Daily FX Market Roundup 07-11-12

Why the USD Soared on the FOMC Minutes
EUR: Shrugs Off Fresh Spanish Budget Cuts
GBP: Fresh 3 Year High Against EUR
AUD: Lifted by Stronger Economic Data
CAD: Trade Deficit Widens
NZD: Oil and Gas Prices Increase
JPY: All Eyes on the BoJ

Why the USD Soared on the FOMC Minutes

Up until the release of the minutes from the most recent Federal Reserve monetary policy meeting, it had been a very quiet trading day. Its not often that the FOMC minutes will cause a large reaction in currencies but the fact that the dollar soared minutes after the release to a 2 year high against the euro goes to show how easily swayed investors are when it comes to signs of QE vs. no QE. In today’s case, the FOMC minutes was just not enough to satisfy QE3 traders who wanted a more explicit admission that further asset purchases would be necessary. A few FOMC members felt that more stimulus could be needed but this wasn’t any different from what they said back in April. The same is true of the warning that they are prepared to take further action as appropriate. While Federal Reserve officials are clearly worried about the state of the U.S. economy and the outlook for China, their call for a study on “new tools for easing” suggests that they want to look for other options beyond Quantitative Easing. In a nutshell, the Federal Reserve isn’t committing to anything and keeping all of their options open which was enough to squeeze the dollar higher.

Does this mean that QE3 is off the table? Absolutely not.

While the monetary policy committee felt that the economy continued to expand moderately between April and June, they admitted that the gains were smaller than anticipated and there is unusually high uncertainty for jobs and growth. Some FOMC members also believed that there could be a significant slowdown in China that could deal a blow to the export sector. Their decision to revise down their growth forecasts were motivated by a slower pace of job growth, weak retail sales, a lower trajectory for personal income and weaker exports. The prospect of further uncertainty in Europe and tighter domestic financial conditions also contributed to their decision to downgrade their GDP forecasts. The FOMC minutes may have helped the dollar by shaving the chances of QE3 but we don’t believe that everyone have given up on the idea of more stimulus and for this reason every piece of incoming data this week and next could still trigger big moves in the greenback as traders adjust their QE expectations including tomorrow’s import prices and weekly jobless claims report.

EUR: Shrugs Off Fresh Spanish Budget Cuts

The euro fell to a fresh 2 year low against the U.S. dollar after the release of the FOMC minutes. The weakness of the euro reflects the market’s ongoing concern about growth as nothing is good enough for the euro. The Spanish government announced new plans to cut its budget deficit by EUR65 billion which should have been positive for the euro because it reduces the risk of a sovereign bailout and puts the country closer to receiving the money that it needs to save its banking sector but the euro barely budged. European equities on the other hand responded positively while Spanish ten year bond yields continued to tick lower. The problem is that more austerity will only prolong the recession in Spain especially since the government plans to raise the value added tax by 3 percentage points from 18 to 21 percent. Expectations of faster balance sheet expansion by the ECB versus the Fed seem to be the only thing that matters to the EUR/USD right now. The prospect of sluggish growth in the months to come means that there is a very good chance the ECB will have to introduce another long term refinancing operation (LTRO). On the other hand, today’s FOMC minutes tell us that the bar is still high for QE3.

GBP: Fresh 3 Year High Against EUR

The British pound continued to trade higher against the euro and remained steady against the U.S. dollar. While no major U.K. economic data was released today, Bank of England member Posen made comments that were at odds with his previous views. On Monday, Posen sounded extremely negative about the U.K. economy and said the BoE did the right thing by not overreacting to the surge in inflation. This morning however he said the BoE has done “enough for now” on QE. As one of the most dovish members of the Monetary Policy Committee, this is signal of a potential shift to a neutral stance by Posen which could be telling of how other MPC members feel. Currently the market expects the BoE to ease again this year but if Posen and other central bank officials are satisfied with the current level of stimululs, then it may be some time before they ease again. Of course this would be dependent on data but the recent strength of the British pound against the euro certainly suggests that some investors anticipate less aggressive action from the BoE compared to other central banks going forward.

AUD: Lifted by Stronger Economic Data

The Australian, New Zealand and Canadian dollars ended the day higher against the greenback. Australian employment numbers are due for release this evening and after strong job growth in the month of May, the labor market is expected to hold steady in June. Economists are looking for ZERO job growth but based on the rise in the employment component of the service, manufacturing and construction sector PMI reports, we believe there’s scope for an upside surprise. Better than expected economic data overnight also lent support to the Aussie. According to our colleague Boris Schlossberg, “Australian consumer confidence soared to a 5 month high helping to lift Australian dollar well above the 1.0200 level. The index advanced by 3.7% to 99.1 – its highest level since February as the accommodative monetary policy of the RBA appears to be making an impact on consumer demand. RBA has cut 125 basis points off its benchmark rate since it began its easing campaign and Australian home owners, most of whom carry variable rate mortgages have clearly benefited from the reduction in debt service costs. Amongst mortgage holders, confidence increased by 5.5%, suggesting that the RBA policy is making its mark.” Up North Canada’s trade deficit grew to -0.79B from -0.62B as energy exports declined and imports rose 0.4 percent to its highest level ever. No economic data was released from New Zealand but consumer confidence numbers and business PMI figures are due this evening.

JPY: All Eyes on the BoJ

The Japanese Yen traded lower against all of the major currencies ahead of the BoJ meeting. Although eased twice this year, the deterioration in trade has led many people to believe that the BoJ may ease again. While that’s certainly a possibility, there are also strong arguments for steady policy. Since the last BOJ meeting, USD/JPY has stabilized. On June 22nd, it was trading in the highs of 80.42. On June 14th, the day of the previous meeting, USD/JPY closed on 79.38, and right now it is trading around 79.70. Retail sales have decreased from 5.7% to 3.6%. Manufacturing PMI has decreased from 50.7 to 49.9. Household spending increased from 2.6% to 4.0%. Unemployment rate has decreased from 4.6% to 4.4%. Current account decreased from 0.29T to 0.28T but the trade deficit rose from -0.46T yen to -0.86T yen. Yet not too long ago the BOJ raised the economic assessment for all nine regions for the first time since October 2009. The ECB eased its rates last week and BOJ Governor Masaaki Shirakawa in response pledged to pursue the appropriate policy. We are eager to see what the BOJ will decide to do with its rates, how they plan to tackle the rising yen to prevent its export sector from deteriorating, and review its forecasts for growth and inflation.