Daily FX Market Roundup 11-09-12

More Pain for the Euro?
USD: Impact of Obama’s Win on the Financial Markets
GBP: Big Week Ahead of UK
AUD: One More Piece of Chinese Data
CAD: Oil Up 1.4%, Gold Sees Small Gains
NZD: Stabilizes after a Tough Week
JPY: GDP to Turn Negative for First Time Since Q2 2011

More Pain for the Euro?

The euro dropped to a 2 month low against the U.S. dollar today and as we prepare to enter a new trading week, many investors are wondering whether 1.27 is good place to go long or short euros. EUR/USD certainly had a very weak run – over the last 16 trading days, it only ended the North American session higher on 3 occasions. Picking bottoms can be very tempting but there are many reasons why EUR/USD has been performing poorly and until something changes, there could be more pain for the euro. There are at least 4 reasons why no one wants to own euros, some of which we covered in this morning’s note on Why the Dollar Continues to Rise so we’ll just summarize them here and move onto discussing what to expect next week.

Why no one wants to own euros:

1. Slower German growth means slower Eurozone growth – No More Sugar Coating
2. Next week’s GDP numbers will show Eurozone back in recession
3. ECB/IMF standoff on Greece delaying bailout payment
4. Concern about US Fiscal Cliff weighs on all risk currencies including EUR

None of these challenges facing the euro are expected to change in the coming week but there are a few pieces of event risks that could affect how the EUR/USD trades. The Greek Parliament approved the austerity measures this past week and the next step is a vote on the 2013 Budget. The vote occurs on Sunday and is expected to pass because it contains most of the same measures approved on Wednesday. Europe’s Finance Ministers will also be meeting on Monday and Tuesday of next week but no decisions are expected on Greece. The country needs to repay 5 billion on Friday and there is no immediate risk of a default because the Treasury will sell more bonds and roll over the debt (demand is expected to be sufficient). The ECB could also step in to help by allowing Greece to raise its debt ceiling. However growth is becoming a bigger issue for the Eurozone and the smooth passage of Sunday’s vote and rollover of Greek debt may not be enough to mitigate concerns about growth. The German Q3 GDP report and ZEW survey is scheduled for release next week and even if Germany continued to grow in Q3, the outlook is grim and the psychological impact of the Eurozone falling back into recession could be hobbling. Germany’s own Economy Ministry warned today that economic activity in the winter months (Q4 and Q1) will be “noticeably weaker.” Yet the story of slower growth and continued sovereign debt troubles is hardly new. The real focus will be on U.S. stocks – if they continue to fall, so will the euro.

USD: Impact of Obama’s Win on the Financial Markets

Now that we know who will lead of the United States for the next 4 years, we want to take a quick moment to review how the financial markets have responded. Since the beginning of trading on November 7th, the U.S. dollar appreciated all major currencies (except for the Japan Yen), the S&P 500 dropped more than 3%, 10 year bond yields fell from 1.75% to 1.62% and gold prices rose 1%. Some of the reaction is in line with expectations and others are not. For example, President Obama’s policies have been expected to be initially negative for stocks, positive for bonds and gold because 4 more years of Bernanke means for a continued bias to keep monetary policy easy. This prospect should also be negative for the dollar and while USD/JPY reacted as expected, the dollar appreciated against all other currencies. Uncertainty in how well the fiscal cliff will be dealt with has left continued uncertainty in the markets. In President Obama’s speech today, he confirmed that higher taxes for businesses and wealthy individuals will be one of the main ways to tackle the deficit. While both the President and House Speaker Boehner want to find a common ground, they laid out competing approaches on the budget, which means a resolution won’t come easy. The U.S. economy will be in focus next week with a number of important economic reports on the calendar. This includes producer / consumer prices, retail sales, the Empire State and Philly Fed surveys as well as the minutes from the most recent FOMC meeting. Relative economic performance is also playing a role again in how the dollar is trading. Consumer confidence rose to the highest level since July 2007 according to the University of Michigan which is encouraging but with the recent slide in stocks, we expect these gains to be fleeting and consumer confidence to reverse sharply in the following month. Import prices also increased more than expected but at 0.5%, inflationary pressures grew at a slower pace in October. While the deterioration in the Eurozone economy accelerates, most of the economic reports released over the last 2 weeks tell us that the U.S. recovery is gaining momentum. From the non-farm payrolls report to jobless claims, the trade balance, manufacturing activity and consumer confidence, there have been broad based improvements in U.S. data and hopefully it will last.

GBP: Big Week Ahead of UK

The British pound traded lower against the U.S. dollar and euro despite better than expected trade numbers. Thanks to an increase in exports and decline in imports, the U.K. trade deficit narrowed to –GBP8.36 billion from –GBP9.984 billion. While exports to both EU and non-EU nations increased, demand from non-EU nations are doing more to help support trade activity. Like many other nations, higher oil prices affected trade activity but export volumes in the U.K. still increased 2.1%, which is good news for the U.K. economy. Stronger trade activity will contribute positively to Q3 GDP. Next week will be a busy one for anyone trading the British pound. Inflation, employment and consumer spending numbers are scheduled for release along with the Bank of England’s Quarterly Inflation Report. The central bank has often times used the inflation report to signal plans for easier or tighter monetary policy. While we don’t expect a strong signal from this month’s report, it could shed light on how worried policymakers are about the recent turn in data. The Monetary Policy Committee is currently split on the need for more easing but the deterioration in economic performance last month could have swayed a few members to consider additional asset purchases.

AUD: One More Piece of Chinese Data

Better than expected Chinese economic data kept the Australian, New Zealand and Canadian dollars supported. Inflationary pressures eased in China, which is good news because higher prices in periods of recovery hurt growth. More importantly, industrial production and retail sales grew at a faster pace in the month of October. It is clear that the Chinese government has effectively engineered a soft landing and with moderate inflationary pressures, could come in again to stimulate the economy without risking runaway prices if weak growth in other parts of the world becomes a more serious problem. The real test will be this weekend’s trade numbers from China. The country’s trade surplus is expected to decline slightly which would not be a problem unless export growth slows. AUD traders need to keep on eye on this report because it will affect how the AUD/USD trades on Sunday. Meanwhile a rise in credit card spending, house sales and house prices helped the New Zealand dollar recover after this week’s steep losses. It will be a quiet week in the way of economic data with no major reports expected from Australian, Canada or New Zealand. As a result the comm dollars will take their cues from risk appetite for most of the week.

JPY: GDP to Turn Negative for First Time Since Q2 2011

The intraday recovery in U.S. stocks helped to halt the rise in the Japanese Yen. While the Yen ended the North American trading session higher against European currencies, it gave back earlier gains to settle slightly lower against the U.S., Canadian and New Zealand dollars. The only piece of Japanese data released overnight was consumer confidence, which declined in the month of October but not as much as economists had anticipated. Japanese GDP numbers are due for release on Sunday and given what is expected, could have a meaningful impact on the Yen. For the first time since the second quarter of last year, Japan’s economy is expected to contract by 0.9%. Japan rose out of recession in the third quarter of last year but is now expected to return to recessionary conditions. Consumer spending and trade activity has been particularly weak with Japan running both a current account and trade deficit. The strong Yen and weak global growth has taken a huge toll on the export sector, with profits of most major Japanese corporations being squeezed significantly. While we won’t know if Japan entered a recession until the fourth quarter GDP numbers are released (Q3 numbers are due on Sunday), many economists in Japan believe that the economy is already in recession. We continue to expect more stimulus from the Japan with the possibility of additional action on November 20th.