Daily FX Market Roundup 10-18-12

USD: Risk Aversion or U.S. Data?
EUR: Drops for the First Time in 6 Trading Days
GBP: Rise in Retail Sales Reduces Need to Ease
AUD: Sell-Off in Stocks Overshadow Stronger Data
NZD: Steep Decline in Job Ads
CAD: Softer Inflationary Pressures Ahead?
JPY: Calls for Monetary Stimulus

USD: Risk Aversion or U.S. Data?

The big question in the forex market today was whether the rally in the U.S. dollar was driven by risk aversion or stronger data. The fact that the dollar strengthened against all major currencies including the Japanese Yen and Swiss Franc suggests that this is a story about the greenback but if investors were truly encouraged by the latest economic reports, U.S. stocks would not have fallen as much as they did today. The big move was in the Nasdaq, which dropped more than 1% on disappointing earnings from Google. High beta currencies such as the euro and British pound were trading sharply higher during the early European trading session but gave up all of their gains and then some during the U.S. hours.

For the first time in 6 months, manufacturing activity in the Philadelphia region expanded. The Philly Fed index rose to 5.4 from -1.9 in the month of September, which is encouraging and consistent with the improvement seen in the NY region. Yet we can’t necessarily attribute the rally in the dollar to an improvement in data because the details of the Philly Fed survey were not as convincing as the headline number. The main reason why the Philly Index increased was because of higher prices. New orders and employment conditions worsened, dragging the future index down to 21.6 from 41.2. Jobless claims also rose more than expected but the dollar was unfazed by the initial release. Jobless claims increased to 388k this week from 342k. While a snapback was expected after the quarterly reporting distortions last week, few people expected claims to rise to its highest level in 3 months. The increase in claims suggests that the labor market may not be performing nearly as well as the drop in the unemployment rate suggests – a worry that has been at the front of the minds of the Federal Reserve, economists and many investors. The only unambiguously positive report was leading indicators, which rose 0.6% last month. Higher stock prices and stronger labor market conditions contributed to the largest increase since February. Existing home sales are scheduled for release tomorrow and given the recent improvements in housing market data, there’s scope for an upside surprise. However stronger housing numbers may not be enough to revive the risk rally especially if there are more disappointments in earnings.

EUR: Drops for the First Time in 6 Trading Days

The euro weakened against the U.S. dollar for the first time in 6 trading days. There hasn’t been any bad news out of Europe to explain the reversal, which leaves the sell-off in U.S. stocks as the main catalyst. Yes, the EU Summit will most likely be a disappointment which shouldn’t surprise anyone. European officials made it clear that no major decisions will be made and the only accomplishment will be a timeline for a banking union. Spain could be warming to the idea of a bailout because according to the Wall Street Journal, who quoted a Spanish official, the ECB must define aid conditions for Spain. This in no way means that Spain has committed to a bailout, but the fact that they are telling the ECB to show them what they have in mind suggests that they are not opposed to the idea either. Meanwhile Spanish 10 year bond yields dropped below 5.3% to its lowest level in 6 months following another solid Spanish bond auction. Spain sold EUR4.6 billion bonds, which exceeded their target of EUR4.5 billion at an average yield of 5.46%, which is much lower than the 5.67% yield paid at the previous auction. Spain has now covered 95% of this year’s planned issuance. This shows that investors have not lost their taste for Spanish bonds despite the risk of a bailout. The EU Leaders Summit ends at 4am ET / 8 GMT on Friday. German producer prices and Eurozone current account figures are scheduled for release and no major surprises are expected. Better than expected Swiss trade numbers triggered an extremely short-lived rally in the Swiss Franc. Exports surged 2.6% last month while imports rose 3.0%. The increase in domestic and external demand boosted the trade surplus to 2.01B from 1.61B in September. These numbers show that the Swiss National Bank’s efforts to contain the rally in the Franc are paying off.

GBP: Rise in Retail Sales Reduces Need to Ease

The British pound ended the day lower against the U.S. dollar despite stronger economic data. Retail sales grew 0.6% in the month of September after falling 0.1% in August. Auto fuel costs had next to no impact on spending as sales ex autos rose by the same amount. Expectations for additional Quantitative Easing by the Bank of England have been pared significantly this past week and will decline further with today’s release. Between the stronger employment numbers and the rise in retail sales, members of the monetary policy committee who are hesitant about the need for more QE will become even more reluctant to ease. As reported by our colleague Boris Schlossberg, September retail sales were “boosted by sales in clothing and school uniforms due to the start on a unusually late autumn school term. Clothing sales rose by 2.0% contributing a lion’s share of growth to the number. Overall retail sales rose by 1.0% after slumping the month prior as Britons stayed home to watch the Olympics.” Public sector finances are due for release tomorrow. Borrowing needs rose to a record high in August and is expected to decline slightly in September.

AUD: Sell-Off in Stocks Overshadow Stronger Data

The Canadian and New Zealand dollars ended the day lower against the greenback while the Australian dollar held steady. Early gains in commodity currencies were given back as U.S. equities trickled lower. Better than expected Chinese economic data and an improvement in business confidence in Australia failed to lead to lasting support for the Aussie. Job ads in New Zealand dropped 2.9% in the month of September, which was the steepest decline in close a year. The Canadian dollar also shrugged off stronger wholesale sales, which leads us to believe that consumer demand improved in the month August. Most importantly, a crisis was averted with in line to stronger Chinese data. According to Q3 GDP numbers, China experienced its weakest pace of growth in more than decade but at 7.4%, the pace was right in line with expectations. On a quarterly basis, GDP growth was stronger than anticipated rising 2.2% and industrial production along with retail sales also beat expectations. These reports show that there is no hard landing for China right now and with a small amount of fiscal or monetary stimulus, it may find a bottom soon. New Zealand credit card spending numbers are scheduled for release this evening along with Canadian consumer prices. With prices in the manufacturing sector dropping according to the IVEY PMI report, there’s a good chance inflationary pressures will ease with CPI growing at a slightly slower pace. The Canadian dollar also rose to a 1 year high last month, which should have pushed down prices as well.

JPY: Calls for Monetary Stimulus

Having hit a 7 week high of 79.46, the U.S. dollar ended the North American trading session only slightly higher against the Japanese Yen. U.S. equities failed to extend its gains, putting pressure on all of the Yen crosses. No Japanese economic data was released overnight and the rally in risk during the Asian trading session faded during the U.S. hours. Aside from Prime Minister Noda’s plans to increase fiscal stimulus, there are now calls for the Bank of Japan to increase monetary stimulus. Last night, Japanese Economy Minister Maehara told reporters that the economic stimulus ordered by the Prime Minister won’t rely on fiscal measures alone. He called for strong Bank of Japan easing and challenged the country to find ways to benefit from the strong yen. These comments were followed by a report from Nikkei net that the Bank of Japan is under pressure to ease at its next policy meeting. Yet having just increased monetary stimulus in mid September, the central bank may not be in a rush to ease again because stimulus takes time to work its way through the economy. Furthermore, the Yen has weakened since the last monetary policy meeting reducing pressure on the economy and the central bank. A number of secondary reports are scheduled for release from Japan tonight including the all industry activity index, coincident index and leading indicators.