How FOMC Minutes Will Impact the Dollar

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Daily FX Market Roundup 08-21-12

How FOMC Minutes Will Impact the Dollar
EUR: Hits 6 Week Highs
GBP: Shrugs Off Weaker Data
AUD: Shoots Higher on RBA Optimism
CAD: Hit by Wholesale Sales
NZD: Credit Card Spending Declines
JPY: Trade Numbers on Tap

How FOMC Minutes Will Impact the Dollar

The lack of U.S. economic data did not stop the dollar from trading lower against all of the major currencies today. The improvement in risk appetite was impressive especially considering that U.S. stocks ended the day in negative territory. The most important piece of event risk on the economic calendar this week will be Wednesday’s FOMC minutes. Existing home sales are also on the calendar but a rebound is all but certain after the sharp decline the previous month. We believe that the Fed minutes will be as unsatisfying as the last monetary policy meeting, which means that the impact on the U.S. dollar should be minimal. Don’t expect any optimism in the Fed statement because in the run up to the meeting, economic data was weak enough to justify additional action. If anything, the minutes should reflect more concern within the central bank, which could be mildly negative for the U.S. dollar.

When the central bank last met, they dropped very little hints about future monetary policy. This should not come as a surprise to anyone since U.S. policymakers have been divided on the need for a third round of Quantitative Easing for months. While the Federal Reserve admitted that the economy was decelerating, they chose to repeat they were prepared to take action if the economy weakened further. This promise has fallen on deaf ears because global economic conditions would need to deteriorate significantly for the central bank to follow through with more action. However their decision to keep policy unchanged and ride out the weak data proved to be the right move because since then we have seen improvements in the labor market and consumer spending. The FOMC minutes are a bit dated which may be a reason why investors will shrug off any negative sentiments. The FOMC minutes should have very little impact on the U.S. dollar.

Comments from Federal Reserve President Lockhart, who is a voting member of the FOMC this year confirms that the central bank has grown less willing to increase monetary stimulus. Traditionally Lockhart is one of the more dovish members of the FOMC but today, he said “there is a risk to monetary policy being employed too aggressively and without effect” to addressing problems that can only be solved with fiscal reform. While he added that “monetary policy can exert a powerful positive influence on the economy,” it “is not a panacea.”

EUR: Hits 6 Week Highs

The euro performed extremely well today despite the lack of economic data. European stocks rallied as Spanish borrowing costs fell on a successful debt sale. The euro rose to six-week highs against the dollar and yen before leaders meet this week to discuss Greece’s fiscal adjustment program. Eurogroup head Juncker will visit Greece tomorrow and discuss a two-year extension to the austerity program with Greek Prime Minister Samaras. German Chancellor Angela Merkel’s senior lawmaker said concessions are possible for Greece as long as Prime Minister Samaras expresses willingness to meet the objectives set out in his country’s bailout program. Samaras will travel to Berlin and Paris on August 24 and 25 after French President Francois Hollande and Merkel meet in the German capital on August 23rd. Meanwhile talk of a cap on European bond yields continue to make the rounds in the market with fresh reports that the German government is on board with the idea. There has been no confirmation from the ECB, but this hasn’t stopped investors from buying the currency in the hopes of more action from the central bank. No major economic data is scheduled for release from the Eurozone on Wednesday.

GBP: Shrugs Off Weaker Data

The British pound strengthened against the U.S. dollar but weakened against the euro. CBI industrial order expectations decreased as UK manufacturers reported a decline in their total and export order books in August while expectations for output growth flattened. “The economic environment for UK manufacturers remains challenging, with domestic demand relatively muted and the ongoing Eurozone crisis now seeming to drag on broader global economic momentum” according to a report released by the CBI. The UK also unexpectedly posted a budget deficit in July as corporation-tax receipts declined. Corporation taxes fell 10.4% from April-July. Public sector net borrowing plunged 1.8 billion pounds in July which adds pressure on the government to stay on its fiscal track. With the unexpected deficit it raises concern that the Chancellor of the Exchequer George Osborne will miss his forecast for a deficit, 120 billion pounds for the current fiscal year and the National Institute for Economic and Social Research predicts it will exceed to 138.5 billion pounds. Government spending rose 3.5% and tax receipts were only up 1.1% against expectations for a 3.9% rise. What may follow is more tightening to control the deficit or loosening in the hopes of sparking growth. No U.K. economic data is scheduled for release tomorrow.

AUD: Shoots Higher on RBA Optimism

The Canadian dollar ended the North American trading session unchanged against the greenback after giving up earlier gains. Wholesale sales fell 0.1 percent in June following a rise of 0.9 percent the prior month. Canadian retail sales are scheduled for release on Wednesday and according to wholesale sales, which is one of our favorite leading indicators for the broader consumption report, spending growth most likely slowed in June. The Australian and New Zealand dollars ended the day in positive territory but well off earlier highs. The release of the Reserve Bank of Australia’s meeting minutes turned out to be extremely positive for the country’s currency. While the RBA left interest rates unchanged when they met in August, their concern about the high level of the exchange rate, peak in terms of trade and weaker global economic conditions had many traders worried that the central bank could consider lowering rates again. However the RBA minutes was not nearly as pessimistic as the monetary policy statement released on August 7th and the central bank made no mention of possible currency intervention which helped to send the AUD/USD sharply higher. The RBA’s optimism about the local economy helped offset their concerns about global growth. Monetary policy committee members said consumer spending retained momentum in the June quarter. Previous rate cuts and higher rents brought stability to the housing market while the resource sector benefits from large projects receiving approval or just commencing. There were also signs that investment growth has steadied and “employment growth continued to reflect the net effect of strong growth in the resource sector.” In early August, there were some disappointments in Chinese economic data but the RBA appeared to be unfazed, choosing instead to characterize the Chinese economy as “stabilizing.” The RBA is overlooking many of the problems that investors have been worried about which suggests that they do not believe Europe and China will pose a major threat to their local economy in the last 4 months of the year. For the time being, the central bank has become more tolerant of a higher exchange rate and is comfortably on hold. The RBA even admitted that part of the gains in AUD/USD can be attributed to reserve diversification by the Swiss National Bank. They said the SNB purchased EUR 100 billion worth of AUD over May and June with further large purchases occurring in July. Meanwhile New Zealand credit card purchases grew at a much slower pace in July while inflation expectations declined.

JPY: Trade Numbers on Tap

The Japanese Yen weakened against all of the major currencies today except for the U.S. dollar. Japan’s all industry activity index grew 0.2% in June meeting economist expectations. Although there was a pickup in today’s data, a Bank of Japan official expressed concern that China is entering a “danger field” as loans and property prices increase along with age in the population. BOJ Deputy Governor Kiyohiko Nishimura said in a speech that, “If a demographic change, a property-price bubble, and a steep increase in loans coincide, then a financial crisis seems more likely and China is now entering the danger zone.” In order to prevent the second largest economy from slowing materially, Premier Wen Jiabao wants to rein in house prices inflated by the stimulus spending that countered the global financial crisis. China’s new home prices increased in July proof that the housing market is picking up from interest rate cuts in June and July. Japanese trade numbers are scheduled for release this eveing.

Kathy Lien
Managing Director

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