Daily FX Market Roundup 11-04-13
Dollar Retains Bid, More Views from Fed Presidents
AUD: What to Expect from the RBA
NZD: Supported by Stronger Chinese Services Data
CAD: Gold and Oil Unchanged
GBP: PMI Construction Index Hits 6-Year Highs
Quiet Trading for EURO
JPY: No Surprises Expected from Kuroda
Dollar Retains Bid, More Views from Fed Presidents
It was a quiet start to a busy week in the foreign exchange market today with the U.S. dollar trading higher against most of the major currencies. U.S. factory orders and the ISM New York index were the only pieces of data released during the North American trading session and neither one of these reports had much impact on the dollar even though both numbers showed improvements in the manufacturing sector. Stronger growth in manufacturing is encouraging, but the U.S. is a service-based economy and the dollar is far more sensitive to the performance of the service than manufacturing sector. Hence, investors will be carefully watching tomorrow’s U.S. non-manufacturing ISM report to see if service sector growth also accelerated in the month of October. The dollar surged last week after the Federal Reserve surprised the market with their level of optimism and good data would validate their bias, causing further liquidation out of short dollar positions. However chances are, service sector activity slowed because of the U.S. government shutdown. When it comes to the non-manufacturing ISM report, the most important part of the release is the employment component because it is generally viewed as a leading indicator for non-farm payrolls. A sharp decline in the subcomponent could set expectations for a much weaker NFP report whereas a sharp rise could send the dollar higher as investors position for a stronger release.
While many investors are still worried about the outlook for the U.S. economy, Federal Reserve officials continue to sound optimistic. With the quiet period before the FOMC meeting now behind us, Federal Reserve Presidents are out in force sharing their views on the economy and monetary policy. Dallas Fed President Fisher who is not a voting member of the FOMC this year but votes next year said he believes the “Fed should resume normal policy as soon as they possibly can” while FOMC voter Bullard said “$85 billion per month in asset purchases is a torrid pace” and he’d rather “get out of it.” While we know that Bullard favors earlier tapering, Fisher’s comments suggest that he will also support slowing asset purchases early next year. In contrast, their colleague Jerome Powell, who votes in December, was far less excited about tapering. He said that he expects the Fed to push on with stimulus for some time and move gradually when exiting accommodation. Looking ahead, the outlook for the dollar hinges upon how serious the central bank is about tapering next month. We believe they will remain on hold until March 2014 but if U.S. data surprises to the upside, showing that the government shutdown had only limited impact on the economy, the dollar could trade much higher.
AUD: What to Expect from the RBA
The best performing currency today was the Australian dollar, which rose approximately 0.8% against the greenback to trade back above 95 cents. On the eve of the Reserve Bank of Australia’s monetary policy announcement, stronger than expected economic data from Australia and China raises the odds of less dovishness from the central bank. Australian retail sales rose 0.8% in the month of September, two times stronger than economists had anticipated. Consumers opened up their wallets at department stores, pushing retail sales growth to its strongest level in 7 months. Service sector activity in China also beat expectations, rising to its highest level since the third quarter of 2012. On top of all this, we have seen job growth return in Australia, hotter inflationary pressures and stronger Chinese manufacturing activity. This leaves us to believe that RBA could express more optimism tonight and maybe even drop the line “Members agreed that the Bank should again neither close off the possibility of reducing rates further nor signal an imminent intention to reduce them” from their monetary policy statement. If they choose to do so, the RBA would be effectively telling the market that they are done easing and that could drive the AUD/USD to 96 cents. The New Zealand dollar also received a lift from Chinese data but the gains were modest compared to the AUD. New Zealand employment numbers are also scheduled for release over the next 24 hours and given the hawkishness of the RBNZ, a significant improvement is expected in the labor market report. The Canadian dollar on the other hand ended the day unchanged due to the lack of market moving U.S. or Canadian data.
GBP: PMI Construction Index Hits 6-Year Highs
The British pound traded higher against the U.S. dollar and euro on the back of stronger housing market numbers. The PMI construction index rose from 58.9 to 59.4 in the month of October, its highest level in 6 years. The surprise strength of the housing market eases concerns that the entire economy is slowing after 3 months of positive surprises. Last week, we saw a second month of weaker manufacturing activity and many investors feared that the construction and service sectors suffered the same fate last month. Thankfully low interest rates and government incentives have helped to keep the sector supported because housing is a key driver of the recovery. Yet gains in sterling were limited ahead of Tuesday’s PMI services report because a slowdown in services would offset any optimism from the uptick in construction activity. With the Bank of England expected to leave monetary policy unchanged, the PMI services report is one of the most important U.K. releases on the calendar this week and with GBP/USD hovering near the key 1.60 level, the direction of the data could determine where sterling trades in the front of the week.
Quiet Trading for EURO
With no major Eurozone economic reports released today, the euro was supported by the rise in equities and ended the day slightly higher against the U.S. dollar. The only numbers on the calendar were revisions to manufacturing PMI and the flash PMI report were spot on Eurozone, resulting in no revision. Growth in Germany was slightly stronger than initially reported but the upward revision was offset by a downward revision to the French PMI report. This indicates that Germany continues to drive the recovery for the region, a fact that we have all grown accustomed to. Investor confidence also ticked higher in the month of November, according to a survey by Sentix. While we don’t usually follow this data closely, the increase is consistent with the rise in the ZEW survey and could be a reason why the ECB may opt to leave interest rates unchanged this week. Most economists do not expect the European Central Bank to lower rates but there’s a small minority favoring easier monetary policy from the central bank. We believe the most important event this week is the European Central Bank’s monetary policy announcement on Thursday and not non-farm payrolls. The EUR/USD dropped more than 2% last week on the back of less pessimism from the Fed, weaker Eurozone data and dovish comments from an ECB member. With inflationary pressures slowing significantly in the region, investors have rushed to price in another round of easing from the central bank. Some economists are even calling for another rate cut by the central bank on Thursday. While we believe this forecast is overly aggressive, the reasoning is sound because inflation is a top priority for the central bank and there’s a good chance that Mario Draghi will be less optimistic and appear more inclined to ease monetary policy. This could accelerate losses in the EUR/USD in second half of the week causing the currency pair to drop through 1.34 and head towards 1.32. However if the central bank President downplays ECB member Nowotny’s comments or suggests that the drop in inflation will be temporary, the EUR/USD could recover quickly.
JPY: No Surprises Expected from Kuroda
The Japanese Yen traded lower against all of the major currencies except for the U.S. and Canadian dollars. Since Japanese markets were closed overnight, no economic reports were released. As a result, the Yen crosses took their cue from risk appetite and U.S. equities. The uptick in U.S. stocks helped to drive most of the Yen crosses higher. Tonight will be another light one in terms of Japanese data but Bank of Japan Governor Kuroda will be speaking in Osaka. While the comments from the head of a central bank are important, in the case of Kuroda, we already know that the central bank is optimistic about growth and less worried about the negative impact of next year’s sales tax rise. The BoJ is comfortable with the current level of monetary policy and nothing will change their view in the coming week. This leaves the Yen vulnerable to the performance of other currencies and risk appetite for most of the week.
