Daily FX Market Roundup 07-31-12
How FX Traders are Positioned Ahead of FOMC
EUR: Germany and France Report Weaker Spending
GBP: Growth Outlook Cut by Moody’s
AUD: Watch Out for Chinese PMI Numbers
CAD: Hit by Slower GDP Numbers
NZD: Rebounds in June
JPY: More Easing on the Way?
***We will be traveling to Singapore and Australia tomorrow so writing will be sporadic for the next week.
How FX Traders are Positioned Ahead of FOMC
The Federal Reserve’s 2 day monetary policy meeting is underway and a decision is expected at 2:15pm ET on Wednesday. Based on the small degree of dollar weakness today, investors are not looking for any overly hawkish or optimistic comments from the central bank. Since the last monetary policy meeting, there have been improvements and deterioration in the U.S. economy. Retail sales for example dropped for the third consecutive month in June but GDP growth slowed less than expected and job growth has been anemic while inflationary pressures remain muted. Most of the economic reports that matter including ISM and non-farm payrolls won’t be released until the day of or after the Fed meeting. When Bernanke spoke earlier this month, he said they were trying to judge whether the loss of momentum in the economy is enduring and unfortunately there hasn’t been enough reasons for them to lean one way or the other.
Since the beginning of the week, we have seen very little volatility in the major currencies, which suggests that investors don’t expect much from Wednesday’s FOMC announcement, especially now that bond yields in Europe have stabilized. The Federal Reserve and the European Central Bank are no longer under pressure to make any brash decisions. Recent stability gives the Fed the luxury of time, allowing them to shelve the discussion of QE3 for a few more weeks. The meeting in September is much more important and we should get a good sense of whether QE3 is a realistic consideration for the Fed when central bank officials convene in Jackson Hole for their annual economic summit in late August. In the meantime, we expect no major changes to FOMC statement. The Fed will reiterate their pledge to keep interest rates at exceptionally low levels for the next 2 years and continue to warn that they could “take further action as appropriate to promote a stronger economic recovery and sustained improvement in the labor market.” For more on how the economy has changed since the last Fed meeting, read our FOMC Preview.
Before the Federal Reserve makes its monetary policy announcement, the ADP Employment Change and ISM manufacturing numbers will be released. ADP has done a poor job tracking NFPs but the importance of this week’s non-farm payrolls means that all eyes will be on this report. If private sector payroll growth slows as economists anticipate, investors will start to wonder whether NFPs will print below 100k for the fourth month straight month. Improvements in Chicago, Philadelphia and NY manufacturing activity points to a stronger national ISM reading. Personal incomes grew by 0.5% in June, up from 0.3% the previous month while personal spending held steady. With Americans finally making more and spending less, their personal savings rate rose to 4.4% last month, its highest since December. Inflationary pressures remain muted with the PCE deflator rising a mere 0.1%.
EUR: Germany and France Report Weaker Spending
The euro traded slightly higher against the U.S. dollar and remains in consolidation mode. Clearly investors are waiting for new direction from either the Federal Reserve or European Central Bank monetary policy meetings. In our opinion, the Fed announcement should be a nonevent for the U.S. dollar, leave the ECB meeting as the markets’ only hope for clarity. The latest economic reports show German consumer spending falling for the third month in a row. If we take a look at a slightly longer time frame, consumer spending declined 7 out of the last 9 months. The cracks are showing in Europe’s largest economy, which helps to explain why German lawmakers have had such a tough time convincing their constituents to allocate more money to their weaker neighbors. Thankfully the labor market has been holding steady. While unemployment rose for the fourth consecutive month, the increase was small, keeping the unemployment rate at 6.8%. In France, consumer spending is also very anemic with demand growing a mere 0.1% last month. With the 2 largest economies in the Eurozone reporting weak spending and lower inflation, the European Central Bank needs to ease again. However, the recent decline in Spanish and Italian bond yields, recovery in stocks along with the rebound in the euro reduces the urgency for the ECB to act but the longer they wait, the longer they will prolong the crisis. Final Eurozone PMI numbers are due for release tomorrow and no major revisions are expected.
GBP: Growth Outlook Cut by Moody’s
The British Pound weakened against all the major currencies today. Moody’s Investors Service cut Britain’s forecast for growth saying, “Moody’s sees rising challenges in achieving debt reduction within the timeframe that has been laid out by the government.” It also “believes that the UK government’s response to negative developments late last year indicates its commitment to restoring a sustainable debt position.” Moody’s cut its economic forecast to 0.4% this year and 1.8% in 2013. Moody’s also said, “Should the UK’s growth potential weaken significantly, then this would create a significant challenge to the government’s debt-reduction efforts and would place downward pressure on the country’s rating.” Moody’s has had the UK on a negative outlook and the rating “reflects concerns of UK’s macroeconomic outlook for the next few years.” Standard & Poor’s rates the UK AAA, saying that the government “remains committed to implementing its fiscal program.” Last night GfK consumer confidence survey remained unchanged at -29. The index has remained between -29 and -31 for the past seven months. PMI manufacturing is due for release tomorrow along with Nationwide house prices. PMI is forecasted to fall slightly to 48.4 from 48.6.
AUD: Watch Out for Chinese PMI Numbers
The Australian and New Zealand dollar traded higher against the greenback but the Canadian dollar lost value following weaker GDP numbers. The Canadian economy expanded by .1% in May compared to a 0.2% forecast. Growth in Canada slowed more than expected while inflationary pressures continued to decline with the industrial product price dropping 0.3% and raw material prices falling 4.0%. Incoming Canadian data raises more questions about what is motivating the level of hawkishness within the Bank of Canada. There is very little justification for a tightening bias with growth slowing, manufacturing activity contracting, price pressures declining and retail sales growing at a sluggish rate. The recent strength of the Canadian dollar will also make life more challenging for Canadian exporters. Australian manufacturing PMI numbers are due for release this evening but the more important reports will come from China. Both the official and independent HSBC Manufacturing PMI numbers are due for release. When HSBC first put out their estimates for Chinese manufacturing last week, the data showed a smaller contraction, which the market interpreted to be good news for China and risk appetite. Hopefully this momentum will be sustained and confirmed by the national release.
JPY: Improvement in Labor Market
The Japanese Yen strengthened against the GBP and CAD but weakened against the EUR, AUD, NZD and CHF while remaining flat against the greenback. The nation’s jobless rate unexpectedly declined from 4.4% to 4.3%. It was forecasted to remain at 4.4%. The job market improvement was due to the increasing demand of workers for reconstruction from last year’s earthquake and tsunami disaster. The better than expected employment data is not enough to bring out the nation from its slump. The yen has strengthened against the dollar by almost 6% since mid-March, hurting its export sector. Industrial production over the weekend dropped for the third time in a row, validating the government’s decision yesterday to downgrade its assessment of industrial production for the first time since September. Household spending declined more than forecasted from 4.0% to 1.6%. Although with the dismal data for the month of June, Asian stock markets were enlightened by the decline in jobless rate sending the Nikkei 225 up 0.69% to 8,695.06. No major economic reports are due for release from Japan this evening.
