FX: Central Bank Meetings vs. Non-Farm Payrolls

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Daily FX Market Roundup 08-30-12

FX: Central Bank Meetings vs. Non-Farm Payrolls
EUR: Potential Disappointment in Retail Sales
GBP: Surge in Business Confidence
CAD: Contraction in June?
NZD: Plunge in Business Confidence
AUD: Recovery in Capex
JPY: Signs of Weakness in Japan?

FX: Central Bank Meetings vs. Non-Farm Payrolls

The U.S. dollar ended the week higher against all of the major currencies amidst ongoing tensions about Syria and mixed U.S. data. This morning’s U.S. releases highlight the ongoing challenges in the economy. Personal income and personal spending growth slowed in the month of July while the Chicago PMI index rose slightly to 53 from 52.3. These early Q3 PCE numbers point to the possibility of weaker consumption in the third quarter. At the same time stable manufacturing conditions in the Chicago region may not be enough to offset the sharp decline in activity in NY and Philadelphia. Prices paid and orders increased slightly but employment eased. Thankfully an upward revision in consumer confidence helped to round things out. The University of Michigan consumer confidence index was revised up to 82.1 from 80 for the month of August.

The last unofficial week of summer was suppose to be a quiet one but the risk of a strike on Syria and thin liquidity in the financial markets ended up causing wild swings in currencies, equities and commodities. Tensions in the Middle East will continue to dominate headlines but for the financial community, there’s a lot more than geopolitical risk to worry about this coming week. U.S. traders are off on Monday but when they return on Tuesday, the market will wake up from their summer slumber and start moving once again and there’s no shortage of potential volatility inducing events next week. Five central banks have monetary policy meetings and on Friday, the non-farm payrolls report is scheduled for release. In addition to these event risks, there’s a laundry list of other top tier economic reports on the calendar. We’ll take a look at some of the most important ones in each section of this commentary starting with the August non-farm payrolls report, which is widely believed to be the most important event risk of the week.

When it comes to the currency market, the single biggest driver of currency flows is the market’s appetite for U.S. dollars. For this reason, U.S. economic data is exceptionally important and there’s no piece of data that receives as much attention on a month to month basis than the non-farm payrolls report. Jobs fuel spending which in turn fuels growth but this month’s release is particularly crucial because it will help the Federal Reserve decide if and by how much asset purchases should be tapered in September. Recent economic data has been mixed leading many investors to wonder whether the central bank is acting prematurely. Yet their singular focus on the labor market suggests they will not deviate from their plan to taper in either September or December. We believe the Fed is prime to act next month as long as job growth exceeds 150k and probably even just 125k. Based on the low level of weekly jobless claims in August, we expect job growth to exceed the prior month’s 162k print. Bear in mind, a number of U.S. economic reports will be released before Friday’s payrolls number including manufacturing and non-manufacturing ISM, the trade balance, ADP employment change and the Beige Book report – all of which will help shape the market’s expectations for NFPs. While the market’s appetite for dollars could determine how currencies trade throughout the week, the fact that 5 major central banks also have monetary policy announcements mean that country specific factors could also drive currency flows. In other words, the outlook for payrolls should be the overriding theme for the coming week but central bank rate decisions could trigger unexpected volatility.

EUR: Hit by Uneven Data

The euro dropped to fresh 2 week lows against the U.S. dollar today. The move began in Europe when European traders ignored strong Eurozone confidence numbers and sold euros on month end rebalancing and softer German retail sales, which plunged 1.4% in the month of July. With U.S. stocks falling in August, rebalancing flows is positive for the dollar and negative for the euro this month. After non-farm payrolls, the second most significant event risk is the European Central Bank’s rate decision. The ECB is not expected to alter interest rates next week but the recent increase in uncertainty and unevenness of Eurozone data could lead to continued caution from the central bank. Economic data from Germany has been mixed with stronger manufacturing activity offset by a rise in unemployment and decline in spending. There are no major inflationary pressures in the region and the recent rise in oil prices could worry the central bank not from a price but growth perspective. The ECB has taken a more cautious approach to the outlook for the Eurozone after their recent rate cut and now higher oil prices poses a greater risk to consumer and business spending. As such, we expect the central bank to remain dovish, a stance that could hurt the euro. The currency pair has had a very difficult time breaking the 1.34 level and unless the ECB is surprisingly optimistic (and they don’t have any major reasons to be), we don’t expect this level to be breached in the coming week. Aside from the ECB meeting, final Eurozone PMI numbers, revisions to GDP, German factory orders, industrial production and trade balance are also scheduled for release.

GBP: No Major Surprises Expected from BoE

Despite stronger housing market numbers the British pound continued to trade lower against the U.S. dollar. Mortgage approvals increased more than expected while house price growth slowed only slightly. It has been a quiet week in general for the British pound, which slowly grinded lower on risk aversion. The Bank of England has a monetary policy meeting next week but we don’t expect any major policy surprises or reaction in the currency. Having just heard from Mark Carney this past week we know that the central bank is leaving the door open to additional easing but recognize the improvement in data. They are comfortable with the current level of monetary policy and will adjust their stance based on the progression of the U.K. economy. For this reason, we believe that next week’s PMI and industrial production numbers could have a much more significant impact on sterling than the rate decision. If the data shows that the recovery is gaining momentum, we could see renewed demand for the British pound as a large part of the currency’s resilience has to do with the upside surprises in data. We are also interested in seeing whether a detailed statement is released after the rate decision. BoE Governor Carney chose to provide one in his first monetary policy meeting but comments in his second statement was much shorter. As a new central bank governor, the market is still trying to understand his rhythm.

CAD: Slower GDP Growth Could Worry BoC

The Canadian, Australian and New Zealand dollars extended their losses against the greenback as weaker economic data boosts the risks of dovish comments from central banks next week. Canada released its June and Q2 GDP numbers today and slower growth could prompt the Bank of Canada to be more cautious. The Canadian economy contracted 0.5% in the June causing second quarter GDP growth to slow to 1.7% from 2.2% in Q1. Sluggish demand for exports, decline in business spending and slower growth in the U.S. are to blame but some of the weakness can also be attributed to temporary factors such as floods in Alberta and strikes in Quebec. When the BoC last met, Stephen Poloz led his first monetary policy meeting and immediately changed the central bank’s statement. Previously, it said a “modest withdrawal will likely be required, consistent with achieving the 2 per cent inflation target” but Poloz adjusted this language to say that “over time, as the normalization of these conditions unfold, a gradual normalization of policy interest rates can also be expected, consistent with achieving the 2% inflation target.” This was a move to provide forward guidance that would hopefully signal to the market they are in no rush to raise rates. Today’s Canadian GDP report will reinforce their desire to keep rates steady and could even trigger dovish comments. 1.06 is stiff resistance in USD/CAD and significantly dovish comments from the BoC are needed to drive the pair above this level. Meanwhile we feel that an increase in private sector credit won’t stop the Reserve Bank of Australia from expressing concerns about the outlook for the economy. After cutting interest rates earlier this month the central bank still maintains a dovish bias and for good reasons because there are many signs that the recovery in Australia is losing momentum. If the trend doesn’t change soon, the RBA could cut interest rates again, which is why we will be watching this week’s Australian PMI, retail sales and Q2 GDP numbers very closely.

JPY: Stronger Data Eases Concerns About Slower Japanese Recovery

The Japanese Yen traded lower against most of the major currencies today despite decent economic data. The latest manufacturing and consumer reports have eased concerns about a deeper slowdown in Japan’s recovery. Industrial production rebounded last month by a healthy 3.2% while the PMI manufacturing index increased to 52.2 form 50.7. These improvements along with the rise in consumer prices, drop in the jobless rate and rebound in household spending are all signs that Japan’s economy is moving in the right direction. The 0.7% increase in core CPI also suggests that Japan is slowly beating deflation. Like many other countries around the world, Japan also has a monetary policy meeting next week but theirs will probably be the least interesting. Improvements in the economy means that the Bank of Japan isn’t all that eager to increase stimulus because the central bank firmly believe that the current programs need time to affect the economy. Deputy Governor Iwata said it could take up to a year before Japan sees any real benefit but the signs should be clearer in FY2014. As such we also do not anticipate any major changes in the central bank’s monthly report. For the most part, the Yen crosses will move on the market’s appetite for dollars, euro, sterling and aussie where more significant event risks are expected.

Kathy Lien
Managing Director

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