High Beta FX Benefitting Most from US Data

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Daily FX Market Roundup 08-16-12

High Beta FX Benefitting the Most from US Data
EUR: 10 Yr Spanish Yields at 2 Month Low
GBP: Lifted by Another Piece of Good News
CAD: Surprise Decline in Manufacturing Sales
NZD: Job Ads Rebound
AUD: Slower Consumer Inflation Expectations and Average Wages
JPY: Yen Crosses Lifted by Chinese Comments

High Beta FX Benefitting the Most from US Data

After more than a week of consolidation in the equity market, we are finally beginning to see some action. The S&P 500 rose to its highest level in 4 months thanks to stronger earnings from Cisco and improvements in the U.S. economy. While this morning’s U.S. economic reports were mixed with some numbers beating expectations and others missing, most of the data pointed to a continual economic recovery. At some points, this will be positive for the dollar and at others, positive for risk. Today, the price action of the greenback indicates that the recovery is benefitting high beta currencies the most. The greenback traded lower against all of the major currencies except for the Japanese Yen. We have been looking for an upside breakout in USD/JPY for a few weeks now and finally we are seeing some action. The concurrent rally in the EUR/USD, USD/JPY and S&P 500 confirm that risk appetite has improved over the past 24 hours.

This morning we received more insight into the performance of the housing, manufacturing and labor markets. While every one of today’s reports except for building permits surprised to the downside, there was no material deterioration. Jobless claims increased more than anticipated this week and the past week’s numbers were revised higher but the increase was too small to raise any eyebrows within the financial sector. In fact, claims were virtually unchanged and still consistent with an addition of 100k or more jobs in the month of August. Continuing claims also dropped to 3.305 million from 3.336 million and the 4- week moving average dipped to 364k from 369k. The housing market numbers on the other hand were mixed with starts falling 1.1% and permits rising 6.8%. Starts and permits have been moving in diametrically opposite directions since the beginning of the year suggesting a major disconnect between when builders file applications and break ground on new projects. At the end of the day however, record low mortgage rates is still supporting the housing market with the number of permits filed rising to a 4 year high. Even though housing starts dropped in July, more projects were started last month compared to January. Manufacturing activity in the Philadelphia region contracted more than expected in August but the pace of contraction improved with the index rising from -12.9 to -7.1.

In light of these improvements, Federal Reserve officials stepped up their opposition to Quantitative Easing. Dallas Fed President Fisher who is not a voting member of the FOMC this year believes that additional stimulus won’t have much impact on jobs and may look political. Minneapolis Fed President Kocherlakota didn’t talk about Quantitative Easing but said there is room to reduce the interest rate on excess reserves. On Wednesday, Fed President Plosser said he is dubious about the effectiveness of additional bond purchases in lowering the unemployment rate at a faster pace. It is clear that QE3 is a controversial topic with strong supporters and equally strong critics. Therefore unless there is a sharp pullback in the labor market or another near death experience in Europe, QE3 will be shelved for the time being.

EUR: 10 Yr Spanish Yields at 2 Month Low

The euro traded higher against the U.S. dollar but unlike other major currency pairs such as USD/JPY and GBP/USD, today’s move did not take the EUR/USD to a fresh monthly high. Instead, the currency pair remains trapped within its 1.5 week trading range of 1.2240 and 1.2440. Reassuring comments from German Chancellor Merkel lent support to the euro. In a speech made during her trip to Canada, Merkel reiterated her pledge to “do everything we can in order to maintain the common currency.” In other words, the Germans will fight tooth and nail to defend the euro but hopefully it won’t come to that. While the EUR/USD remains very weak, the recent stabilization in the currency is a big relief to policymakers. The fact that 10 year Spanish bond yields also dropped to its lowest level in more than 2 months today is music to their ears. Consumer prices were the only piece of Eurozone economic data released today and EUR/USD traders were completely unfazed by the sharp decline in inflationary pressures. CPI fell 0.5 percent in July, marking the third consecutive month of lower prices. Accelerated budget cuts and increasing job losses in the region forced retailers to cut prices to attract demand. The ECB won’t be too worried however because on an annualized basis, CPI rose from 1.6% to 1.7%. Overall, muted inflationary pressures in Eurozone leaves room for further easing from the ECB, if needed. German producer prices and Eurozone trade numbers are scheduled for release on Friday.

GBP: Lifted by Another Piece of Good News

The British pound rose against the U.S. dollar but weakened against the euro. The big story in Europe was the sharp increase in U.K. consumer consumption last month. Retail sales rose 0.3 percent in July and the icing on the cake was the sharp upward revision to the June numbers from 0.1% to 0.8%. While retail sales ex autos were flat, the market was looking for much weaker consumer spending numbers and for this reason Q2 GDP forecasts could be revised higher. Retail sales should continue to rise in August thanks to the improvement in the labor market and spending around the Olympics. This week’s economic reports were overwhelmingly positive for the British pound. Inflationary pressures increased more than expected in July, the number of people filing for unemployment benefits dropped by 5.9k and consumer spending beat expectations. While the Bank of England is still open to the idea of more stimulus, the latest numbers will give them the flexibility to hold monetary policy steady at their next meeting in September. No U.K. economic reports are due for release tomorrow

CAD: Surprise Decline in Manufacturing Sales

The Canadian, Australia and New Zealand dollars strengthened against the greenback today. Canadian manufacturing sales unexpectedly declined by 0.4% in June and was forecasted to increase by 0.3%. Manufacturing sales declined in four of the past 6 months. Sales of petroleum and coal products fell 10.6% in June. Although manufacturing sales had dismal reports, if petroleum and coal was excluded, sales rose by 1.1%. Petroleum and coal took a toll in June from lower prices and factory shutdowns. Canadian stocks rallied as Chinese Premier Wen Jiabao signaled China may cut banks’ reserve requirements or interest rates after inflation slowed to 30-month low in July. In other news, German Chancellor Angela Merkel praised Canada’s budget model for prospering without “living on borrowed money.” Merkel hopes replicate Canada’s debt-deficit model. Canadian consumer prices are due for release on Friday. Of the 3 commodity currencies, the New Zealand dollar was the best performer thanks in large part to a rebound in job ads. Manufacturing activity however contracted last month, offsetting some of the upside surprise.

JPY: Yen Crosses Lifted by Chinese Comments

The Japanese Yen weakened against all of the major traded currencies today. It has been another quiet day in Japan with no new market moving data on the calendar. Asians stocks rose with the Nikkei 225 Index up by 1.88%, 167.71 points, to 9,092.76 after Chinese Premier Wen Jiabao signaled the possibility of easing. He said there’s “growing room for monetary policy operation” and “we have conditions and capabilities, and will be sure to fulfill this year’s economic and social development targets.” Wen also said that slowing inflation will allow more room to adjust monetary policy in the world’s second largest economy. Inflation slowed to a 30-month low in July and export growth has taken a toll. There is no data expected for tomorrow in Japan.

Kathy Lien
Managing Director

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