Daily FX Market Roundup 07-13-12

USD: QE3 Expectations Could be Reshaped Next Week
EUR: It Has Been a Rough Week
GBP: Busy Week Ahead for the U.K.
CAD: Will be Difficult for BoC to Remain Hawkish
AUD: Shrugs Off Slowdown in Chinese Growth
NZD: Nice Rebound in Comm Dollars
JPY: Optimistic BoJ Monthly Report

USD: QE3 Expectations Could be Reshaped Next Week

QE3 or no QE3 will remain one of the primary questions that investors will seek answers to in the new trading week. Although the rally in the U.S. dollar against the euro and other major currencies suggests that traders are lowering their bets on a third round of stimulus, the inconsistent movements in other markets indicates that many market participants are still undecided. A quick survey will show that expectations for QE3 are very malleable at this point which is what makes next week’s economic reports so important.

The Federal Reserve’s Beige Book report, retail sales, consumer prices, housing market and manufacturing sector numbers will all play a role in shaping investors’ expectations for QE3. If consumer spending declines for the third straight month or consumer prices fall for the second month in a row, we will once again hear talk of QE3 in the third quarter which would be bearish for the U.S. dollar. However based on the consumer spending reports from the International Council of Shopping Centers and Johnson Redbook, we could see a small increase in retail sales and if that becomes the case, it would be positive for the U.S. dollar. In many ways, consumer spending is just as important as the non-farm payrolls report because it is the backbone of the U.S. economy and accounts for 70 percent of GDP. The Beige Book report will provide a more thorough assessment of the state of the U.S. economy and can therefore also play a big role in reshaping QE3 expectations. For the time being, the verdict for QE3 is still out. Most economists and investors agree that the U.S. economy needs more stimulus but they are not sure when it will happen this year, or at all. According to the FOMC minutes, central bank officials are also exploring “new tools.”

According to the latest U.S. economic reports, producer prices grew by 0.1 percent in June, which was the first increase in wholesale prices in 4 months. Economists anticipated another monthly decline in price pressures but with PPI ticking upwards, the case for a third round of Quantitative Easing weakens. Excluding food and energy costs, PPI rose 0.2 percent, which was right in line with expectations. While inflation is still very low, the Fed will latch onto any reasons that would allow them to delay QE3. The University of Michigan Consumer Sentiment survey on the other hand declined which is consistent with the weakness in the labor market

EUR: It Has Been a Rough Week

It has been a rough week for the euro. The single currency lost value against all of its major counterparts and while the losses were small on a percentage basis, many milestones were reached. The one that you hear the most about is the 2 year low in the EUR/USD or the 3 year low in EUR/GBP but the fact that the euro fell to a record low against the Australian, New Zealand and Canadian dollar is also very important. As we have argued in our special report on the amount of EUR weakness the ECB is willing to tolerate, a weaker euro is good for Europe. It makes the region’s exports more attractive, encourages acquisitions of European companies and boosts tourism. With inflation a nonissue, the ECB won’t stand in the way of further euro weakness for these specific reasons. A trip down to 1.20 is still a possibility but whether this level is reached in the coming week will probably be determined by U.S. and not European data. Unlike the U.S. the Eurozone economic calendar is quiet with the most important release being the German ZEW of investor confidence. No major meetings will be held in the front of the week but on July 20th, Euro area finance ministers are expected to meet and finalize the bank bailout program for Spain and hopefully the signing of this agreement won’t be derailed by any unexpected developments. Meanwhile, Italian and European policymakers have been screaming about the untimeliness of Moody’s downgrade of Italy. This morning, the rating agency cut Italy’s sovereign debt rating by 2 notches to Baa2 but investors shrugged off the announcement because it still left Italy with a rating one notch higher than S&P.

GBP: Busy Week Ahead for the U.K.

The British pound’s persistent strength against the euro drove EUR/GBP to a fresh 3 year low. We don’t need to explain why investors prefer sterling over euros as the Eurozone is the source of the world’s troubles. It has been light week for U.K. data but that will change in the coming week with a heavy economic calendar that includes the Bank of England minutes, consumer prices, employment and retail sales numbers. Like in the U.S., next week’s U.K economic reports will be critical in shaping the market’s monetary policy expectations. This week, Bank of England member Posen, who is traditionally one of the most dovish members of the MPC said the amount of QE is appropriate which suggests that he is comfortable with the level of stimulus and has moved to neutral. If the minutes show that other members of the central bank share his view that the recent increase in asset purchases is all the U.K. economy needs for now, the GBP could extend higher against the EUR. The U.K Telegraph also reported this morning that the number of tourists has reached a record high. With the London Olympics beginning in 2 weeks, tourism should provide a much needed boost to the U.K. economy.

CAD: Will be Difficult for BoC to Remain Hawkish

The Australian, Canadian and New Zealand dollars traded higher thanks to the market’s positive reaction to the latest Chinese economic reports. GDP growth slowed to 7.6 from 8.1 percent in the second quarter, which was the weakest pace of growth since Q1 of 2009. Interestingly enough, investors were unfazed because this along with the retail sales and industrial production reports were in line with expectations. Economists were looking for Chinese growth to slow to 7.7 percent and the fact that it only missed by 0.1% turned out to be good news. Industrial production and retail sales also slowed by only a tenth of a percentage point. The market’s reaction could have been a lot worse but with expectations so low, currencies actually rallied on the heels of these reports. For Australia, slower growth in China gives the Reserve Bank stronger reasons to ease again this year. The minutes from the last RBA meeting will be released next week and investors will be combing through this report carefully for any clues on future monetary policy. The Bank of Canada also has a monetary policy meeting and when they last met, the BoC held onto their belief that interest rates need to increase. With Canadian manufacturing activity contracting significantly since then, oil prices falling and a number of central banks easing, it will be difficult for the BoC to remain hawkish.

JPY: Optimistic BoJ Monthly Report

The Japanese yen strengthened against the U.S. dollar but weakened against all of the other major currencies. Most Japanese stocks rose on the heels of China’s growth figures. The Nikkei 225 rose 0.05% to 8724.12. China’s sluggish growth may require the need for more stimulus to boost the world’s second largest economy. China’s year over year GDP expanded just 7.6% last quarter, down from 8.1% the previous quarter. It was the slowest pace growth in three years. Japan’s industrial production declined to -3.4% compared to an unchanged forecast of -3.1%. The BOJ released its monthly report noting the economy’s modest recovery as domestic demand remains strong primarily due to reconstruction-related demand. Business investments have been increasing along with corporate profits. Private consumption has increased due to demand for automobiles and employment situation improving. The housing sector has picked up as well. Japan’s economy is forecasted to return to a “moderate recovery path as domestic demand remains firm and overseas economies emerge from the deceleration phase.” The BOJ also notes the overnight rate remaining at an extremely low level and firms’ funding costs declined moderately. It has been a quiet day in Japan as only the monthly report and industrial production were released today and no data is anticipated until Tuesday.