Daily FX Market Roundup 11-07-12

FX: Maybe China can Succeed where Obama & Greece Failed
How the ECB Could Kill the Euro
GBP: Don’t Expect Much from the BoE
NZD: Unemployment Rate Hits 13 Year High
AUD: Upside Surprise in Labor Market Data
CAD: Looking for Trade Gap to Widen

FX: Maybe China can Succeed where Obama & Greece Failed

President Obama’s victory and the Greek vote for more austerity failed to lift the financial markets. Currencies and equities traded sharply lower with the S&P 500 down more than 2% and all major currencies weakening against the U.S. dollar. The U.S. Presidential election may be behind us but fiscal uncertainty remains in Europe and while Greek leaders made a difficult but important decision for more austerity, the ECB’s concern about growth in Germany cast a dark cloud over the financial market. Starting with tonight’s 18th party Congress, China will be announcing a major leadership change that will hopefully succeed where Obama and Greece failed in lifting risk appetite. Although China is under a one party rule, this once in a decade transition is nonetheless a historic event. China’s new leaders will take over the country at a very a delicate time for their nation and the global economy. While China has been growing for a few decades, more steps need to be taken to solidify the economy and ensure stability. If the leadership change is accompanied by any major announcements in policy, it could be just the type of reform that the market needs to renew its rally. Xi Jinping is widely expected to succeed Hu Jintao and officially take over the role at the annual meeting of parliament in March. In all likelihood, the leadership change will pass without triggering any major volatility in the market, but we are hopeful that positive comments out of China’s biggest political event will help to lift risk appetite and stem the slides in currencies.

While investors were initially excited about Obama’s victory, the sell-off in risk suggests that investors realize the President won’t be as kind to the financial markets as his Republican contender. In our 2012 Election Preview, we discussed how Obama’s policies are more negative for the dollar but the real takeaway is that he plans to squeeze more out of big businesses and wealthy individuals. The President’s first task will be to deal with the Fiscal Cliff and it won’t be made any easier with Republicans continuing to control the House and Democrats controlling the Senate. We hope that his victory will give him a renewed focus and energy to do everything in his power to attain bipartisan cooperation but it won’t be easy. The price action in the financial markets today is very similar to the price action the day after the Election in 2008, when the EUR/USD, USD/JPY and S&P 500 fell for the next 10 trading days. Without a fresh dose of good news from China or some other part of the world, we could see additional weakness in the financial markets and a repeat of 2008.

How the ECB Could Kill the Euro

Aside from the Chinese leadership change, there are also 2 major central bank monetary policy announcements on the calendar and the most important of which will be the European Central Bank monetary policy announcements. We cannot completely blame the sharp sell-off in the EUR/USD on President’s victory or equity market weakness because the sell-off was triggered by comments from ECB President Draghi. The central bank head said, “data suggests economic slowdown has reached Germany” and if he follows with more negative comments at tomorrow’s post monetary policy meeting press conference, it could kill the euro. With Draghi admitting that German rates are lower than they would be otherwise because the debt crisis is artificially inflating demand for German bonds, it is hard to believe that he will have anything positive to say about the Eurozone economy. The central bank has already committed to Outright Monetary Transactions and will most likely remind us that they are ready to go as soon as a country asks for help. The European Commission also downgraded euro-area growth forecasts for 2012 and 2013 with a particularly sharp cut to German 2013 GDP growth. Back in May, the EC predicted 1.7% growth in Germany next year but now they are only looking for the Eurozone’s largest economy to expand by only 0.8%. They also expect Spain to miss their budget forecast by a wide margin, increasing the need for a bailout. Even the approval of the Greek austerity measures failed to help the euro as investors look forward to another tough day for the EUR/USD.

GBP: Don’t Expect Much from the BoE

The British pound has been surprisingly resilient given the sharp weakness in the financial markets today. Part of this may have to do with the prospect of steady monetary policy from the Bank of England tomorrow. While economic data has taken a turn for the worse, the minutes from the last monetary policy meeting did show enough consensus for us to believe that the central bank will move forward with raising asset purchases this month. However we do expect Monetary Policy committee members to warm to idea of more stimulus and perhaps prepare to raise asset purchases in December or early next year. September was a good month in the U.K. but much of that strength has now faded and there’s an overriding fear that the deterioration in economic data marks the beginning of a fresh wave of weakness in the U.K. economy. Policymakers will most likely choose to wait another month to see if the weakness becomes a trend before taking any action. Unlike the ECB, when monetary policy is left unchanged, the Bank of England does not provide any details, limiting the GBP/USD’s reaction.

NZD: Unemployment Rate Hits 13 Year High

It was a tough day for the Australian, New Zealand and Canadian dollars, which came under pressure from the sharp sell-off in U.S. equities. The weakness of the NZD/USD was exacerbated by the surprise increase in the unemployment rate. Economists were looking for an improvement in labor market conditions but New Zealand’s unemployment rate surged to a 13 year high in the third quarter, immediately raising the risk of an interest rate cut from the Reserve Bank of New Zealand. As a tiny economy, New Zealand is particularly sensitive to the ebbs and tides of the global economy and the rise in unemployment rate from 6.8% to 7.3% could reflect businesses paring back activity due to the slowdown in Australia and China during the third quarter. When the central bank meets next month, new central bank Governor Graeme Wheeler may have to cut interest rates for the first time in nearly 2 years. The RBNZ has left rates steady at 2.5% since March 2011 and while Wheeler may have previously been comfortable with the level of monetary policy, the sharp rise in the unemployment rate will give him no choice but to ease. The Australian dollar on the other hand benefitted from stronger than expected employment numbers. A total of 10.7k jobs were created last month compared to a forecast for only 500 job growth. The unemployment rate also held steady at 5.4% and the mix of employment gains was healthy with all of the increase seen in full time and not part time work. This gradual improvement in the Australian economy leads us to believe that the RBA will remain on hold for the rest of the year. Keep an eye on AUD/NZD because this dramatic divergence has already triggered a breakout in the currency pair and could propel it back up to 1.30. Canadian trade numbers are due for release tomorrow and given the drop in the IVEY PMI, we are looking for the deficit to widen.