Daily FX Market Roundup / Asia Preview 06-28-12

EUR – Riding on the Hope for Short Term Solutions
USD: Q1 Growth Still Exceeds Other Nations
GBP: Three Out of Four Quarters of Negative Growth
NZD: Trade Surplus Narrows on Strong Rise in Imports
CAD: Oil Prices Drop 3 Percent
AUD: Hit By Weaker Data
JPY: Busy Night for Japan

EUR – Riding on the Hope for Short Term Solutions

Day one of the EU Leaders Summit has come to pass with no major surprises. A few announcements have been made – EU Leaders approved a EUR120 billion, growth package though it is not clear if the Spanish and Italians have signed off on it and a EUR10 billion capital injection into the European Investment Bank. The money will come primarily from existing EU funds – EUR55 billion from unused European structural funds, EUR60 billion from the EIB and EUR5 billion from project bonds for infrastructure projects such as new road, rail and air links. At less than 1 percent of the EU’s total GDP, the growth package is small but the money will be dedicated to fast-acting growth measures. While the euro ended the day lower against the U.S. dollar, this announcement was enough to trigger a small intraday rally in risk currencies, which goes to show that with expectations so low, it doesn’t take much to satisfy investors. With this in mind, what Europe still needs and what investors want is a convincing plan towards greater economic integration and that’s not something we expect from this meeting.

EU Leaders are also discussing short-term measures to support Spain and Italy and are apparently considering proposals from Finland and Italy. Finland suggests selling covered bonds that are backed by government assets or tax revenues that are specifically earmarked to service those bonds. The EFSF or ESM could then be given the ability to buy these bonds to facilitate their issuance in case there are any problems with demand. Italy’s proposal is similar and involves semi-automatic purchases of bonds by the EFSF or ESM in the secondary market to keep borrowing costs of distressed nations down. While Finland hopes that the EU Summit will result in a timeline for a banking union, there may not be enough agreement on the idea of a banking union for a timeline to be established. What could help the euro however are short term policies to support Spain and Italy. In today’s press conference, EU Van Rompuy confirmed that short term policies such as direct bank aid or using EFSF/ESM funds to buy Spanish and Italian will be discussed tomorrow. Since Spain and Italy are too big to bailout, Europe needs to proactively prevent a further rise in yields. The European Council will finalize its conclusions tomorrow, release a communiqué and hold a number of press conferences to explain their decisions.

In our morning note we said the EUR/USD could still hold above its 2 year low of 1.2288 if investors look to the ECB for help but at the end of the day, the central bank’s belief that fiscal problems should be solved with fiscal changes means they could continue to refrain from providing any support to European nations with the goal of pressuring Europe’s leaders into action. So far very little detail has come out of the Summit, but the talk that European policymakers are considering a number of different proposals suggests that they are still at the very early stages of identifying solutions which means that it will be sometime before they agree let alone implement a plan for greater economic integration.

USD: Q1 Growth Still Exceeds Other Nations

Deleveraging and risk aversion has once again sent the dollar higher against almost all of the major currencies. The only currency that outperformed the dollar was the Japanese Yen. As we had mentioned in yesterday’s note, risk on risk off will be the primary driver of currency flows over the next 48 hours. This morning’s U.S. economic reports had little impact on the U.S. dollar. First quarter GDP growth was confirmed at 1.9 percent but personal consumption was revised lower while prices were revised higher. The data shows that the U.S. economy has slowed significantly since the fourth quarter, when it grew by 3.0 percent. Nonetheless positive growth is still something to cheer about considering that the U.K. contracted by 0.3 percent in Q1 and the German economy grew by a mere 0.5 percent. Jobless claims declined but the drop was small considering that the prior week’s report was revised higher. While claims below 400k is nothing to worry about, the improvement has not been significant enough to reflect momentum in the labor market. As a result, we do not expect Federal Reserve officials to adjust their outlook for monetary policy following this week’s economic reports. On Friday, personal income and spending numbers will be released alongside the Chicago PMI report and final University of Michigan consumer sentiment figures. With retail sales contracting in the month of May and average hourly earnings remaining unchanged, we expect another round of weak reports.

GBP: Three Out of Four Quarters of Negative Growth

For the second day in a row, the British pound sold off against all the major currencies on the heels of weak economic data. House prices dropped 0.6 percent in June according to the Nationwide Building Society. The housing market has been hit hard by the recent weakness in the U.K. economy. This latest report is consistent with the first decline in home loans reported by the British Banker’s Association. GDP numbers confirmed that the U.K. is in a technical recession and has contracted for 3 out of the past 4 quarters. The current account deficit also swelled to -11.2B from -7.2B, which was the second worst reading in more than 18 months. As our colleague Boris Schlossberg pointed out, this suggests that UK trade and capital account position continues to deteriorate at an alarming rate. These latest reports help to explain why so many Monetary Policy Committee members are looking to increase stimulus. This evening, consumer confidence is due for release followed by the Index of Services on Friday.

NZD: Trade Surplus Narrows on Strong Rise in Imports

Despite the late day recovery in U.S. stocks, the Australian, New Zealand and Canadian dollars fell steeply against the greenback. The weakness was caused primarily by risk appetite due to the lack of major economic reports from commodity producing countries. Last night, Australia reported sluggish growth in new home sales and a sharp decline in job ads. The latest numbers show job vacancies in Australia at its lowest level in 2 years. New Zealand data was also depressing with the National Bank of New Zealand reporting a sharp pullback in business activity and confidence. There was no economic data from Canada but oil prices fell 3 percent, adding pressure on the CAD. New Zealand building permits is the only piece of data expected over the next 24 hours and its lack of significance means that the outcome of the EU Summit will continue to drive currency flows.

JPY: Busy Night for Japan

The Japanese Yen strengthened against all major currencies today. Good news spread when the Trade Ministry announced that retail sales in May rose a more than expected 0.7 percent. This helped rally the Japanese stock markets with the Nikkei 225 up 143 points or 1.65% today. Retail sales have increased for the past six months. In the latest monthly report, the government noted that private consumption is increasing at a moderate pace and the economy is on its way to recover at a moderate pace partially due to reconstruction-related demand. The Finance Minister estimates that the government has a 1.2 trillion yen ($15 billion) surplus from last year’s budgets. With Fitch Ratings downgrading Japan’s sovereign rating, the surplus may tame the nation’s debt. The money can be used to pay off debt and promote spending and may provide relief for Prime Minister Yoshihiko Noda’s consumption tax bill. The government also has 748.9 billion yen in unused funds which had been reserved for earthquake-reconstruction projects. Fewer than expected government bonds were also issued last fiscal year because of the increased tax revenue aiding the nation’s debt. It will be a busy night for Japan with Manufacturing PMI, Jobless Rate, Industrial Production and CPI data due for release.