Daily FX Market Roundup 10-14-13
FX Traders and their Nerves of Steel
EUR: Potential Decline in ZEW
GBP CPI Not Expected to be Big Mover
AUD: What to Expect from the RBA Minutes
NZD: Lifted by Stronger PMI Services
CAD: Struggles as Oil Remains Under Pressure
JPY: Quiet Week for Japan
FX Traders and their Nerves of Steel
This is a crucial week in the financial markets and based upon the price action in currencies, FX traders have nerves of steel. Another day has passed without Congress reaching an agreement to raise the debt ceiling or fund the government for a few weeks and yet losses in the dollar are limited. While the greenback traded lower against most of the major currencies, the losses were small as the dollar recovered from a steeper slide at the start of the North American session. The reversal that was seen in both currencies and equities was triggered by comments from President Obama who said “important progress” had been made in the debt negotiations. The Senate majority leader was also optimistic that a deal would be reached but this only refers to a deal in the Senate, which would have to be approved by the House. So the U.S. is still at risk of default, which is why FX traders have nerves of steel because they are holding onto their current U.S. dollar exposures.
We are now entering the third week of the U.S. government shutdown and the House and Senate have not signed a stopgap agreement to reopen the government and raise the debt ceiling. Investors are still hoping for an eleventh hour deal but the clock is ticking and with each passing day, the risk of a default increases exponentially. With a newfound aggressiveness in the Democratic Party and the Republicans on the defensive, negotiations will go down to the wire, keeping investors uneasy for most of the week. FX traders don’t believe that the U.S. government will allow for its first ever default and this assumption is helping the markets maintain a level of stability. However the risk premium is high and for this reason, we don’t expect any new positioning or breakout trends until the uncertainty is lifted either through a 6 week stopgap funding measure, a clean increase to the debt ceiling or a default. Unless there is a sudden compromise before Thursday October 17th, we expect additional losses in USD/JPY, further gains in the EUR/USD, recovery in gold and a steeper correction in stocks. Our base case scenario is still for a last minute deal but unlike 2011, when the debt ceiling was raised 2 days before the Treasury reached its borrowing limit, this time a deal may not happen until the last few hours.
For as long as the U.S. government remains shutdown, U.S. data will be delayed but there are a handful of economic reports that will be released including the Empire State and Philadelphia Fed manufacturing surveys, jobless claims and the Federal Reserve’s Beige Book report. A number of central bank Presidents are also scheduled to speak this week and we will be listening closely to see if the government shutdown and fiscal uncertainty has made them more reluctant to taper asset purchases this year. It will be very difficult for Federal Reserve officials to justify changing monetary policy when no data has been released over the past 2 weeks and any data that will be released in the weeks that follow will be distorted. We continue to believe that the Fed will maintain its current level of asset purchases for the rest of 2013.
EUR: Potential Decline in ZEW
The euro extended its gains the U.S. dollar on the back of stronger data and a desire to sell the greenback. Industrial production in the Eurozone grew 1.0% in the month of August, erasing the past month’s decline. With German, Italian and French data released before the Eurozone report, economists had already been looking for a strong release but not only was the increase more than expected but the July figures were also revised higher. The euro is currently trading near its year to date highs against the buck and we don’t expect a breakout move in the currency pair unless the U.S. defaults. As IMF head Christine Lagarde warns, America’s lawmakers risk pushing the world into recession. If politics gets in the way of raising the debt ceiling, the U.S. won’t be the only country that suffers. Lagarde fears that it could cause a “massive disruption the world over.” The head of the World Bank also believes that “Inaction could result in interest rates rising, confidence falling and growth slowing.” The German ZEW survey is scheduled for release tomorrow and given the risk that the U.S. fiscal debt crisis poses to the markets, we would not be surprised if investor confidence deteriorated in the month of October. As long as the problems in the U.S. remained unresolved, we expect the ECB to remain dovish. Like the U.S., a number of Eurozone policymakers are scheduled to speak this week and they have no reason to be optimistic.
GBP CPI Not Expected to be Big Mover
The British pound traded higher against the U.S. dollar and euro ahead of a busy week filled with market moving U.K. data. No economic reports were released this morning but tomorrow we have inflation. Consumer and producer prices will be released simultaneously and based on a report from the British Retail Consortium, prices fell at a slower pace in September. Economists are looking for CPI growth to slow and for the annualized rate to drop from 2.7% to 2.6%. While consumer prices are running above the central bank’s 2% target, it is slowly dropping from the 2.9% rate last seen in June. Inflationary pressures are not a major concern for the central bank because weak demand is limiting overall price growth. The Bank of England intends to keep monetary policy unchanged until 2016 and between now and then price pressures could change dramatically. Therefore the more important U.K. releases this week will be retail sales an employment. Economists are looking for unemployment rolls to decline and spending to grow but given the drop in the BRC retail sales monitor, the data could surprise to the downside and the outlook for sterling hinges on directional surprise. This month the currency has been hit hard by weaker PMIs and drop in industrial production. The British pound is now basing against the dollar and in order for the consolidation to turn into a bottom we need good data.
AUD: What to Expect from the RBA Minutes
Commodity currencies shrugged off weaker Chinese trade numbers to rise on the back of the sell-off in the U.S. dollar and rally in gold. The New Zealand dollar continues to be the best performer thanks to the support of stronger economic data. Activity in the service sector accelerated in the month of September, keeping the Reserve Bank of New Zealand on track to raise interest rates next year. Australian data on the other hand continues to underwhelm with house prices growing at a slower pace while home loans and investment lending slowed. The Reserve Bank of Australia is scheduled to release the minutes from its last monetary policy meeting tonight. When they last met, their less dovish tone drove the Australian dollar sharply higher. At the time, the RBA left interest rates unchanged and noted the improvement in business and consumer confidence. The central bank felt better about household savings behavior, a view they dropped the previous month. They did not mention the level of the currency, which suggests they were comfortable with the AUD/USD rate at the time. The combination of stronger data and less dovishness from the RBA pushed the prospect of another rate cut to February of next year. Since then we have seen mixed data including less than expected job growth, stronger business confidence and faster activity in the service and manufacturing sectors. As a result, we don’t expect the RBA minutes to be significantly optimistic given the pockets of weakness in Australia’s economy but if the tone is similar to that of the RBA statement, the AUD/USD could hold onto its gains.
JPY: Quiet Week for Japan
The Japanese Yen ended the day lower against the U.S. dollar but its performance against other currencies were mixed. This is a quiet week for Japan with the most important release being the country’s final industrial production report. The lack of market moving data means that Yen crosses will take their cue from risk appetite and U.S. Treasuries. If Treasury yields continue to move lower on the growing risk of a U.S. default, USD/JPY could drop towards 97, talking all of the Yen crosses down with it. Of course, if and when a compromise is reached, the Yen crosses will be among the biggest beneficiaries so traders should position accordingly depending on how much faith they have in the U.S. government and its ability to compromise before the debt ceiling is reached. Bank of Japan Governor Kuroda will also be speaking at the end of the week and we continue to expect the central bank head to express confidence in the current level of monetary policy.
