Daily FX Market Roundup 03-20-13
Dollar Lifted by Bernanke’s Relaxed Vibe
EUR: Cyprus a Risk but Focus Shifts to PMIs
GBP: Retail Sales Report Could Drive Further Gains
NZD: Stronger GDP Growth Expected
CAD: Retail Sales Expected to Rebound
AUD: Watch for Chinese Data
JPY: Watch for Urgency from BoJ
Dollar Lifted by Bernanke’s Relaxed Vibe
The Federal Reserve left monetary policy unchanged but the U.S. dollar received a boost from Fed Chairman Ben Bernanke’s comfort and ease about the outlook for the U.S. economy. While the central bank cut its growth forecast for this year to 2.3%-2.8% vs. prior forecast of 2.3%-3% and said fiscal policy has become somewhat restrictive, Bernanke did not spend much time during his press conference discussing his concerns about the negative impact of the sequester or fiscal policy. Instead, he talked positively about the labor market and the housing sector and said on more than one occasion that they could consider varying the amount of asset purchases.
Lets to be clear – the Federal Reserve is not backing off its Quantitative Easing program, they still plan to continue buying bonds and feel that the risks associated with QE are manageable for the time being but they may change the amount they purchase month to month depending on how economic data fares. He sounded pleased with all of the recent improvements in the economy but said they are looking for sustained improvements. The Fed Chairman’s apparent lack of concern about the negative implications of the sequester and potential budget showdown suggests that the recovery is strong enough to withstand the hiccups that they can cause. He also saw nothing wrong with the rally in equities, which means he is green lighting the move. As for Cyprus, he doesn’t expect the country’s problems to have a major impact on the U.S. economy. In other words, Bernanke is optimistic and investors are taking this well. Jobless claims, the Philadelphia Fed Survey, Existing home sales and Leading Indicators are due for release tomorrow. Minor improvements are expected in most reports which would reinforce Bernanke’s positive view and potentially help the dollar.
EUR: Cyprus a Risk but Focus Shifts to PMIs
The euro rebounded against the U.S. dollar today as we continue to watch the headlines out of Cyprus. While the country’s fiasco will continue to affect EUR/USD flows, the focus on Thursday will shift to economic data and the underlying fundamentals of the region’s economy. If Cyprus is truly an isolated problem, then the outlook for the euro hinges on the sustainability of the recent improvements in Germany’s economy and its ability to support the region as a whole. Economists expect service and manufacturing activity in the Eurozone to improve, leading to a higher Eurozone PMI composite index. If the data surprises to the upside, reassuring investors that there are still areas of growth in the Eurozone, the currency pair could extend its gains. If however the data surprises to the upside, it would add to the anxiety in the market and possibly turn today’s gains into losses. As for Cyprus, the Troika has rejected a second proposal that involve raiding a pension fund, selling one of their bad banks or consolidating their good and bad banks and sell the good one to Russia. Apparently Plan C is in the works along with continued negotiations with Russia. Cypriot banks will be closed until Tuesday as negotiations continue which means at the earliest, we’ll get a deal over the weekend but most likely sometime next week if not later. Discussions and the necessary approvals won’t come easy because Russia is playing hardball and both the Parliament and the Troika needs to say yes to any deal before it can proceed. In the end we expect a deposit levy to be included in the final deal in one form or another.
GBP: Retail Sales Report Could Drive Further Gains
To everyone’s surprise, the Bank of England did not grow more dovish in the face of weakening economic data. Instead, they expressed concerns about unwanted depreciation of their currency and the impact that it could have on inflationary pressures. This discussion could very well shift the outlook for the British pound whose recent sell-off was caused largely by expectations for easier monetary policy. If Thursday’s retail sales report finally shows some life in consumer demand, we could see further gains in the GBP/USD and there is a very good chance that the data will surprise to the upside because of higher shop prices and increased activity reported by the British Retail Consortium. As our colleague Boris Schlossberg pointed out “although the UK economy remains in near recessionary conditions, the monetary authorities are clearly concerned that further QE could trigger inflationary pressures and with core CPI still above the key 2% level those concerns are justified. Thus despite the need for stimulus it is likely that the BOE may refrain from further QE actions in the near future as it continues to watch price levels and the exchange rate of the pound which has tumbled more than 10% since the start of the year.” If retail sales falls again, then the GBP/USD could reverse its gains quickly as the risk of a triple dip recession will lead investors to wonder if the BoE’s focus on inflation versus growth is misplaced.
NZD: Stronger GDP Growth Expected
The Canadian, New Zealand and Australian dollars traded higher against the greenback today despite unimpressive economic data. House prices in Canada continued to decline while New Zealand’s current account to GDP ratio increased in the fourth quarter. While the deficit itself narrowed to -3.255B from -4.385B, as a percentage of GDP it deteriorated. Australian leading indicators held steady at a monthly growth rate of 0.3%. These economic reports are important but not nearly as market moving as the data expected over the next 24 hours. We start the evening with New Zealand’s Q4 GDP numbers. Growth is expected to have accelerated as trade activity and retail sales increased in the last 3 months of the year. HSBC’s flash manufacturing PMI numbers for China are also scheduled for release this evening and will undoubtedly affect the AUD/USD. Chinese manufacturing activity is expected to improve and if economists are right, it could compound the rally in the currency. Finally, Canadian retail sales numbers are also on the docket and after falling 2.1% at the end of the year, consumer spending is expected to have rebounded in January. Overall good numbers are expected from the commodity producing countries over the next 24 hours and if these calls are right, the data will not only benefit local currencies but also equities.
JPY: Watch for Urgency from BoJ
The new members of the Bank of Japan are scheduled to deliver their first press conference this evening. Unfortunately we don’t have a specific time for the briefing which means Yen traders will just need to keep an eye on the headlines. We are looking for the possibility of dovish comments from the new members of the BoJ, which could be just the catalyst that the Yen needs for a fresh push lower. We will be gaging their sense of urgency to see whether asset purchases will be increased in early or late April. Based upon the recent rally in the Nikkei and the sell-off in the Yen, we believe the BoJ has the luxury of time and can wait until the end of next month before increasing stimulus. However, their goal could be to impress and therefore an earlier change in monetary policy is still on the table. Tonight’s trade numbers could play a role in their decision. The trade deficit is expected to improve significantly and if this improvement is caused by a sharp increase in exports, it could buy the BoJ time. Now that USD/JPY is trading above 95, the next key level is its 3 year high of 96.70.
