Daily FX Market Roundup 03-01-13

**No articles for next 2 weeks – off to Australia. Back on March 18th

EUR Breaks 1.30 as Systemic Risk Return
GBP: Could Weak PMI Prompt More QE from BoE?
Dollar Rallies as Sequester Kicks In
CAD: Growth Slows Ahead of Bank of Canada Meeting
AUD: RBA to Leave Rates Unchanged Next Week but watch Comments
NZD: To Take its Cue from AUD Next Week
USD/JPY Quietly Edges Higher

EUR Breaks 1.30 as Systemic Risk Return

The first day of trading in March has kicked off with a bang as many currency pairs broke key support and resistance levels. For the first time in December, the EUR/USD is poised for a close below 1.30. The GBP/USD also tested the 1.50 level and USD/CHF hit 3 month highs. Eurozone economic data was actually quite good with German retail sales jumping 3.1% in the month of January and Eurozone manufacturing PMI revised up slightly to 47.9 from 47.8. Unfortunately economic data matters little when systemic risk has returned. Later in the morning, we also learned that the unemployment rate in the region increased to 11.9% from 11.8%. More importantly though the ECB’s report that European banks made only EUR12.5 billion in LTRO payments today compared to EUR67 billion last week triggered the sell-off in EUR/USD. Lower LTRO repayments are negative for the euro because it reflects concerns about liquidity needs in banks. In Italy, Bersani confirmed that he is ruling out a grand coalition with the centre right party, adding pressure to the euro. Yet despite the decline in the currency, Italian bond yields remain below 5% and far from dangerous levels.

The European Central Bank meets next week and some economists are looking for easier monetary policy. Unlike last month, the central bank’s comfort with the level of the euro is not question. Since the last meeting in February, the EUR/USD has dropped more than 4% in value from 1.3575 to a low of 1.2967. A weaker currency provides support for the region’s economy, limiting the need for additional stimulus. However there are some economists looking for the central bank to cut interest rates by 25bp and/or offer new LTROs which would compound the losses in the euro. It’s a tough call because German economic data continues to surprise to the upside. Aside from the rate decision, comments from President Draghi could also trigger volatility in the currency so next week’s meeting will be especially important for the euro. We think the central bank will keep monetary policy unchanged but there’s certainly a number of other analysts calling for a move and when there is such a big divergence, one thing is certain and it is volatility.

GBP: Could Weak PMI Prompt More QE from BoE?

Of all the major currencies, the biggest mover today was the British pound. Having held near its 2.5 year lows for most of the week, the straw that broke the camel’s back was the PMI report. To the market’s surprise, manufacturing conditions contracted in the month of February, raising concerns for a triple dip recession. Economists had anticipated an improvement but “tough conditions both at home and abroad” weighed on demand according to Markit. New orders, new export orders and output declined, which is discouraging for the U.K.’s outlook. Labor market conditions also deteriorated as staffing levels fell at the quickest pace in 40 months. From all angles, this was a terrible report that should convince more monetary policy committee members to side with BoE Governor King, Fisher and Miles in calling for more Quantitative Easing. The Bank of England meets next week and it could be a close call for the central bank. Even if the BoE does not pull the trigger on additional easing in March, the minutes will most likely reveal a more dovish bent, which could compound the losses in the GBP but please remember that the minutes will not be released until 2 weeks after the BoE meeting. While the GBP/USD fell to a new low of 1.4986 today, it is still holding above 1.50 at the time of publication. This is the key support level for the currency pair but we believe it will only be a matter of time before the GBP breaks it in a meaningful manner.

Dollar Rallies as Sequester Kicks In

The U.S. dollar traded higher against all of the major currencies today as weaker economic at home and abroad weighed on investor sentiment. Manufacturing activity accelerated and consumer confidence was revised higher in the month of February but the sharp declines in construction and personal incomes raised concerns about what lies ahead for U.S. growth. Incomes dropped 3.6% in January, the largest decline in 20 years. Personal spending rose 0.2%, but last month’s report was revised down to 0.1% and the PCE deflator held steady in the month of January. The data shows that the decline in incomes have left Americans more frugal with their spending, which doesn’t bode well for retail sales. The most important reports next week will be the Beige Book report and Non-Farm Payrolls but we are not looking for any major surprises that would alter the current stance of the central bank. Meanwhile the sequester officially kicked in at the end of the day today and it did not stop investors from continuing to buy U.S. dollars because they are not overly concerned about the consequences. We’ve been down this road before with the debt ceiling and survived. The numbers this time around aren’t enormous – only $50B worth of cuts are expected this year and not all of it will kick in at one time. Government agencies are mandated to give their workers at least 30 days notice and this means Federal agencies will let their workers know Monday March 4th at the earliest and the cuts won’t take place until April 4th. This means that effectively the Obama Administration has another 30 days to come up with a deal to cancel and avoid the cuts. The more important deadline is March 27th, when the government runs out of money and will be forced to shutdown if no additional measures are taken. Of course, Republicans and Democrats want to avoid a government shutdown and House Republicans will be voting on a measure that would finance the government until the end of the year. Investors are clearly holding out hope that a last minute deal before the March 27th deadline will occur.

CAD: Growth Slows Ahead of Bank of Canada Meeting

The Canadian dollar edged higher against the U.S. dollar today while the Australian and New Zealand dollars traded slightly lower. Canada’s GDP reports were right in line with expectations, which was good enough for the Canadian dollar. GDP growth slowed slightly in the fourth quarter from 0.7% to 0.6% while growth in December contracted by 0.2%. The pullback could have been much worse considering the sharp decline in retail sales at the end of the year and the fact that it wasn’t lent support to the loonie. The Bank of Canada meets next week and subpar growth should prompt Carney to remind us that a rate hike is “less imminent.” IVEY PMI and Employment numbers are also on the calendar. The Australian dollar on the other remained under pressure throughout the North American trading session after China reported slower manufacturing activity in the month of February. With the PMI index at 50.1, the sector barely expanded. The RBA also meets next week and while it is widely believed that they will leave monetary policy unchanged, weaker Chinese data could prompt dovish comments from the central bank. The AUD/USD continues to hold above the pivotal 1.0148 level and next week’s retail sales, RBA meeting and GDP reports will determine whether the currency pair remains above that level. It will be a quiet week for New Zealand however, which means the NZD will take its cue from the AUD.

USD/JPY Quietly Edges Higher

For the fourth consecutive trading day, USD/JPY quietly edged higher. This week Prime Minister Abe nominated Haruhiko Kuroda as Bank of Japan Governor. The next step is for the Upper and Lower Houses to hold hearings on the latest nominations next week and then votes will be held the week of March 11th. Asia’s Development Bank is already planning for Kuroda’s departure and said he will step down on March 18th. It is widely believed that Kuroda will have the support of both the Upper and Lower houses, paving the wave for a smooth change of power. While the BoJ is not expected to change monetary policy next week, the price action of USD/JPY suggests that investors are slowly pricing in more aggressive easing by the central bank in March. We have been all over this story since USD/JPY dropped to 91. The fundamentals have not changed and the previous decline represented an attractive opportunity to buy the currency pair at lower levels. At this point, we believe that USD/JPY is poised for test of its 2.5 year high of 94.75 but a break above 95 will require dovish comments from Kuroda. While the BoJ is committed to additional easing this year, there are signs of improvements in Japan’s economy. Last night’s economic reports showed household spending jumping by 2.4% in January and the jobless rate dropping from 4.3% to 4.2%. Unfortunately capital spending continued to fall rapidly in the fourth quarter and inflationary pressures remain muted.