Daily FX Market Roundup 09-07-12

FX: Be Prepared for the Next 5 Trading Days
EUR: ECB Announces Unlimited Bond Buys, Keeps Rates Unchanged
GBP: Behind the Anemic Rally
CAD: Hits 11 Month High on Employment Data
AUD: Trade Deficit Balloons
NZD: Gold and Oil Up, RBNZ Next Week
JPY: Japanese Data to Take Backset to Chinese Reports

FX: Be Prepared for the Next 5 Trading Days

Between the U.S. non-farm Payrolls report and the ECB’s monetary policy announcement, we have seen some big moves in the forex market over the past 48 hours. Today’s volatility is a taste of what may be come in the new trading week, which is jammed packed with more market moving events. The week starts off with a Chinese data dump that is followed by the German Constitutional Court’s ruling on Europe’s rescue fund, moves on to the Federal Reserve’s monetary policy announcement and ends with the U.S. retail sales report and the beginning of the EU Finance Ministers meeting on Friday. Risk currencies performed extremely well thanks to the disappointing U.S. non-farm payrolls number and monetary support from the ECB. Most major currency pairs have broken out of their recent ranges and as long as the German Constitutional Court approves the rescue fund and the Federal Reserve eases, the rallies could continue.

In the meantime, the non-farm payrolls report was a slap in the face for the U.S. dollar. With payrolls rising a mere 96k last month compared to a downwardly revised increase of 141k in July, easier monetary policy is in the bag even with the unemployment rate dropping to 8.1%. Economists were looking for job growth to slow but not by nearly as much as it did especially considering Thursday’s better than expected economic data. Job growth was also revised lower in June and July, highlighting the overall weakness in the labor market. While the improvement in the unemployment rate is encouraging it was caused largely by a drop in the participation rate. Although private sector payrolls was slightly better, the first month of job losses in the manufacturing sector in nearly a year gives the Fed reason to be very worried about the labor market. Setting monetary policy will be made easier by today’s non-farm payrolls report because the rise in July proved to be nothing more than a one month blip. Job growth is very weak and if Fed officials had considered easing in early August, the latest NFP report only increased their urgency. The only question left is the form of easing that the Federal Reserve will choose. One option is a third round of Quantitative Easing and the other option is to change the extended period language in the FOMC statement and possibly tie it to a piece of economic data. We put the odds of QE3 at 75% next week. If the Fed adds to the stimulus provided by the ECB and the Chinese government, we could see a sustained improvement in risk appetite.

EUR: ECB Announces Unlimited Bond Buys, Keeps Rates Unchanged

Despite the weaker than expected U.S. non-farm payrolls report, there was an overall sense of optimism in the financial markets today as investors view the new stimulus programs announced by the European Central Bank and the People’s Bank of China as a game changer for the markets. While we approached the ECB’s announcement with skepticism, the sharp decline in Spanish and Italian 10 year bond yields indicate that the central bank has achieved their goal (at least in the near term) of effectively convincing investors to buy the bonds of heavily indebted Eurozone countries. As long as Spanish and Italian bond yields continue to fall, the risk of the euro crisis deepening declines with it. The German Constitutional Court’s ruling on Europe’s rescue fund poses a big risk for the euro next week but we don’t expect the court to block the fund. The justices are fully aware of the severe political and economic consequences of rejecting the ESM because a referendum will most likely be called to change the German constitution. An approval by the German court could drive the EUR/USD to 1.30 especially if it is followed by QE3 from the Federal Reserve. As a risk currency, the flood of stimulus from the ECB and the Chinese government as well as the hope for more action from the Fed has gone a long way in shifting the balance of sentiment in the market. Hopefully policymakers will able to keep it up. No major Eurozone economic reports are scheduled for release this coming week but between the German Constitutional vote, an expected decision on Spain’s rating by Standard & Poor’s and the beginning of the EU Finance Ministers meeting, it should be an active week for the euro. Meanwhile it was another day of big moves for EUR/CHF, which soared to a high of 1.2155. The jump today was the largest one day move for EUR/CHF since December. The Swiss National Bank’s quarterly monetary policy announcement will be held next week and the latest price action could reflect expectations that the SNB will raise the currency floor.

GBP: Behind the Anemic Rally

While the British pound also benefitted from the risk rally today, its gains were moderate compared to other major currencies. The lackluster rally in sterling was particularly interesting because the currency should have benefited from better than expected data. Not only did industrial production grow 2.9 percent in the month July but manufacturing production also rose 3.2 percent. Inflationary pressures ticked up as well with PPI input prices jumping 2.0 percent and output pricing rising 0.5 percent. Every single piece of U.K. economic data surprised to the upside and yet the GBP only managed to rally 0.5 percent against the U.S. dollar. The only explanation is that the ECB’s announcement has given European investors who have parked their money in British pounds the confidence to move them back into euros – hence the almost 1 percent rally in EUR/GBP. If the German Constitutional Court doesn’t strike down Europe’s rescue fund, EUR/GBP could enjoy further gains. U.K. trade and employment numbers are due for release next week with stronger data expected all around.

CAD: Hits 11 Month High on Employment Data

The Canadian, Australian and New Zealand dollars traded sharply higher against the greenback. The Canadian dollar rose to its highest level in nearly a year following better than expected employment numbers. In contrast to its Northern neighbor, Canada enjoyed a very strong month of job growth. A total of 34.3k jobs were added last month, which was enough to erase the past month’s decline. The unemployment rate held steady at 7.3 percent. The CAD would have probably experienced a stronger rally if not for the fact that all the job growth was in part time and not full time work. Also, bad U.S. data always weighs on the Canadian dollar because of the close trade relationships between these 2 nations. Thankfully manufacturing activity did not slow as much as economists had anticipated. The IVEY PMI index dropped slightly to 62.5 from 62.8, which is much more positive for the CAD than the forecasted decline to 59. The Bank of Canada’s hawkish monetary policy stance has been vindicated by the latest economic reports. Meanwhile the Australian dollar received a big boost from China’s stimulus announcement. While we have seen a turn in Australian data, if China’s economy stabilizes, the Reserve Bank may not have to ease again this year. Unfortunately domestic conditions are quite bad according to the latest trade numbers which showed the trade deficit doubling in the month of July. Not much is expected from the 3 commodity producing countries next week outside of the Reserve Bank of New Zealand’s monetary policy announcement.

JPY: Japanese Data to Take Backset to Chinese Reports

Typically a risk rally is accompanied by broad based strength in the Yen crosses. Unfortunately today, the weakness of USD/JPY curtailed the rally. The euro, Swiss Franc, Australian and New Zealand dollars ended the day higher against the Yen but the greenback, Canadian dollar and British ended lower. There was very little in the way of Japanese data this week with the leading and coincident indices being the only reports on the calendar. Both numbers declined, confirming the challenges in Japan’s economy. Next week we will gain more insight into the economy’s performance with GDP, trade, consumer confidence and the Eco Watchers Survey scheduled for release. While Japanese data is important, it will take a backseat to Chinese economic reports. On Sunday, China’s inflation, industrial production and retail sales figures are scheduled for release. We can interpret the Chinese government’s $134 billion stimulus program in one of two ways – they are either preempting the weak data and hoping to temper the market’s reaction or they are serious about taking an active interest in preventing their soft landing from turning into a hard one and want to leverage on stronger data.