Daily FX Market Roundup 08-07-12
USD Sells Off as Stocks Weaken Ahead of Chinese Trade Data
AUD: Big Night for Aussie
CAD: Surprise Decline in IVEY PMI
NZD: Shrugs Off Higher Unemployment Rate
GBP: Lifted by BoE GDP Upgrade
CAD: Sees Sharp Improvement in Trade
EUR: Lifted by Stronger German Data
USD Sells Off as Stocks Weaken Ahead of Chinese Trade Data
The lack of U.S. economic data today failed to stop investors from selling dollars. The greenback traded lower against all of the major currencies with the steepest losses seen against the Japanese Yen, British pound and New Zealand dollars. Cleveland Fed President Sandra Pianalto threw her support behind tapering asset purchases “if the U.S. labor market remains on recent improving path.” While she left out the all-important when, as a non-voting FOMC member this year, her views have a limited impact on the markets. Nonetheless it is becoming increasingly clear that a large number of Fed Presidents believe that the time for reducing asset purchases is near. The prospect of tapering has driven U.S. stocks off their highs and if the speculation gains momentum, we could see further losses in equities. While last week’s non-farm payrolls report fell short of expectations and the Federal Reserve now sees “modest” versus moderate performance in the U.S. economy, the dialogue about tapering has not changed. Based on the recent comments from Fed officials, the central bank is still on track to reduce asset purchases in September. What is interesting however is that the dollar has not benefitted from the prospect of fewer asset purchases because U.S. Treasury yields have barely budged.
Aside from Fed speeches, there is very little U.S. data this week. Jobless claims are scheduled for release tomorrow and a small uptick is expected after the sharp improvement last week. This leaves the tone of trading vulnerable to external factors such as tonight’s Chinese Trade numbers. China’s trade surplus is expected to shrink but exports and imports are expected to grow. An uptick in exports and imports would imply a healthier outlook for China and the global economy. On the other hand if exports or imports shrink significantly, it could mean big trouble for risk appetite. A plunge in exports would reflect a pullback in global demand that could threaten growth in China while a plunge in imports could reflect deteriorating internal demand – both scenarios would be damaging to risk. However if Chinese imports and exports increase, currencies and equities could resume their rise. We expect Chinese trade numbers to be central focus for the next 24 hours.
AUD: Big Night for Aussie
Compared to the New Zealand and Canadian dollars, the Australian dollar’s gains today versus the greenback were relatively modest. Tonight will be a busy one for the Aussie with Chinese trade and Australian employment numbers scheduled for release. The Reserve Bank of Australia’s recent decision to cut interest rates by 25bp was fueled in part by their concerns about Chinese growth. If Chinese trade numbers confirm that growth is slowing, AUD/USD could resume its slide. As for Australian employment numbers, no major improvements are expected. Economists are looking for the unemployment rate to rise even though stronger labor market conditions were reported in the service and construction sectors. The primary area of weakness is in manufacturing, which unfortunately is one of the key areas of Australia’s economy. A higher unemployment rate in New Zealand did not stop NZD/USD from powering higher because the increase in the employment change exceeded market expectations. Finally, the Canadian dollar extended its losses after the IVEY PMI index printed at its weakest level in 8 months. Not only was this the first contraction in manufacturing activity since November 2012 but the index fell far short of expectations. Economists had been looking for the IVEY PMI index to rise to 57 from 55.3 but instead it dropped to 48.4. Combined with the 10.3% drop in building permits, the outlook for Canada’s economy has worsened, putting USD/CAD at risk of hitting 1.05 in the near term.
JPY: No Change Expected from the BoJ
The Japanese Yen traded higher against all of the major currencies today ahead of the Bank of Japan’s monetary policy decision. The BoJ began its 2 day meeting last night and will make its monetary policy announcement this evening. No changes are expected but the central bank will discuss whether another upgrade to their economic assessment is warranted. The recent rise in JGB yields and mixed outcome of Japanese economic reports should keep the BoJ’s assessment unchanged this month. According to a survey conducted by the Wall Street Journal, most economists do not anticipate an increase in stimulus until March of next year at the earliest. Meanwhile USD/JPY dropped to a fresh one month low below 97 today. The idea of buying USD/JPY, which was once touted as one of the best trades of 2013 is now looking tenuous. With no U.S. economic data on the calendar today, the latest sell-off in USD/JPY, which marks the fourth consecutive day of weakness for the pair has been driven by the 4% decline in the Nikkei overnight and the drop in U.S. 10 year yields. Concerns about Fed tapering, the recent strength of the Yen and uncertainty surrounding the upcoming Bank of Japan meeting have contributed to the weakness in Japanese stocks and USD/JPY has a negative correlation with the index. The break of prior 1-month low puts USD/JPY at risk of slipping down to its June lows near 95.
GBP: Lifted by BoE GDP Upgrade
In the U.K., the Bank of England’s Quarterly Inflation Report triggered a significant amount of volatility for sterling. The central bank has adopted a 7% unemployment rate threshold. They said interest rates would not be raised as long as unemployment remains above 7%. The jobless rate is currently at 7.8% and according to their latest forecasts the BoE believes that the unemployment rate will remain above their new threshold until “at least 3Q of 2016.” This puts the first potential rate hike much later than the market had anticipated and for this reason, the initial reaction was GBP weakness. However, at the same time, the BoE also upgraded its 2013 GDP forecast to 1.5% vs. 1.2% in May and more significantly, their 2014 GDP forecast to 2.7% from 1.9%. In other words, the central bank expects easy monetary policy to fuel significantly stronger growth next year. If the central bank’s forecasts for growth are spot on and the momentum is sustained into 2015, we would not be surprised if the unemployment rate falls faster than the central bank currently anticipates. However their decision to estimate that the 7% mark will not reached until late 2016, is their attempt to convey an ultra-dovish monetary policy stance to the market. While sterling as since soared, the combination of dovish forward guidance and a higher GDP forecast means the potential for more extended range trading in the GBP/USD. Gains should be capped at the June highs of 1.5750 and losses should limited to the July lows at 1.48. This may be a wide range but there has significant volatility in the GBP/USD in recent weeks.
EUR: Lifted by Stronger German Data
While the euro traded higher against the U.S. dollar today, it weakened against the British pound and Japanese Yen. German industrial production beat expectations in June following uplifting German factory orders data that point to a potential recovery in Germany’s economy. Industrial production accelerated 2.4% month-to-month and 2.0% year over year. The Economy Ministry said in its report that, “Industrial production has passed its weak phase. Current sentiment indicators clearly indicate positive progress in manufacturing.” Mario Draghi said last week that economic indicators signaled that the nation was past its recession and that a “tentative” stabilization is under way in the Euro-Zone after six quarters of contraction. Draghi reiterated that interest rates will stay low in the near future. Germany is having a parliament election next month in which Angela Merkel is seeking for a third term. Germany’s AAA rating was also reaffirmed by Fitch today as the rating agency praised Germany for having “all the ingredients of a declining public debt path. The economy is growing, the budget position is relatively favorable and nominal interest rates are low.” Though Fitch also warned that the debt crisis is not over yet, they remain optimistic about German finances. The country’s trade balance report is scheduled for release tomorrow and stronger factory orders combined with the jump in industrial production points to healthier trade conditions.
