Refocusing on the U.S. Dollar
EUR: Moody’s Officially Postpones Spanish Decision
GBP: More Weakness in Housing
AUD Collapses After RBA Rate Cut
CAD: Consolidation Continues
NZD: Chinese PMI Services On Tap
JPY: New Japanese Officials Speak

Refocusing on the U.S. Dollar

With no U.S. economic data on the calendar, it has been another dull day for the dollar. The greenback traded lower against European currencies and higher against commodity currencies and the Japanese Yen. The mixed performance of the greenback reflects a shift back to relative growth as the main driver of currency flows. The Australian dollar dropped nearly 1.00% following a rate cut from the Reserve Bank while the euro continues to remain supported by the hope that Spain will ask for a bailout (more on this in the euro part of our commentary). However the lack of volatility and focus on the U.S. dollar should change tomorrow with the release of ADP and ISM non-manufacturing. While investors have been combing newswires for headlines on Spain, they haven’t lost sight of the U.S. non-farm payrolls report due at the end of the week. The only reason why it hasn’t received more attention is because investors aren’t sure how much more the Federal Reserve can or will do, especially in the near term if NFPs are weak. For this reason, fewer than 100k jobs will be unambiguously negative for the greenback while job growth anywhere near the current consensus forecast of 115k should be positive for the dollar. The outcome of the ADP and ISM reports will help to shape expectations and positioning in the U.S. dollar ahead of Friday’s release.

In the meantime, barring any fresh developments in Spain, the main focus of the media over the next 24 hours will be the first Presidential debate Wednesday evening. The U.S. election is one of the highest profile events this year and it is only 5 weeks away. The economy will be in center focus and according to moderator Jim Lehrer from PBS, the first 3 segments will be on the economy and the last 3 segments will be on health care, the role of the government and governing. This will be the Candidates first opportunity to challenge each other’s plans for economic growth and deficit reduction face to face. We know that President Obama supports a mix of spending cuts and tax increases on the wealthy and targeted tax breaks for U.S. companies to expand in the U.S. and bring jobs home. Republican Candidate Mitt Romney wants to cut discretionary spending and entitlements while protecting defense programs and retiree benefits. His plan for economic growth includes calls for reduced regulation and government spending. On the Bush era tax cuts, Romney wants all cuts to be extended and called for another 20% reduction in individual income taxes. Obama on the other hand wants to limit the extension to families earning less than $250,000 and introduce a new tax for people earning more than $1 million. How clear each candidate is about his economic policies will determine who comes out of the debate stronger than before. The Presidential debates usually do not have much impact on the U.S. dollar or risk appetite but if one candidate completely embarrasses himself, that could change. Either way, the U.S. economy will be a key focus over the next 48 hours.

EUR: Moody’s Officially Postpones Spanish Decision

Moody’s has now made it official. They will not be making a decision on Spain’s debt rating until the end of October. This announcement coupled with Spanish Prime Minister Rajoy’s continued denial that a bailout is imminent has been met with disappointment from currency traders. The euro appreciated against the U.S. dollar today but it trended lower throughout the second half of the North American trading session. Moody’s said they needed more time to review the Spanish budget and stress tests results, but we believe they are hoping that Spain will make its own decision on a bailout shortly after the October 21st regional elections, sparing them a controversial decision that could trigger sharp volatility across the financial markets. So far, it seems that the Spanish government isn’t budging. Contrary to the market’s general belief, this afternoon, Prime Minister Rajoy said a bailout isn’t imminent and indicated that regions are committed to meeting their deficit reduction targets. We’ve been down this road before with Greece and only time will tell because we heard the same denials. We continue to believe that the market won’t let Spain off the hook without a bailout. Hope of help from Chinese also faded with the comments from the Chairman of the country’s Sovereign Wealth Fund. He said it is unrealistic to expect Chinese investment in bonds issued by highly indebted European countries until problems are resolved. So what we have left is no decision from Moody’s, no willingness to be bailed out by Spain and no desire to buy European bonds from the Chinese, all of which are bad news for the euro.

GBP: More Weakness in Housing

The British pound ended the day unchanged against the U.S. dollar and lower against the euro. Weaker U.K. economic data continued to pressure the currency lower. UK Nationwide house prices fell unexpectedly in the month of September by 0.4%. Nationwide chief economist Robert Gardner said, “Monthly price changes have been impacted by a number of one-off factors this year, such as the ending of the stamp duty holiday that cannot be controlled by the usual process of seasonal adjustment. However, labor market developments will remain of paramount importance in deciding the trajectory of house prices. There are grounds for caution on this front, as the unusual combination of rising employment and declining economic activity that was evident in the first half of 2012 is unlikely to be sustained.” Gardner expects house prices to remain “relatively flat or declining only modesty” over the coming 12 months. While construction PMI rose from 49 to 49.5 in September, the increase was less than anticipated. Data from the BOE yesterday showed that mortgage approvals increased slightly from 47,556 to 47,665. BOE Markets Director Paul Fisher said last week that Q3 economic growth will be “very strong,” however; the British Chambers of Commerce said today that “UK economic performance remains weak and inadequate.” We side with the latter and believe that tougher times lie ahead for the U.K., especially due to the continued uncertainty in Europe. PMI Services are scheduled for release on Wednesday and if activity slows as expected, we could see a steeper slide in GBP/USD.

AUD Collapses After RBA Rate Cut

We start by admitting that we were completely wrong in our call for unchanged rates from the Reserve Bank of Australia. The RBA cut interest rates by 25bp to 3.25% last night, triggering a major sell-off in the AUD/USD. While the resource sector continues to perform well, the central bank has grown increasingly concerned about their two speed economy. Moderating job growth, a high exchange rate and the slowdown in China prompted the Reserve Bank to take insurance against greater uncertainty. Furthermore, according to our colleague Boris Schlossberg, “the absence of an inflation pressures in the system has clearly allowed the RBA to assume a more accommodative stance on monetary policy as authorities attempt to be more proactive in anticipating the possible slowdown in demand. Overall, today’s RBA statement clearly shows that policymakers are no longer neutral in their assessment of risks to the Australian economy and could move to lower rates further should conditions deteriorate into the year end.” Australian PMI services and trade balance are due for release this evening. Given the contraction in manufacturing activity last month, we also expect slower growth in the service sector, which should add pressure on the AUD. The New Zealand and Canadian dollars lost value against the greenback but not by nearly as much as the AUD. No major economic reports are expected from Canada or New Zealand tomorrow but this evening non-manufacturing PMI is due from China.

JPY: New Japanese Officials Speak

The Japanese Yen traded lower against all major currencies except for the Australian dollar. Japan’s average cash earnings surprised to the upside. Earnings rose for the first time in four months by 0.2% year over year in August after a 1.6% decline in July. Economists forecasted a drop of 1%. Although the overdue positive earnings data came out the economic outlook is uncertain as weak global demand and strong yen are detrimental to the economy. Japan’s monetary base also increased 9.0% on the year. Japan’s new Economy Minister, Seiji Maehara, vowed a closer watch over the BOJ to ensure it meets its 1% inflation goal. He suggested that purchasing foreign bonds may be a powerful easing tool. He said, “Now I am in this position, I will scrutinize even more strictly.” If the BOJ’s job is inadequate he will do more than “just talk” to ease the economic situation. The new finance minister, Koriki Jojima was skeptical about purchasing foreign bonds as it “requires cautious handling and consideration.” Already reiterating what other Japanese officials have said Maehara said, “If we do not correct the extreme yen appreciation, then Japan’s manufacturing will not hold up. I think the current yen level is too high.”