FX Risk Rally Sustained Despite Jobless Claims Distortion

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Daily FX Market Roundup 10-11-12

FX Risk Rally Sustained Despite Distorted Jobless Claims
EUR: Rock Solid Support at 1.28
GBP: BoE Weale Raises Concern About More QE
CAD: Lifted by Hotter Economic Data
AUD: Job Growth Beats Expectations
NZD: Consumer Confidence Continues to Decline
JPY: Japan Says It Can Intervene Without US Consent

FX Risk Rally Sustained Despite Distorted Jobless Claims

Currencies traded higher today thanks to better than expected U.S. labor market numbers. More specifically, the dollar traded lower against all major currencies except for the Japanese Yen, which is consistent with an improvement in risk appetite. Investors have been searching for reasons to believe that the decline in the unemployment rate last Friday is an accurate reflection of the labor market’s performance. Today’s jobless claims report suggests that the pace of job growth may not be as weak as the Federal Reserve fears. Jobless claims fell to a 4.5 year low of 339k, which is a sharp improvement from last week’s levels. Before getting too excited however, the Bureau of Labor Statistics said the data is distorted by one state that did not process and record additional quarterly numbers. At the beginning of every quarter unadjusted claims tend to rise as people receiving jobless benefits need to resubmit their applications but apparently one state reported a decline rather than an increase which suggests they did not file adjustments. Based on the price action in the FX markets, investors were not dismayed by the potential payback in claims next week because hope can have a very powerful impact on the market especially if there is even an ounce of possibility that the rebound next week won’t be very large.

Millions of Americans are still unemployed so for the time being, we’ll consider this improvement in claims an outlier until it is confirmed by an equally low print next week. The restrained rally in the U.S. dollar tells us that investors share our skepticism because they realize that at the end of the day, one week of lower jobless claims won’t be enough to change the Federal Reserve’s plans to keep monetary policy extremely easy. While the Fed will breathe easier with today’s jobless claims report, they can’t get too excited about one week of improvement especially if there is potential for distortion. The outlook for slow growth over the next 6 months hasn’t been changed by what is traditionally a volatile report. Meanwhile the U.S. trade deficit widened in the month of August to -$44.2B from -$42.5B after exports dropped 1% to their lowest level since February. Weaker demand from Europe, China and other emerging markets is taking a big toll on manufacturing activity and based on the 0.1% decline in imports, U.S. demand isn’t all that strong either.

Producer prices and the University of Michigan Consumer Sentiment Index are scheduled for release on Friday. With import prices rising 1.1% last month, we wouldn’t rule out the possibility of stronger inflationary pressures. We are also looking for an improvement in consumer confidence after a similar survey from Investors Business Daily found Americans more optimistic. Despite high oil prices and high unemployment, the recent performance of the stock market has made consumers more upbeat. Further signs of improvement in U.S. economy should keep USD/JPY from falling below 78. Don’t forget, JPMorgan Chase and Wells Fargo earnings are due tomorrow morning before the stock market open and the outcome could affect risk appetite across the FX market.

EUR: Rock Solid Support at 1.28

After declining for 3 consecutive trading days, the euro finally rebounded against the U.S. dollar. The 1.28 level appears to be rock solid support for the currency pair that can only be broken by very bad news since S&P’s downgrade of Spain was not enough. Moody’s decision is still pending and stripping Spain of its investment grade rating would most likely be sufficient to drive the EUR/USD below this support level but the only question is whether they will choose to do so. The Spanish government continues to deny the need for a bailout and unsurprisingly disagrees with S&P’s downgrade. Sweden’s Finance Minster Andres Borg begs to differ – he believes that Spain’s bailout demand will come quickly. Since Sweden is not apart of the Eurozone, they have a lot less to lose if Spain were to ask for a bailout and in fact could benefit from one because it would likely drive the euro higher and the Swedish Krona lower. According to the last consumer price reports, inflationary pressures in Germany and France were muted last month. Weak consumer consumption has prevented any meaningful increase in CPI. The ECB released its monthly report today in which they said that inflation is expected to stay above 2% in 2012 and ease afterwards. The central bank reassured investors that Outright Monetary Transactions (OMT) is a “necessary, proportional and effective instrument” that “is ready to activate as soon as a country requests.” Growth “”is expected to remain dampened by the necessary process of balance sheet adjustment in the financial and non-financial sectors, the existence of high unemployment and an uneven global recovery.”

GBP: BoE Weale Raises Concern About More QE

The British pound rebounded against the U.S. dollar and weakened against the euro. No U.K. economic data was released this morning but Bank of England Monetary Policy Committee member Weale cast doubt on the effectiveness of more Quantitative Easing. In an interview with the Daily Mail newspaper today, he said “It is certainly not self-evident to me in the light of the apparent stickiness of inflation that substantial extra support for the economy would be compatible with the inflation target.” He added that he is “concerned about the stickiness of inflation.” Following recent weakness in economic data, the BoE is widely believed to be the next central bank to ease. The minutes from their last monetary policy meeting will be released next week and we are very interested in seeing how many members favored more QE this month. We know that Ben Broadbent and Spencer Dale do not support additional Quantitative Easing but its now looking like this could be true for Weale as well.

CAD: Lifted by Hotter Economic Data

Better than expected economic data drove the Canadian, Australian and New Zealand dollars higher against the greenback. Canada’s trade deficit narrowed in the month of August while house prices increased. The country’s International Merchandise Trade shrank to -1.32B from -2.53B. This improvement was not a major surprise considering that Canada’s trade deficit hit a record high the previous month. The details were a bit discouraging with exports falling 0.1% and imports dropping 3.1%. Whenever there is an improvement in trade activity, we want to see a rise in exports and not a decline. Nonetheless weakness beneath the headlines did not stop the CAD from appreciating against the U.S. dollar thanks in part to the stronger rise in house prices. Unlike other parts of the world, there have been more improvements than deterioration in Canadian data, which suggests that there may be merit to the Bank of Canada’s hawkish monetary stance. Meanwhile down under, a larger than expected rebound in employment last month drove the Australian dollar higher. A total of 14.5k new jobs were created in September compared to a 5k forecast. According to our colleague Boris Schlossberg, “This was the second time in three months that employment data beat forecasts suggesting that the labor situation Down Under is healthier than the market thought despite the clear economic slowdown in the region. Australia’s unemployment rate came in at a seasonally adjusted 5.4 percent in September compared to 5.1 percent in August. Economists had expected a more modest increase in the jobless rate to 5.3 percent but the rise was due to increase in the participation rate, which rose to 65.2 percent, topping expectations for 65.0 percent. In a further sign of strength of the report the number of full-time jobs advanced by 32,100 in September, and part-time employment fell by 17,700. It remains to be seen however, if today’s robust labor data will persuade the RBA to remain stationary for the time being. Today’s data point was the first bright piece of news out of Australia over the past several weeks and may spur further short covering as traders reassess the chances of additional rate cuts in the region.” As for New Zealand, the rally in NZD was more modest because consumer confidence continued to decline, albeit at a slower pace. No major economic reports are expected from the commodity producing countries on Friday.

JPY: Japan Says It Can Intervene Without US Consent

The Japanese Yen traded lower against all of the major currencies despite the Japanese government’s continual threats of verbal intervention. Overnight, Japanese Economy Minister Maehara warned that they could intervene in the Yen even without the consent of the U.S. Technically there is 100% true because the Japanese government doesn’t need anyone’s approval to sell the Yen and buy U.S. dollars. They have come into the market alone in the past on countless occasions and could do so at anytime. The more important question however is whether the Ministry of Finance will direct the Bank of Japan to do so in the near future. The Japanese know that unilateral intervention rarely works. The only type of intervention that has ever been effective is coordinated with other central banks. With the Federal Reserve actively devaluing the dollar through Quantitative Easing, there is zero chance that Japan will be able to convince the U.S. to buy dollars and sell Yen at this time. So with general elections coming up, the Japanese could opt to go at it alone if only to show the current government’s commitment to the economy. While Japan has upped the rhetoric on Yen strength, we don’t expect intervention in USD/JPY unless it falls below 78 and more likely below 77 as well. Economy Minister Maehara will be meeting with Bernanke and Draghi on Friday as part of the G7 conference. The Yen will not be discussed according to Maehara but we wonder if these 3 central bankers will discuss coordinated easing. The Cabinet’s monthly economic report is schedule for release this evening – we don’t expect the government to have anything positive to say about the economy at this time.

Kathy Lien
Managing Director

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