USD: Why This Month’s Beige Book Report is Important

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Daily FX Market Roundup 08-28-12

USD: Why This Month’s Beige Book Report is Important
EUR: Catalonia Bailout Request Raises Stakes for ECB
GBP: Housing Market Continues to Struggle Despite Low Rates
NZD: Hit by News From Fonterra
AUD: Sharp Decline in New Home Sales
CAD: Oil and Gas Prices Unchanged
JPY: Downgrades Economic Assessment

USD: Why This Month’s Beige Book Report is Important

As we count down the days to Bernanke’s annual testimony in Jackson Hole, the U.S. dollar has traded quietly higher against most of the major currencies. The price action of the greenback over the past 24 hours suggests that investors are paring their short dollar positions ahead of this week’s most important event risk. When the FOMC minutes were released last Wednesday, investors readjusted their QE3 expectations by selling the U.S. dollar aggressively against all major currencies. Since then, this reaction has abated as investors realize that they could be expecting too much from Bernanke. There is a good chance that Bernanke will let the market down come Friday by creating more confusion than clarity. For this reason, we may get far more insight into future Fed policy from this Wednesday’s Beige Book report than the Jackson Hole Summit.

The Beige Book report provides the Federal Reserve with an updated assessment of how conditions are “on the ground” in each of the 12 Fed districts. It is an important report that should never be overlooked because it carries a lot of weight with the Federal Reserve and has significant predictive capabilities for GDP according to a number of studies. This in-depth analysis of the economy comes at an important crossroads in Fed policy. We know that job growth and consumer spending improved in the month of July but what we don’t know is how broad-based the improvement has been and whether it has continued into the month of August. The Beige Book report should provide us with some answers and depending on the level of clarity, a reaction in the U.S. dollar. Aside from the Beige Book report, the second release of Q2 GDP is also due along with pending home sales. GDP growth is expected to be revised slightly higher and home sales are expected to rebound.

According to the latest Conference Board report, consumer confidence fell sharply in the month of August. The index dropped from 65.4 to 60.6, its lowest reading since November 2011. This pullback suggests that the increase in job growth and rise in stocks has done little to ease the nerves of U.S. consumers. While Americans did not change their current outlook by much, their expectations declined steeply. This is discouraging but the report is at odds with the University of Michigan consumer sentiment index, which showed an improvement in confidence this month. According to S&P Case Shiller, house prices rose 0.94% in the month of June. While this pace of growth was slightly weaker than the past month’s rise, it was double market expectations. Taking the upward revision to the May figures into consideration along with the recent rebound in existing and new home sales, the housing market is stabilizing thanks to the recovery in the stock market and low interest rates.

EUR: Catalonia Bailout Request Raises Stakes for ECB

The euro ended the North American trading session higher against the U.S dollar. While smooth Spanish and Italian bill auctions helped encourage the gains, we are a bit concerned by the rise in 10 year Spanish and Italian bond yields which tell us there is still ongoing concerns relating to Europe’s debt crisis. This concern is well placed considering that Catalonia, Spain’s most indebted region formally requested for EUR5 billion worth of financial assistance from the government. Catalonia is the third region out of 17 in Spain to request for a bailout and the amount exceeds the aid requested by Valencia and Murcia combined. With Barcelona as its capital, Catalonia is a big region to fall with more to follow. The stakes are high for the ECB who is hard at work preparing for its September monetary policy meeting. The ECB announced this morning that central bank President Draghi has canceled his trip to Jackson due to “a heavy workload in the coming days.” We continue to believe that the ECB is up to something big. In early August, the central bank pledged to provide a new framework for open market operations (translation: bond purchases). With no other executive board members of the central bank taking his place at Jackson Hole, it is clear that they want every able body ECB member to remain in the region and involved in outlining the details of the plan. With the cancellation of Draghi’s trip to Jackson Hole, the ECB has set the market’s expectations for a major policy announcement next Thursday. The EUR/USD is trading higher in anticipation of additional support from the ECB. The central bank is widely expected to unveil a new bond purchase program aimed at the short end of the curve. Intervention in the bond market would reduce the risk premia by driving Spanish and Italian bond yields even lower.

GBP: Housing Market Continues to Struggle Despite Low Rates

The British pound strengthened against the U.S. dollar but weakened against all major currencies. The UK is returning from their bank holiday yesterday and starts off with a shortened week devoid of any major economic reports. As a result its been quiet trading in the British pound which continues to hold its 1.58 breakout against the dollar. The next 24 hours should be just as dull in the U.K. with any action in sterling determined by Eurozone or U.S. developments. If investors continue to bid up the euro, the British pound will benefit. If the Beige Book reports improvements in the U.S. economy, GBP/USD could give up its gains. There are increasing speculation that housing data on Friday will decline, increasing bets that the Bank of England will expand its asset purchases to stimulate growth. Hometrack’s survey showed home values declining 0.1% in August and currently, forecasts for the Nationwide report call for only a small rise. BoE policy makers cut their growth forecasts this month and left the door open to more stimulus, with Governor Mervyn King saying they will use everything at their disposal to sustain the economic expansion. The central bank is currently running a 375 billion pound purchasing program and in the previous meeting decided to leave the program unchanged.

NZD: Hit by News From Fonterra

The worst performing currency today was the New Zealand dollar, which also happened to be the only currency that weakened against the greenback over the past 24 hours. The underperformance of the currency can be attributed to lower forecasts for payments to farmer suppliers from Fonterra, New Zealand’s largest company. The dairy giant blamed the strong New Zealand dollar for offsetting the recent rise in dairy prices. Dairy is a huge industry in New Zealand and the cut in payout could shave as much as $500 million from the economy. The Australian and Canadian dollars on the other hand continued to perform well with gold and oil prices edging higher.
Economic data wasn’t as promising – Australian new home sales fell 5.6% in the month of July. According to HIA Chief Economists Dr. Harley Dale, “New home building is the weakest sector of the Australian economy. Interest rates are lower, it’s a very competitive market, and there is less pressure on skilled labor availability. However, consistently weak consumer and business confidence is weighing very heavily on new housing investment. Combine that low confidence with very tight credit conditions and excessive taxation, and you have the unpalatable recipe for the recessionary conditions facing new housing.” The Reserve Bank of Australia, which is scheduled to meet next week, indicated this month that there were early signs that the economy was reacting to the rate cuts. Minutes released by the RBA noted that the housing market was slowly recovering due to being weak for some time. Tonight Australia will release its construction data.

JPY: Downgrades Economic Assessment

It was a mixed day for the Japanese Yen, which strengthened against the greenback, sterling, kiwi and Aussie but weakened against the euro, loonie and Swiss Franc. The Japanese government cut its nation’s assessment for the first time in nearly a near as the sluggish global growth weighed on exports, causing uncertainty in recovery prospects and pressuring the Bank of Japan to provide further stimulus. In the previous assessment the BOJ said the economy was starting to pick up but in a report released by the Cabinet Office today wrote, they said “the economy is moderately recovering helped by reconstruction demand, while some weak movements were seen recently.” This report had a more dovish tone than the previous report, which merely noted there were difficulties. The August report noted that the government and the BOJ is collaborating to combat deflation “which is the biggest challenge of Japanese economy in the short term. The government also expects the BOJ to continue powerful monetary easing until the exit from deflation is ensured while working closely with the government.” Retail trade data is due for release tomorrow night and is expected to decline by 0.5%.

Kathy Lien
Managing Director

2 thoughts on “USD: Why This Month’s Beige Book Report is Important”

  1. The Beige bookis similar in construction to the Consumer confidence surveys. Conference board and Bloomberg/ABC surveys are both negative and the bounce in Michigan is small and from a very low level. Hence should keep alive of QE3 going into Jackson hole, so expect AUDUSD to rally. (i.e. there might be some improvement byt it will be slow, so not enough to prevent QE3 according to the minutes)

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