Daily FX Market Roundup 10-02-13
US Government Shutdown to Delay Fed Taper
EUR Hits 1.36 on Letta’s Victory, Offsetting Dovish ECB
GBP Rallies BoE Officials Express Comfort with Monetary Policy
AUD: Recovers Earlier Losses as Commodity Prices Rebound
NZD: Lifted by Hotter Commodity Prices
CAD: Unchanged, Oil Higher
USD/JPY Drops to 1 Month Low on Nikkei Sell-off
US Government Shutdown to Delay Fed Taper
The U.S. dollar traded lower against most of the major currencies today on the back of weaker economic data and the growing prospect that a U.S. government shutdown could delay Fed tapering. The longer the U.S. government remains closed for business the, greater the impact on the U.S. economy. We are going into day 3 of the shutdown and if public offices are not reopened by the end of the week, it could subtract as much as 0.25% off U.S. GDP. Yet that is not the only reason why the government closure could defer tapering to 2014. According to Fed President Rosengren, who is a voting member of the FOMC this year, the shutdown also affects data gathering and could “put out further into the future the time when we can get a real assessment.” He said “it would make me less willing to remove accommodation until we had good data.” Given the significance of the decision to taper, there’s a good chance Rosengren’s views will be shared by many of his colleagues at the Federal Reserve. If the shutdown extends beyond next week, it may be very difficult for the Fed to justify reducing asset purchases in December and certainly not in October. So far there is little sign of compromise by Republicans and Democrats. President Obama has invited the top 4 leaders of both parties from both houses to meet this afternoon but its not clear how much it the negotiations will help.
Meanwhile there’s a very good chance non-farm payrolls will not be released on Friday but jobless claims will be issued on schedule according to the Labor department. When it comes to leading indicators for non-farm payrolls, our favorite is always the employment component of non-manufacturing ISM, due tomorrow. If the index declines, the dollar could extend its losses as investors notch down their NFP expectations. If the data is strong it would ease some concerns caused by the weaker ADP report. According to private payroll provider ADP, U.S. companies added fewer jobs in the month of September. Economists had been looking for ADP employment change to rise from 176k to 180k but instead U.S. companies added only 166k jobs to their payrolls, up from a downwardly revised 159k. Based on these numbers alone, the Federal Reserve was right to defer tapering but we will have to wait for the non-farm payrolls report to confirm that job growth slowed in the month of September because ADP can over or undershoot NFPs.
EUR Hits 1.36 on Letta’s Victory, Offsetting Dovish ECB
The European Central Bank’s monetary policy decision may have been the most important event risk on the calendar today but it was the confidence vote in Italy that sent the euro above 1.36. The single currency rose to its strongest level in 7 months after Premier Enrico Letta won the no confidence vote and despite cautious comments from ECB President Draghi, the euro managed to hold onto its gains. Italy’s political crisis has been threatening the stability of the region for the past few months and Letta’s victory means that it is finally coming to an end, removing a major risk for the EUR/USD. The euro also avoided a sell-off when ECB President Draghi failed to directly mention LTRO. Earlier this morning, Berlusconi gave up his attempt to bring down the government by saying he would vote for Letta. Over the weekend, Berlusconi received widespread criticism for asking five ministers from his People of Freedom Party to. With an expulsion vote scheduled for Friday, these resignations were his last ditch effort at trying to affect the outcome. However senior officials in his own party rejected Berlusconi’s brash efforts and threw their support behind Letta. This was the first time in 2 decades that Berlusconi’s party turned on him and Letta’s victory now removes a major risk for the euro. On the other hand, there’s no question that the ECB is dovish but at this stage, they are in no rush to increase stimulus. During his press conference, Draghi acknowledged that confidence and survey indicators have been improving but he also felt that the risks are to the downside. Like other central bank heads, he expressed specific concerns about the U.S. budget shutdown and the impact that it could have on the U.S. and global economy if it lasts for more than a few days. While he said the region is more resilient now than before, he called the recovery weak, fragile and uneven. As a result, the central bank feels that monetary policy should remain accommodative at the present or lower levels for an extended period of time. They are ready to consider all instruments including a rate cut which was discussed today if the economy were to weaken further. None of these comments were particularly new which is why the euro shrugged off Draghi’s dovish bias. Eurozone retail sales and final PMI services are scheduled for release tomorrow.
GBP Rallies BoE Officials Express Comfort with Monetary Policy
The British pound resumed its rise against the U.S. dollar on the back of optimistic comments from U.K. policymakers. Bank of England Governor Carney and Markets Director Paul Fisher spoke today and both of these gentlemen acknowledged the recent improvements in the economy and indicated that they are comfortable with the current level of monetary policy. According to Carney, the rise in business sentiment should boost investment and hiring. However in order for “this recovery to gain traction, to be sustainable, to really move forward” it needs to extend beyond London and the southeast to other parts of the U.K. economy. The central bank is not going to “begin to think about raising interest rates or tightening monetary policy until we see the conditions in the economy where the economy is really growing and growing at a sustained pace.” According to Fisher, the U.K. recovery is just beginning and even though wages are rising, it has a long way to go. Nonetheless the “things that held back the economy seem to have gone,” “the situation has changed quite considerably,” with “forward looking indicators signaling that the pace of growth will be maintained for the next 2 quarters.” As a result the BoE doesn’t want to do more QE given the change in the U.K. economic outlook. In other words, the central bank is not in a rush to raise rates but they are moving in that general direction. These comments helped sterling shrug off a softer construction sector PMI report. The PMI index dropped from 59.1 to 58.4. PMI services is due for release tomorrow and if this sector slows as well, all 3 reports would have declined in the month of September.
AUD: Recovers Earlier Losses as Commodity Prices Rebound
The rebound in commodity prices and sell-off in the U.S. dollar helped the Australian and New Zealand dollars recover from earlier losses. AUD ended the day unchanged while NZD rose more than 0.6% and the outperformance of NZD reflects the diverging outlook of these 2 countries. New Zealand is poised for stronger growth and tighter monetary policy next year while Australia reports underwhelming data. Commodity prices in New Zealand rose 0.9% in September up from 0.7% the previous month. The RBNZ has already said they are looking to raise rates next year and the increase in prices only hardens their conviction. In contrast, Australia’s trade balance narrowed less than expected in the month of August while building approvals dropped 4.7%. The trade deficit for the month of July was also nearly 2 times larger than initially reported. Part of the deterioration was tied to changes in level estimates using new customs data but the miss was so large that a disappointment was unavoidable. AUD/NZD resumed its slide and we continue to believe that the pair is poised for further losses. No economic data was released from Canada and as a result, the currency ended the day unchanged against the greenback. Australian and Chinese service sector reports are scheduled for release this evening so traders should keep an eye on the AUD.
USD/JPY Drops to 1 Month Low on Nikkei Sell-off
The Japanese Yen rose to a 1 month high against the U.S. dollar today on the back of steep losses in the Nikkei and weaker U.S. data. Prime Minister Abe’s failure to announce a corporate tax reduction yesterday is finally catching up to Japanese stocks, which dropped more than 2% overnight. While it remains to be seen whether or not the Cabinet will agree on additional support for corporates, the uncertainty suggests that internal differences could stymie Prime Minister Abe’s efforts. The recent decline in the Nikkei and rise in the Yen will keep the Bank of Japan who begins its 2 day monetary policy meeting tomorrow, dovish. There are no major Japanese economic reports expected this evening outside of the weekly Ministry of Finance’s portfolio flow data. We expect Yen crosses to remain under pressure in the near term. The 14,000 level is important support for the Nikkei, if Japanese stocks continue to fall, it could drag USD/JPY down with it.
