Daily FX Market Roundup 02-28-13
USD: Sequestration Kicks in Fri, No Deal in Congress
EUR: Still Crippled by Italian Election Concerns
GBP: Manufacturing PMI to Decide Sterling’s Direction
CAD: Hits Fresh 7 Month Lows Ahead of GDP Data
AUD: Manufacturing Activity Rebounds
NZD: Sharp Improvement in Business Confidence
JPY: Abe Nominates Kuroda as BoJ Governor
USD: Sequestration Kicks in Fri, No Deal in Congress
After rising to a fresh 5 year high intraday, the Dow Jones Industrial Average gave up all of its earlier gains to end in negative territory. This turn in risk appetite not only affected equities but also currencies as the U.S. dollar ended the day unchanged or higher against every major currency. A large part of the nervousness in the market today was caused by the Senate’s decision to reject a pair of proposals that would have helped avert the automatic spending cuts set to kick in March 1st. In doing so, $85 billion worth of spending cuts will now begin. While stocks have fallen and the dollar has risen, the mild decline suggests that investors are not terribly worried about the implications of sequester. We’ve been down this road before with the debt ceiling and survived. The numbers this time around aren’t enormous – only $50B worth of cuts are expected this year and not all of it will kick in at one time. Government agencies are mandated to give their workers at least 30 days notice and this means that if Obama issues his sequestration order tomorrow, Federal agencies will let their workers know Monday March 4th at the earliest and the cuts won’t take place until April 4th. This means that effectively the Obama Administration has another 30 days to come up with a deal to cancel and avoid the cuts. The more important deadline is March 27th, when the government runs out of money and will be forced to shutdown if no additional measures are taken. Of course, Republicans and Democrats want to avoid a government shutdown and House Republicans will be voting on a measure that would finance the government until the end of the year. Investors are clearly holding out hope that a last minute deal before the March 27th deadline will occur.
Meanwhile this morning’s mixed U.S. economic reports left very little impression on the FX market. Economists were looking for a major upward revision to Q4 growth but instead, GDP was revised up to only 0.1% from -0.1%. While this means that the U.S. economy grew instead of contracted at the end of last year, economists were hoping for 0.5% growth. The shortfall was in consumption and imports, which fell more aggressively than initially anticipated. Perhaps if the so-called experts did not anticipate such a large revision to GDP, investors may have reacted more positively to the decline in jobless claims. Last week, jobless claims dropped from 360K to 344K and this low level of claims is consistent with a continued recovery in the labor market. Manufacturing activity in the Chicago region also improved. Yet the dollar barely reacted to the data because they know it won’t change the Federal Reserve plans for monetary policy. Lower jobless claims may be encouraging but the Fed is primarily focused on job growth and therefore non-farm payrolls are far more important. Personal income, personal spending and the national ISM manufacturing index are scheduled for release on Friday
EUR: Still Crippled by Italian Election Concerns
The euro trickled lower against the U.S. dollar throughout the North American trading session. Concerns about the lack of a majority government in Italy continues to weigh on the market as investors wait to see whether Bersani will be able to form a coalition government or be forced into early elections. It won’t be an easy path for Italy and the outcome will most likely be a weak government that is unable to deliver meaningful reform or austerity. This morning’s Eurozone economic reports didn’t provide much help. While German unemployment declined in the moth of February, the unemployment rate held steady at 6.8%. Economists were hoping for an improvement to 6.8%. Consumer spending in France plunged, reminding us of the big gap between the performance of Germany and the rest of the Eurozone. Inflationary pressures on the other hand remained muted with Eurozone CPI dropping 1% in January. This trend appears to be abating however with German CPI rising 0.6% in February. German retail sales numbers are due for release tomorrow – based on the rise in consumer confidence, spending should have improved but according to Markit’s Retail PMI report, consumer spending contracted for the second time in 3 months. Final PMI manufacturing numbers are also due for the Eurozone but revisions are not expected. Meanwhile it is also worth noting that GDP growth in Switzerland beat expectations. Switzerland’s economy grew 0.2% in the fourth quarter but unfortunately the Franc ignored news partly because of the drop in consumer prices – which gives the Swiss National Bank continued flexibility to keep monetary policy easy.
GBP: Manufacturing PMI to Decide Sterling’s Direction
With no major U.K. economic reports on the calendar today, the British pound ended the North American trading session unchanged against the U.S. dollar and slightly higher against the euro. Consumer confidence remained held steady in the month of February according to the GfK who called the development encouraging. While the survey of consumer sentiment was taken before Moody’s downgrade, it is still surprising that sentiment held steady despite the decline in consumer spending. It appears that there is a major disconnect between how consumers feel and how they spend. Nationwide house prices and the country’s PMI manufacturing report is due for release tomorrow. The sharp improvement in the CBI index points to stronger manufacturing activity. If the PMI report surprises the upside, the GBP/USD could rise back above 1.52. So far the currency pair has absorbed the downgrade well and now economic data will determine whether the currency pair bottoms at these levels or continues lower.
CAD: Hits Fresh 7 Month Lows Ahead of GDP Data
After consolidating for the past 2 trading days, the rally in USD/CAD has resumed with the currency pair rising to its highest level since July. Continued disappointments in economic data renewed the sell-off in the Canadian dollar. While the Bank of Canada has not abandoned its call to raise interest rates, investors realize that it will be some time before they get serious about unwinding monetary stimulus. Canada’s current account deficit narrowed to -$17.3B in the fourth quarter from -$18.0B. This improvement was smaller than anticipated but still encouraging. Industrial product prices held steady in January but raw materials prices soared – a sign that there’s some inflation in Canada. Fourth quarter and December GDP numbers are due for release tomorrow and we believe the sell-off in the CAD can be attributed to expectations for much slower GDP growth. Although trade improved slightly, retail sales plunged at the end of the year. A larger than expected pullback in GDP growth could drive USD/CAD to 1.04. The Australian dollar also weakened but only slightly ahead of Chinese PMI numbers. If manufacturing activity slowed in China, Australia’s largest trading partner, we could see additional losses in AUD/USD. Manufacturing activity in Australia on the other hand improved with the PMI index rising from 40.2 to 45.6, its highest level since June 2012. Unfortunately the overall decline in commodity currencies prevented the New Zealand dollar from rallying despite a sharp improvement in business confidence.
JPY: Abe Nominates Kuroda as BoJ Governor
The big story overnight was Prime Minister Abe’s formal nomination of Kuroda as Bank of Japan Governor and Iwata and Nakaso as Deputy Governors. Contrary to our expectations, there was no major reaction in the Yen during the Asian trading session but Japanese equity investors were clearly satisfied as stocks rose more than 2.7% overnight. During the North American session however, the Yen started to fall as investors finally realized that we are getting closer to another strong dose of easing from the Bank of Japan. While we haven’t heard any official comments from Kuroda yet, BoJ member Kiuchi confirms that the central bank will consider extra easing if necessary. Since he believes that the downside risks are large for the economic outlook and thinks the 2% price target will not be easily achieved, it is clear that he will throw his support behind more easing. Economy Minister Amari also wants the “BoJ to continue bold easing to reach their price target as soon as possible.” There will most likely be hearings in both the upper and lower houses for the BoJ nominees next week and at that point we could hear some official comments from Kuroda. Afterwards, votes on the BoJ Governor are likely to occur between March 14th and March 15th with a new Governor hopefully in place by the time Shirakawa steps down on March 19th.
