Daily FX Market Roundup / Asia Preview 06-26-12

More Bad News for the Euro
USD: Mixed US Data Does Not Alter Fed Outlook
GBP: Shrugs Off Dovish Comments and Weaker Data
AUD: Comm Dollars Lifted by Better Chinese Data
CAD: Will House Prices Rise for Fifth Straight Month
NZD: Trade Balance Numbers on Tap
JPY: Consumption Tax Passes

More Bad News for the Euro

The euro ended the day unchanged against the U.S. dollar, which is surprising considering that Europe’s problems continue to grow. While Spain had no issue attracting demand for their short-term bills, investors required significantly higher yield to be willing to own Spanish debt. With interest rates on 3-month bills tripling since May, investors are clearly nervous about being exposed to Spain, even on a short-term basis. Normally this would be terrible news for the euro, but the currency took the results in stride. The EUR/USD also shrugged off a downgrade of Germany’s sovereign debt rating by Egan-Jones, the small but extremely respectable rating agency. At the same time, shockingly brash comments from German Chancellor Merkel and Italian Prime Minister Monti also had very little impact on the euro. The currency pair’s resilience in the face of bad news reflects the lack of interest in one-sided positioning ahead of the EU Summit. In other words, any one who wants to buy or sell euros before the meeting already has their positions on and the rest are waiting on the sidelines until the EU statement is released. All the side meetings that are happening before the Summit have fueled hope for a positive outcome – Eurozone Finance Ministers will be gathering again tomorrow over teleconference.

Yet a satisfactory outcome from the Summit is becoming increasingly unlikely following public spats between European Leaders. This morning German Chancellor Merkel said there will be no shared debt liability for as long as she lives which is an extremely strong statement that leaves zero room for ambiguity. Every opportunity she gets she publicly opposes any type of liability sharing and with only 48 hours to go before the Summit begins, there is simply not enough time to change her mind. The lack of compromise from Merkel has made European leaders extremely frustrated. So much that there was apparently a story today in an Italian newspaper that said Italian Prime Minister Monti threatened to quit if Merkel did not relent on Eurobonds. While the story was later denied by Monti’s administration, it nonetheless reflects the deep-seated frustration among European policymakers who know that little will come out of the Summit other than a plan for growth and a tax to raise bailout funds. For this reason, we expect the EUR/USD to remain under going into Thursday’s meeting.

Amidst all these euro negative developments, there was one piece of good news. According to GfK, German consumer confidence increased for the first time in 5 months. Concerns about the region’s debt crisis were outweighed by higher wages and the improvement in the labor market. However with manufacturing and service sector activity slowing in the Eurozone’s largest nation, it is hard to believe that these wage gains can be sustained. The ECB still needs to ease monetary policy this year and how quickly they act will depend on the market’s reaction to the EU Summit.

USD: Mixed US Data Does Not Alter Fed Outlook

With U.S. equities edging higher, the greenback held steady or traded lower against all of the major currencies. Mixed U.S. economic reports do not alter the outlook for Fed policy. The central bank still stands ready to add stimulus if necessary. According to S&P Case-Shiller, house prices continued to fall but at its slowest pace since 2010. This is good news for the housing market but a turnaround in the real estate sector is still in the distant future because lowering prices remains the only way for sellers to move inventory. Property values in 20 U.S. cities rose 0.67 percent between March and April but fell 1.9 percent year over year. Consumer confidence also dropped to its lowest level since January while the Richmond Fed manufacturing index hit an 8 month low. With a significant slowdown in job growth, contraction in consumer spending and Europe’s troubles continuing to make headlines, it is no surprise that Americans have grown more pessimistic. The Conference Board’s report is also consistent with similar surveys conducted by Investors Business Daily and the University of Michigan. Durable goods orders and pending home sales are scheduled for release on Wednesday. Both reports are expected to show a rebound in May after deterioration in April.

GBP: Shrugs Off Dovish Comments and Weaker Data

The British pound appreciated against the U.S. dollar and euro despite dovish comments from policymakers and a worsening of U.K. finances. Bank of England Governor Mervyn King testified before the U.K. Treasury Committee expressing concerns about worsening conditions in the global economy and the financial markets. He said we are not halfway through the crisis and for this reason the central bank has activated the extended collateral term repo (ECTR) to prepare for any liquidity issues. Other monetary policy committee members provided further details on the central bank’s outlook. Bank of England member Broadbent said the economy remains in a difficult position and indicators suggests that there could be no growth over the next two quarters. Policymaker Miles said more expansionary policy is the right thing to do and asset purchases would ease conditions in the financial markets. Aside from comments from BoE officials, U.K. Chancellor Osborne also postponed an increase to the petrol tax, which would lower inflation in the near term. For the British pound, all of these factors point to the growing possibility of an expanded asset purchase program. In fact, the BoE could be the next central bank to ease, which is why we expect the British pound to underperform other currencies. As for public sector finances, borrowing was higher than expected due to lower tax receipts, another sign of weakness in the U.K. economy.

AUD: Comm Dollars Lifted by Better Chinese Data

The Australian, New Zealand and Canadian dollars appreciated against the greenback thanks in part to stronger economic data from China. According to the leading indicators report, activity in the Chinese economy expanded at a faster pace in the month of May. While there has been significant skepticism about the strength of the Chinese economy and the accuracy of Chinese data, a rebound in bank loans and real estate activity helped to fuel the economy. Exports however remain subdued with domestic demand also slowing. No economic data was released from the 3 commodity producing countries. Oil and gas prices were largely unchanged, having little impact on the AUD, NZD and CAD. Tonight, New Zealand’s trade balance numbers are schedule for release. Growth in exports and imports are expected to narrow the trade surplus slightly. Reserve Bank of Australia Assistant Governor Debelle will be speaking this evening at a Mortgage Conference in Adelaide. It is not clear whether he will touch on monetary policy in the panel discussion but he may touch on the outlook for the economy, which could have an impact on the Aussie. Canadian house prices are due for release tomorrow and it will be interesting to see if house prices grow at a faster pace for the fifth month in a row.

JPY: Consumption Tax Passes

It was a mixed day for the Japanese Yen, which traded higher against the U.S. dollar, euro and Swiss Franc and lower against the commodity currencies. After the close of the market yesterday Prime Minister Yoshihiko Noda’s bill to hike Japan’s sales tax passed the lower house of parliament following a long battle for supporters. Under the bill, there are two stages of increases that begins with the consumption tax rising to 8% in April 2014, and then to 10% in October 2015. Noda’s Democratic Party of Japan, the main Opposition Liberal Democratic Party and New Komeito voted for the bill with 363 votes to 96. However, the results caused a lot of embarrassment for the Democratic Party of Japan as the Democratic Party’s leader Ichiro Ozama and 57 of his followers voted against the bill. Noda’s disregard for Ozama’s approval caused Ozama to consider picking up and forming a new party. This isn’t Noda’s first time disregarding Ozama’s wishes, as this month Noda restarted two nuclear reactors after they were shut down after last year’s nuclear disaster. Noda’s defiance of Ozama is his way of building up his political reputation to boost his leadership credentials. At a press conference Noda said, “We have taken a big step toward reform, both for the sake of present-day Japanese and future generations.” He also noted that the people in his party who opposed the bill will be dealt with “strictly according to party rules.” However, if Ozama and the 57 followers decide to leave and start a new party, it will be an endangerment of the Democratic Party’s majority vote. Parliament extended the current session to September 8 to allow party leaders’ effort to bring anti-tax lawmakers. The IMF and Organization for Economic Cooperation urged Japan to be more aggressive in tackling their debt as the OECD forecasted a debt rise of 223% of GDP. With Fitch cutting the country’s sovereign rating in May, Noda has a lot of pressure to reduce the nation’s debt levels.