Daily FX Market Roundup 10-31-12

How Hurricane Sandy Impacts the Dollar
EUR: Concern for Greece Overshadows Rise in German Spending
GBP: Possibility of Further Deterioration in Manufacturing Activity
CAD: First GDP Contraction in 6 Months
AUD: Keep an eye on AU and Chinese PMI Numbers
NZD: Gold and Oil Unchanged
JPY – Manufacturing PMI Drops to 18 Month Low

How Hurricane Sandy Impacts the Dollar

Now that Hurricane Sandy has come and gone, residents and businesses in the Northeast are slowly trying to return to normalcy. Power is still out for a large swath of New York City and many websites have had spotty service (ours included) due to damage to data center sites in the region, but the NYSE resumed trading for the first time this week. With most financial firms operating with a very lean staff, it should no surprise that it felt like the day after a holiday on the New York Stock Exchange floor. Yet it is far from a holiday for most people in the Northeast who have spent the day cleaning up and recovering from the storm. Since we are lucky enough to escape with no major damage, our first thoughts are to the families impacted by the storm. Our second thought is how the storm could impact the U.S. economy and more specifically the U.S. dollar. Having seen Mother Nature wreck havoc across the globe in recent years in ways much worse than what was seen this week, we know that there shouldn’t be much impact on fourth quarter GDP. Nonetheless, the initial cost is still estimated to be between $30 to $50 billion in uninsured property damage and lost business activity. However when New Zealand and Japan suffered from devastating earthquakes, spending on rebuilding made up for the hit to economic activity but this does not mean that the Hurricane will have zero impact on the U.S. dollar – quite the contrary.

First and foremost, economic reports for the months of October and November will definitely be distorted by the Hurricane. Even though the data will return to normal levels in the months to follow, the outcome of the October and November economic reports could cause an erratic reaction in the U.S. dollar. Most likely these numbers will show a decline in economic activity which could cap gains in USD/JPY but drive the greenback higher against other currencies because of risk aversion. Hurricane Sandy also boosted President Obama’s chance of reelection. According to InTrade, President Obama’s election odds soared to 65% and with less than a week to go before the elections, it may be difficult for Romney to recover his losses because Hurricane coverage have put both candidates’ campaigns on hold. If President Obama wins the election, the initial impact could be dollar weakness because of the perception that Democrats are less business friendly and because of concern that Obama will continue to face resistance getting the lame duck Congress to reach an agreement on how to handle the fiscal cliff.

Non-farm payrolls will be released on scheduled this Friday, which means it is time to start thinking about the possible outcome of NFPs and its impact on the U.S. dollar. The ADP payrolls estimate and jobless claims report are due for release tomorrow will help to shape the market’s expectations for NFPs. Payrolls are expected to increase slightly in October compared to September. ADP is also expected to increase while jobless claims are expected to hold steady. We continue to see gradual improvements in the U.S. economy with manufacturing activity increasing slightly in the Chicago region. Aside from ADP and jobless claims, consumer confidence and the ISM manufacturing index will also be released on Thursday.

EUR: Concern for Greece Overshadows Rise in German Spending

After rising to a high of 1.3020 intraday, the euro gave up its earlier gains to end the North American trading session unchanged against the U.S. dollar. A sharp rise in German retail sales was not enough to offset the market’s ongoing concern about Greece and Spain. This morning, German Finance Minister Schaeuble said a decision on Greece by November 12th is ambitious which means Greece would be very lucky if they get their next bailout payment unlocked at the November 12th Eurozone Finance Ministers meeting. Their financial situation will definitely be discussed but the Troika may not be able to complete their review by that time and according to Schaebule, Greece still needs to meet more conditions before receiving their next tranche of aid. Meanwhile the Prime Minister has already warned that the country’s coffers will be empty if they do not receive additional funds by the end of next month and the deadline is closing in quickly. If no progress is made, the uncertainty could mean further weakness for the euro. Also, according to Spanish government sources, the government does not foresee asking for a bailout before the December European Council meeting since its financing needs are covered for the rest of the year. However the government will consider the potential for a “soft bailout” but until that happens, the EUR/USD may have a very difficult time rallying. With this in mind, the gap between the performance of the German economy and the rest of the region continues to widen. German retail sales jumped 1.5% last month while French consumer spending grew a meager 0.1% and spending in Greece dropped 7.2% from a year earlier. Stronger consumer confidence, rising wages and low unemployment helped to keep the German economy steady. The other big news came from the Swiss National Bank who diversified out of euros aggressively in Q3. While we know that the central bank continues to buy euros to keep EUR/CHF from falling, their latest reserve data shows their holdings of euros dropping from 59.7% to 48.4% of their overall portfolio.

GBP: Possibility of Further Deterioration in Manufacturing Activity

The British pound rebounded against the U.S. dollar and euro despite weaker economic data. Consumer confidence dropped to its lowest level in 6 months according to a survey conducted by GfK. This deterioration is at odds with recent improvements in the labor market and rise in retail sales and is particularly concerning because confidence tends to be a forward looking indicator of economic activity. Hopefully the decline in confidence does not imply a drop in retail sales and rise in joblessness next month. Consumers were specifically concerned about their financial situation, which raises red flags in regards to the outlook for private consumption but it is still a bit too early to tell if the drop in confidence will be sustained. Nationwide house prices and manufacturing PMI numbers are due for release tomorrow and while house prices are expected to increase, manufacturing activity could slow more significantly. Earlier this month, the Confederation of British Industry released its industrial trends survey and the index plunged to its lowest level in 10 months. As a relatively reliable leading indicator for the manufacturing PMI report, the decline in the CBI index points to a more significant deterioration in manufacturing activity than what is currently expected by economists.

CAD: First GDP Contraction in 6 Months

The Australian and New Zealand dollars ended the day unchanged against the greenback while the Canadian dollar edged slightly lower. Thanks to the recent rate cut by the RBA, building approvals soared in the month of September. The 7.8% increase in building approvals and the upward revision to last month’s report suggests that the prospect of easier lending conditions made builders more optimistic about the outlook for the housing market. Private sector credit also rose 0.3% in September, up from 0.2% the previous month. Tonight, we expect some action in the Australian dollar on the heels of Australian and Chinese manufacturing PMI numbers. Australian manufacturing activity is widely expected to contract for the eighth consecutive month but Chinese manufacturing activity is expected to expand once again, which would confirm that China is undergoing a soft and not hard landing. The Canadian dollar on the other hand was hit by negative GDP growth. Canada’s economy contracted for the first time in 6 months by 0.1% in August. This drove annualized GDP growth down to 1.2% from 1.9%. Unfortunately the decline was not caused by one sector but broadly based. If the trend of weaker data continues, the Bank of Canada may be forced to retract its call for higher interest rates.

JPY – Manufacturing PMI Drops to 18 Month Low

Weaker than expected economic data drove the Japanese Yen lower against all major currencies. According to the latest report from Markit/JMMA, manufacturing activity in Japan contracted at its fastest pace in 18 months. Rapidly deteriorating economic conditions drove the Bank of Japan to ease monetary policy this week and to downgrade their growth and inflation forecasts. The manufacturing sector is the lifeblood of Japan and the strength of the Yen continue to put significant pressure on the manufacturing sector. Japan has ran a trade deficit since March 2011 that has only been made worse by their territorial dispute with China. Exports have taken a huge hit and will probably remain weak in the near term. Labor cash earnings were flat last month and even though housing starts increased on an annualized basis, starts declined 2.5% between August and September. No major Japanese data is scheduled for release this evening and with most of NY still paralyzed from Sandy, investors will be primarily keying off of Chinese manufacturing data.