Janet Yellen Confirmation is a Risk for the Dollar

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Daily FX Market Roundup 11-13-13

Janet Yellen Confirmation is a Risk for the Dollar
GBP: BoE Sees 7% Unemployment Rate Reached in 2015 Instead of 2016
EUR: Sent on Rollercoaster Ride by Dovish ECB Comments
NZD Rallies as RBNZ Reiterates Plan to Raise Rates
AUD: Rebound in Consumer Confidence
CAD: House Price Growth Accelerates
JPY: Don’t be Too Worried about Slower GDP Growth

Janet Yellen Confirmation is a Risk for the Dollar

Investors are selling dollars on the eve of Janet Yellen’s confirmation hearing. As one of the most dovish members of the FOMC, Yellen is widely expected to assert her dovish views on Capitol Hill tomorrow. In fact, based on the full copy of her opening statement, which was released in late North America, she is not going to act out of character just to appease her critics. When she speaks before her confirmation hearing tomorrow, she will say that the labor market and the economy are performing “far short of potential” with the jobless rate much higher than what they would like to see. She also believes that inflation will run below the Fed’s 2% goal for some time, which implies that Yellen does not share her colleagues concerns about the risks of monetary policy. If Janet Yellen were to lead the central bank, she would favor later versus earlier tapering. She has long been criticized for being soft on inflation but with high unemployment, she can soundly argue that jobs come first.

However as we have seen from watching Bernanke’s semi-annual testimonies, being in the hot seat is never easy and investors will be watching carefully to see if she wavers in her views or ends up sounding more moderate under heavy grilling by U.S. Senators. This is the very first time that the mild mannered central banker has testified on Capitol Hill since her low key 2010 Fed vice-chair confirmation. Aside from being a smart and experienced economist, the head of the central bank also needs to be politically savvy. Most speeches by central bank officials are scripted and on Thursday we will get a chance to see how she handles herself live in an environment where she could find herself heavily criticized for her soft views on inflation. Her views in general will carry increased importance if she becomes the new Fed Chairman, so she will have to choose her words carefully because her comments on monetary policy could have significant ramifications for U.S. assets. Senator Rand Paul has threatened to hold back the nomination but with 45 other Republicans present, her confirmation is expected to be smooth with few politicians willing to block the confirmation of the first female central bank governor.

In the mentime, Ben Bernanke is still the Fed Chairman and he scheduled to speak this evening. We will be watching closely to see if he mentions monetary policy. Bernanke will be speaking to a group of teachers about the central bank’s 100-year history and a Q&A session will follow so the impact on the dollar and tapering expectations will depend on whether these teachers have any interest in asking about the central bank’s plans to reduce stimulus. We also have a few pieces of U.S. data due for release but traders should not expect a big reaction in the greenback because jobless claims and the trade balance are tier 2 economic reports.

GBP: BoE Sees 7% Unemployment Rate Reached in 2015 Instead of 2016

The British pound traded sharply higher today after the Bank of England altered its projections in favor of a faster decline in the jobless rate. According to the central bank’s Quarterly Inflation Report, their 7% target could be reached as early the middle of 2015, more than a year earlier than their previous forecasts. The market had second-guessed its belief that rates would be increased in mid 2015 but their optimistic views are now shared by the central bank. Back in August, as part of their new forward guidance policy, the BoE said rates would remain unchanged as long as the jobless rate is above 7%. As the unemployment rate started to fall, investors began to price in an earlier rate hike and their positioning drove the GBP/USD to 1.6260 in early October. Since then sterling gave up part of its gains as weaker economic data started to pour in, causing investors to question their hawkish views but with the official changes in the BoE’s forecasts, the currency could now see stronger recovery. In order to temper the currency’s rise, Bank of England Governor Carney made it clear that interest rates will not increase automatically when the unemployment rate drops to 7%. Instead he wants to see real incomes rise and the recovery on stronger footing before tightening monetary policy. However as long as data continues to improve, it may be difficult to hold back market expectations. Jobless claims dropped more than expected last month and when combined with the 44.7k decline in September, the central bank could act even sooner than 2015. U.K. retail sales are scheduled for release tomorrow and a strong release would accelerate the rally in sterling.

EUR: Sent on Rollercoaster Ride by Dovish ECB Comments

The euro ended the day only slightly higher against the U.S. dollar but this moderate move masked a decent amount of intraday volatility. At the start of the North American trading session, the EUR/USD plunged after European Central Bank Governing Council member Praet said the central bank could adopt negative interest rates and purchase assets if needed to lift inflation. These exceedingly dovish comments tripped stops in the EUR/USD, driving the currency pair below 1.34 and sparking speculation of additional easing from the ECB. However when U.S. stocks started to recover and turned positive on the day, the EUR/USD also regained momentum, erasing all of its earlier losses in the process. The resilience of the euro has been nothing short of impressive especially since data continues to surprise to the downside, reminding us of the challenges the Eurozone economy faces. Industrial production dropped 0.5% in the mot of September, dragged down by weaker activity in France and Germany. Tomorrow, third quarter GDP numbers are expected from the Eurozone and some of its member countries including France and Germany. Slower growth is expected all around but unless GDP turns negative, indicating a contraction in the third quarter, a soft number may not do much damage to the euro.

NZD Rallies as RBNZ Reiterates Plan to Raise Rates

The Australian, New Zealand and Canadian dollars rebounded against the greenback today on the heels of better than expected data and continued hawkishness from the RBNZ. According to the latest economic reports, the pullback in business confidence did not affect consumer confidence, which improved in the month of November. For the New Zealand dollar, the outcome of the RBNZ’s Financial Stability Review was less clear cut. Initially NZD fell sharply when the RBNZ expressed its concerns about the threat that the overvalued housing market posed to the financial system but the currency recovered after the central bank said the market is cooling thanks to the recent LVR restrictions. The sector is performing pretty much in line with their expectations and so the RBNZ remain committed to their plans to raise interest rates next year. Central Bank Governor Wheeler’s reminder sparked renewed demand for NZD as investors realized that New Zealand is the only major central bank talking about raising interest rates. As such, we are looking for a stronger rally in NZD versus the USD and AUD. There are no Australian economic reports scheduled for release on Thursday but New Zealand’s third quarter retail sales and business PMI numbers are due for release. An upside surprise would accelerate the recovery in the NZD/USD. Finally, the loonie was supported by Canadian house prices which rose at a faster pace last month. The country’s trade balance is due tomorrow and given the sharp rise in IVEY PMI, a narrower deficit is anticipated.

JPY: Don’t be Too Worried about Slower GDP Growth

With no major U.S. or Japanese economic reports on the calendar, it was a quiet day for the Yen. The only pieces of data from Japan were the Domestic Corporate Goods Price Index and Machine Orders, both of which declined over the previous month. Weaker orders and lower price pressures highlights the ongoing challenges in Japan’s road to recovery. Tonight, third quarter GDP numbers are scheduled for release and unfortunately economists are looking for a significant slowdown in growth. Q3 GDP growth is expected to slow from 0.9% to 0.4%, which would be the slowest level this year. There have been improvements in consumer consumption but trade activity weakened in the third quarter and this is expected to drag on overall GDP growth. While weaker growth could erase some of the recent gains in the Nikkei and drive the Yen crosses lower, investors need not be overly concerned about a pullback in GDP. Economic activity is expected to improve over the next 4 months as investors rush to spend before the consumption tax is increased. But if whatever reason, GDP contracted in Q3, even the prospect of stronger growth ahead may not be enough to prevent a sell-off in Japanese assets. The Bank of Japan is widely expected to leave monetary policy easy for the next year and while they won’t admit that the consumption tax is a risk to growth, BoJ member Miyao expressed his concerns about U.S. fiscal troubles and its potentially negative impact on global growth early next year.

Kathy Lien
Managing Director

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