FX: Friday After Thanksgiving Breakout

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Daily FX Market Roundup 11-21-12

FX: Friday After Thanksgiving Breakout
EUR: Shifting to Data as we wait on Greece
GBP: No Rate Cut, QE Undecided
CAD: Looking Forward to Retail Sales and CPI
NZD: Annualized Credit Card Spending Drops to 3 Year Low
AUD: Chinese HSBC Flash Manufacturing PMI on Tap
JPY: Relentless Rally in USD/JPY

FX: Friday After Thanksgiving Breakout

Most of the major currencies ended the day unchanged or lower against the U.S. dollar. The only currency pair to experience a real move was the Japanese Yen, which dropped to a fresh 7 month low against the greenback. For most Americans, Thanksgiving is a time to offer thanks for everything we have and to celebrate with a big family meal. For currency traders, this holiday means lower volatility and liquidity in the FX market. The absence of U.S. traders can be seen in the tighter trading ranges for most major currencies. While many U.S. traders also take Friday off, the intraday range of the EUR/USD, GBP/USD and USD/JPY tends to expand significantly on the day after Thanksgiving. Some traders are back and the low liquidity exacerbates the volatility in the FX market. The following table shows that on average since 2003, the trading ranges for the EUR/USD and GBP/USD increases 200% the day after Thanksgiving. The impact on USD/JPY is less significant but we still see similar trading activity. The abundance of Eurozone data scheduled for release over the next 2 days could drive an increase in activity as well as the possibility of a delayed reaction to this evening’s Chinese manufacturing PMI report.

Meanwhile, weaker U.S. economic data failed to take the steam out of USD/JPY’s rally. Jobless claims dropped to 410k in the week of November 17th from an upwardly revised 451k. With the effects of Super storm Sandy subsiding, claims are beginning to normalize and unfortunately have not returned to its pre-Sandy levels. While there could still be some storm related impact, if claims do not fall below 400k soon, there will be renewed concerns about labor market conditions and expectations for easier monetary policy. The University of Michigan’s consumer confidence index was also revised lower but still remained at a 5 year high in the month of November. Leading indicators beat expectations, rising 0.2% in October but the increase was offset by a downward revision to the previous month’s report. Overall, these numbers confirm that the U.S. recovery is losing momentum and validating Fed Chairman Ben Bernanke’s concerns about the economy.

EUR: Shifting to Data as we wait on Greece

With no agreement on aid disbursement for Greece, the euro ended the day unchanged against the U.S. dollar. By now, everyone should know that the Eurogroup plans to reconvene on Monday to work out the “technical details of the package.” The price action in the EUR/USD suggests that investors remain hopeful because what’s a few more days when we have waited months for a deal. Also, the Germans have gone out of their way to reassure everyone that progress is being made and the more conciliatory tone from Merkel is being received positively. The Chancellor said the Greek financing hole could be filled through the combination of lower interest rates and more EFSF funding. She was optimistic that a deal could be reached on Monday and said the good news is that the Troika believes Greece is fulfilling its obligations. Finance Minister Schaeuble was a bit more specific. He indicated that Greece could receive up to EUR10 billion in extra EFSF funds to buyback bonds and that their current aid could be re-paid in steps or tranches. Aside from the disbursement of the next aid payment, Finance Ministers are also discussing debt restructuring, a possible moratorium on interest rate payments on EFSF loans, which would save Greece EUR 44 billion and reducing interest rates on bilateral loans. According to the Wall Street Journal, the IMF wants Greece to be financed until 2016 and the Eurogroup only wants financing to 2014. At the end of the day, we still expect Greece to receive its next aid payment and this announcement could be enough to drive the EUR/USD higher. If they are able to agree on a soft restructuring of debt that includes an interest rate holiday and/or a maturity extension, it is even more positive for the euro. As investors wait for a decision, the focus will shift to economic data and growth. Eurozone November flash PMI numbers will be released on Thursday followed by the German IFO report on Friday. Given recent warnings of weaker growth in Germany, the odds favor a deeper contraction in manufacturing and service sector activity for the Eurozone’s largest economy as well as lower business confidence. If there is a material decline in the PMI or IFO reports, fear of a sharper slowdown in German growth could weigh on the euro.

GBP: No Rate Cut, QE Undecided

The British pound ended the day slightly higher against the U.S. dollar and euro. According to the minutes from the most recent monetary policy meeting, policymakers voted 8-1 to keep asset purchases unchanged. David Miles was the sole dissenter who favored increasing asset purchases by GBP25 billion. The monetary policy committee made it clear that they have no intention to cut interest rates further because they believe the impact on lending will be limited. The minutes said “A case could be made for further easing in monetary conditions” but “views differed over the exact impact of the monetary policy committee’s asset purchases.” As indicated in the Quarterly Inflation report, MPC members felt that output could be expanded without stoking inflationary pressures. While the BoE minutes show no real urgency to ease, the central bank is still dovish and not neutral. Further Quantitative Easing in December is still an open question and given the sharp division within the central bank, there may not be enough consensus for an increase in asset purchases at the end of the year.

CAD: Looking Forward to Retail Sales and CPI

The Canadian, Australian and New Zealand dollars sold off once again against the greenback. Over the next 48 hours, we have 2 very important pieces of economic data scheduled for release from Canada. Retail sales on Thursday will be followed by consumer prices on Friday. Economists are currently looking for retail sales growth to accelerate from 0.3% to 0.5% but with wholesale sales dropping by the largest amount in nearly 19 months, the odds favor a weaker released. Also, Canadian job growth slowed significantly in October, which does not bode well for consumer spending. Only 1800 jobs were created last month compared to 52k jobs in September. Inflationary pressures are also expected to ease and if price pressures decline as consumer spending slows, the Bank of Canada may have no choice but to drop its bias to raise rates. House prices were released this morning and according to Teranet-National Bank, prices declined for the second month in a row. No major economic reports were released from Australia but in New Zealand, credit card spending grew at a slower pace. On an annualized basis, spending declined for the first time in 3 years.

JPY: Relentless Rally in USD/JPY

USD/JPY soared to a fresh 7 month high against the U.S. dollar this morning, extending a rally that has now lasted for 6 straight trading days. With the latest move, the currency pair is on track to close higher for the first time in 6 years. As long as USD/JPY ends the year above 76.90, this would be the first positive year for USD/JPY since 2006 and this time, the rally has been caused almost entirely by Japanese and not U.S. fundamentals. Aside from the political mess in Japan, the country’s trade deficit did not narrow as much as most economists had anticipated in the month of October. Between a net trade and current account deficit, more money is now flowing out of Japan, which is extremely negative for the Yen. In fact, it is so negative that it completely overshadowed pre-positioning for the U.S. fiscal cliff. Japanese trade numbers were released last night and the improvement fell short of expectations. The adjusted merchandise trade balance narrowed to –Y624.3B from –Y959B as exports fell 6.5% and imports dropped 1.6% on a year over year basis. Exports reached a 3 year low as the global economic slowdown and tension with China sap external demand. This spells big trouble for Japan and signals that the country is most likely in recession once again.

Kathy Lien
Managing Director

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