Will the FOMC Minutes Help or Hurt the U.S. dollar?
EUR: German ESM Delay is Another Blow to Euro Rescue
GBP: Fresh 3 Year High Against EUR
AUD: Drop in Business Confidence
CAD: Trade Balance on Tap
NZD: Weighed Down By Weaker Chinese Data
JPY: More Easing on the Way?

Will the FOMC Minutes Help or Hurt the U.S. dollar?

So far it has been a very quiet week in terms of U.S. data, which is a problem for currency traders because the lack of fresh U.S. economic reports makes it difficult to put a finger on the odds of QE3 in the third quarter. Last week’s non-farm payrolls report divided the market with some economists arguing that job growth wasn’t weak enough for the Fed to pull the trigger on another round of stimulus while others believed 3 months of payrolls below 100k keeps QE3 on the table. This lack of agreement means that every piece of incoming economic data will be assessed for on its impact on Fed policy. This morning’s secondary small business and economic optimism reports rarely garner attention from the Fed. According to the National Federation of Independent Businesses, small business confidence fell the most in 2 years. Although consumer confidence ticked up slightly in the month of July according to Investors Business Daily, Americans grew less optimistic about the economic outlook and their personal finances. The only reason why the index increased was because of expectations for support from federal policies.

With this in mind, tomorrow’s FOMC minutes could help shape the market’s expectations for QE3. When the Federal Reserve last met they extended Operation Twist and downgraded their GDP and inflation forecasts. Instead of downplaying the weak non-farm payrolls report like in April, Bernanke admitted this time around that the Fed was too optimistic. He made it clear that they still have ammunition and would consider further asset purchases if necessary. This means there is a good chance that tomorrow’s FOMC minutes will show a great deal of pessimism within the central bank, which would build the case for QE3 and be negative for the dollar. The only problem is that concern about the outlook for the U.S. economy and a general sense of dovishness is what the market currently expects from the Fed. Therefore if the central bank sounds even the slight bit wishy-washy about QE3, the dollar could rise against the Japanese Yen. Yet don’t expect the rally to last for long because at the end of the day, the simultaneous weakness of the U.S., Eurozone and Chinese economies will eventually force the Fed to spring into action. In other words, we don’t believe the FOMC minutes will provide much support for the greenback. Aside from the FOMC minutes the U.S. trade balance is also scheduled for release and despite a sharp deterioration in manufacturing activity, a small improvement is expected.

EUR: German ESM Delay is Another Blow to Euro Rescue

While the euro traded lower against the U.S. dollar for most of the North American trading session, the sell-off only gained momentum after the German Constitutional Court decided to delay its approval of the European Stability Mechanism, or Europe’s new bailout plan. A decision was supposed to be made by July 1st but the German court refused to stick to any timelines and without their approval the rescue of the euro will fall apart. Yet even though this is a meaningful setback for German Chancellor Merkel and for the euro, the German court still has plenty of time because the EFSF is set to remain in effect until mid 2013. As a result, it could weeks and possibly even months before the Constitutional Court makes a decision. The reason why it has been so difficult for them is because many Germans question the legality of the ESM and of course few are willing to easily part with their hard earned money. The IMF also issued a thorough report on Italy and in a nutshell, they believe that it will be a long road to recovery and despite Prime Minister Monti’s efforts further reform could be needed. They also warned of the downside risks caused by the intensification of the Eurozone debt crisis. With delays in the euro rescue, no news was good enough for the single currency including an emergency loan for Spain.
The decision by Eurozone Finance Ministers to offer Spain EUR30 billion by the end of July should have sent the EUR higher but investors were disappointed by the fact that EU Finance Ministers failed to provide enough details on decisions made at the EU Summit to satisfy investors. We are also still waiting for the German Constitutional Court to give its stamp of approval on the ESM, Europe’s new bailout fund. In terms of Spain, the mechanics behind bank recapitalization still needs to be worked out and it seems that the discussions won’t take place until September because a single banking supervisor needs established and a proposal isn’t expected until that time. The lack of details this week clearly reflects the lack of agreement. Hopefully the details on Spain’s bank bailout will be provided on July 20th, when Finance Ministers reconvene in Brussels to finalize their agreement because other wise, the EUR/USD is in big trouble.

GBP: Fresh 3 Year High Against EUR

Better than expected economic data continues to make the British pound one of Europe’s favorite safe haven currencies as sterling rose to a fresh 3 year high against the euro and 1 year high against the Swiss Franc today. The U.K. has its own problems including a LIBOR scandal but at the end of the day, the Eurozone is source of the world’s troubles and for this reason, the euro is being punished. The LIBOR scandal that has gripped citizens in London has not made U.K. assets any less attractive. The rally in the British pound was sparked by a surprise increase in industrial production and contraction in the trade deficit. Thanks to an extra working day, manufacturing production rose 1.2 percent in May while industrial production rose 1.0 percent. U.K. economists have completely downplayed the significance of the improvement in factory output and the visible trade balance, which narrowed from –GBP9.7 billion to –GBP8.4 billion. The increase in asset purchases this month suggests that the U.K. economy is headed for more weakness.

AUD: Drop in Business Confidence

The Australian, New Zealand and Canadian dollars ended the day lower against the greenback. In the face of weaker Chinese growth, business confidence in Australia is beginning to falter with the NAB business confidence index dropping from -2 to -3. The NAB said in a statement, “the RBA’s most recent 25 basis point rate cut in June appears to have provided little additional support to confidence.” In other news, Canada had a surprising turn of events as housing starts increased from 217.4k to 222.7k. Finance Minister Jim Flaherty tightened mortgage regulations for a fourth time last month on concerns that household had debts that were unaffordable when borrowing costs increase. The mortgage regulations that went into effect yesterday were implemented to prevent a housing bubble. Fears of a housing bubble took place in Canada’s largest city, Toronto, where low interest rates fueled a condominium building boom and annual price increases for existing homes. Avoiding what happened in the US in the past, tightening of mortgage regulations was called for. The length of government mortgages shortened from 30 years to 25 years. This also makes it difficult for some families to qualify for mortgages. Meanwhile the commodity currencies were also weighed down by Chinese data. Last night we learned that China’s trade surplus jumped from $18.7 to $31.73 billion in the month of June. At first glance, this looks like a major improvement for the Chinese economy but with import growth slowing to 6.3% and exports growing a mere 11.3%, the data confirms that domestic and external demand has weakened significant. Some local economists estimate that export growth could shave as much as 1.5% from Chinese GDP which would most certainly necessitate further easing from the PBoC. China’s second quarter GDP report is one of the most important event risk this week. Australia consumer confidence and home loan figures are due for release this evening followed by a trade balance report from Canada tomorrow morning.

JPY: More Easing on the Way?

The Japanese yen rallied against most of the major currencies while the Japanese stock market declined as Chinese imports missed forecasts. The Nikkei 225 fell the fourth day today raising concern of a deeper economic slowdown in Japan’s largest overseas market. Bank of Japan Governor Masaaki Shirakawa took action by announcing his plans of implementing “strong monetary easing steps, such as its near-zero interest rate policy and asset purchases in order to overcome deflation.” The BOJ has gathered 54 trillion yen ($681 billion) as of now from asset purchases but plans on expanding the program to 70 trillion yen. Former BOJ Deputy Governor Kazumasa Iwata agreed that further easing steps could be necessary in order to tackle Japan’s deteriorating job market to avoid further wage decline. With the rebellious Democratic Party of Japan is upset by Prime Minister Yoshihiko Noda’s tax consumption bill, Japan’s Ministry of Finance will make a return while collaborating with Noda to prevent an economic slowdown. They will try to prevent any further yen appreciation by implementing higher taxes with help of Noda’s consumption tax should it be passed successfully through the upper house. Japan’s consumer confidence leaves its highest level in 15 months in June as it misses economic forecasts. Increasingly more people believe that job security and income growth will decline in the next six months. The Cabinet Office downgraded its assessment that consumer confidence index is flat from its previous assessment last month that it was picking up. The BOJ will meet Thursday and if further easing goes as expected we may see consumer confidence improve next month. Data expected for tonight is tertiary industry index and machine tool orders in the morning.