Daily FX Market Roundup 10-25-12

Will Q3 GDP Help or Hurt the Dollar?
EUR: Hit by S&P Downgrade of French Banks and Economic Risk Score
GBP: UK Enjoys Strongest Expansion in 5 Years
NZD: Extends Gains on Nonchalant Attitude from RBNZ
AUD: Struggling to Hold Onto Gains
CAD: Marginal Rally in Gold and Oil
USD/JPY – Struggling to Hold Onto Gains Above 80

Will Q3 GDP Help or Hurt the Dollar?

Despite the amount of U.S. data that was released today, country specific factors dictated the direction of currencies. The dollar traded higher against the euro, Swiss Franc, Japanese Yen and New Zealand dollar but lost value against the British pound and Australian dollar. The consolidative moves in equities also provided little direction to currencies. Part of the reason for this renewed focus on country specific factors is because recent economic data has forced traders to readjust their expectations for monetary policy changes and in turn their positions. The strength of the British pound and Australian dollar for example reflect reduced expectations for monetary easing while the weakness of the Yen reflects a greater chance of more stimulus. The euro on the other hand is a completely different animal that sings to its own tune. Headlines and news flow tend to have the greatest influence of the price action of the euro.

We continue to see evidence of improvement in the U.S. economy but so far it hasn’t been enough to shift the Federal Reserve’s sentiment from pessimism to optimism. The market has made its own decision and believes that the U.S. will outperform some other major economies. A further rise in the dollar will hinge upon Friday’s third quarter GDP report. If the U.S. manages to grow at the fastest pace in 5 years like the U.K., the dollar will soar but this will be nearly impossible considering that the economy expanded by 4.1% in Q4 and analysts are only looking for the economy to grow by 1.8% in Q3. Improving labor market conditions, stronger consumer confidence and solid retail sales growth will help boost GDP. The trade deficit also narrowed from -$49.8 billion in April to -$41.9 billion in June. Retail sales and trade are the 2 most important components of GDP and both saw improvements in the third quarter. If GDP growth exceeds 1.8%, USD/JPY should rise but if economy expanded a slower pace in Q3 compared to Q2, USD/JPY will fall.

The big focus today was jobless claims, which finally give us a true sense of how the labor market is faring and the data was right in line with expectations. Claims dropped from 392k to 369k while continuing claims declined to 3.254M, its lowest level in more than 5 months. If we compare the current level of jobless claims to where it was 3 weeks ago before the reporting distortion, it hasn’t changed at all. There have been no further improvements in the labor market, reinforcing the central bank’s dismissal of recent upticks in U.S. data. Durable goods also beat expectations, rising 9.9% in the month of September after falling 13.1% in August. Transportation and defense orders take credit for a large part of the increase because durables rose 2.0% excluding transportation orders. Pending home sales on the other hand grew by a mere 0.3%, which was much weaker than economists had anticipated.

EUR: Hit by S&P Downgrade of French Banks and Economic Risk Score

For the third day in a row, the euro ended lower against the U.S. dollar. While the currency was weak for most of the North American trading session, the sell-off gained momentum after S&P downgraded 3 French banks and revised the outlook to negative for 10 banks. These actions include changes for big names such as BNP Paribas, Societe Generale and Credit Agricole. More importantly, they cut their economic risk score for France from a 3 to a 2 which is a component of its banking industry country risk assessment and means that France is now a higher credit risk. Their main concern centers on the exposure of French banks to the recession in Europe. They also believe that the economic environment for banking will become more demanding as the French housing market is in the process of correcting a build-up in housing prices. The euro was also pressured by more setbacks on Greek aid. German Chancellor Merkel said there was no majority for reported Greek aid and according to the Finance Minister the Troika said they will not accept the changes in labor measures that Greece agreed to. Finally, stronger U.S. data also dragged the currency lower. There is a general sense of caution and worry that the Eurozone will slog behind the rest of the worry is hurting demand for euros. Better than expected economic data has come out of the U.S., U.K. and China but Eurozone data surprised to the downside. The Eurozone faces a challenging period ahead as continued austerity hampers future growth. Six months from now, we could find ourselves in a position where the U.S., U.K. and Chinese economies gain momentum and Europe is stuck where they are now. German and French consumer confidence numbers are scheduled for release tomorrow and sentiment is expected to have deteriorated in both countries.

GBP: UK Enjoys Strongest Expansion in 5 Years

The British pound soared on the heels of stronger than expected U.K. GDP numbers. After 3 straight quarters of negative GDP growth, Britain is finally out of recession. According to the advance release of U.K. GDP, the economy grew by 1.0% in the third quarter against expectations for a 0.6% rise. Most economists and investors expected a rebound in growth but few anticipated the strongest GDP growth in 5 years. Bank holidays and the London Olympics contributed to the increase but even if we stripped these related boosts, GDP still expanded in the third quarter thanks in large part to an increase in service sector activity. At this point, given the rise in GDP, improvement in the labor market and stronger than expected increase in retail sales, there is a 85% chance the Bank of England will leave monetary policy unchanged next month. Monetary policy officials were reluctant to ease when they met last month and recent economic data gives them even less reason to rush through another round of stimulus. The British pound should be able to extend its gains against the U.S. dollar and euro and more specifically, we believe there is a reasonable chance that EUR/GBP will drop below 80 cents.

NZD: Extends Gains on Nonchalant Attitude from RBNZ

With no major moves in U.S. equities or any economic data on the calendar, the Canadian and Australian dollars ended the day virtually against the greenback. The New Zealand dollar on the other hand continued to trickle higher after RBNZ Governor Graeme Wheeler expressed his comfort with current monetary policy. Based on the central bank’s comments last night, interest rates will most likely be left unchanged for the rest of the year. New Zealand trade numbers are scheduled for release this evening and the deficit is expected to grow slightly which could take some steam out of the NZD/USD rally. There are no economic reports expected from Canada and Australia but both currencies are at interesting crossroads. Bank of Canada Governor Carney made it clear this week that while the central bank’s next move will be an interest rate hike they are in no rush to tighten. Parity (1.0) is pretty stiff resistance for USD/CAD because it is a round number and an area where the 100-day and 200-day SMA converge. If the currency pair manages to clear that level, then it could rise as high as 1.03 but if it fails to do so, a move back below 98 cents is possible. The AUD/USD broke above some recent resistance levels following stronger CPI and Chinese PMI numbers but has been unable to extend its gains. It ended the North American trading session near its lows and if it breaks below 1.0325, a move down to 1.02 becomes possible.

USD/JPY – Clears 80 for the First Time in 4 Months

The big story in the FX market today was the sharp rise in USD/JPY which finally cleared 80. Continued speculation of easing by the Bank of Japan has driven the Yen lower. Rapidly deteriorating economic conditions and upcoming elections makes the chance of additional easing from the BoJ pretty high but having just increased stimulus last month, we are skeptical about their willingness to ease again next week. We would not be surprised if they laid the groundwork for additional easing and followed through in November or December. The latest excitement was driven by an article in one of Japan’s most widely read newspaper that said the BoJ could consider expanding its asset purchase program by another 10 trillion yen on October 30th. No major Japanese economic data was released overnight but consumer prices are due this evening and the data will confirm that deflation is one of Japan’s biggest problems. Further gains in USD/JPY will hinge upon Friday’s U.S. GDP numbers.

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  1. HILAL OMAN says:



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