there’s a lot left to be desired when it comes to U.S. growth. This morning’s economic reports only reinforce the Fed’s decision to increase stimulus. Personal incomes grew 0.1%, matching the downwardly revised pace of growth seen in July. While personal spending increased at a faster pace of 0.5%, it raised concerns about whether Americans are spending above their means, again. The PCE deflator shows that inflationary pressures ticked up slightly (0.4%) but remains muted overall, particularly core prices, which increased only 0.1% last month. The Chicago PMI index dropped from 53.0 to 49.7 while the University of Michigan Consumer Confidence index was revised lower to 78.3 from 79.2 for the month of September.

GBP: Shrugs Off Hotter Data, Fitch Warns of Possible Downgrade

The British pound saw its largest decline against the U.S. dollar in nearly 2 months. While the latest U.K. economic reports were largely supportive of the pound, the currency fell victim to risk aversion and warning by Fitch that the risk of the U.K. losing its AAA rating has increased. Thanks to better than expected economic data, consumer confidence improved. The GfK index rose to -29 to -28, the highest level in 15 months. Not all of the subcomponents increased but the future personal financial situation rose 2 points. This improvement, which is also the first in 4 months could be a sign of stronger household consumption. The index of services also rose 1.1% in the month of July. While this was less than economists anticipated, it was the strongest pace of growth in 14 months. The service sector benefitted significantly from the Olympics, Queen Elizabeth’s Diamond Jubilee and an increase in demand for autos. U.K. manufacturing, service and construction sector PMI numbers are scheduled for release next week. The Bank of England also has a monetary policy meeting where the size of their Quantitative Easing program and interest rates are expected to remain unchanged.

AUD: China Releases Key Data During Golden Week

The Australian, New Zealand and Canadian dollars ended the day lower against the greenback. Next week is Golden Week in China and the financial markets are closed. In anticipation of this holiday, the central bank announced its largest reverse repo operation ever. This is a fancy term that basically involves flooding the market with liquidity to tie banks over. Despite the Chinese government’s aggressive action, the Chinese Yuan rose to a record high against the U.S. dollar. The question now is whether the People’s Bank of China will do more. Next week we have Chinese manufacturing and non-manufacturing PMI numbers scheduled for release. If the manufacturing sector continues to contract, the odds of a bolder stimulus move would increase. If the manufacturing PMI index exceeds 50, the PBoC could hold off for a bit longer. The Reserve Bank of Australia also has a monetary policy announcement next week. Of the 28 economists surveyed by Bloomberg, 19 expect the RBA to leave rates unchanged and 9 expect them to cut by 25bp. The futures market is also pricing in a 75% chance of a rate cut. We think the central bank will remain on hold due to the lack of economic data in recent days and a significant trigger like a downgrade of Spain by Moody’s. This morning we learned that Canadian GDP grew by 0.2% in the month of July. While this was stronger than expected, the 0.1% downward revision the previous month offset the increase, making it more of a wash. On an annualized basis, growth slowed to 1.9% from 2.2%. Canadian IVEY PMI and employment numbers are scheduled for release next week. Australia has retail sales and a number of PMI reports on tap.

JPY: Busy Night for Japan

It was a mixed day for the Japanese Yen and very busy evening in Japan. A number of economic reports were released overnight and we learned that in the month of August, overall household spending increased 1.8% (from 1.7% previous month), the jobless rate held steady at 4.3%, consumer prices fell 0.4%, retail sales jumped 1.5% and industrial production fell 1.3%. The weak industrial production number is discouraging but the jump in consumer consumption indicates that spending is not just moving in one direction. Housing starts also dropped 5.5%, which was a little less than expected. The main focus next week is the Bank of Japan’s monetary policy announcement. After having just increased asset purchases last month, we don’t expect more action from the BoJ but with the Yen still trading at very high levels, the central bank will continue to talk about the need to do more.

Kathy Lien
Managing Director

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