Daily FX Market Roundup 03-27-13

EUR/USD Next Stop 1.29 or 1.26?
USD: Air of Optimism from Fed Presidents
GBP: Potential for Additional Small Losses
CAD: Strongest CPI Growth Since 1982
AUD: RBA Expects A$ to Remain High, Consequences
NZD: Snaps 5 Day Winning Streak
JPY – Impact of Higher Commodity Prices on Japan

EUR/USD Next Stop 1.29 or 1.26?

After a brief pause on Tuesday, the euro extended its losses, dropping to a fresh one month low against the U.S. dollar. Taking a look at the daily chart, there’s no question that this breakdown in the EUR/USD is significant and paves the way further losses. However it is rarely that simple. Most of the sell-of happened during the first half of the European trading session and since then the currency pair has treaded water, leaving traders to wonder if there is enough momentum for a further push lower. On a technical basis, there is little reason to question the sell-off in the EUR/USD but on a fundamental basis, the key to the currency pair’s next direction lies in the hands of Germany and Cyprus.

Today’s sell-off in the euro was triggered by the decline in Eurozone confidence. Concerns about the fallout from the Italian elections and the problems in Italy caused the region’s overall economic confidence index to drop from 91.1 to 90.0 in the month of March. This decline should not be a huge surprise to our readers as we had warned about it on Tuesday. Looking ahead, the next test will be tomorrow’s Germany retail sales and unemployment numbers. Economists are looking for a sizeable pullback in German retail sales after a nice rise the prior month but labor market conditions are expected to improve as the PMI reports showing the strongest pace of job growth since January 2012. If everyone is right and Thursday’s economic reports show improvement in the German economy, the EUR/USD could rebound and aim for a retest of 1.29. However if the data turns out to be weak, then it could be just the catalyst that the EUR/USD needs for a move down to 1.26. Without a catalyst, it may be difficult for the currency pair to extend to that level.

Meanwhile banks reopen in Cyprus with a withdrawal limit of 300 euros. Capital controls have also been announced and they will include limits on credit card transactions to 5000 euros per month and maximum withdrawal out of the country per trip of 3000 euros. Based on the big moves in German bonds, it is clear that investors in Europe are turning to the bonds of the strongest Eurozone economy for safety. Ten year German bund yields are trading at its lowest level since August. If German economic data continues to weaken, investors may start to wonder if putting their money in German bonds is the best idea.

USD: Air of Optimism from Fed Presidents

U.S. stocks just don’t want to fall. After trading down more than 100 points at the open, the Dow Jones Industrial Average closed down only 35 points or 0.25% while the S&P 500 dropped a mere 0.09%. The resilience of U.S. equities helped to limit the slide in currencies but the dollar and the yen still ended the day higher against all major currencies. While Cyprus is gearing up to reopen its banks, investors remain worried about the Eurozone as a whole and have turned to the dollar and yen for safety. Fed Presidents, even the doves appear to be relatively optimistic about the outlook for the U.S. economy. Kocherlakota said he was pleased with the stronger labor market improvement and sees an ongoing modest U.S. recovery while Rosengren who is typically one of the more dovish members of the FOMC felt that monetary accommodation could be reduced. Even Evans sees a pretty good outlook for the U.S. economy but he warned that the central bank could still increase QE if job growth falters. What he wants to see is 6 months of job growth in excess of 200k, a metric that we believe Bernanke shares as well – so as FX traders, that’s what we’ll have to look for before anticipating any withdrawal of QE. The only economic report released this morning was pending home sales, which fell 0.4% in the month of February after rising a downwardly revised 3.8% the previous month. While January was a very good month for the U.S. housing market, existing, new and pending home sales all gave back some gains in February. Revisions to Q4 GDP are scheduled for release tomorrow along with weekly jobless claims and the Chicago PMI report. GDP is actually expected to be revised higher, which would be good news for the dollar.

GBP: Potential for Additional Small Losses

The British pound rebounded against the euro but continued to trade lower against the U.S. dollar on the back of weak economic data. The excitement that we saw last week is beginning to fade but before returning to pessimism, let us remind you that today’s reports were from the fourth quarter and therefore quite stale. While the U.K.’s current account deficit narrowed in Q4, the absolute numbers for the third and fourth quarters were far worse than anticipated. Economists had expected the deficit to narrow from -12.8B to -12.5B but instead Q3 figures were revised to -15.1B with the deficit narrowing to only -14.0B in the fourth quarter. Annualized GDP growth was also revised lower to 0.2% from 0.3%. Domestic demand was less of a drag in the final numbers but higher imports pushed trade activity lower. Regardless of how you slice it, there’s no escaping the fact that the U.K. economy experienced extremely anemic growth last year. The only hope now is for a stronger recovery in the first half of 2013. Consumer confidence, Nationwide House Prices and the Index of Services are due for release tomorrow. Unless there are major surprises, we don’t expect these reports to have a significant impact on the GBP. While lower highs and lower lows point to the possibility of further weakness in the GBP/USD, we don’t expect a big sell-off.

CAD: Strongest CPI Growth Since 1982

The Canadian dollar recovered earlier losses to end the day unchanged against the greenback while the Australian and New Zealand dollars finally gave up some gains after rising for five straight days. Hotter than expected consumer prices in Canada spared the loonie from losses. CPI jumped 1.2% in the month of February, which was the strongest increase since 1982. Annualized price growth increased by the same amount while seasonally adjusted prices rose by a more modest 0.4%. For the Bank of Canada, higher inflationary pressures will encourage a steady hawkish bias. Between the recent rise in oil prices and stronger data, the CAD has risen to a 1 month high. The Australian dollar on the other hand was hit by RBA Board member Broadbent’s comment that A$ strength has been pretty painful. However he expects the currency to remain elevated and thankfully, Australian corporations have been adapting well. While her comments overall were relatively optimistic, the RBA Financial Stability report was more balanced. The twice yearly review found financial conditions improving significantly but the RBA felt that it is to early to say if the improvement in sentiment can be sustained. They also indicated that some industries were weighed down by the stronger currency and softer demand and that lower mining investment could dampen economic activity. For the AUD/USD to crack above 1.05, we needed unambiguously positive comments from the RBA and unfortunately we did not receive them. With this in mind, the AUD/USD would need to drop below 1.04 to negate the uptrend. Australian job vacancies and TD Securities Inflation report is scheduled for release this evening. As for the NZD/USD, lower business confidence and activity in the month of March stalled the rally but a rebound in building permits tonight could help restore the uptrend.

JPY – Impact of Higher Commodity Prices on Japan

The Japanese Yen traded higher against all of the major currencies today. With no economic data on the calendar, the Yen took its cue from the level of risk appetite. Prime Minister Abe gave a speech where he expressed his satisfaction with the recent weakness of the Yen. He said the recent move is a plus for the economy overall and the excessive strength is finally being corrected. The most interesting part of the speech was his comment that they are watching import prices carefully. Commodity prices are on the rise again and the weakness of the Yen exacerbates the pains. As a net importer of oil Japan’s efforts to promote growth are hampered by rising import prices. In February alone, import prices increased 13.2%. While higher import prices helps the government beat deflation, if wages are not increasing at the same pace, the higher cost of living creates a net drag on the economy. Therefore if import prices rise too quickly without an accompanying increase in wages, the Japanese government may have to slow the decline in the Yen. Retail sales are scheduled for release this evening and consumer spending is expected to increase after falling 0.2% the previous month. Bank of Japan Governor Kuroda will be speaking again this evening so watch for his comments to impact USD/JPY.