Daily FX Market Roundup 11-20-12

EUR: Nope, Nothing Yet for Greece
USD: Bernanke Reiterates Willingness to Ease
GBP: All Eyes on BoE Minutes
AUD: December Rate Cut Back in Play
CAD: Oil Prices Tumble 2%
NZD: Day’s Biggest Loser, Credit Card Spending on Tap
JPY: BoJ Fights Back

EUR: Nope, Nothing Yet for Greece

As of the end of the North American trading session (marked by the close of the U.S. stock market), there has yet to be an announcement or deal for Greece. Euro area Finance Ministers are still hard at work negotiating various options but the fact that a deal has not been reached after 5 hours of intensive meetings shows just how difficult the discussions are. The backs of euro area finance ministers are against the wall – they don’t want to rush a decision on Greece but they are also know that they are running out of time. Investors have no choice but to sit and wait. Aside from the disbursement of the next aid payment, Finance Ministers are also discussing debt restructuring, a possible moratorium on interest rate payments on EFSF loans, which would save Greece EUR 44 billion and reducing interest rates on bilateral loans. According to the Wall Street Journal, the IMF wants Greece to be financed until 2016 and the Eurogroup only wants financing to 2014. By the end of the meeting, we still expect Greece to receive the next aid payment and this announcement could be enough to drive the EUR/USD higher. If they are able to agree on a soft restructuring of debt that includes an interest rate holiday and/or a maturity extension, it would be even more positive for the euro. However, in the off chance that the meeting ends with no announcement, the EUR/USD could suffer as investors express their disappointment by selling the currency. At the end of the U.S. trading session, Eurogroup Finance Ministers took a break to discuss their options and probably have dinner since 3pm NY is 9pm in Brussels. Euro traders should be on their toes this evening because an announcement or decision could come at anytime.

USD: Bernanke Reiterates Willingness to Ease

Despite Fed Chairman Ben Bernanke’s reminder that the U.S. central bank stands ready and willing to ease monetary policy further, the dollar ended the day unchanged against the euro, British pound and Swiss Franc. While the greenback appreciated against the Japanese Yen and commodity currencies, this strength had more to do with concern about other countries than optimism about the greenback. Bernanke talked about the substantial threat of the fiscal cliff, the substantial slack in the U.S. labor markets and the need for the Fed to ensure that the recovery is secure before raising interest rates. During the Q&A session, he said forward guidance is very important and the Fed is looking “very carefully” at a number threshold and said the Fed does not rule out the possibility of cutting interest rates on excess reserves to zero but warned that it is wrong to think that excess reserves is a major policy tool. When the Fed last met, they discussed the possibility of increasing asset purchases once Operation Twist expires at the end of this year. Today’s comments from Bernanke confirm that the central bank is still leaning towards the possibility of more stimulus even though Fed President Lacker opposed linking monetary policy to numerical targets such as the unemployment rate. According to the latest housing market reports, homebuilders broke ground on new projects for the third month in a row with starts rising 3.6% to a 4 year high in October. What’s particularly encouraging about this increase is that it follows a very strong month for both housing starts and building permits. Unfortunately permits still fell 2.7%, which is not terrible considering that they increased 11.1% the previous month. As we have noted in recent reports, while low interest rates and stronger consumer confidence provided underlying support to the housing market, a full blown recovery in housing is not expected until the recovery in the economy gains momentum. Bernanke seems to agree as he said the barriers to housing recovery are many and diverse. The biggest problem is that banks are unwilling to lend despite the Fed’s efforts at encouraging mortgage lending. Jobless claims, leading indicators and the final University of Michigan consumer confidence index will be released on Wednesday. Of these reports, the most important will be jobless claims as we watch to see if claims fall back below 400k.

GBP: All Eyes on BoE Minutes

The British pound traded slightly higher against the U.S. dollar and euro ahead of the minutes from the Bank of England’s most recent monetary policy meeting. Based on the tone of the Quarterly Inflation report and economic data leading up to the last monetary policy meeting, there’s a reasonable chance that calls for more easing within the central bank grew louder this month. While the central bank noted an increase in inflation, the Quarterly Inflation report also revealed concerns that the economy will perform below its pre-financial crisis levels for the next 3 years. BoE Governor King even said it would be very hard for the economy to grow without a lower exchange rate and one way to achieve a lower currency would be through easier monetary policy. However comments from MPC officials continue to very mixed, showing a great deal of division within the central bank. Just today, BoE member Weale said that sustained above-target inflation remains a concern. He felt that it would undermine the central bank’s credibility and further stimulus would probably add to inflation. Weale’s opposition to additional stimulus stands in contrast to the comments made by MPC member Miles over the weekend. Miles felt that more stimulus may be needed and there is scope for additional Quantitative Easing depending “on how the headwinds holding back growth play out.” He said the bank’s “Funding for Lending Scheme will have some positive impact as we go into next year, but if it turns out that not enough as been done, that the economy’s going to stay in a recessionary state and that’s going to drive inflation down, there is more we can do. We have not run out of ammunition.” With one more monetary policy meeting before the end of the year, the bias of MPC officials will play a big role in setting QE expectations for the coming month.

AUD: December Rate Cut Back in Play

The Australian, New Zealand and Canadian dollars traded lower against the greenback. The Reserve Bank of Australia’s monetary policy minutes revealed a continued willingness to ease. While a gradual recovery in both dwelling and other business investment was anticipated, assisted in part by the lower level of interest rates, there was also uncertainty about the timing and magnitude of this pick-up.” The board concluded that, “further easing may be appropriate in the period ahead.” Earlier today RBA Governor Glenn Stevens said in his speech that the reason for leaving rates unchanged in the last policy meeting was so the policy makers could monitor the impact of the previous rate cuts on the economy. After a 1.5% cut from November 2011 to October 2012 the RBA left the rate unchanged at 3.25% this month. Stevens reiterated that “further easing might be required over time.” He said, “Overall, our assumption is that consumption will probably continue to grow at about trend pace, in line with income.” In response to the country’s high currency Stevens said, “The exchange rate may also have some role in helping the needed re-balancing.” The RBA has one more monetary policy meeting before the end of the year and these dovish comments from Stevens has renewed the possibility of another rate cut. Australian leading indicators are scheduled for release this evening along with New Zealand credit card spending numbers. Meanwhile, the combination of a sharp decline in wholesale sales and a 2.3% decline in oil prices drove the Canadian dollar lower.

JPY: BoJ Fights Back

While the Bank of Japan refused to buckle under the government’s pressure to ease monetary policy further, the Yen continued to slide against the U.S. dollar. USD/JPY soared to a fresh 7 year high even as the BoJ left interest rates and the size of its asset purchase program unchanged. Few economists expected the central bank to ease but many had anticipated a more pessimistic economic assessment. The tone of BoJ statement was slightly softer with the central bank now expecting the economy to remain weak for the time being before resuming a moderate recovery. Previously, the BoJ expected growth to remain flat. However, they did not change their assessment that the economy is “weakening somewhat.” BoJ Governor Shirakawa defended the BoJ’s independence and went out of his way to debunk many of the proposals suggested by LDP leader Shinzo Abe, who have called for more aggressive action from the central bank. He argues that negative interest rates could be counterproductive as banks could raise borrowing rates to cover the costs of holding reserves. He also believes that a 3% inflation target is unrealistic because even in the 1980s, when the economy was performing much better, the average inflation rate was 1.3%. Finally, Shirakawa believes that unlimited liquidity is not the right solution because the BoJ already provides a tremendous amount of liquidity. He argues that the government needs to increase the velocity of money by providing more investment opportunities. The general election will be held on December 16th, days before the next Bank of Japan monetary policy meeting. This will give the BoJ plenty of time to assess the economic impact of the September and October easing and the outcome of the election. Japanese trade data is scheduled for release this evening and hopefully the deficit will shrink as much as economists project.