Daily FX Market Roundup 10-24-12

USD: No Help from the Fed
EUR: Weaker Data Serves as Harsh Reminder of Eurozone’s Troubles
GBP: UK to Rise Out of Recession
NZD: New RBNZ Governor Isn’t Overly Pessimistic
AUD: Hot CPI Reduces Odds of November Easing
CAD Drops After Carney Says Rate Hike Not Imminent
USD/JPY – Holding Steady above 79.50

USD: No Help from the Fed

It has been a long time since a Federal Reserve monetary policy meeting created as little volatility for the FX market as what we have seen today. USD/JPY moved approximately 10 pips when the FOMC statement was released while the EUR/USD enjoyed a slightly larger 25-pip move. No one expected the Fed to change monetary policy but there was some hope that they would provide a boost to the market by acknowledging the improvements in the economy. While the central bank did say that “household spending continued to advance,” they also said fixed investment appears to have slowed, inflation has been subdued and the committee is concerned that without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. These are hardly words of an optimistic central bank and in fact confirm that they are still very worried about the outlook of the U.S. economy and refuse to be swayed by one month of mediocre improvements in U.S. data. However having just announced unlimited liquidity, a dramatic shift in tone would have also undermined their credibility and put the Fed at risk of being criticized for overreacting or worse, being partisan.

Tomorrow’s U.S. economic reports should be far more interesting and potentially market moving for the U.S. dollar. Durable goods, jobless claims and pending home sales are scheduled for release. Orders for goods made to last for more than 5 years are expected to rebound in September after falling sharply in the month of August. Yet jobless claims will be the main release because this week we finally get to see what is the “real” level of jobless claims. Two weeks ago, claims came in abnormally low because of reporting issues from one state and last week there was a huge spike as a result. This week claims returns back to normal and are expected to drop to 370k. If claims exceed 385k, it would be bad news for the dollar but if it is less than 350k or even 365k, the dollar should rise in relief. Durable goods and claims will be followed by pending home sales, which are also expected to rebound. As shown by today’s new home sales report, low interest rates continue to provide underlying support for the housing market, helping to increase sales of new homes by 5.7%. Although inventory is still being moved at lower prices, sales rose to their highest levels in 2 years.

EUR: Weaker Data Serves as Harsh Reminder of Eurozone’s Troubles

The euro extended its losses against the U.S. dollar as the latest economic reports serve as a harsh reminder of the deep-seated troubles in the Eurozone. Manufacturing and service activity in Germany contracted at a faster pace in the month of October according to the latest PMI report. While the Eurozone as a whole enjoyed a slight improvement in service sector activity (thanks to an uptick in France), the decline in Eurozone manufacturing activity more than offset the improvement, dragging the composite index lower. German business also grew less optimistic about current economic conditions but did not change their assessment of how the economy could perform a few months forward. The deterioration in European economic data seen in today’s reports are a direct consequence of austerity measures across the region and in line with German Finance Minister Schaeuble and ECB member Mersch’s warning yesterday that the calm in Europe is only an illusion. The ECB’s OMT program may have capped the rise in bond yields but has not provided much support to the economy and there is a good chance that the Eurozone economy may not rise out of recession until mid 2013. European Central Bank President Draghi defended OMT by saying that it was essential and doesn’t compromise the ECB’s independence, create excessive risks for taxpayers or lead to inflation. Yet even he isn’t convinced that it is an all-encompassing solution for Europe. Draghi said the euro-area economy will remain weak in the near term because unfortunately rate cuts weren’t passed on in some countries. There’s little fear that unlimited liquidity would create inflation because falling prices is currently a bigger risk than inflation according to Draghi.

GBP: UK to Rise Out of Recession

The British pound rebounded against the U.S. dollar and euro ahead of third quarter GDP numbers. Tomorrow’s data is expected to show the U.K. economy rising out of recession after contracting for 3 straight quarters. The 2 key components of GDP are retail sales and trade – both of which improved dramatically in Q3. Between the Queen’s Diamond Jubilee and the Summer Olympics, the holidays and cause for celebration provided a much-needed boost to the U.K. economy. The labor market also held steady, contributing to stronger consumer demand. If the U.K. economy rises out of recession, the case for more stimulus in November would weaken further, forcing some traders adjust their positions. Economists are looking for GDP to expand by 0.6% and an in line print may be all that is needed to extend the rally in the British pound. However if GDP grows by 0.3% or less, investors may share the Bank of England Governor’s concern about whether the recent signs of improvement will persist. According to the Confederation of British Industry, factory orders dropped significantly in the month of September. Analysts were looking for the index to rise from -8 to -6 but instead it dropped to -23, which is the lowest in 10 months. U.K. businesses grew more pessimistic about the manufacturing sector and according to the CBI’s head of economic analysis, companies are increasingly concerned about political and economic conditions abroad. Unfortunately the CBI index tends to have a strong correlation with the broader PMI report.

NZD: New RBNZ Governor Isn’t Overly Pessimistic

While the New Zealand and Australian dollars ended the day higher against the greenback, the Canadian dollar failed to participate in the rally. The Reserve Bank of New Zealand left interest rates unchanged at 2.5%. This was the very first opportunity for us to hear from Graeme Wheeler, the new RBNZ Governor. The New Zealand dollar rallied as investors realized that he isn’t overly cautious or dovish. He said while the global economy remains fragile it is appropriate to hold rates for now because market sentiment has improved from earlier in the year and domestic GDP continues to expand at a modest pace thanks to stronger housing market activity. Inflation is currently at extremely low levels but the central bank governor expects it to head back toward 2%. While the strong currency undermines export earnings, it also encourages import substitution. This balanced assessment on the New Zealand economy suggests that Wheeler is in no rush to lower interest rates. The Australian dollar received support from hotter inflation data and stronger Chinese manufacturing activity. Consumer prices grew by 1.4% in the third quarter, the strongest pace of growth in nearly 2 years. The increase in inflation had a lot to do with the impact of the carbon tax but even adjusting for that, CPI is still running at higher levels in Q3 than Q2. For the Reserve Bank of Australia, the increase in consumer prices and improvement in Chinese manufacturing activity reduces the chance of another rate cut in November. The Canadian dollar on the other suffered from a decline in house prices last month and clarification of the central bank’s monetary policy stance from BoC Governor Carney. In a press conference in Ottawa today, Carney said the case for raising rates is “less imminent” but overtime rates are more likely to go up than not. This implies that while the central bank is looking to raise rates, they are not in as much of a rush as yesterday’s monetary policy statement may suggest. The BoC’s monetary policy report was also not overly optimistic – the central bank expected stronger growth in the U.S. but saw housing as a potential drag on growth.

USD/JPY – Holding Steady above 79.50

The resilience of USD/JPY has been remarkable. Despite the recent decline in equities, USD/JPY managed to hold above 79.50 with minimal volatility. U.S. 10 year yields are helping to support the currency pair, which is taking its cue from bonds and not equities. It has been a mixed day for the Japanese Yen, which is steady against the greenback, higher against the euro, Swiss Franc and Canadian dollar but lower against other major currencies. No major Japanese data was released overnight, leaving the Yen to trade primarily on risk appetite. Safe haven flows have eased out of some Yen crosses thanks to better than expected Chinese data. According to the HSBC Flash Manufacturing PMI Index, which rose to 49.1 from 47.9 in October, manufacturing activity in China is improving and close to returning to expansionary levels. This independent report from HSBC is generally considered one of the more accurate measures of activity in China and the improvement suggests that the economy may have bottomed which would be good news for all Asian economies. No major Japanese economic reports are due for release this evening.