Daily FX Market Roundup 03-28-13
Why the Miracle Rally in Stocks Hasn’t Helped FX
EUR – Lifted by Stronger German Retail Sales
GBP: Rally Revived by Steady Confidence
CAD: GDP Growth Increases Slightly in January.
AUD: Job Vacancies Drop 10%
NZD: Building Permits Fall Short
USD/JPY Taking its Cue from the Nikkei
Why the Miracle Rally in Stocks Hasn’t Helped FX
With U.S. markets closed for Good Friday, the first quarter of 2013 has officially drawn to a close. The past 3 months have certainly been a tumultuous one in the forex markets, but for equity traders there’s hasn’t been a better time for stocks. In fact, the S&P 500 and the Dow Jones Industrial Average closed at a record high today. It may be hard for some investors to believe how stocks could be doing so well given the current state of the global economy, but it is not a stretch to understand why investors are buying equities and selling currencies. While U.S. data has improved, the performance of the U.S. economy has been far from great and there are plenty of reasons why central banks are still eyeing the recovery with caution. Yet it is this same caution that has helped equities perform so well because make no mistake, this improvement in market sentiment is exactly what central banks have been trying to achieve which makes this a central bank driven rally.
The Federal Reserve and its counterparts around the world are still engaged in aggressive monetary easing and in doing so they are pushing the return in bond investments lower and driving investors into riskier assets like equities. Combine that with the initial evidence of a stronger U.S. recovery and problems in Europe and we can understand why investors are buying stocks aggressive. However it is this same monetary stimulus that has driven investors out of currencies because Quantitative Easing is negative for a country’s currency. The Fed is in no rush to taper asset purchases, the ECB is keeping the spigots open and could ease again if growth deteriorates while the BoE is trying to balance higher inflationary pressures with weak growth and the BoJ (oh the BoJ…) is gearing up to ease aggressively. Simultaneous easing has prevented any major rallies in currencies.
Traditionally, the EUR/USD has a strong and positive correlation with the S&P 500 but this correlation broke down completely in the past 2 months with the S&P 500 rising and the euro falling. While we expect this correlation to resume eventually, we don’t see it happening before Europe finally rids itself of tail risk caused by uncertainties such as like the Italian election and Cyprus once and for all.
Meanwhile, there was a handful of U.S. economic reports released today. GDP growth in the U.S. was revised higher for the fourth quarter to 0.4% from 0.1%. Economists were looking for a slightly stronger print but personal consumption was revised lower. Jobless claims also rose to 357K from an upwardly revised 341K. While this was the largest miss in claims in 4 months, it is still a relatively low number that won’t raise too many eyebrows inside the Fed. Over the past few weeks, claims have been abnormally low and 350K is more consistent with the overall state of the labor market. The Chicago PMI index on the other hand dropped to 52.4 from 56.8, a sign of slower activity in the manufacturing sector. Personal income and personal spending numbers are due for release tomorrow and given the rise in retail sales and increase in average hourly earnings, we look forward to stronger numbers that should be positive for the dollar, equities and overall risk appetite.
EUR – Lifted by Stronger German Retail Sales
The euro traded higher against the U.S. dollar on the back of better than expected German retail sales and the lack of panic on the first day that Cyprus banks have reopened eased concerns in the financial markets and stabilized the EUR. The strict capital controls put in place has gone a long way in preventing bank runs today. As we said in yesterday’s note, whether EUR/USD trades at 1.29 or 1.26 first will largely hinge on German economic data and this morning’s reports weren’t all that bad. After a handful of softer economic reports, the increase in spending eased some concerns about slower German growth in the first half of 2013. Economists were looking for retail sales to decline but instead, it rose by 0.4%. This was the second straight month of stronger spending and that bodes well for the outlook for the German economy. Unfortunately one piece of data won’t be enough to turn us optimistic on Germany particularly since unemployment increased for the first time since October. A total of 13k workers lost their jobs this month versus a 2k decline in February. Our colleague Boris Schlossberg put it best “Overall labor conditions in Germany are markedly better than in the rest of the region especially the periphery economies of southern Europe. However today’s data was the first uptick in joblessness in more than five months and taken together with the sharp declines in flash PMI readings, it suggests that the economic slowdown may be spreading to Germany as well. As we have been noting over the past several weeks, the slowdown in German activity is far more important and potentially more damaging to the health of the euro than the series of financial crises that have erupted in periphery economies. Germany is the bellwether of Europe and its primary driver of growth. If it suddenly sees a slowdown in demand the impact on EUR/USD is likely to be negative with the pair drifting to fresh lows over the next several weeks.”
GBP: Rally Revived by Steady Confidence
The British Pound strengthened against the greenback, Japanese yen, Aussie, loonie and kiwi. Today’s survey released by GfK showed that consumer confidence remained unchanged this month with the confidence index holding steady at -26. This was actually good news because the market had anticipated a decline. GfK said in a statement, “The ongoing recession in the euro zone and the danger of a renewed eruption of the debt crisis have thus far not been damping the economic mood.” Amidst the turmoil in Cyprus, “The stable labor market, rising income and moderate prices all suggest consumer sentiment will remain stable in the coming weeks,” GfK said. Nationwide House Prices was little changed for the month of March. Nationwide Building Society said, “The outlook for the housing market is unusually uncertain at present, in part because the prospects for the wider economy are unclear, but also as the impact of a number of policy initiatives is hard to gauge.” No U.K. economic reports are due for release tomorrow but the lack of data may not stop the GBP from edging higher now that it has cleared Wednesday’s high.
CAD: GDP Growth Increases Slightly in January.
The Canadian and New Zealand dollars held steady against the greenback while the Australian dollar extended its losses. While the rallies in the CAD and NZD remain intact the AUD is losing momentum quickly. Overnight data from Australia was mixed with job vacancies falling more than 10%, inflationary pressures increasing slightly according to the TD Securities index and private sector credit maintaining the same pace of growth as the previous month. New Zealand building permits rebounded in February but the 1.9% rise fell short of the market’s 3% forecast. Meanwhile up North, the Canadian economy grew by 0.2% in the month of January. On an annualized basis, this translates into GDP growth of 1.0% versus 0.7% the previous month. While the data was strong enough to help the CAD hold onto its gains, a larger upside surprise was needed to increase the momentum of the downtrend in USD/CAD. The 1.4% increase in industrial product prices and 2.2% increase in raw material prices however verify the increase in inflationary pressures last month. For the Bank of Canada, slightly stronger GDP growth and hotter inflation pressures will leave their hawkish monetary policy stance intact. With no economic reports scheduled for release from the 3 commodity producing countries, the comm dollars should take their cue from equities but as we have seen today, that may not always be the case.
USD/JPY Taking its Cue from the Nikkei
The Japanese Yen continued to trade higher against the U.S. dollar and most of the major currencies despite the new highs in U.S. equities. Weaker than expected consumer spending failed to hurt the Yen but managed to drive the Nikkei down more than 1.25%. USD/JPY has a very strong positive correlation with the Nikkei and the drop in Japanese stocks is one of the main reasons why the currency pair is under pressure. Bank of Japan Governor Kuroda spoke last night and he vowed to continue easing monetary policy until their 2% inflation target is reached. While this is an affirmation of the central bank’s commitment to additional asset purchases, it was clearly not enough to rally the Yen. What investors want to see is not talk but action and unfortunately we won’t get any of that until April 4th at the earliest. Tonight, a number of Japanese economic reports are scheduled for release and finally, we could see the Yen react to data. These reports include PMI manufacturing, household spending, the jobless rate, consumer prices and industrial production. All of these releases are important but Prime Minister Abe has been saying that he is watching inflation and therefore our eye will be on CPI. If inflationary pressures increase significantly, the BoJ may opt for more moderate stimulus whereas steady inflationary pressures would give them the flexibility to do more.
