Daily FX Market Roundup 07-19-12

EUR: Spain Causing Trouble Again?
USD: Another Round of Disappointing Data
GBP: Shrugs Off Retail Disappointment
CAD: Lifted by Hope for Stronger Data
AUD: Business Confidence Drops to 3 Year Low
NZD: Job Ads Decline
JPY: Weather Blamed for Weaker Spending

EUR: Spain Causing Trouble Again?

Spain is back in the headlines and causing trouble once again for the euro. Spanish 10 year bond yields settled at 6.93 percent, just a hair shy of the 7% danger zone. While Spain is gearing up to sign a memorandum of understanding for their bank bailout with Eurozone Finance Ministers on Friday, investors are nervous about the country’s ability to reduce its deficit and control its finances with yields on the rise. Spain had a terribly difficult time attracting investors for their latest bond auction, which reflects the market’s general concern that the bank bailout won’t mean the end of Spain’s troubles. The euro received a boost after the German Parliament finally approved the rescue package for Spanish banks. The bailout would not have been able to proceed without the monetary support from Germany. As the leader of the opposition party said, they supported the measure only “because a refusal by Germany would be catastrophic.” However the Germans made it clear that they refuse to let the money go directly to Spanish banks, bypassing the sovereign until the European Central Bank takes control of banking regulation in the region.

Eurozone Finance Ministers will be holding a videoconference on Friday to discuss the final terms of the bank bailout for Spain and sign a memorandum of understanding. A draft has already been released but it is unclear which terms will stay and which will go. We will be looking for any details on debt subordination, the EFSF’s role, the use of funds and the allocation to banks. If senior bondholders are subject to losses, it should not be good for the euro. It is important to continue to keep an eye on Spanish bond yields. At 7% or greater, servicing debt becomes prohibitively expensive for Spain. When yields broke above this critical mark in June, it pulled back quickly but if 10 year Spanish bond yields rise above 7% again and stay there for an extended period of time, the risk of a sovereign bailout increases significantly. Spanish-German bund 10-year bond spread hit a record high, which tells us that investors are looking at the euro through two different lenses – euronorth and eurosouth. The North is safe to invest in, the south is not. German producer prices are scheduled for release on Friday.

USD: Another Round of Disappointing Data

Weaker U.S. economic data drove the dollar lower against all of the major currencies today with the exception of the euro and Swiss Franc. This morning’s economic reports were ugly. Jobless claims increased by 386k, up from 352k for the week of July 14th. While claims were distorted by the annual auto plant retooling period, nothing distorted the Philly Fed survey, existing home sales and leading indicator reports, all of which surprised to the downside. The Philly Fed Survey rose to -12.9 from -16.6 but the improvement was significantly smaller than the market’s -9.0 forecast. Existing home sales also fell 5.4 percent last month against expectations for a 1.5% rise. The absolute level of existing home sales reached its lowest level since October but there was one element of good news – the average price of a home sold increased for the fifth consecutive month. Leading indicators on the other hand dropped 0.3 percent, which was the steepest decline since September 2011. For the Federal Reserve, the latest economic reports harden the case for QE3 but once again, the data is still not weak enough to force the Fed’s hand. With no U.S. economic data on the calendar tomorrow, all eyes will be on Europe, leaving the dollar to trade as a safe haven currency.

GBP: Shrugs Off Retail Disappointment

Unlike the euro and Swiss Franc, the British pound traded higher against the greenback despite weak consumer spending numbers. Retail sales grew a mere 0.1 percent in June and excluding the decline in fuel costs, prices rose only 0.3 percent. With a heavy economic calendar, this has been a busy week for sterling. The main takeaway from this week’s developments is that the economic conditions still favor easier monetary policy and based on the minutes from the most recent central bank meeting policymakers are on board. As for the retail sales figure, our colleague Boris Schlossberg covered it thoroughly. He said “UK Retail Sales missed their mark printing at 0.1% versus 0.6% eyed as weather related factors depressed demand in the month of June. Retail sales ex auto fuel were up 0.3% on the month and by 2.2% on the year. Food Sales in particular were hit the hardest with decline of 0.7% as the wettest June since 1910 kept many shoppers away from the stores. Without a fall in food sales the overall sales number would have risen significantly as non-food sales rose 1.2% on the month, with all categories posting increases on the month.” Public sector finances are scheduled for release tomorrow.

CAD: Lifted by Hope for Stronger Data

The Canadian, Australian and New Zealand dollars ended the day higher against the greenback thanks to the rise in commodity prices and increase in equities. Canadian wholesale sales rose 0.9 percent in May, which is a decline from the previous month but significantly stronger than forecast. This is a secondary piece of data but we watch it closely because it tends to have a strong correlation with the more important retail sales report. Canadian consumer prices are due for release tomorrow and despite the sharp pullback in manufacturing activity, the price component of IVEY PMI increased materially last month which tells us that inflationary pressures could have surprised to the upside. The Australian and New Zealand dollars on the other hand shrugged off weaker economic reports. In New Zealand, job ads fell 1.4 percent in June and in Australia, business confidence fell to a 3 year low. Import and export prices are expected from Australia this evening along with New Zealand credit card spending numbers.

JPY: Weather Blamed for Weaker Spending

It was a mixed day for the Japanese Yen, which extended higher against the euro, Swiss Franc, U.S. and Canadian dollars but weakened against the British pound Australian and New Zealand dollars. Japanese economic data was disappointing which is not a major surprise considering that the strong Yen and weak global demand is dealing a double blow to Japan’s economy. The country’s all industry activity index dropped 0.3 percent in May while nationwide department store sales fell 1.2 percent. Demand in Tokyo fared slightly better, but were still down 0.1 percent. Like in the U.K., poor weather conditions – including heavy rain, low temperatures and a typhoon – were blamed for the weakness but it is no secret that spending in Japan has been weak for some time. Industrial output is declining and the strong Yen doesn’t make the outlook for exports any better. It is for these reasons that the Bank of Japan remains in easing mode. Convenience store sales and the weekly stats of domestic / foreign purchases of stocks and bonds are due for release this evening.