USD: Fixing the Job Market an Uphill Battle for the Fed

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Daily FX Market Roundup 09-20-12

USD: Fixing the Job Market an Uphill Battle for the Fed
EUR – Growth is a Serious Problem
GBP: Unfazed by Weaker Retail Sales
AUD: Hit By Weaker Chinese Data
CAD: CPI Numbers on Tap
NZD: Supported by Stronger GDP Numbers
JPY: Is BoJ the Worst Central Bank in the World?

USD: Fixing the Job Market an Uphill Battle for the Fed

Pull out any major financial newspaper and you will see that one of the biggest stories today is Bank of America’s plan to cut 16,000 jobs by the end of the year. Ben Bernanke has not been shy about saying that the labor market is their number one priority and Fed President Lockhart reinforced this message today when he said the immediate outlook for the labor market is their main. Lockhart described conditions in the labor market as not satisfactory, which is almost an understatement that inappropriately describes the abysmal shape of the job market. Bank of America is one of the highest profile companies to lay off workers but we are certain that many smaller companies are doing the same but just not getting an equal level of press coverage. For example, yesterday American Airlines also sent out a letter to 11,000 employees warning them that their jobs could be at stake as the company goes through bankruptcy restructuring. Although the CEO of AA estimates that actual job losses will be around 4,500, 11k Americans are now on edge about possibly losing their jobs which will undoubtedly affect their spending patterns.

Fixing the job market is an uphill battle for the U.S. central bank who brought out its most powerful artillery last week to deal with the problem. Unfortunately cheap money and low interest rates may not be enough to get companies to hire and consumers to spend. Yet what more can the central bank do? According to the Fed, they still have many options but having just announced a new bold and aggressive unconventional monetary policy action last week, they are not likely to follow with more stimulus before year end, especially ahead of the November elections. As a result, investors are left on their own which could pose a problem for currencies and equities because the layoff announcements and latest jobless claims reports indicate that the labor market could worsen before it improves. Based on the last 2 weekly jobless claims reports, we’re not expecting an improvement in job growth this month. The last time we had 2 consecutive weeks of jobless claims as high as these was in June, when payrolls rose by a mere 45k, its weakest in more than 1.5 years. While manufacturing conditions in the Philadelphia region improved in the month of September, it still contracted for the fifth straight month. Improvements in the Philly Fed index which rose from -7.1 to -1.9 does not offset the drop in leading indicators and more importantly, the weakness of jobless claims. Even if Quantitative Easing effectively stabilizes the economy or promotes growth, it will be some time before we see the results, which also explains why the markets tend to have a delayed reaction to QE. Between now and then, weaker data could weigh on risk appetite.

EUR – Growth is a Serious Problem

Growth in the Eurozone is a serious problem and the latest PMI numbers show just how much trouble the region is in. In the month of September, manufacturing and service sector activity reached its weakest levels in more than 3.5 years. The Eurozone composite PMI index dropped to 45.9 from 46.3, its lowest level in 39 months. What is particularly interesting about the report was the diverging economic conditions in Germany and France, the Eurozone’s 2 largest economies. While we know that Germany is doing much better than Spain and Italy, its recent outperformance or more accurately, the recent underperformance of France is only starting to come to light. In Germany, manufacturing and service sector activity improved this month but in France, the contraction deepened. Fiscal tightening measures have curtailed growth across the region but for France in particular, the possibility of tax increases in the 2013 budget could be undermining confidence. Regardless, the main story is one of slower growth and unfortunately this is a situation that is likely to worsen in the coming months. What Europe needs is growth and while the European Union agreed to a growth compact back in June, very little progress has been made on this front. Along these lines, it shouldn’t be a surprise to see Eurozone consumer confidence fall to its lowest level since May 2009. In terms of the outlook for the euro, if it continues to fall, there is major support at 1.2855. Although Switzerland reported a smaller trade surplus in the month of August, the increase in imports and exports suggests that the economy is recovering and their intervention efforts are working. The Swiss National Bank said this morning that monetary policy is now appropriate and inflation is under control, which implies that the SNB is happily on hold.

GBP: Unfazed by Weaker Retail Sales

Compared to the euro, the British pound held up much better against the U.S. dollar despite a decline in retail sales. Contrary to popular belief, the Olympics did not provide as much support to spending as many had anticipated. In the lead up to the event, retail sales increased but once the Olympics began, the event proved to be a distraction from online shopping. Consumer spending dropped 0.2% in the month of August and excluding gas station receipts, retail sales fell 0.3%. Internet based retailers in particular reported a sharp 6.7% drop in sales. While the labor market has seen improvements, the lack of wage growth has also constrained spending. Despite this decline in retail sales, consumer spending should still contribute positively to GDP in the third quarter unless spending in September falls sharply. Industrial trends on the other hand have shown signs of improvement. According to the Confederation of British Industry, factory orders improved which is consistent with the central bank’s view that there are signs of “modest underlying expansion” in the U.K. economy. If Eurozone data continues to weaken, the British pound could see further gains against the euro.

AUD: Hit By Weaker Chinese Data

While the Australian and Canadian dollars ended the day sharply lower against the greenback, the New Zealand dollar recovered earlier losses to end the North American session unchanged. Initially, the commodity currencies were hit hard by another month of contractionary manufacturing activity in China. According to a report released by HSBC, Chinese manufacturing activity contracted for the eleventh consecutive month. While the index increased from 47.6 to 47.8, the rise was marginal. The overall softness of the Chinese report highlights the ongoing challenges that Chinese growth poses to its trade partners and the global economy. For Australia, any additional pullback in Chinese growth is a problem and raises the possibility of lower interest rates from the RBA. The New Zealand dollar on the other hand is supported by a stronger GDP report. The economy expanded by 0.6% in the second quarter, bringing annualized growth up to 2.6% from 2.3% in Q1. Good growing conditions have helped to lift the farming sector and rebuilding efforts from last year’s earthquake continues to contribute positive to the economy. While consumers are cautious, they are spending and despite a high exchange rate, trade activity improved in Q2. There was no news out of Canada but oil prices have stabilized after yesterday’s sharp decline. Canadian consumer prices are due for release tomorrow and economists are looking for hotter inflationary pressures, which would validate the central bank’s hawkish monetary policy stance.

JPY: Is BoJ the Worst Central Bank in the World?

If the Bank of Japan’s goal was to lift the Nikkei and drive the Japanese Yen lower, they failed miserably. The Nikkei dropped 1.57% overnight and the Yen appreciated against most of the major currencies. Japanese bond yields declined but at 0.79%, there’s not much room for yields to fall. The Bank of Japan has long been criticized as one of the world’s most ineffective central banks and based on the market’s reaction to their latest decision, they are living up to this reputation once again. Bank of Japan Governor Shirakawa discussed the central bank’s decision last night. An intensification of the global slowdown and pause in Japan’s recovery along with elevated uncertainty in the global economy led the BoJ to ease this month. Vice Finance Minister Fujita applauded the central bank for their actions, saying they made a good decision by doing more than expected which should help combat deflation. Unfortunately the results of the BoJ’s efforts have long been limited by the extremely low level of interest rates and entrenched nature of deflationary expectations. While Japan’s trade deficit increased less than expected, the fact that the heavily export dependent country is running a deficit at all is very bad. Exports fell 5.8% in August while imports dropped 5.4%. Demand from China was particularly weak but offset by an increase in exports to the U.S. The Bank of Japan also downgraded its assessment of the economy and they now believe that economic activity has come to a pause after picking up moderately in August.

Kathy Lien
Managing Director

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