FX: Stronger US Data, Concerns about Spain Linger

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Currencies are trading slightly higher this morning thanks to the upturn in U.S. stocks. The European trading session was light in terms of data but from the U.S. we had consumer confidence numbers and the Richmond Fed index. According to these reports, consumers are more optimistic this month compared to the last with the Conference Board index rising from 63.1 to 70.3 in September. While job growth has been anemic and some high profile companies are laying off workers again, the rise in the stock market gave consumers a more positive outlook for the U.S. economy. The Conference Board’s findings are consistent with what we have seen from the University of Michigan and Investors Business Daily. Manufacturing conditions in the Richmond region also turned positive while house prices edged higher.

The euro also shrugged off weaker demand for Spanish bill and Italian bonds. Today’s auction brought a lower bid to cover ratio for both which is a sign that investors are nervous about the Spanish economy and their need for further financial assistance. Deputy Prime Minister Santamaria threw the ball back to the ECB by saying that they need to know how much the central bank plans to spend on bond purchases before they decide whether to ask for a bailout. Spain is a big focus this week with rating agency Moody’s set to finish its review by the end of September. If Spain’s rating is slashed, we could see recent gains in the EUR/USD evaporate especially if the country doesn’t react immediately with a bailout request. On Thursday, Spain is also expected to release a new reform package and its 2013 budget and on Friday, Spanish banking sector stress test details are also expected. Unfortunately the Germans do not appear any more willing to help their neighbors. This morning, German Finance Minister Schaeuble said Spain doesn’t need a new program, they need to fix their problem of communication and regain market confidence.

Up North, Canadian retail sales rose strongly in the month of July. Consumer demand jumped 0.7%, compared to a forecast for only 0.2% growth. While the details don’t look as good when we strip out purchases of motor vehicles and parts, sales still increased 0.4%. Canadians also spent more money on furniture and home furnishings and less on electronics. Overall the uptick in consumer consumption has driven the Canadian dollar higher as it supports the Bank of Canada’s persistent call for higher interest rates.

Kathy Lien
Managing Director

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