Daily FX Market Roundup 08-29-12

Dollar Up But Not On Beige Book
EUR: Traded Heavily Throughout the EZ and US Sessions
GBP: New Government Proposals to Pull Country Out of Recession
AUD: Hit by Regional Growth Concerns
NZD: Still Feeling the Blow from Fonterra
CAD: Mixed Inflation Reports
JPY: More Comments on Yen Strength

Dollar Up But Not On Beige Book

The U.S. dollar ended the North American trading session higher against all of the major currencies with the exception of the British pound. While it may be tempting to credit the strength of the greenback to the Beige Book report, most of the dollar’s gains were racked up well before the release on the heels of stronger U.S. data. The Beige Book was actually a big disappointment because it did not provide any fresh insight into the current state of the U.S. economy. According to the report, some Fed districts expanded at a modest or moderate pace while others experienced slower growth. This lack of consistency inside the U.S. economy is why setting monetary policy has become such a challenge for the Federal Reserve. Most Fed districts reported stronger retail sales along with steady or slightly better employment conditions but unfortunately manufacturing activity weakened in half of the Fed districts. Having eased monetary policy tremendously through the years, the Federal Reserve is running low on options. With retail sales improving and employment conditions stabilizing, is the economy really performing poorly enough to warrant further changes in monetary policy? That is the question investors still want answers to and with no clarity provided by the Beige Book, all eyes are now on Bernanke’s Jackson Hole speech. We can hope for the best but we still believe the Fed Chairman will end up letting the market down. The Federal Reserve has no reason to rush into any decisions before their latest economic forecasts are completed and the next non-farm payrolls report is released. Committing to monetary policy changes this week only to change their minds later would end being even more problematic.

According to this morning’s economic reports, the U.S. economy grew 1.7% percent in the second quarter. This upward revision was in line with expectations and caused primarily by an increase in personal consumption. Pending home sales also rebounded, rising 2.4% in July after falling 1.4% the previous month. The data was good considering that the market was only looking for a 1.0% rise. Recent housing market reports including data on sales of existing and new homes have been consistent with stabilization and gradual recovery. The rally in equities and low level of interest rates have given investors confidence to dip their toes back into the market. The Beige Book report confirms that the outlook for housing is generally positive across the Fed districts with continued growth expected. Personal income, personal spending and the weekly jobless claims report are scheduled for release on Thursday. Spending is expected to tick higher due to stronger retail sales but weaker average wage growth could weigh on personal incomes.

EUR: Traded Heavily Throughout the EZ and US Sessions

The euro traded lower against the U.S. dollar throughout the European and North American trading sessions. Stronger than expected consumer price growth in the month of August failed to lend support to the single currency. For the euro, the most important question is what the European Central Bank is up to. ECB President Draghi penned an op-ed piece in the German paper, Die Zelt that supposedly echoed the comments he planned to make at Jackson Hole. In the article he reiterated the ECB’s pledge to do what is necessary to maintain price stability. More importantly, he added that single monetary policy may at times require exceptional measures and strong decisions need to be made to manage the euro. These comments confirm our belief that the ECB is up to something big. Speculation is all that we will mostly have before the September 6th monetary policy meeting. German employment numbers are due for release on Thursday. The service sector has reported job growth but the manufacturing sector continues to see job losses. The EUR/USD’s ability to break above 1.26 will hinge upon the resolve of the Federal Reserve and the ECB. Meanwhile stronger than expected economic data from Switzerland failed to put a mark on the Swiss Franc. The country’s KOF Leading Indicator rose to 1.57 from 1.41 in the month of August. This was the seventh consecutive monthly increase and the strongest reading in a year. According to our colleague Boris Schlossberg, “The positive economic news today validates the interventionist policies of the SNB. It has been nearly a year since the Swiss National Bank intervened in the currency markets setting a floor in the EUR/CHF exchange rate at 1.2000 and during that time the export driven Swiss economy has continued to perform well as exchange rate volatility disappeared”

GBP: New Government Proposals to Pull Country Out of Recession

The British Pound strengthened against all of the major currencies. It has been another quiet day in the UK due to the lack of economic data. That will hopefully change tomorrow with the release of net consumer credit, net lending securities on dwellings, mortgage approvals and money supply. Mortgage approvals are forecasted to increase by 47K and may be the positive news that sterling needs to extend its gains. The U.K. government continues to consider new measures to reduce the deficit and pull the country out of recession. According to the U.K. Guardian, Deputy Prime Minister Nick Clegg said the country’s rich could be asked to pay higher taxes for a limited period of time as a way to tackle the country’s economic downturn. The Financial Times reports that the U.K. government could also force young unemployment Londoners (aged 18-24) to do 3 months of unpaid full time work experience or be disqualified from receiving their weekly job-seeker’s allowance. While we don’t know if any of these measures will come to fruition, innovation is exactly what the world needs right now.

AUD: Hit by Regional Growth Concerns

The Australian, New Zealand and Canadian dollars weakened against the greenback. News out of BHP Billiton caused concerned that the Australian economy is slowing after its decision to delay approval of a $52 billion project last week. There are different opinions on whether the commodity booms is halting. Resource Minister Martin Ferguson said on August 23rd, “The boom in commodity is over – no one can deny it.” RBA Governor Glenn Stevens said the next day, “The peak of the resource investment boom as a share of gross domestic product, the highest such peak in at least a century, will occur within the next year or two.” A government report today showed that construction work declined 0.2% in the second quarter and was forecasted to gain 0.5%. Regardless of what happens, RBA policy makers have signaled confidence that they have tools necessary to support to the economy. Canada reported mixed inflationary numbers with industrial product prices falling for the third consecutive month and raw material prices increases. No economic data was released from New Zealand, but the currency continues to feel the burden on lower forecasts for payments to farmer suppliers from Fonterra, the country’s largest company. NBNZ activity outlook and business confidence in New Zealand are due for release this evening along with private capital expenditure in Australia. Canada will release its current account figures for the second quarter on Thursday.

JPY: More Comments on Yen Strength

The Japanese Yen weakened against the U.S. dollar and British pound and held steady against the euro. Japan’s vice finance minister for international affairs, Takehiko Nakao, said in a speech today that the yen’s appreciation since the collapse of Lehman Brothers almost four years ago is hampering the economy. He said, “Our idea about the exchange rate is that yen is regarded as a safe haven currency today but the Japanese economic condition is not so robust.” He says the yen’s appreciation against the dollar has been excessive. With sluggish growth weighing on exports and the euro zone crisis, Nakao hopes ECB President Mario Draghi will stick by his promise to do whatever is necessary to protect the euro. According to the finance ministry, Japan has not intervened in the market since November. Nakao said Japan would take “very decisive action” in the market if necessary. Retail trade is due for release tonight and is expected to decline by 0.5%.