FX: Shifting from Syria to US GDP

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Daily FX Market Roundup 08-28-12

FX: Shifting from Syria to US GDP
EUR: Another Failed Test of 1.34
GBP: Lifted by Optimism from Carney
CAD: Supported by Continued Rise in Oil
AUD: Gold Hit 3 Month Highs
NZD: Business Confidence Due for Release
JPY Crosses Rebound, Busy 48 Hours Ahead

FX: Shifting from Syria to US GDP

The possibility of a military strike on Syria has not diminished over the past 24 hours but you would not be able to tell that from today’s price action in the financial markets. U.S. stocks rebounded, Treasury yields edged higher and currencies recovered. Some major currencies such as the euro, British pound and Australian dollar still lost value against the greenback but intraday recoveries indicate that the liquidation on Tuesday did not turn into panic selling on Wednesday. The financial media attributed the recovery in stocks to the rise in shares of energy companies but we believe that some investors feel Syria poses only a short and not long term risk for the markets. The latest conversation in Washington suggest that the Obama Administration prefers a limited strike on military units that carried out the chemical attacks that would “deter and degrade” the government’s ability to use chemical warfare again. The fear of backlash in the Middle East means that most likely, the strikes won’t be aimed at ousting President Assad, which is key for investors because a swift limited attack could pave the way for a relief rally in currencies and equities. Unfortunately the duration and scope of a military response in Syria is not the only risk that investors should be worried about. If there is anything more than verbal criticism from the country’s allies (namely Russia and Iran), Syria will remain a driving force for the financial market but we doubt that either country will opt for physical response.

As the world decides if and when it wants to deepen its involvement in Syria, investors may shift their attention to U.S. data and the prospect of Fed tapering. Some people have said that the rise in oil prices and uncertainty in Syria will prevent the Fed from reducing asset purchases this year and while we agree that it discourages them, it may not be enough for the central bank to delay their plans altogether. Revisions to second quarter U.S. GDP is scheduled for release tomorrow and economists are looing for a sharp upward revision. If GDP growth ends up being stronger than initially anticipated, USD/JPY could extend its gains. Jobless claims are also scheduled for release and they are expected to remain low. Fed President Bullard and Lacker will be speaking and between the 2, Bullard is the only voting member of the FOMC.

EUR: Another Failed Test of 1.34

For the second time this week, the EUR/USD rejected the 1.3400 level and at this stage, we can’t help but wonder how large the stops are at 1.34 and how far investors will go to defend it. In order for the EUR/USD to extend its gains and take out 1.34 in the process, good news needs to keep rolling in. Today’s rally was stalled by weaker consumer confidence in Germany. While economic data has been improving, upcoming elections and the recent increases in food prices are making consumers nervous about their future financial situation. Tomorrow we’ll get a look at how the German labor market is faring. The number of people collecting unemployment benefits is expected to decline for the third straight month but the unemployment rate itself is expected to remain unchanged. Despite widespread improvements in Germany’s economy, the PMI report shows that job growth in the service sector was offset by job losses in manufacturing. As a result, we would not be surprised if Germany’s unemployment numbers surprise to the downside, creating a bigger drag on the EUR/USD and keeping the pair below 1.34 for the time being. Besides these reports, ECB members Nowotny and Mersch will be also speaking on Thursday.

GBP: Lifted by Optimism from Carney

Having dropped to a low of 1.5430 intraday, sterling staged an impressive recovery that left the currency down only slightly against the U.S. dollar by the close of the North American session. The much anticipated speech by Bank of England Governor was surprisingly supportive for the currency. In his first major press conference, the U.K.’s brand new central bank head said forward guidance doesn’t prevent the BoE from adding stimulus and they could ease if market rates hurt the recovery. This comment should have driven sterling lower but Carney quickly followed with an optimistic outlook for the U.K. economy. He called the current recovery broad based and said it was set to continue. Carney described growth prospects as solid, not stellar which was good enough for sterling bulls who were looking for any acknowledgement of a firmer outlook. So while Carney left the door open to additional easing “just in case,” his optimism reduces the chance of additional stimulus. This morning’s CBI Distributive Trades report confirmed that the recovery is gaining momentum. The survey of retail sales volume rose from 20 to 27, its highest level this year. While there are lower highs and lower lows in the GBP/USD, the surprisingly upbeat tone of Carney’s speech today could drive a stronger recovery in the currency pair.

CAD: Supported by Continued Rise in Oil

It was mixed day for the commodity currencies with the Australian dollar extending its losses, the New Zealand dollar rebounding slightly and Canadian dollar ending the North American trading session unchanged. All three of the commodity currencies rose from earlier lows, a sign of potential stabilization. However Canada and Australia released secondary economic reports that paint a picture of weak conditions in both economies. Construction work declined in Australia during the second quarter while average weekly earnings growth in Canada slowed in June. Neither of these reports have a major impact on monetary policy but they confirm that both countries are a long way from recovery. New Zealand business confidence numbers are due for release this evening along with Australian new home sales and Canadian current account figures. While these reports may have some impact on their respective currencies, the main driver of demand for comm dollars will be risk appetite, gold and oil prices. Crude prices rose to a 2 year high today and gold prices climbed to a 3 month high but like commodity currencies which are well off earlier lows, commodity prices are off earlier highs. The question of whether today’s stall is a pause or a bottom will depend on how the situation in Syria plays out.

JPY Crosses Rebound, Busy 48 Hours Ahead

After Tuesday’s steep sell-off, Japanese Yen crosses rebounded today thanks in part to the recovery in U.S. stocks and rise in Treasury yields. No economic data was released from Japan but Bank of Japan Deputy Governor Iwata reminded the markets that the central bank seeks to reach its 2% inflation target as soon as possible and will work towards this goal by keeping monetary easing in place. He believes it could take up to a year before Japan sees any real benefit but the signs should be clear in FY2014. According to Iwata, a weak Yen would help the export sector, which explains why they would prefer to see the currency weaken then strengthen. Yet despite their aggressive policies, the Yen has not seen any significant weakness since bottoming out in May, so Japan’s economy needs to find support in other ways. Over the next 48 hours, a number of important Japanese economic reports are scheduled for release and they will provide a look at how the recovery is faring. We start with retail sales tonight and then consumer prices, household spending, the jobless rate and industrial production on Friday. Weak wage growth is expected to push retail sales down for the second month in a row. The Ministry of Finance will also be release its weekly portfolio flow report. According to last week’s report, Japanese investors sold foreign bonds for the first time in 6 weeks. If the selling continued, USD/JPY could have a tough time extending its recovery. Bank of Japan Board Member Morimoto is scheduled to speak this evening on monetary policy.

Kathy Lien
Managing Director

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