Daily FX Market Roundup 07-30-12

Euro Traders Hang Tight Ahead of Fed, ECB Meetings
USD: Relatively Muted Data Expected for Tuesday
GBP: Hit by Weaker Data
CAD: GDP Numbers on Tap
AUD: Benefitting from Reserve Diversification
NZD: Rebounds in June
JPY: More Easing on the Way?

Euro Traders Hang Tight Ahead of Fed, ECB Meetings

It has been a quiet start to a busy week. If you spent more time watching the Olympic games today than the market, you wouldn’t have missed a beat. The U.S. dollar and the Japanese Yen traded slightly higher against all of the major currencies and while the EUR/USD failed to extend last week’s gains, its losses today were small compared to the recent recovery. Spanish bond yields continued to fall while European equities traded higher which should have been good news for the euro and risk appetite. Unfortunately investors did not grow more optimistic over the weekend as they question the resolve European policymakers. According to Alistar Wilson of rating agency Moody’s who commented on what ECB President Draghi said last week, all the European Central Bank can do is buy more time. While Wilson believes that the ECB is committed to help policymakers put an end to Europe’s sovereign debt crisis, their actions alone cannot resolve the crisis. “Resolution will ultimately rest on achievement of fundamental changes to member states’ budgetary positions and debt stocks, on structural economic changes required to stimulate growth and on institutional reform to the economic and fiscal governance of the euro area. Each change will take years to accomplish and support from the ECB will be essential to the preservation of the euro in the meantime.” However Wilson shares our belief that the timing of comments from the ECB and European policymakers is important. With the July EU Leaders Summit failing to stabilize the market, there is an increased level of concern and urgency for action. Investors will be looking for greater activism at Thursday’s ECB monetary policy announcement and the fate of the euro will depend on whether the central bank under or over delivers.

Eurozone consumer confidence numbers were released this morning and it shouldn’t be a surprise that sentiment deteriorated in the month of July. With Spanish and Italian bond yields skyrocketing this month, we have seen consumer, investor and business confidence weaken. In all likelihood, this will also translate into softer German and French consumer spending. Retail sales figures are scheduled for release from both countries on Tuesday along with Germany’s unemployment report. No major changes are expected in the labor market of Europe’s largest economy but according to the Retail PMI report released by Markit Economics this morning, slow job growth has pushed Retail PMI to a 3 month low. There’s enough economic data on the calendar tomorrow to increase the volatility in the euro but the real action should begin on Wednesday with the FOMC rate decision.

USD: Relatively Muted Data Expected for Tuesday

The U.S. dollar traded lower against every major currency except for the Japanese Yen. The Dallas Fed manufacturing index was the only piece of U.S. data on the calendar and unfortunately this reported painted an ugly picture of the U.S. economy. The index printed negative for the third time in four months in July as manufacturing activity fell to a 10 month low. We are beginning to see a divergence in the manufacturing sector across the nation. Earlier this month, the NY and Philadelphia regions reported stronger manufacturing conditions while Dallas and Richmond saw a pullback in activity. The national ISM index is scheduled for release this week and tomorrow’s Chicago PMI report could be the tie-breaker for investors trying to figure out how the sector as a whole behaved last month. Aside from the Chicago PMI report, personal income, spending the PCE deflator, S&P CaseShiller Home Price Index and Consumer Confidence are also scheduled for release. Overall we are looking for relatively muted U.S. data that should have only a nominal impact on the U.S. dollar. Barring any unforeseen comments from European policymakers or any surprising volatility in European assets, we don’t expect any major moves in the greenback until the FOMC announcement on Wednesday. At this point, it is safe to assume that the Fed will keep monetary policy unchanged. How the U.S. dollar responds will depend on whether the Fed drops any hints about future monetary policy. Meanwhile Treasury Secretary Geithner met with German Finance Minister Schaeuble this morning. A joint statement was released promising greater international cooperation and coordination which is nice on paper but with no major deliverables announced, the meeting was all talk and no action.

GBP: Hit by Weaker Data

While the British pound resumed its rise against the euro, it sold off against the U.S. dollar and Japanese Yen. Unfortunately the latest U.K. economic reports showed continued weakness in Britain’s economy. According to Hometrack, House prices fell 0.1 percent in July and net lending on dwellings dropped by -0.4B in June. Consumer credit growth also slowed while mortgage approvals dropped form 50.5K to 44.2K, its lowest level in 18 months. Recessionary conditions and strains in the financial sector have prevented the housing market from enjoying a stronger recovery. Retail sales also pulled back significantly according to the Confederation of British Industry’s latest report. Their retail sales index which tends to have a strong correlation with the government’s official reading fell to 11 from 42 in June. The sharp rise in spending following the Queen’s Diamond Jubilee appears to have abated but with the Olympics happening in London right now, we expect a rebound in the last few weeks of July and the first few weeks of August. Consumer confidence is scheduled for release this evening and no major changes are expected.

CAD: GDP Numbers on Tap

The Canadian and New Zealand dollars weakened against the greenback while the Australian dollar strengthened. It has been a quiet day for the commodity currencies as only New Zealand building permits and Australian new home sales were released. Neither of these reports are big market movers. The main reason why the Australian dollar is outperforming is because there’s a lot of talk that central banks are diversifying out of euros into Australian dollars. The AUD’s performance today in light on no data supports the thesis that this behavior is continuing. In Australia, new home sales increased for the third time in a row as interest rate cuts helped encourage apartment purchases. New home sales rose by 2.8% up from 0.7% the previous month. Recent interest rate cuts have proved to be very supportive for Australia’s housing market. Due for release tonight will be Australian building approvals and private sector credit along with New Zealand’s NBNZ business confidence. In the morning Canada will release its GDP, raw material and industrial product price reports. The loonie hit its weakest level against the Aussie in almost 5 months as expectations for North American recovery dims. Canadian GDP is forecasted to grow by 0.2%, which is meager. The Bank of Canada has been surprisingly hawkish and unfortunately incoming economic data hasn’t supported their stance.

JPY: More Easing on the Way?

The Japanese Yen strengthened against all major counterparts except for the Australian dollar, which remained flat. Over the weekend Japan’s industrial production activity declined unexpectedly in June. It was forecasted to increase by 1.5% but decreased by 0.1%. The unexpected drop came from fears about the situation in the Eurozone and the appreciation of the Yen, which has deterred demand for Japanese exports. Japan’s industry is facing many challenges since the shutdown of nuclear reactors last year but two reactors have recently been restarted. Europe who is a major consumer of Japan’s products remains to be the policy makers’ top concern with officials reiterating that the Eurozone crisis is one of the biggest threats to Japan’s recovery. With the recent drop in consumer prices and pullback in manufacturing activity, there’s a small but realistic possibility for more easing in August. BOJ Deputy Hirohide Yamaguchi stated in his speech and press conference last week that officials won’t refrain from easing. Two new members, Takehiro Sato and Takahide Kiuchi, were appointed to the BOJ policy board last week and voiced dovish support for more aggressive monetary easing. The data that is due for release tonight include the unemployment numbers, labor cash earnings, overall household spending and housing starts.