Daily FX Market Roundup 04-12-13
Will Euro, USDJPY Top Out or Take Out Key Levels Next Week?
EUR Gains Capped Below 1.3150 All Week
GBP – Busy Week Ahead Filled with Key Data
NZD – Slips Sharply as Longs Unwind
CAD – Bank of Canada Meets Next Week
AUD – Ton of Chinese Data Ahead
JPY – BoJ Buying Disappoints
Will Euro, USDJPY Top Out or Take Out Key Levels Next Week?
This has been a very good week to be long stocks and high carry currencies but disappointing U.S. data snapped the rallies. FX traders took profits on their long USD/JPY, AUD/USD and NZD/USD trades while the EUR/USD and GBP/USD, two currency pairs that did not see as much demand over the past month quietly consolidated. We needed unambiguously positive U.S. economic data today for investors to be willing to take on more risk and drive the EUR/USD and USD/JPY higher but unfortunately it did not deliver. With these 2 currency pairs failing at key levels (1.3150 for EUR/USD and 100 for USD/JPY) and stocks possibly turning lower in the week ahead off of today’s data, many traders are now wondering whether this marks a top in both pairs.
Taking a look at next week’s global economic calendar, there is a lot of data scheduled for release but only a handful can trigger big moves in EUR/USD and USD/JPY. Reports such as consumer prices, housing starts, industrial production and the Philly Fed survey are interesting but not a game changer for the U.S. dollar. Instead, the main release that we are watching is the Beige Book report, which may provide additional clues on whether the labor market and consumer spending has become a fresh headache for the Fed. We will also be listening to all of the speeches delivered by U.S. policy makers next week to see if they have share FOMC voter Bullard’s nonchalant attitude about the latest jobs number. If concerns created by the decline in retail sales and slowdown in job growth is not reflected in the Beige Book or Fed speeches, the optimism could renew the rally in the EUR/USD and USD/JPY. However we doubt that Fed officials will be unilaterally optimistic and as such believe that more consolidation and profit taking could occur in these pairs before key levels are broken. Aside from U.S. data, the German ZEW survey is also worth watching along with Sunday’s Chinese Q1 GDP numbers. Strong growth in the first quarter could boost risk appetite.
This morning’s U.S. retail sales report highlights how much of a challenge it has been for the Federal Reserve to stimulate the economy. Despite their no holds barred Quantitative Easing program, the sustainability of the recovery has come into question with this month’s abysmal retail sales and non-farm payrolls reports. While many Fed officials maintain a glass half full view of the recovery and believe that the jobs number will be revised higher, today’s data shows that despite record breaking levels in stocks, weak job growth and high unemployment has constrained consumer spending. This means the Federal Reserve will need to postpone their plans to taper asset purchases. At this point, we don’t expect the central bank to make any announcements on reducing the size of their monthly purchases until September at the earliest. In the month of March, retail sales fell by 0.4%, the largest decline since June 2012. Excluding autos, spending also dropped by the same amount. According to the details of the report, Americans spent less on electronics, sporting goods, general merchandise and autos. With oil prices plunging at the end of February, gas station receipts dropped 2.2%. Lower energy costs also drove producer prices down 0.6% last month. Finally, the University of Michigan Consumer Confidence report also fell short of expectations as the index fell to a 9 month low of 72.3 from 78.6. It is clear that the deterioration in the labor market and the higher payroll tax completely overshadowed the rise in stock prices and property values.
EUR Gains Capped Below 1.3150 All Week
It has been a tough week for anyone looking to trade a breakout or extension in the EUR/USD. For most of the week, the currency pair was trapped in a 100 pip or 1 cent range that extended from 1.3040 to 1.3140. A stronger than expected Eurozone industrial production report for the month of February was offset by a downward revision to the prior month’s report and a decline in German wholesale prices. Yet what really did the euro in during the European session were reports that the Euro area Finance Ministers will cap the Cyprus bailout at 10 billion euros. The weaker U.S. retail sales report initially led to a risk off move in the euro but the currency pair quickly recovered as euro traders saw no major reaction in U.S. markets and European bond yields turned lower. We continue to stress that there’s quite a bit of resistance right above current levels in the EUR/USD that have prevented the pair from extending higher – right now the 100-day SMA at 1.3150 is the level to watch. In the week ahead, there is not much in the way of Eurozone data. The most important release is the German ZEW survey. Beyond that, the EUR will be subject to headline risk and the market’s reaction to Chinese and U.S. data.
GBP – Busy Week Ahead Filled with Key Data
It has been a relatively quiet week for the British pound, which edged higher against the U.S. dollar and stayed pretty much unchanged against the euro but that will change next week when U.K. data comes into focus. We have a very busy economic calendar with key events due for release on Tuesday, Wednesday and Thursday. This includes consumer and producer prices, retail sales, employment and the minutes from the most recent Bank of England meeting. Overall we know that the pace of recovery in the U.K. economy has been uneven and may even require additional stimulus to regain momentum. However the BoE has expressed concerns about inflation – all issues that will be addressed with next week’s releases. We will get a chance to see if consumer prices have increased and whether the strength in retail sales in February extended to March. If the data is good, the breakout in GBP/USD could finally gain some momentum but if the data is weak, the currency pair could fall sharply. As for the BoE minutes, we don’t expect any major change in views as data has been mixed.
NZD Slips Sharply as Longs Unwind
The performance of the commodity currencies today shows that what has risen the fastest can also fall the hardest. Next to the Japanese Yen pairs, the worst performing currency pair was the NZD/USD. While there were a few pieces of New Zealand data released overnight, the reports were not significant enough to cause this type of move in the currency. Instead, it is unwinding of longs accumulated throughout the past month that has driven NZD/USD sharply lower. The currency pair appreciated nearly 7% over a very short period of time and a correction is only natural. The latest report on food prices indicates that inflationary pressures have declined which will important for next week’s CPI reading. The NZD/USD rally can only continue if it has the blessing of the central bank and if CPI declines for another month, the Reserve Bank of New Zealand may want to curtail the rally because a strong currency decreases price pressures further. Thankfully even with the drop in food prices over the past 2 months, prices are still higher now than Q4. The Australian and Canadian dollars also came under selling pressure. While no noteworthy economic reports were released from either country overnight, next week will be a busy one in Australia and Canada with the RBA minutes scheduled for release and the Bank of Canada holding a monetary policy meeting. There are also a number of Chinese reports on the calendar including Q1 GDP, industrial production and retail sales that will undoubtedly affect the AUD.
JPY – BoJ Buying Disappoints
The Japanese Yen traded higher against all of the major currencies today. Data out of Japan has been improving as the country reaps the benefits of abundant liquidity and a weak currency. The Tertiary Industry index jumped 1.1% in the month of March, an improvement that is consistent with other nonmanufacturing business activity measures. However the Cabinet did not change its economic assessment, which isn’t too much concern as they had just upgraded it in March. The Japanese government currently sees the economy as “showing movements of picking up recently,” but “weakness can be seen in some areas.” Next week’s trade and consumer confidence numbers should show further improvement. The big story overnight was weak JGB purchases. After the bold and aggressive easing measures announced by the central bank, the market expected to see a nice decline in bond yields but weak demand left some yields higher than pre-BoJ announcement levels. Between Japanese foreign bond purchases and JGB yields, we have yet to see the behaviors that should occur after such an aggressive move by the central bank.
