USD: What to Expect from FOMC

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Daily FX Market Roundup 03-19-13

USD: What to Expect from FOMC
EUR: Drops to 3 Month Lows after Cyprus Parliament Rejects Levy
GBP: Beware of BoE Minutes and Budget
CAD: Manufacturing Sales Drop fourth time in 5 Months
AUD: RBA Leaves Door Open to More Easing
NZD: Current Account Numbers Due
JPY: Say Hello to New BoJ Gov Kuroda

USD: What to Expect from FOMC

Forex traders remained focused on the headlines out of Cyprus, which not only determined every pip move in the euro today but also the moves of most major currencies. We discuss this in detail in the EUR/USD portion of commentary but in a nutshell, the Parliament rejected the levy on deposits. In response, the euro sold off aggressively as investors flocked into safe haven currencies with the U.S. dollar and Japanese Yen being the biggest beneficiaries.

While the Federal Reserve’s monetary policy meeting concludes tomorrow with the FOMC announcement (2pm ET), latest Fed forecasts (2pm ET) and a press conference from Bernanke (2:30pm ET), we are not expecting much from the central bank. Asset purchases and interest rates are expected to remain unchanged, leaving the market’s focus on the FOMC statement, the forecasts and Bernanke’s comments. Economic data has improved since the last meeting with retail sales jumping 1.1% and non-farm payrolls doubling, concerns about the impact of sequester and deterioration in more recent economic reports also raises red flags about the outlook for the U.S. economy. As a result, Bernanke, the mild manner dove may opt for cautious optimism, which may not be good for the U.S. dollar.

There has been recent speculation that the Fed could begin tapering asset purchases and there’s no doubt in our minds that Bernanke will be asked about their exit strategy by reporters at the press conference. Traders should also beware that the FOMC statement, Fed forecasts and Bernanke’s comments could send mixed messages – it has happened before and could happen again. In this case, the FOMC statement could recognize recent improvements in economic data and contain a more optimistic tone but economic projections and Bernanke’s comments could be more cautious. Previously, the Fed Chairman said the sequester could reduce GDP growth by 0.5%.

In the end, confusion, ambiguous answers and caution won’t lend much support to the greenback but it may not hurt it either if Cyprus continues to dominate the headlines, giving investors greater reason to seek safety in the greenback.

EUR: Drops to 3 Month Lows after Cyprus Parliament Rejects Levy

The euro dropped to fresh 3 month lows against the U.S. dollar as the fiasco in Cyprus continues to unfold. As we anticipated, the deposit levy was shot down in Parliament and the next step now is for the Cyprus government to start discussions on alternative ways to raise revenue. This does not mean that a tax on deposits is completely scrapped – it will rear its ugly head but with a different mix. According to the Wall Street Journal, the Finance Minister, who denied rumors of resignation plans to propose a deal that would impose a 20% to 30% levy on Russian deposits in return for equity in Cyprus’s future national gas company and some additional strategic benefits in the sector. Russian investors could be given control of the board of directors at Cyprus’s banks. We have no idea about how receptive Russia would be to this type of deal particularly since a 20 to 30% tax is a steep amount that will undoubtedly insight internal anger. As we mentioned in yesterday’s note, this is a terribly difficult situation for Cyprus and the euro. Without a levy, Cyprus risks not receiving its desperately needed bailout from the European Union. If the levy is imposed, it would be a blow to confidence in Europe’s banking sector and to the government. Optimists argue that this situation is unique to Cyprus but we don’t know how reassuring that is as this would set a precedent for the entire region. The Cyprus bailout has reawakened the fear of contagion, which could cause capital flight out of European banks and slower LTRO repayments on the fear of liquidity problems even though the ECB has pledged to provide liquidity if the bank levy is approved. Meanwhile German investor confidence increased slightly in the month of March with the ZEW survey rising to 48.5 from 48.2. Unfortunately Eurozone economic sentiment deteriorated significantly with the region’s ZEW survey plunging to 33.4 from 42.4. German producer prices and Eurozone current account numbers are due for release tomorrow but these releases will take a backseat to the ongoing developments in Cyprus.

GBP: Beware of BoE Minutes and Budget

The British pound is trading cautiously ahead of Wednesday’s busy economic calendar. Individually each of tomorrow’s economic reports has the power to trigger big moves in the GBP but collectively, an explosion in volatility is almost assured, especially after the recent consolidation in the GBP/USD. Between the Bank of England minutes, the country’s employment numbers and the 2013 Budget, we are looking at an active day for the currency. Based on the trend of recent economic reports and the PMI numbers, the BoE minutes and employment data could be negative for sterling. At the February monetary policy meeting, the MPC voted 6 to 3 to keep Quantitative Easing unchanged with Governor King joining Fisher and Miles in favoring more QE. While the majority still voted to keep policy steady in March, one more member could have sided with the minority as talk of a triple dip recession gains momentum. If we are right, the GBP/USD will collapse. Jobless claims could also fall less than anticipated or worse increase given reports that the manufacturing sector saw staffing levels reduced at its quickest pace in 40 months. However the U.K.’s employment numbers will take a backseat to the BoE minutes and the U.K. Budget. Chancellor Osborne is expected to release a tighter fiscal budget with possible initiatives to help credit flows. The BoE’s inflation target could also be reviewed and more flexibility in the central bank’s inflation target would be negative for the British pound. If the inflation target is not reviewed however, the Budget could lend support to the GBP but only if the BoE hasn’t grown more dovish.

CAD: Manufacturing Sales Drop fourth time in 5 Months

The Canadian, Australian and New Zealand dollars extended their losses against the greenback amidst weaker economic data and continued risk aversion. In Canada, wholesale sales growth rose 0.3%, which was less than expected while manufacturing sales dropped 0.2%. The was the second consecutive decline in manufacturing sales and marked the fourth time in five months that demand contracted. For the Bank of Canada, the latest economic reports reinforce their increasingly cautious monetary policy stance. We are particularly worried about the sluggish growth in wholesale sales because it tends to have a strong correlation with the broader retail sales index. USD/CAD has soared and appears to be on its way for a test of 1.03. No economic data was released from New Zealand but last night’s Reserve Bank of Australia minutes provided zero support for AUD/USD. While the RBA left interest rates unchanged this month, the minutes revealed a continued bias to ease. The central bank said “While further reductions may be required, on the information currently to hand it was appropriate to hold rates steady.” Yet this bias did not weigh too heavily on the AUD thanks to optimistic comments from RBA Deputy Governor Lowe who said, “the high exchange rate and increased household savings are the very same factors that have been critical to Australia’s good macroeconomic performance.” With no support from the RBA minutes, the AUD/USD failed at the critical 1.04 level. New Zealand current account numbers are due for release this evening and we are looking for the deficit to narrow. This will be followed by leading indicators from Australia.

JPY: Say Hello to New BoJ Gov Kuroda

The last day of Masaaki Shirakawa’s term as Bank of Japan Governor proved to be positive for Japanese equities and the Yen. In his own words, it has been a “turbulent” 5 years at the BoJ. Not only did Shirakawa have to battle the global financial crisis but he was unable to make significant headway in the government’s decades long battle with deflation. The task will now fall on Haruhiko Kuroda who takes over as BoJ Governor on Wednesday. It is no secret that he is a dove whose policies are aligned with the Prime Minister’s. He has international experience having served as the head of Asia’ Development Bank and experience with currencies. Abe has brought in 3 new Monetary Policy Committee members with the goal of easing monetary policy. Kuroda made it clear last week that he will be looking to increase bond purchases and more specifically favors unlimited Quantitative Easing. He has previously said that a “self-imposed rule limiting the scale of buying isn’t something adopted by other central banks.” We should soon get a sense of where he and the new BoJ members stand with their first press conference scheduled for Thursday. In the meantime, last night’s Japanese economic reports where encouraging. While leading and coincident indicators were revised downwards, Nationwide and more specifically Tokyo department store sales soared. This increase in demand in Tokyo suggests that the economy is finally moving in the right direction after 2 consecutive months of lower spending. The country’s trade balance is due for release this evening and the deficit is expected to shrink as the weak Yen continues to support the export sector.

Kathy Lien
Managing Director

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