The ECB Wants EURO Lower

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Daily FX Market Roundup 07-09-13

The ECB Wants EURO Lower
USD – What to Expect from the FOMC
GBP – Driven to 3 Year Lows by Weaker Data
AUD – The China Effect
NZD – Extends Gains on Stronger Data
CAD – Oil Prices Hit $104
JPY – Signs of Fading Strength

The ECB Wants EURO Lower

The euro was hit from all sides today despite the lack of Eurozone data. The currency fell to a 3 month low against the U.S. dollar after ECB Board member Asmussen said officials need to prepare for potential capital shortfalls. Speaking at a conference in London, Asmussen talked about the possibility of a new Long Term Refinancing Operation and said the central bank’s guidance for an extended period of easy monetary policy goes beyond 12 months. This caused quite a stir in the markets and the ECB was quick to respond by clarifying that Asmussen did not intend to provide an exact length of time as guidance. The comment about 12 months was the problem because while it may be realistic to expect no major reduction in stimulus from the European Central Bank over the next year, they are not ready to provide specific timing. Yet Asmussen’s slip of tongue was enough to give investors a frame a reference. His comment about capital shortfalls has to do with the stress tests that they want to impose on banks but the ECB and the European Banking Authority have not decided on the methodology.

Losses in the euro exacerbated after S&P downgraded Italy’s sovereign debt rating to BBB from BBB+ on concerns about growth This leaves Italy’s debt rated only 2 levels above junk and with a negative outlook, the country is vulnerable to another downgrade this year or next. According to S&P “the low growth stems in large part from rigidities in Italy’s labor and product markets. Eurostat data suggests that wages have become misaligned with underlying productivity trends, weighing on Italy’s competitiveness.” Growth is one of the region’s biggest problems. According to German Chancellor Merkel who sees her country growing by only 0.3% in 2013, sustainable global growth is still a challenge and the motivation for low rates in the Eurozone. Monday’s weaker German industrial production and trade numbers confirm that the outlook for the region is grim which is one of the main reasons why the ECB is talking down the currency. With inflationary pressures relatively muted, the central bank has the luxury of keeping monetary policy ultra easy and driving the euro lower. The April low of 1.2746 is support for the EUR/USD, but below there, it should be clear sailing down to 1.25. A break of the year to date low may only require modestly hawkish FOMC minutes.

USD – What to Expect from the FOMC

The big focus this week for the U.S. dollar is the FOMC minutes and Bernanke’s speech on economic policy in Boston, both of which are expected tomorrow. Given how much the dollar has risen, the question now is whether the minutes will reveal enough new information to extend the gains for the greenback. When the Fed last met, Bernanke said point blank that they may moderate asset purchases this year and end them completely by mid 2014. At the time, the Fed Chairman started his press conference by discussing all the reasons why investors should not expect a rate hike but these comments were only geared towards managing the market’s expectations for the words that followed. After saying that meeting their inflation or unemployment targets does not automatically equate to a rate hike, Bernanke started to outline their specific plans to taper. At the time, they also reduced their unemployment forecasts and while the jobless rate did not decrease last month, the larger than expected rise in non-farm payrolls was enough to make investors confident that the U.S. economy could handle a reduction in stimulus. The exit is clearly marked so even if the FOMC minutes reveal nothing new, we expect Fed Chairman Ben Bernanke to confirm that the central bank is on track to reduce asset purchases this year. For the FOMC minutes to drive the dollar sharply higher, we need it to show significant support for tapering in September. There are only two real opportunities for them to take action this year – September and December. As this is a major monetary policy shift Fed Chairman Ben Bernanke will want to clarify the central bank’s position and press conferences are scheduled after both of those meetings. If the Fed believed that the economy could handle it, they would much rather taper for the first time in September than December because the December meeting is too close to the holidays.

GBP – Driven to 3 Year Lows by Weaker Data

The British pound dropped to a 3 year low against the U.S. dollar on the back of weaker economic data. Industrial production stagnated in the month of May while manufacturing production fell 0.8%. Economists had been looking for production to increase on both fronts but both readings fell short of expectations with broad based declines in all 14 subsectors. Despite a surge in the PMI manufacturing index, the latest economic reports show weakness in the sector. Aside from the miss in production the country’s trade deficit also widened in the month of May and retail sales growth slowed according to the British Retail Consortium. This pullback could be temporary because the business surveys are for the month of June while today’s reports were for May but these disappointments validate Bank of England Governor Carney’s dovish monetary policy stance. While there are no other major U.K. releases on the calendar for the rest of the week, the prospect of slower growth ahead could keep sterling under pressure.

AUD – The China Effect

Unlike European currencies, the improvement in risk appetite and rise in U.S. stocks continued to drive the Australian, New Zealand and Canadian dollars higher. Economic data from the 3 commodity producing countries were better than expected and the rallies were also supported by a rise in commodity prices. In New Zealand, credit card spending rose 1.1% and house prices surged to 7.6% year over year from 7.1%. In Australian, business conditions deteriorated but business confidence improved and in Canada, housing starts beat expectations. Inflation reports were also released from China and the data showed hotter consumer price pressures. Despite the rise in CPI, inflation in China should remain below 3%. Tonight the focus will be on China because the trade balance is scheduled for release. Economists are looking for stronger trade activity with a nice increase in exports and imports. If the data meets or beats expectations, the recent AUD/USD bounce could turn into a stronger recovery for the currency. However if export growth slows or worse, declines which we feel is more likely the AUD could head towards 90 cents. Australia also has consumer confidence numbers due for release but nothing is expected from Canada or New Zealand.

JPY – Signs of Fading Strength

It was another mixed day for the Japanese Yen, which strengthened against European currencies but weakened against the U.S., Canadian, Australia and New Zealand dollars. No major economic reports were released from Japan. The only piece of data worth mentioning was Machine Tool Orders, which fell 12.4% in June. The positive impact of Japanese stimulus is beginning to fade and in order to extend the recovery, the Bank of Japan may need to provide the economy with another jolt of stimulus. Japan’s consumer confidence index is due for release tomorrow and a small decline is expected. The outlook for USD/JPY hinges less of Japanese data and more on monetary policy. An extension in the currency pair will initially hinge on the outcome of the FOMC minutes and Bernanke’s speech and then later on the Bank of Japan announcement.

Kathy Lien
Managing Director

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