USD/JPY Breaks 94, EUR/USD Slapped Around

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Daily FX Market Roundup 02-11-13

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management

USD/JPY Breaks 94, EUR/USD Slapped Around
USD: Light Data, Dovish Comments from Yellen
GBP: Resumes its Slide, Down 1% Against EUR
CAD: Third Straight Day of Losses
NZD: Credit Card Spending Rises 0.3%
AUD: Testing 3 Month Lows
JPY: Kuroda Comments Example of Why Yen Will Remain Weak

USD/JPY Soars, EUR/USD Slapped Around

Despite the lack of economic data and closed markets in China and Japan, we had some nice volatility in the foreign exchange market. The last hour of trading during the North American session was the most exciting for USD/JPY which spent most of the European and NY hours in a tight 40 pip range. Around 3pm ET, Dow Jones quoted a Treasury official saying that they support Japan’s efforts to boost growth and end deflation and they will continue to work with Japan to ensure that G7 FX vows are adhered. These comments drove USD/JPY up more than 60 pips over the next hour. This suggests that the U.S. government has no problems with Yen weakness and won’t support any official criticism of Japan’s exchange rate policies at the G20 meeting. Japan is back from holiday this evening and unless the Japanese government decides to talk down the currency ahead of Thursday’s meeting “just in case,” USDJPY is poised for a move towards its 2010 highs right below 95.

The EUR/USD on the other hand was slapped around today by comments from European policymakers. Eurozone Finance Ministers met in Brussels this morning and comments from policymakers led to wild swings in the euro. The French said they will call for a coordinated approach to stabilize exchange rates, the Italians said the distortion in the exchange rate market is a concern but Luxembourg isn’t worried and more importantly, the Germans do not believe that the euro is extremely overvalued and even warned that a policy of targeting a lower euro would drive higher inflation. Weidmann, the head of Germany’s Bundesbank is also a member of the European Central Bank and we believe that Draghi takes his views seriously. EU Finance Ministers are meeting tomorrow, so expect more comments on the euro. Unfortunately, we expect more back and forth as there is a widespread variances in views within the Eurozone. ECB President Draghi will also be speaking in Spain and we’ll be listening carefully for his currency comments as his views matter the most as seen in last Thursday’s sell-off in the EUR/USD. Meanwhile the Swiss still want to see a weaker Franc. According to SNB Governing Council member Zurbruegg, the Franc is “overvalued even at today’s exchange rates against the euro.” In response to these comments, the CHF dropped like a rock against the EUR and USD and with the endorsement of the central bank, we believe EUR/CHF could be headed back up to 1.25.

USD: Light Data, Dovish Comments from Yellen

It was another mixed day for the U.S. dollar, which traded higher against the British pound, Japanese Yen, Swiss Franc, Canadian and Australian dollar. Against the euro and New Zealand dollar, the greenback lost value. With no U.S. data on the calendar today and nothing significant tomorrow, the fluctuation in the greenback was largely driven by the currency specific flows. However Federal Reserve Vice Chair Janet Yellen spoke today and she said that inflation and unemployment targets aren’t policy thresholds meaning just because they have been crossed does not guarantee an interest rate hike from the central bank. While she believes that QE is helping to boost growth, she also believes that the improvements in the labor market are happening too slowly. The weaker dollar has also made a substantial difference in narrowing the country’s current account deficit. Four additional Federal Reserve Presidents are scheduled to speak on the economy tomorrow but Esther George is the only FOMC voter. Don’t expect any overly dovish comments from George – if you recall she was the lone dissenter at the Fed’s last meeting voting against steady policy. She is concerned that the “continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.” We expect these comments to be repeated tomorrow.

GBP: Resumes its Slide, Down 1% Against EUR

It was another big day for the British pound, which dropped more than 1% against the euro. In the past, EUR/GBP use to be one of the least interesting currency pairs because the intraday volatility was so small, but over the past 2 weeks, volatility in EUR/GBP exploded. Considering that the pip value for EUR/GBP is 1.5 times that of the GBP/USD, the greater than 1% moves that we have seen are even more significant. The weakness of the GBP against the euro continues to be driven by capital flows moving out of the safety of sterling into opportunities in the euro. No major U.K. economic reports were released overnight and the one piece of data that was released (the Lloyds Employment Confidence) showed a further deterioration in the labor market. There is a very good chance the Bank of England will ease monetary policy again and a large part of that decision will hinge on tomorrow’s inflation report. Consumer and producer prices are scheduled for release simultaneously. While PPI is expected to increase, CPI is expected to decline. Annualized consumer price growth is still running well above the central bank’s 2% target but if the year over year rate continues to decline, the Bank of England has more flexibility to ease.

CAD: Third Straight Day of Losses

For the third consecutive trading day, the Canadian dollar sold off against the U.S. dollar. USD/CAD is now poised for a test of its 6 month high of 1.01. Last week’s disappointing employment numbers and less hawkish comments from the Bank of Canada shifted the outlook for the CAD. There were no Canadian economic data released today and the loonie received zero benefit from the rise in crude prices because the cost of Western Canada Select oil declined. Unlike the CAD, the New Zealand dollar rebounded against the greenback thanks to an uptick in house prices and rise in credit card spending. New Zealand’s disappointing fourth quarter employment report did a number on the NZD and a further increase in consumer spending has helped the currency recover. The AUD on the other hand resumed its slide. The third monthly decline in home loans boosted the odds of a rate cut by the Reserve Bank in March. According to interest rate futures, investors are pricing in a greater than 50% chance of a quarter point cut next month. Australian business confidence numbers are due for release this evening and given the recent deterioration in data, business confidence most likely weakened. The AUD/USD is vulnerable to additional losses but it may take next week’s RBA minutes to cause a slide down to 1.02.

JPY: Kuroda Comments Example of Why Yen Will Remain Weak

The Japanese Yen resumed its slide against the U.S. dollar after Asian Development Bank President Haruhiko Kuroda said there is scope for additional easing by the Bank of Japan in 2013 and believes that 2 years is an appropriate time frame for reaching the inflation target. The reason why his comments are important is because he is a potential candidate for BoJ Governor. Although he isn’t the most dovish candidate, his comments today tell us that if he were to become the new head of the BoJ, he would support increasing asset purchases this year. Kuroda’s comments are an example of why the Yen will remain weak. Whoever the new BoJ Governor is, he will support more aggressive monetary policy right off the bat and possibly make dramatic changes as quickly as the April monetary policy meeting. While Yen weakness should be limited ahead of the Bank of Japan monetary policy meeting and the G20 meeting, leading up to and immediately following Prime Minister Abe’s selection of BoJ Governor, we could hear a lot of comments that could potentially weaken the Yen. Japanese consumer confidence numbers are due for release this evening along with Machine tool orders.

Kathy Lien
Managing Director

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