Daily FX Market Roundup 11-28-12

Dollar – A False Sense of Hope?
EUR: Spanish Bond Yields Fall Sharply after Bank Bailout
GBP: Mixed Housing Market Numbers
NZD: RBNZ Wheeler Says Strong Currency Hurting Demand
CAD: Current Account Balance Due
AUD: Oil and Gold Prices Decline
JPY: Lifted by Comments from Abe’s Economy Minister

Dollar – A False Sense of Hope?

Currencies failed to see much benefit from today’s rally in equities. While the commodity currencies edged higher, the euro, British pound, Swiss Franc and Japanese Yen ended the day unchanged against the greenback. At the end of the North American trading session, EUR/USD jumped about 20 pips but there was no major catalyst. The rally in equities was sparked by comments from House Speaker Boehner who sounded more conciliatory and optimistic that a deal will be reached. Yet the divergence between the performance of equities and currencies suggests a false sense of hope and implying that either equity traders are overly optimistic or currency traders are overly cautious. Given the back and forth comments from U.S. lawmakers, we believe that caution is warranted particularly since just yesterday Senate Majority Reid expressed disappointment on the lack of progress. Boehner said Republicans are willing to raise revenue if Democrats agree to spending cuts. He is “optimistic” that Republicans and Democrats can “work together to avert this crisis, and sooner rather than later.” However more revenue won’t come from higher taxes for the rich because Boehner continues to oppose increasing rates on the wealthy. President Obama isn’t letting up on his call on raising taxes on the top 2% either and as a result, the best we can hope for is a partial deal that involves eliminating loopholes, deductions and extending Bush era tax cuts on lower to middle income families. Obama wants a deal done by Christmas and based on the price action in the financial markets, investors are cautiously optimistic and hopeful that his deadline will be met.

According to the Federal Reserve’s Beige Book report, the U.S. economy expanded at a “measured pace” as the Fiscal Cliff nears. The tone of the report was slightly less upbeat than in the past due largely to the negative impact of Hurricane Sandy. While most districts reported an improvement in consumer spending and optimism about the holiday shopping season, manufacturing conditions weakened, wage pressures were subdued and drought conditions persisted in some regions. For the FOMC, the latest Beige Book report gives them very little reason to change their view that more stimulus may be needed once Operation Twist ends in December. There is also signs of weakness in the housing market. According to this morning’s new home sales report, sales fell 0.3% in October. Economists were looking for a small increase after a large rise the previous month but not only did sales decline but the past month’s report was also revised sharply lower. In September sales rose a mere 0.8% compared to an original report of 5.7% growth. The median price of a home sold also dropped for the second month in a row by 4.2%, reflecting continuing weakness in housing demand. While sales of existing homes have been strong, there has been virtually no growth in new home sales over the past 3 months. Low interest rates have been supportive of the housing market but the sector lacks momentum and will be unable to fully recover until there is a broader economic recovery. According to the minutes from the last Federal Reserve meeting, the housing market remains an area of concern for the central bank. The second revision to third quarter GDP is due for release tomorrow along with the weekly jobless claims report and pending home sales.

EUR: Spanish Bond Yields Fall Sharply after Bank Bailout

For the third consecutive trading day, the euro held steady against the U.S. dollar. Volatility has declined significantly in the EUR/USD with the currency pair confined within a 72 pip trading range since last Friday. The lack of big moves in the euro is great news for the ECB and other European policymakers who would love to see continued range trading until the end of the year. Following the announcement of aid disbursement for Greece, the European Union also approved restructuring measures for Spanish banks as a condition for receiving bailout funds. A payment of 37 billion euros will be made to 4 banks in Spain including Bankia, the bank that was bailed out by the government. As a result, Spanish 10 year bond yields dropped to its lowest level since March. Normally, such a sharp decline in borrowing costs for Spain would drive EUR/USD higher but it failed to do so. As expected German consumer prices dropped 0.1% in November. Unemployment numbers are due for release tomorrow and we expect joblessness to grow because according to the PMI report, job losses were the greatest since January 2010. Third quarter GDP numbers is also scheduled for release from Switzerland and the data is expected to show the country being spared from recession. The franc tested the upper bounds of its recent range against the euro despite Swiss National Bank President Jordan’s comments. He defended their currency cap, saying that it has helped Switzerland avoid major damage. The SNB remains determined to defend the cap and is prepared to buy the Franc in “unlimited quantities” to achieve the goal.

GBP: Mixed Housing Market Numbers

The British pound ended the day unchanged against the euro and U.S. dollar. The focus in the U.K. continues to be on how current Bank of Canada Governor Carney who will become the future governor of the Bank of England will manage monetary policy. Yesterday we talked about how he would be tough on banks and more flexible on monetary policy. One of the greatest areas of differentiation between Carney and King is that Carney is a big proponent of providing a clearly defined time frame of how long monetary policy will remain easy. In the case of Carney, he promised in 2009 to keep rates low for 15 months and this transparency has been largely credited for his success in navigating the economy through the financial crisis. Mortgage approvals increased in the month of October but net consumer credit declined. Unfortunately the housing market has not received as much support from the Funding for Lending Scheme as the government would have liked.

NZD: RBNZ Wheeler Says Strong Currency Hurting Demand

The rally in equities helped to lift the New Zealand, Australian and Canadian dollars despite cautionary comments from the Reserve Bank of New Zealand. RBNZ Governor Wheeler said the country’s manufacturing industry has been hurt by a stronger currency and slump in house building. Over the past 12 months, the New Zealand dollar has risen from a low of 0.7370 to its present level of 0.8250, an appreciation of nearly 12%. In yesterday’s report we talked about how this would negatively impact the filmmaking industry which Prime Minister Key has betted big on but New Zealand’s biggest industry is manufacturing and according to Wheeler, some manufacturers have already been forced to close plants and layoff workers due to weaker demand and rising costs. No economic data was released from the 3 commodity producing countries today but tonight Australian new home sales, New Zealand business confidence and Canadian current account numbers are scheduled for release. With the sharp deterioration in Canadian trade activity in the third quarter, we expected the current account deficit to widen.

JPY: Lifted by Comments from Abe’s Economy Minister

Despite the rally in U.S. equities, the Japanese Yen ended the day unchanged to higher against all of the major currencies. No Japanese data was released overnight but a more conciliatory tone from Shinzo Abe’s economic advisor helped lift the Yen. It is widely believed that with the December 16th general election, Abe will become the new Prime Minister of Japan. Recent weakness in the Yen has been caused by the fear that Abe will force the Bank of Japan to adopt a higher inflation target and engage in easier monetary policy. While Abe hasn’t wavered from this belief, his economic adviser believes that “there’s no need to go as far as having a provision to fire the central bank governor.” While Abe’s administration believes that the central bank governor should be held accountable on the inflation target, they also believe he should be “made to appear in parliament or write an open letter to explain why a target hasn’t been met, as is the case in Britain.” This has been interpreted as a softening in stance and helped drive the Yen higher against most of the major currencies. Retail trade numbers are due for release tonight. As discussed yesterday, economists are looking for a rebound in spending, but rising bankruptcies and a decline in confidence may have curbed demand. It is widely believed that Japan’s economy returned to recession in the fourth quarter and a further drop in retail trade would need to occur for that to happen.