Daily FX Market Roundup 04-29-13
Why EUR Refuses to Fall Despite Potential Rate Cut
USD – Fed Won’t be Fazed by Weaker Data
GBP – Gains Beginning to Fade Near 1.56 Resistance
NZD – Lifted by More Spending on Christchurch Rebuilding Efforts
CAD – GDP Data on Tap
AUD – Gold and Oil Prices Extend Higher
JPY – Busy Night Ahead but Volatility Limited by Golden Week
Why EUR Refuses to Fall Despite Potential Rate Cut
The euro refuses to fall despite growing evidence that the Eurozone economy is in trouble. According to the latest reports, consumer spending and consumer confidence weakened further in the month of April and this time, the deterioration was led by weakness in France and Italy as demand in the Eurozone’s second and third largest economies continued to be hit by slower growth and punishing austerity measures. Even Germany saw a slightly reduction in retail sales in April and this pullback in demand across the region has resulted in either weak job creation or job losses for the retail sector. It should be no surprise therefore that Economic Confidence also declined last month and there’s a good chance tomorrow’s German retail sales and unemployment numbers will also surprise to the downside.
For the European Central Bank, the case for a rate cut this week is building quickly. We have now seen evidence of weaker consumer, business and investor confidence and if the central bank does not act now, they risk allowing the sour mood to slow growth even further. Yet with a rate cut looming, many traders may be wondering why the euro refuses to fall. Today, the EUR/USD has been supported by the news that a new government is being formed in Italy but the euro’s resilience also reflects skepticism about how much of an impact a rate cut would actually have on the Eurozone’s economy. Of the 70 economists surveyed by Bloomberg, 62.8% expect the central bank to lower interest rates, which is hardly an overwhelming majority. The eonia or (Euro OverNight Index Average) rate has already been trading near zero for the past 9 months so a rate cut can’t drive rates much lower unless the central bank is willing to accept negative deposit rates. We are not ruling out this possibility but the euro is trading like it wants more aggressive action from the ECB beyond a rate cut to break below 1.2950. In other words, investors already expect the ECB to ease, so if they do not follow up with a bolder commitment, EUR/USD traders could be disappointed and the euro could end up still trading above 1.30.
USD – Fed Won’t be Fazed by Weaker Data
The U.S. dollar weakened against all of the major currencies today following worse than expected economic data. Personal income growth slowed from 1.1% to 0.2% in the month of March while personal spending growth slowed to 0.2% from 0.7%. Pending home sales increased 1.5% but any enthusiasm from the rise was offset by a large downward revision to the prior month’s report. For the Federal Reserve who meets later this week, today’s economic data confirm that the U.S. recovery lost momentum at the end of the first quarter. However without seeing this week’s ISM numbers or the all important non-farm payrolls report, the Fed won’t rush to any judgments. As a result, we do not expect any major changes to the central bank’s monetary policy stance. This week’s ISM and payroll reports will go a long way in shaping the market’s expectations for Fed policy in the month to come. Therefore non-farm payrolls will be the number to watch for the U.S. dollar but given that its at the very end of the week, country specific factors rather than risk on / risk off sentiment should drive currency flows for most of the week. The 4 main events on the calendar are the Chinese manufacturing PMI report Tuesday evening, the FOMC rate decision on Wednesday, ECB rate announcement on Thursday and Friday’s non-farm payrolls report. Meanwhile over the next 24 hours, S&P Caseshiller house price index, Chicago PMI and Consumer confidence are scheduled for release. While stocks held onto their gains in April, the labor market weakened and therefore it will be interesting to see if the Conference Board reports an improvement or deterioration in sentiment.
GBP – Gains Beginning to Fade Near 1.56 Resistance
While the British pound also traded higher today against the greenback, the currency pair ended the day much closer to its intraday low than high. The Lloyds Business Barometer index and Hometrack Housing Sruvey – two tier 3 economic reports were the only pieces of U.K. data on the calendar. According to these reports, business grew more optimistic in the month of March and housing transactions increased. More specifically the London Property research company said that the market in London was particularly strong with homes staying on the market for an average of 4.6 weeks, the least since October 2007. These better than expected numbers helped the GBP/USD sustain its gains but the real test will be the PMI reports, which will provide the market a better look at whether the stronger growth enjoyed in the first quarter extended into April. Consumer confidence numbers are due for release this evening along with net consumer credit, net lending and mortgage approvals. The 1.56 level should be resistance in the GBP/USD.
NZD – Lifted by More Spending on Christchurch Rebuilding Efforts
The best performing currencies today were the New Zealand and Australian dollars, which rose more than 1% and 0.7% against the U.S. dollar respectively. No economic reports were released from either country overnight but the rise in commodity prices and the rally in stocks helped to boost demand for higher interest rate and/or higher beta currencies. While NZD/USD appears poised for a test of its 1.5 year high of 0.8676, the AUD/USD has stiff resistance at 1.04. The rally in the NZD/USD was helped by Prime Minister John Key’s admission that the rebuilding of Christchurch after the February 2011 earthquake will cost another $10 billion more than initially anticipated. “This is the largest and most complex, single economic project in New Zealand’s history,” Mr Key said on Sunday. This is good news for New Zealand because it means more public spending and more money pumped into the economy. Building permits and business confidence are scheduled for release this evening and stronger numbers could extend the rally. Australian private sector credit is not expected to have a significant impact on the AUD/USD. Meanwhile the Canadian dollar also extended its recent gains thanks to the rise in oil prices. February GDP numbers are due for release tomorrow and given a large increase in the country’s trade deficit and smaller rise in retail sales, we believe there’s room for a downside surprise that could sap the rally in the CAD.
JPY – Busy Night Ahead but Volatility Limited by Golden Week
It is Golden Week in Japan, which means lower participation and volatility during the Asian trading session. Last night, the markets were closed but that did not stop USD/JPY and other Yen crosses from falling quickly at the open of the Asian trading session. Australian and other Asia Pac traders who were online saw USD/JPY fall sharply on Friday and took the currency pair even lower Sunday evening. Since then however, the rise in U.S. stocks and overall improvement in risk appetite helped most of the Yen crosses recover to end the day in positive territory. The markets in Japan reopen tonight and a number of economic reports are scheduled for release including PMI manufacturing, the jobless rate, industrial production and retail sales. Nearly all of these reports are expected to show improvement in Japan’s economy as the weakness of the Yen and monetary stimulus, continue to provide support for growth. While we have a very busy economic calendar this week, we don’t think there’s enough catalyst and participation in the FX market from Asia to drive USD/JPY above 100 unless there is a blow out non-farm payrolls report on Friday and even then we are doubtful that it will be enough to take the currency pair above this key level.
